Your Excellency Ambassador Linda Tsao Yang,
Chairman Emeritus of the Asian Corporate Governance Association;
Douglas Henck, Chairman of ACGA;
Members of the ACGA Council;
Distinguished guests, Ladies and gentlemen – a very good morning to all.
- It is a great pleasure for me to be here at the 2015 ACGA Annual Conference, and I would like to thank the organisers for kindly inviting me to speak here this morning.
- When Jamie first reached out to me with the invitation, I was extremely delighted to learn that this Conference was going to be held for the first time in Malaysia. This is of course a very important milestone, and I would like to wish all of our international delegates a very warm welcome to Kuala Lumpur.
- I understand that you will have a fairly busy programme ahead of you, but I do encourage everyone to take this opportunity to sample Malaysia’s rich multicultural heritage by exploring the various sights and local delights that the city has to offer.
- This conference venue in particular benefits from a very central location, which puts you a stone’s throw away from many of Kuala Lumpur’s famed attractions including the Petronas Twin Towers next door and the KL Tower in the nearby Bukit Nanas Forest Reserve.
- Both of these buildings serve as iconic mainstays of the Kuala Lumpur skyline, which – to many – appears to be a skyline that never stops changing. Indeed, the history of Malaysia’s post-Independence growth may be traced in the constantly-evolving façade of the city – which first took root as a tin mining settlement in the 19th century, and has now grown into a metropolis of more than 1.5 million people.
- The narrative of growth through modernisation and industrialisation is one that is echoed across the ASEAN region. From Jakarta to Bangkok, Hanoi, Manila and beyond, the capital cities of Southeast Asia have come to embody the pulsating energy and dynamism lent by its youthful and increasingly urban demographics, which account for approximately 36% of ASEAN’s 600 million population.1
- When viewed as a single bloc, ASEAN has already emerged as the seventh-largest economy in the world with a collective gross domestic product of $2.57 trillion in 2014. As home to one of the world’s largest consumer markets, with 125 million households expected to become part of the “consuming class” by 2025, it is clear that ASEAN’s regional profile is one of tremendous economic potential.2
Ladies and gentlemen,
Staying the course amid presently challenging market conditions
- Such an appreciation for the region’s positive fundamentals and long-term prospects is critical in providing context for the episodes of turbulence that have influenced short-term sentiments on emerging market economies over the last two years.
- While financial markets in Malaysia and its neighbours remained largely resilient throughout the global financial crisis, lingering uncertainties over the pace of monetary policy normalisation in several major economies as well as concerns over the impact of global commodity prices on growth and corporate earnings have to a certain degree curtailed investor appetite for emerging markets, particularly in recent quarters.
- Nevertheless, the adjustments arising from such fluctuating sentiments have thus far been effected through financial markets in a gradual and orderly manner, facilitated by the development of local currency bond and equity markets that were significantly deeper and more liquid now than during the Asian financial crisis in 1997.
- Moreover, the implementation of more flexible exchange rate regimes and accumulation of significant foreign reserves also function as an additional layer of “shock absorbers” for regional financial markets, with Malaysia, in particular, further benefiting from deep pools of domestic institutional liquidity in its capital market.
- As policymakers, we are deeply cognisant of the need to remain vigilant against materialisation of threats to market resilience and have therefore continued to intensify our supervision of the capital market and the soundness of its participants while also strengthening arrangements for inter-agency cooperation both within the country and across the region. For a relatively open economy such as Malaysia, these cooperative arrangements are particularly valuable in enabling us to identify and defuse potential sources of risk before they may significantly impair the functioning of the capital market and the broader economy.
However, ladies and gentlemen,
The overall thrust of regulation must be oriented towards long-term growth
- Such vigilance against immediate risks must not distract us from the conviction that the central thrust of public policy – and by extension, the overall regulatory architecture – must ultimately be oriented towards promoting long-term and sustainable growth.
- Within the context of capital markets, this pro-growth approach necessitates the adoption of a balanced regulatory posture which is conducive for real economy undertakings, such as capital-raising and business formation, while being sufficiently robust against activities that may undermine the legitimate interests of market participants as well as systemic integrity of the market.
- This dual approach is embodied in the statutory mandate of the Securities Commission, which has been entrusted by law to safeguard the integrity of the Malaysian capital market while also promoting its development in the interest of the real economy – a role which may be interpreted as providing an enabling environment for private enterprise while ensuring the protection of investors, particularly retail participants.
- In operationalizing this mandate, taking into consideration the structural shifts occurring both within and outside the region, the Securities Commission has embarked on a series of regulatory and developmental reforms designed to significantly reduce time-to-market for capital market products and facilitate entry by a broader range of market participants, while also gradually opening up access to various avenues for market-based financing to businesses at the unlisted end of the spectrum. To promote capital formation and reduce friction costs, efforts are also presently underway to study how efficiencies may be further introduced into the capital-raising process.
- At the same time, for Malaysia to be able to harness not only domestic but also regional sources of growth in line with the ASEAN economic integration agenda, it is essential for greater interconnectivity to be established among the region’s capital markets. This would not only support broad-based regional growth by facilitating optimal cross-border allocation of capital, thus elevating ASEAN’s self-financing capacity, but also raise its global profile as an investible asset class.
- The need for greater capital market interconnectivity becomes increasingly acute as the broader ASEAN region continues to make significant progress in transitioning away from a state-led developmental model towards private sector-led growth – a critical step in unlocking the region’s significant economic potential. The mobilisation of ASEAN’s large pools of domestic savings into financing the region’s full spectrum of businesses, ranging from start-ups to large and established corporations, is therefore a vital economic role which these capital markets shall seek to fulfil.
- Ongoing efforts to establish pathways for market interconnectivity are spearheaded by the ASEAN Capital Markets Forum (ACMF), a grouping of all ten securities regulators from within the region – which I presently chair. Since its establishment in 2004, the ACMF has been instrumental in driving the implementation of initiatives that seek to facilitate greater intra-regional investment flows and cross-border participation, through measures such as the ASEAN Disclosure Standards, Expedited Review Framework for Secondary Listings and Framework for the Cross-border Offering of ASEAN Collective Investment Schemes.
- Recognising the establishment of the ASEAN Economic Community (AEC) at the end of this year as the capstone for the first phase of our work, my ACMF colleagues and I have also pressed on in articulating our post-2015 work programme which is designed to further align our markets through greater harmonisation and focus on various areas including professional mobility.
- A key thrust of our post-2015 agenda will be the introduction of a suite of market developmental initiatives which are tailored to meet the specific needs of our member countries. It is envisaged that this focus on capacity-building and developmental initiatives would help to accelerate the participation of all ACMF members in the initiatives that we have jointly formulated and endorsed, thus paving the way for more inclusive regional growth.
Nevertheless, ladies and gentlemen;
Disciplining markets: managing conduct risks
- In charting the future it would do us well to draw lessons from the past – and the boom and bust cycles of modern economic history serve as a potent reminder of what may come to pass from unrestrained animal spirits.
- As mentioned earlier, it remains the core duty of regulators to protect the legitimate interests of market participants while also safeguarding the systemic resilience of the overall capital market. And indeed, it may be argued that this market disciplinary role is far from being a drag on growth – on the contrary, by preserving public trust and confidence in the integrity of the market, the resolute discharge of our regulatory duties actually helps to foster broader and more sustained participation in the capital market.
- For the Securities Commission, the conduct of corporations and capital market intermediaries has emerged as a particularly important area of supervisory focus, given the extent to which it governs the interactions between these businesses and their respective stakeholders, particularly investors. Observable stress points may arise under a range of circumstances, such as when the management of supervised entities display behaviour consistent with excessive focus on the short-term, fail to observe appropriate risk management procedures and are willing to tolerate ethical violations by company officers.
- Such manifestations of business conduct risk, if left unaddressed, may not only result in corporate failure but also the inadvertent exposure of counterparties and stakeholders to risks which may not have been fully apparent at the commencement of the business relationship. This potential transmission of contagion to the broader capital market is a source of particular concern to the SC, as they may further compound the potential impact upon parties that may traditionally lack the capacity or resources to defend themselves such as retail investors.
- It is therefore one of our key supervisory objectives to ensure that business conduct risk could be identified and mitigated at the source, not only through sanctions but also by mandating more honest disclosures and the observance of fair sales practices – the standards of which are outlined in the SC’s rules and regulations.
- This emphasis dovetails with the focus placed by the Financial Stability Board (FSB) on financial supervisors’ role in assessing a firm’s “risk culture” – defined as “… the norms and traditions of behaviour of individuals and of groups within an organization that determines the way in which they identify, understand, discuss, and act on the risks the organization confronts and the risks it takes.” The responsibility for promulgating a healthy risk culture is vested in the board, making it an important determinant of corporate conduct.
Ladies and gentlemen,
Corporate governance as a source of resilience
- If regulatory supervision and enforcement are a source of external discipline, then their equally powerful complement is a firm’s corporate governance practices and internal culture. Recognising that such practices and culture are to a certain extent malleable, the SC has constructed an incentive ecosystem which seeks to shape the prevailing norms on corporate governance in Malaysia.
- Such an ecosystem deploys a multi-pronged approach through a combination of mandatory disclosures such as the Malaysian Code for Corporate Governance, the development of professional standards through initiatives such as the Financial Services Professional Board (FSPB) and the introduction of rules to strengthen board effectiveness and the protection of minority shareholders.
- An encouraging indication of such evolving norms is the leading role that is increasingly taken on by the private sector in promulgating good governance. In 2014, for example, a group of Malaysia’s largest institutional investors have collectively developed and launched the Malaysian Code for Institutional Investors, which articulated broad principles of effective stewardship for their own observance. This was shortly followed by the establishment of the Institutional Investors’ Council which was chaired by one of the signatories of the Code, the Retirement Fund Incorporated (KWAP).
- This development is particularly significant given the size and the long-term nature of such institutional investors’ shareholdings, indicating that few others are better-placed to control these levers of corporate governance. In other words, when their largest shareholders send a clear signal regarding the value of good governance and long-term sustainability, then company officers are more likely to be incentivised into meeting these expectations.
- Moving forward, the SC will continue to implement measures to further strengthen the Malaysian corporate governance environment. One such measure will be the implementation of mandatory poll voting for all resolutions at shareholders’ meetings beginning in January 2016. The completion of the transition from voting by show of hands brings the jurisdiction in line with the principle of “one share, one vote” with the availability of electronic poll voting apparatuses further facilitating this process.
- At the same time, Malaysia has also vigorously pursued the corporate governance agenda at the regional level. Under the ASEAN Corporate Governance Initiative, ACMF members have collectively enlisted a group of experts to develop the ASEAN Corporate Governance Scorecard and ranking methodology which address the five key areas under the OECD Principles on Corporate Governance, namely the rights of shareholders, equitable treatment of shareholders, role of stakeholders, disclosure and transparency as well as board responsibilities.
Ladies and gentlemen,
Future challenges: culture, accountability and technology – a moving target?
- While Malaysia and ASEAN have charted significant progress with respect to corporate governance since the Asian financial crisis, we remain acutely aware of challenges – both old and new – that may necessitate bold and innovative policy responses.
- The wave of digitalisation that is currently sweeping global financial markets, in particular, offers both tremendous potential as well as room for regulatory caution. The advent of financial technology – also known as fintech – promises to deliver significantly cheaper and broader access to financial services. However, the potential of services such as marketplace funding may only be fully realised if its operators engender trust and confidence, which necessitates due protection of investor rights as well as sufficient and truthful disclosure.
- Given the nature of marketplace funding platforms such as equity crowdfunding that primarily cater to small businesses, sound corporate governance practices become a source of competitive advantage in attracting investors, in the absence of a track record or extensive financial statements. For policymakers, it would hence be important to inculcate good corporate governance practices both in the market operators as well as those seeking funds to ensure that they are equipped with a foundation of formal structures to accommodate an injection of outside capital and enforce the notion of the firm as a legal entity which is separate from that of the owners. Such an undertaking is likely to become more challenging in jurisdictions where the regulatory remit over this sphere of financial activity has not been clearly defined or is subject to multiple, conflicting rules.
- Another common and longstanding global challenge is the diminution of individual accountability, which results in poor corporate culture and manifests in misconduct. In particular, the misguided view that legal compliance is an adequate substitute for ethical behaviour has led to the proliferation of egregious behaviour resulting in not only direct harm to both consumers and the viability of the business, but also spillover effects to the overall financial system and economy. For evidence, we need not look further than the global financial crisis which was partly rooted in widespread predatory lending practices to subprime borrowers who were actively courted into financial commitments for which they were clearly unfit.
- This gravity of this issue has been recognised at the highest levels of policymaking, with discussions taking place under the ambit of the International Organisation of Securities Commissions (IOSCO) – of which Malaysia is a Vice-Chair – emphasising the need to restore the social legitimacy of financial institutions, while stressing that cultural change cannot be bludgeoned through by regulation but must originate from senior management, beginning with greater acceptance for personal responsibility and display of ethical leadership.
Ladies and gentlemen,
Conclusion
- As we look ahead, it remains evident that the algorithm mapping the variables affecting corporate governance – such as regulation, moral suasion and information – to the actual quality of governance, manifesting in corporate culture and conduct, remains sadly elusive.
- Part of the reason, I believe, is that corporate governance is not a mechanical but rather a human issue. And human issues necessitate a human solution – perhaps one that is rooted in the realm of ethics and morality, rather than numbers and figures.
- Hence, until a silver bullet is found, or the elusive algorithm uncovered, both the policymakers and the private sector must leverage on each other’s strengths to figure out the solution together. I hope that the discussions taking place over the next two days will go a long way towards furthering this end.
Thank you.
END
