By Conrad Tan

DESPITE turbulent financial markets, plunging share prices and a darkening economic outlook, it pays for companies to pay close attention to how their company is managed and how they communicate with investors, says David Gerald, a long-time champion of small investors' rights in Singapore.

'Corporate governance is not seasonal - it is for all times. Companies cannot put corporate governance on the shelf in bad times,' says the founder, president and chief executive of the Securities Investors Association of Singapore (SIAS), which represents retail investors here.

'Corporate governance is often thought of as something fashionable for companies to excel in and win awards for, but it goes beyond that. Companies are looked at very closely nowadays not only by institutional investors but also by high net worth and retail investors.'

Given the number of frauds that have been discovered over the last decade or so - the scandals at China Aviation Oil, Accord Customer Care Solutions (ACCS) and Citiraya Industries spring to mind - 'investors have become wary about companies whose practices are questionable', he says. 'They want to be assured that the companies in which they invest must be run by honourable men with integrity.'

He says that even with the tough economic times ahead, companies have little excuse to pay less attention to good corporate governance practices such as communicating effectively with shareholders and ensuring proper and timely disclosure of important information so that investors can make sound investment decisions.

'The notion that in lean times companies would be more interested in beefing up their bottom line and therefore will not have time for corporate governance is nonsensical to me because either you are honest and have integrity, or you don't.

'It must be ingrained in senior corporate managers and the owners of the company - it is for all times.'

Retail investors here, he says, 'are becoming more and more discerning and aware of the need for companies to be well-governed before they consider investing in these companies'.

That said, SIAS has little time for greedy investors hungry for short-term gains. 'We've been preaching the gospel of investment since 1999. We do not spend time with gamblers and those inclined to do short-term trading. We're about helping small investors imbibe good financial planning and good investment principles. It is in that context that we organise our activities,' Mr Gerald says.

'Investors must know how to choose companies based on good fundamentals - they must do value investing. We've been screaming at our members: Stop gambling, do value investing.'

As Mr Gerald unfailingly points out to small investors: 'Historically, investing in the stock market has proven to score the best returns - provided investors have the stamina and the time to be in the market.'

'It's not timing the market, it's how much time you spend in the market' that matters, he tells those who come to him for investment advice.

'The initial process of selecting a company to invest in is very important and we help our members with that. We have workshops that help members with interpretation of annual reports, investment seminars, dialogue groups, to help investors imbibe sound investment principles.'

With share prices plunging worldwide, these may be bad times, but 'it is only in these times that you can pick up good companies at very low prices', Mr Gerald points out. 'There is a belief that in these volatile times, it is not wise to hold stocks long term. I say that if you hold stocks that are fundamentally very strong, you don't have to worry about good times and bad times.'

That's why SIAS has been giving out awards to Singapore-listed companies for good corporate governance practices and transparency in disclosing information for the last nine years - since 2000, he says. 'We felt that we needed to rate companies - to look at every single annual report.'

For the corporate governance awards, masters and PhD students at the NUS Business School go through the annual reports of Singapore's nearly 800 listed companies, assigning each firm a score using a checklist prepared by ratings agency Standard & Poor's. The scorecard, which contains 137 questions, was developed based on the Code of Corporate Governance introduced here in 2001 and updated in 2005, and is available on SIAS' website.

It gives marks to companies that comply with the corporate governance code 'in the letter of the law' - such as having a training programme for its directors, linking executive pay to performance, and preventing board members from influencing decisions on how much they should be paid, says Mr Gerald. But it also rewards companies that have complied with the true spirit of the law. For example, if more than one-third of a company's board is made up of independent directors - the minimum recommended by the corporate governance code - 'we would give them double the marks', he says. 'Our aspiration is that every listed company should have at least half or more of its board made up of independent directors.'

Separation of chairman and CEO roles

'It is also our expectation that the company should clearly separate the role of the chairman from the CEO. SIAS itself appointed an independent chairman in August last year, separate from Mr Gerald's role as president and CEO, even though it is a not-for-profit association rather than a public listed company.

'We practise what we preach. We want this to be a clear message because many Asian family-owned companies are reluctant to part with that role - they want to run the company and still be chairman.

'And very often the sons or daughters will be on the board. This is because they have greater confidence in their family members and I suppose they want to keep family secrets close to their chest. But as the companies expand and go global, they have to give way to corporate governance principles - to let management, not the family, take management decisions.' Otherwise, 'they lose the competitive edge', says Mr Gerald.

Training for directors

'We've been hoping for greater disclosure regarding directors' training and orientation programmes. While most companies have professionals on their boards, there are many directors who are not well-trained in corporate governance and financial matters. Business acumen alone - though essential - will not do.

'The nomination of new directors is also an area where SIAS is very much concerned. Is the nomination process independent and is it done in a manner that is acceptable to shareholders?'

One bugbear is that companies seem to be increasingly reluctant to state explicitly a relationship between the CEO and the chairman when it exists, Mr Gerald says. In such cases, 'transparency would be better received than not disclosing', he points out.

Directors' pay

'There has been very little improvement in the disclosure of remuneration of executive directors and senior management,' notes Mr Gerald. Most big companies here still report top executives' pay in wide bands of $250,000.

'I think they need to accept that investors will reward talent and will not pick on remuneration as an issue if it is not out of the ordinary. Leadership and performance must go hand-in-hand. I get very sad when I see company CEOs or senior management being given an enormous salary when the company's bottom line has not improved.' Still, Singapore companies are generally sensitive to shareholders and to the fact that remuneration must be pegged to performance, he says.

Companies shy away from disclosing the exact pay of top executives because 'they feel that the possibility of poaching is real', he notes. 'But how many times can a man be poached? It's all a question of how you treat him and the sort of incentives you provide. And how much more can peers pay if you benchmark the pay against your peers?'

Ultimately, 'any remuneration package for senior executives must be couched in clear language and must be understood by shareholders without difficulty', Mr Gerald says, when asked about some companies that choose to award shares to top executives based on future performance targets. 'One thing that shareholders do not like is over-the-top rewards for senior management which lack justification. If you can justify your package and clearly couch it so that your shareholders can know without difficulty what it is that he's getting, no problem.'

Investor relations

Investor relations is a necessary exercise for listed companies, Mr Gerald believes. Without an effective investor relations practice, companies will not be able to communicate with shareholders. As things stand, companies are not communicating well with minority shareholders - as a result, there are a lot of disputes and unhappiness.

Although SIAS itself helps companies to communicate with retail investors, Mr Gerald strongly recommends that firms engage professional investor relations (IR) companies - 'they will take you to the investors, mainly institutional clients'.

'Investor relations is still not taken seriously by a number of companies - it's seen as an unnecessary expense', especially by smaller companies which find it a burden, he says. His advice: Don't be penny-wise and pound-foolish. If a crisis hits, 'you have to engage lawyers, accountants, financial experts and then investor relations companies - you'll be paying through your nose'. Have a good investor relations policy to start with as part of your corporate governance exercise, he says.

'IR is one of the important pillars of corporate governance. You may have a good business that's making money but it is not covered by analysts, not known to investors - how far can your share value go?' Some companies don't realise that, Mr Gerald says. 'They think a listed company's business is all about making money, getting good salaries and forgetting about the share value.'

'Investors are likely to be more receptive to buying a company if they understand its business and the management well.' Companies 'can cultivate a good following through effective investor relations', he adds. 'Demand will grow over time and this will be reflected in the share price.' Still, 'it's an arduous process - we have to keep talking about it for years', he acknowledges. 'It requires a change in mindset.'

Corporate scandals

Mr Gerald also believes that company managers, regulators and investors here have much to learn from recent corporate scandals in the US and Europe, including Enron in the US in 2001 and Parmalat in Italy in 2003. More recently, the FBI launched an investigation into possible fraud at four of the biggest financial institutions in the US - Fannie Mae, Freddie Mac, Lehman Brothers and American International Group (AIG).

'It can happen so long as there is a failure in integrity. When greed takes over, then good corporate governance takes a back seat,' says Mr Gerald. In such cases, it is not just the company's internal structure that is to blame. 'One has to also look at the regulatory framework. The inclination throughout the world has been to allow companies to self-regulate. Has that paid off?

'Allowing companies to self-regulate and asking the market to settle corporate and shareholder issues - has it helped? Is it time to go back to the drawing board and ask where we have failed? How much intervention was necessary to avoid this or would it have avoided this meltdown?

'I think in the case of America, it's been largely because they have been hands-off. Allowing a person to sign a mortgage document knowing full well that he cannot service the mortgage - I think that is a lesson for us to learn.'

In recent years, many investors here have been tempted to put money in the US and other countries, including China. 'The question to ask is, how much do you know about the company, who is running the company, what is the company's business. Are you excited by the share price alone, because what is $8 today can be five cents tomorrow.'

Finally, Mr Gerald says: 'How sure are you the next president of America will set things right? I'm telling myself, as a small investor, keep it in cash. Or if I want to take advantage of the current situation, following the example of Warren Buffett and others to do value investing, then seek advice on companies which are fundamentally sound, which are good for long-term investments.'

A 'comatose' stock market in America 'cannot get up and run', he adds. 'It needs to take years before the economy and the stock market start becoming vibrant again. I won't believe any politician in America or elsewhere who says, 'Don't worry, we'll fix it'. It's going to be a long time before things get better.'

This article was first published in The Business Times on October 10, 2008.