I REFER to the letter from the Singapore Exchange 'Shareholders decide merits of stock option awards' (BT, Dec 16).

While I agree that lapses in disclosure of options do not necessarily equate to backdating of options, I am concerned with the regulatory stance of SGX.

Adequate and timely disclosure, effective enforcement of disclosure obligations, and transparency of enforcement actions, are fundamental to a disclosure-based regime.

The first of the six pillars of corporate governance under the influential OECD Principles of Corporate Governance - 'Ensuring the basis for an effective corporate governance framework' - reinforces this. One of the principles states:

'Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfil their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained.'

While Singapore is not a member of the OECD, these principles have been embraced by many regulators, policymakers, institutional investors and intergovernmental organisations such as the World Bank.

The Business Times articles which led to the letter from SGX had highlighted numerous cases of failure of companies to announce the offer of stock options immediately, thereby breaching the listing rules. Some of these companies have breached this rule more than once.

Nevertheless, the SGX continues to hold the position that actions it may or may not have taken against companies for many breaches is for it and the companies to know, and for the rest of us to guess.

While it is right that the SGX's response should be proportionate to the infraction, there are inherent dangers in SGX keeping its enforcement actions largely as a private matter between the SGX and the companies.

Infractions by companies could be an early warning sign of bigger troubles ahead. For example, a company that fails to comply with listing rules about announcing stock option grants immediately could have weak internal compliance procedures, or other corporate governance issues, such as the backdating of options. Breaches of listing rules are potentially harmful to investors, especially minority investors, as these rules are there to protect their interests in the first place.

There is no doubt that one of the key causes of the current financial crisis is regulatory failure. The Madoff scandal provides further evidence of this failure. The US and other countries will undoubtedly review their regulatory frameworks and make significant changes to them.

We should likewise review our regulatory framework. It would be a mistake for us to take a 'business as usual' attitude and to assume that regulatory deficiencies are just a 'Western' problem.

As part of this review, we should closely examine the current approach to dealing with the conflicts between the SGX's commercial and regulatory roles.

In the UK, the two roles are separated, with the regulatory role undertaken by the Financial Services Authority. In Australia, the exchange established a separate subsidiary in July 2006 to manage its day-to-day supervisory functions. This subsidiary has a board with members drawn equally from the board of the exchange and elsewhere.

In Hong Kong, the regulatory division of the exchange reports directly to a listing standards committee, whose members are separate from the members of the main board of directors of the exchange.

In Malaysia, the chief regulatory officer of the exchange reports directly to the board of directors and administratively to the CEO.

We should examine whether the current SGX approach of handling the conflict is adequate. Concerns about this conflict and the approach to dealing with it are frequently raised by participants in industry conferences and market watchers, both here and overseas.

Proclaiming that all is well and that the current regulatory approach is working, without a detailed study, would in my view be failing to 'seize the moment' to improve Singapore's reputation as a well-regulated international financial centre.

Let us ensure that our regulatory framework is robust so that we are in a good position to attract serious long-term investors as the market recovers from this financial crisis.

Mak Yuen Teen
Singapore

This article was first published in The Business Times on December 23, 2008.