Special Address by
YBhg Dato’ Siow Kim Lun
Director, Market Supervision Division
Malaysian Capital Market Summit
Organised by Asian Strategy & Leadership Institute (ASLI)
27 October 2005
Meeting the challenges of being an internationally competitive capital market through enhancing the quality of Public-Listed Companies (PLCs)
Distinguished Guests, Ladies and Gentlemen:
1. First of all, I would like to thank ASLI for inviting me here today to deliver this special address. This is indeed a timely occasion to review issues on meeting the challenges of making Malaysia an internationally competitive capital market.
2. It was in anticipation of these challenges that the Capital Market Masterplan (CMP) was developed. This 10-year blueprint was formed with significant input from all capital market stakeholders and maps out an orderly and carefully managed transition towards achieving the vision that Malaysia will be an internationally competitive capital market.
3. Since the launch of the CMP in 2001, many of the recommendations have been implemented resulting in the establishment of the necessary rules and framework for a well-functioning market. Malaysia now has a comprehensive corporate governance framework, internationally compatible financial reporting standards with clearing and settlement systems and regulations that conform to the principles of International Organisation of Securities Commissions (IOSCO).
4. In addition, the capital market has also been broadened considerably and is now worth in excess of RM1 trillion. Some of the segments that have emerged strongly to complement the equity market include a corporate bond market that ranks as one of the largest amongst the emerging economies, a unit trust industry that represents 12% the size of our equity market and a thriving Islamic Capital Market (ICM). These successes have been achieved through the significant effort put in by all capital market stakeholders to achieve the CMP vision.
5. Today, I wish to speak in greater detail on one of the key strategies to leverage on the strong foundations of the capital market. This strategy was outlined in the Budget 2006 speech by the YAB Prime Minister and this relates to the need to enhance the quality of companies listed on Bursa Malaysia to further strengthen the capital market.
Ladies and Gentlemen,
Enhancing the quality of listed companies and sustaining growth momentum
6. For a capital market to be internationally competitive, it needs to be recognised as a premier market. Such markets are typically regarded are well regulated from an investor protection perspective and therefore meet international benchmarks whether in terms of corporate governance, settlement systems or financial reporting.
7. The requirements for maintaining a “fair and orderly market” are critical to being recognised as an internationally competitive market and, as I have indicated earlier, there has been considerable success in meeting these requirements.
8. Another aspect of being a premier market is that it must offer a wide-range of high-quality investible products. In this regard, public-listed companies are the issuers of debt and equity securities and therefore turning the Malaysian capital market into a premier market requires a strategy that focuses on enhancing the quality of Public-Listed Companies (PLCs).
9. It is generally recognised that there are strong linkages between the vibrancy of the capital market, its ability to contribute to capital formation and the positive effects this has on economic growth. As the Malaysian economy grows in sophistication, it will be the private sector that will increasingly spearhead economic growth.
10. Hence, enhancing the quality of companies goes hand in hand with national economic strategies and the budget strategy has identified this as a major initiative to sustain the growth momentum. This is why the budget has provided incentives that would encourage mergers & acquisitions (M&As) with the objective of enabling Malaysian PLCs to expand operations, increase liquidity, enhance their capital base and achieve better economies of scale.
Ladies and Gentlemen,
Quality and value creation
11. Quality companies are distinguished by the value proposition they offer to investors. The bottomline is good governance and sound management but most importantly companies should demonstrate visible commitment to delivering value either through growing their earnings or returning capital to shareholders through dividends or prudent share buy-back programmes.
12. The quality of companies and value creation are thus closely intertwined in that they are the key ingredients that engender investor confidence and trust. In this context, it is important to realise that capital markets are places where “investors pay enormous amounts of money for intangible rights, whose value depends entirely on the quality of the information that investors receive and on the honesty of people about whom investors know almost nothing” 1.
13. When investors have faith in the management of a company, they are willing to be long-term investors in the company. Most global companies view a loyal shareholder base as providing a competitive advantage in the form of a readily available source of low-cost funding to finance expansion as well as to offer some protection against hostile takeovers.
14. As many corporate governance studies have shown, when investors trust a company, they will value the company at a premium. In this regard, it is worth noting that large Malaysian companies have consistently traded at a valuation premium relative to their peers in the region, which seems to suggest that generally Malaysia’s leading companies have done reasonably well on corporate governance relative to the region.
Ladies and gentlemen
SC findings on quality issues relating to the smaller companies
15. While Malaysia’s top companies rank relatively well relative to the region in terms of their quality, the number remains low. There is a need to enhance quality across the board given that Malaysia now has over 1,000 listed companies.
16. Let me highlight some statistics in relation to the smaller companies listed on the exchange. The SC has recently conducted a study of the 100 smallest companies, as ranked by market capitalisation, from the Main and Second Boards of Bursa Malaysia. These companies make up about RM2.3 billion or a mere 0.3% of the market capitalisation of the two boards. This is a worrying situation given that the aggregate market capitalisation of these 100 companies is only equivalent to a mid-cap company on Bursa Malaysia.
17. Assessing these companies based on broad quality criteria, we found that only one among these 100 companies is trading above its par value. 66 of these companies have not paid any dividends over the past 5 years. It should also be noted that the profit records of the majority of these companies have also consistently reported losses.
18. With such statistics, it is not surprising that such companies do not attract investors, trade at valuation discounts and have low market capitalisation.
19. You can understand why we, as a regulator, are concerned about the quality of companies. In the instances where we have conducted surveillance on the non-performing companies, we find that the losses arise mainly from shortfalls in meeting fundamental obligations to shareholders. In these instances, value was destroyed by mismanagement and, in some cases, through schemes that could be deemed to constitute frauds.
20. Indeed, it is disheartening to see companies recording consistent losses and eroding their shareholders’ funds. When companies slip into PN4/PN17 status, it is minority shareholders such as retail investors who are left in the lurch as the value of their investments are diminished by the fall in market prices of their stocks and this has a dampening effect on their inclination to make future investments in the market.
Ladies and Gentlemen,
The role of regulation in reinforcing the quality of PLCs
21. As stakeholders, we all share a common obligation and responsibility to enhance the quality of PLCs in Malaysia. Overall, it should be noted that the public invests in listed companies with the expectation that board members will exercise the oversight duties effectively to ensure that the companies are managed with high levels of integrity and honesty.
22. In providing a stewardship function, directors and senior management of PLCs are therefore expected to maintain accountability and exercise due care in ensuring that the check and balance mechanisms work effectively towards safeguarding corporate governance and the interest of all shareholders.
23. While the rules provide for direct accountability for ensuring high standards of corporate governance, it is more effective if the corporate private sector is able to inculcate a culture of corporate governance so that it is practised effectively. This is supplemented by business conduct in a transparent manner and with reliable and relevant information disclosed on a clear and timely basis.
24. Beyond compliance and disclosure, there is also a need to ensure more consistent focus on delivering value to shareholders. Ultimately, it is the performance of the PLCs and the value that a company creates that drive investor support for long-term market valuation.
25. Enhancing the quality of companies is a priority on the SC’s agenda. Initiatives have been implemented on many fronts ranging from increased scrutiny on the qualitative aspects of new listing applications to initiatives to expedite the judicial process. As emphasised by the YAB Prime Minister in his recent Budget speech, the capacity and effectiveness of SC’s enforcement in dealing with corporate misconduct will be enhanced and the SC will continue to enforce laws to ensure investor confidence in the capital market.
Ladies and Gentlemen,
The role of the management of PLCs in promoting investor confidence
26. As a regulator, I have often been asked why has our stock market not been performing that well compared with our peers in the region. My simple answer to this is that for the stock market to do well, the PLCs must do well. For the PLCs to do well, the management of the PLCs must perform. And there is no two ways about it. The management of PLCs plays a critical role in promoting investor confidence in our market. When management of PLCs delivers consistent earnings and dividends to their investors, the share price of their counters will take care of itself.
27. Recent events related to market misconduct have eroded the confidence of many of our retail investors who used to be big supporters of our smaller PLCs. Many of them have got their fingers burnt. As retail investors still represent a sizeable participation in our stock market, it is important that we treat them well and work hard to gain back their confidence.
28. Many have pointed out that although our retail investors today still have a lot of cash, they are not investing in the stock market, particularly the smaller listed companies. Our banking system is flushed with liquidity. Total deposits placed with the banking institutions today well exceed RM380 billion. These depositors are now getting negative real returns from their deposit savings. Our challenge is to get these retail investors to invest in the stock market again by offering them safe and sustainable investments.
Ladies and Gentlemen,
Enhancing the qualities of PLCs .
29. Apart from issues relating to governance and value creation, it is also important for companies to enhance their investment qualities so as to increase their attractiveness to investors.
30. In this regard, the management of PLCs has a key role to play in displaying visionary leadership and maintaining active communications with investors through transparency in their actions, constant disclosure and communications of financial and non-financial information such as their business strategies are critical for investment decisions. Pro-active investor relations therefore form an important aspect of enhancing investment qualities.
31. We see some complacency in terms of companies taking the initiative to attract investors and addressing their concerns. It is important for corporate management to open the channels for investor feedback, whether positive or negative, as a means of understanding what they need to do to enhance their performance. Most top-performing companies try to forge relationships with their loyal investors as they value the advice and insights that are offered by these experienced and highly respected investors.
32. It was towards this end that the Capital Market Development Fund (CMDF)-Bursa Research scheme was launched this year to ensure more Malaysian companies get on the radar of investors. This scheme, which is partially funded by CMDF, aims at providing research coverage for smaller firms, as these stocks tend to be under-researched – thereby expanding the universe of Malaysian stocks that are actively covered by research analysts.
33. Another important aspect of investible quality relates to the liquidity of the stock. The liquidity of stocks can be measured in terms of the stock volumes that are traded actively, by the differential between the buying and selling prices and also by the impact large trades have on price movements.
34. By and large, enhancing liquidity requires that there be sufficient free float in the market for the stock to be traded actively by investors – particularly institutional investors. The rising importance of free float is reflected by the fact that it is increasingly being used as a factor for determining the weighting of a stock on an index.
35. It is also worth noting that in a recently published research report, CIMB Securities observed that 8 out of the 13 major shareholders from their selection of Malaysia’s best managed firms owned less than a third of their firms’ equity. This is not surprising as high free float leads to high liquidity and this can enhance interest in a stock. PLCs should consider initiatives that can help them increase the level of free float such as through the use of equity-linked products such as warrants.
Ladies and Gentlemen,
36. I have taken the opportunity to speak at length on the SC’s strategy on enhancing the quality of listed companies. This is because , simply put, a capital market is as strong as its constituents, which are the PLCs.
37. If we are to achieve our vision for Malaysia to be an internationally competitive market, we must then share a common goal of ensuring that our market-place is filled to the brim with excellent fast-growing companies helmed by dynamic, visionary and trustworthy management.
38. It is also clear that this is a priority on the government’s agenda which has made significant progress in implementing a significant corporate transformation programme for Government-Linked Companies (GLCs) to enhance their delivery of shareholder value, to create regional champions and to enhance their international competitiveness.
39. In conclusion, I would like to urge the management of all PLCs to follow the example set by the leading Malaysian companies and the GLCs to place shareholder value creation at the top of their corporate agenda. Corporate leaders should shape their companies so that they are treasured by investors, admired by your peers in the business world and, in the process, help us build a premier capital market that all of us, as Malaysians, are proud of.
1 Prof. Bernard Black, “Remarks on the Preconditions for Strong Securities Markets”