Placing shareholders in the front line

By Alistair Jones

SMU Office of Research – Shareholders in Singapore are vested with significant powers, putting them in a position to play an important monitoring role, including the appointment and removal of company directors.

In contrast, corporation law in jurisdictions such as North America and Canada confers the board of directors with 'original and un-delegated' powers. Under this model, shareholders have little say in how the board exercises its powers.

Singapore's corporate governance regime tilts the balance of power in favour of shareholders, with the right to dictate the contents of the company constitution. The Companies Act effectively vests in the shareholder body the right to determine a company’s division of powers and with it the contours of shareholder intervention rights.

According to Pearlie Koh, an Associate Professor of Law at Singapore Management University (SMU), the origin of Singapore's corporate governance structure is "probably historical".

"We inherited much of our law from England because of our colonial past. And England adopts a shareholder-centric approach," she says.

"But in a sense, to focus on shareholders is also intuitively natural, since companies have to begin with some person or persons deciding to operate a business using the corporate form and putting money in it. So these investors are likely to see themselves as 'owners' of the business, in much the same way that sole proprietors and partners are owners."

Professor Koh has co-authored a recent study examining whether the superior position accorded to public or retail shareholders in Singapore is largely aspirational, even ornamental. Do they bother to be engaged, are they equipped to exercise their rights, and can they actually affect change?

Sufficiently interested

Singapore's shareholder-centric regime has certain advantages.

"First, it vests responsibility for monitoring the company’s directors on a body of persons who are financially vested in the company," Professor Koh says.

"Companies are essentially private for-profit enterprises. So ensuring that those persons who stand to gain (or lose) from bad management have the wherewithal to call management to account is likely to be more effective – well, at least in theory.

"Second, it provides for a clear focus for how the company should be run. In a shareholder-centric regime, the company’s purpose is straightforward. It is to maximise returns for the shareholders."

Yet the research, based on an online survey of 505 Singapore retail investors, revealed that they are not necessarily motivated only by self-serving concerns and that the proper management and governance of companies are important issues that can unite and galvanise them.

Only about one-third of the sample said they attended company meetings to vote, which could seemingly support a perception that shareholders are generally apathetic about their rights.

"I guess it depends on how one looks at it," Professor Koh says. "The rights are there to be utilised. Even if only a minority of retail investors are sufficiently vested, that still means there are folks who are interested. All you need really is for someone to be sufficiently interested," Professor Koh says.

Among survey participants who had never voted in shareholder meetings, key reasons were that the effort of getting involved was too time consuming and that their various shareholdings were too small to make any difference to the voting outcome.

A pragmatic lot

The lack of voting impact that retail investors can face is highlighted by the fact that more than 50 percent of companies in Singapore are owned and controlled by families or the state. They have the numbers to call the shots, or resist change. 

"But change can come about in different ways," Professor Koh says. "Sometimes it’s all about bringing the issue into the light, drawing attention to it."

Investor activism is reportedly on the rise in Asian boardrooms. So, what could it take to motivate more of Singapore's retail investors into pursuing an active monitoring role?

"It has been repeatedly observed that Singaporeans are a pragmatic lot. But times are changing, as Singaporeans cotton on to the increasing need to grow their savings/idle funds. Also, as younger folk with different mindsets become investors, their investing motto might well be affected by the concerns they have as a generation," Professor Koh says.

"I think the research does show that retail investors tend not to want to bother themselves overly. But this is a generalisation as there will inevitably be those who take a more active role."

And could the sustained prosperity of Singapore's business environment prove a disincentive for shareholder activism?

"I would not say that it is a disincentive. Rather it is probably more accurate to say that there is thus no need for activism. We also should not assume that activism is necessarily a good thing," Professor Koh says.

Healthy skepticism

A second line of inquiry for the researchers was to determine whether information technologies, especially social media, have any effect on shareholder behaviour and on shareholder engagement with their companies in particular. Could it be a tool for rallying the like-minded into collective action?

"Electronic communications, platforms and social media all allow for information dissemination. So it’s now so easy to get information, find out things and conduct checks. All of which make it easier for shareholders to be better monitors," Professor Koh says.

About 92 percent of survey respondents said they would access social networking platforms to acquire information about their companies, with Facebook being the most frequently used.

But compared with other more traditional sources of relevant corporate information, including financial news media, financial advisors or other investment professionals and academic experts, the survey respondents trusted social media platforms much less.

Clearly, investors were unconvinced as to the credibility and reliability of social media as a source of information about their companies. Accuracy of the coverage was the most cited concern.

"I think it’s the nature of social media," Professor Koh says. "Other online or electronic media may not suffer the same problems. Social media can be a source of falsehoods and misrepresentations. So a healthy dose of skepticism with respect to what one receives on one’s social media portals is not necessarily a bad thing."

Overall, Professor Koh believes the research results augur well for the corporate governance scene in Singapore.

"I think it shows that we have enough retail investors who are interested, and interested in the correct things. This suggests that they still stand up and bark should the need arise. But if things are going as they should, there is no need to create trouble," she says.

Back to Research@SMU February 2024 Issue