As a form of corporate social responsibility, corporate governance is self-regulation that is more concerned with enhancing shareholder value and also guarding the stakeholder’s position in society. The latter theory is arguably more relevant in light of corporate scandals worldwide. It serves as the framework that ensures board accountability to the shareholders and, arguably, to society-at-large. In fact, Sir Adrian Cadbury in his Corporate Governance Report (1999) explained corporate governance as ‘holding the balance between economic and social goals between individual and communal goals’.

Corporate governance is important, firstly because the separate legal entity doctrine demands that adequate measures be implemented to ensure that the company’s interests are first and foremost. Such measures act as a check on agents of the corporation and prevent them from misusing their position and knowledge to the detriment of the interests of the company.

Secondly, on a practical note, it is one of the most important considerations in the stock selection of publicly-listed Asian companies. The McKinsey & Co Investor Opinion Survey 2002 showed that 82% of Asian respondents feel that corporate governance is more important than the potential financial returns. Another practical argument proffered is that good corporate governance, which demands increased bona fide disclosure, may encourage investor confidence, which in turn means greater capital flow.

Singapore’s model is based on both legislation and non-legislative regulations. The primary legislation dealing with corporate governance is the Companies Act. Singapore also has a wealth of case law dealing directly with corporate governance, as well as the stringent listing rules of the Singapore Stock Exchange (SGX).

However, a description of the local model is incomplete without the ‘Code of Corporate Governance 2005’. This code spells out guidelines pertaining to matters such as the composition and training of board of directors, disclosure/communication with shareholders, and accountability and audit. As with the U.K. Hampel Report, a key feature of the Code is its voluntary nature: non-compliance does not attract penalties. This voluntary nature reflects the maturity of Singaporean companies. An analysis of the Code shows that it is intended to allow companies a large degree of flexibility in their approach to corporate governance, as long as their approach remains centred around sound principles of corporate governance. Singapore has achieved success in this regard by recognizing that there is no ‘one-size-fits-all’ corporate governance model that can apply to all companies successfully.

The coupling of the Code with the Companies Act reflects Singapore’s approach to corporate governance. A balanced approach was seen as the most appropriate model in ‘slightly less developed markets’. This approach, as the label suggests, encourages commercial autonomy while also mandating legislative accountability. It thus differs from a prescriptive approach requiring companies to adopt specific practices and a non-prescriptive approach allowing companies to determine their own practices, subject to appropriate disclosures of such practices adopted.

The prescriptive approach is clearly unsuitable for Singapore given that it assumes a ‘one-size-fits-all’ model. On the other hand, the non-prescriptive approach is prevalent in the U.S. ,where stock exchanges require public-listed companies to describe specific corporate practices. The U.S. Securities and Exchange Commission, for example, emphasizes high disclosure standards. This approach was previously taken by Australia, although it has recently moved towards more regulation in the wake of Enron. However, it is suggested that this move is merely a prolonged knee-jerk reaction which will subside in the face of strong market forces.

Singapore should follow the non-prescriptive approach and adopt a model that mirrors the U.S.. In a mature economy like Singapore’s, it is important that investments flow unhampered by unnecessary regulations. Before this seamless flow of investments can occur, businesses must allowed the flexibility to stay competitive and adapt to market adjustments. Certainly, the law cannot keep up with changing commercial realities. Instead, commercial realities will necessarily force the investor to judge which company has the corporate governance practice that best matches his risk appetite. Market forces will edge out companies which do not practise good corporate governance policies.

Fears of the next Enron can be assuaged by the fact that Singapore is moving towards a more robust accounting standards system, coupled with the bare essentials of corporate governance legislation, viz the Companies Act, and other industry-specific legislation (e.g. Securities & Futures Act). Nevertheless, a closer examination of corporate scandals reveals that the problem lies not with the ineffectiveness of corporate governance legislation, but rather, the ineffectiveness of auditing practices.

The solution lies not in hamstringing corporate maneuverability with superfluous ‘codes’ or legislation, because these merely offer boxes in which directors are inclined to tick, so as to absolve themselves of liability. Instead, the solution is in buttressing our auditing and accounting standards, while retaining our disclosure-based philosophy of regulation and encouraging a more active shareholder participation. Although good corporate governance is paramount in any mature economy, unlike the rest of Asia where corruption heavily permeates commerce, Singapore’s economy is mature and robust enough to move towards a non-prescriptive approach to corporate governance. It needs to, if Singapore is to remain competitive.

Aidil is a second year law student and the Operations Manager of SLR. He would like to thank A/P Yeo Hwee Ying for her comments on this article.