Views on improving the integrity of global capital markets
27 June 2011

An Arms Race We Should Welcome: The Race for Higher Corporate Governance Standards

Is the race for higher corporate governance standards heating up?

On 3 June the Singapore Exchange (SGX) proposed new listing rules that would improve the corporate governance of companies listed in Singapore. The proposed changes would require all primary-listed companies to hold their annual general meetings (AGMs) in Singapore; provide proxy voting by poll rather than simply a show of hands at the AGM; and require prompt disclosure of AGM vote outcomes.

Those interested in the details of the changing Singapore governance standards may review the consultation paper, “Proposed Amendments to Listing Rules at SGX,“ and a comment letter on the proposed changes jointly submitted by CFA Institute and CFA Singapore.

Some may see these governance reforms as an attempt to differentiate the Singapore market from rival Hong Kong in the race for capital markets supremacy in Asia. A cynic may conclude that these governance reforms are a direct reaction to the recent failed merger of SGX and the Australian Securities Exchange (ASX) that was vetoed by Australia in April. Apparently, some in Australia voiced concern over SGX’s perceived lower corporate governance standards.

September 2010 country governance rankings from our friends at GovernanceMetrics International reveal one view of relative corporate governance standards from around the world. On a scale of one to 10 (10 being the highest score), the governance of the average Australian company rated a 6.65, while the average company in Singapore rated a 4.82. Expect Singapore’s ratings to rise in the future due to the changes in listing rules mentioned above, and higher independence and internal control standards suggested in a recent consultation paper from the Corporate Governance Council (a panel appointed by the Monetary Authority of Singapore).

Whatever the reasons for the proposed amendments to the Singapore listing standards and suggested changes to the corporate governance code, we welcome higher corporate governance standards in any market. Higher corporate governance standards result in more transparent markets, better protection of shareowner rights, and more efficient capital markets. What’s not to like?

A number of studies over the years have also shown that better corporate governance standards lead to a lower cost of capital for publicly traded companies:

This understanding of the relationship between corporate governance and the cost of capital, coupled with a hope to attract foreign capital from those seeking companies with higher governance standards, was behind the launch of the Novo Mercado in Brazil. Nearly a decade ago, the Bovespa in Brazil developed the Novo Mercado as a section of the Brazilian market designed for shares issued by companies that voluntarily undertake to abide by higher corporate governance standards and transparency requirements. The Novo Mercado has been an unmitigated success, drawing scores of investors to the Brazilian market over the past decade. Other markets have started copying this model, with the Maharlika Board, a special corporate governance listing section of the Philippine Stock Exchange (PSE), due to launch in September.

Here’s to the race for higher corporate governance standards around the world. May it continue unabated forever.

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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