Responsible investment: Why Singapore opts for trust
A set of principles guiding institutional investors to be good stewards is being updated. One aspect is that the principles remain voluntary, preferring a trust-based approach. What are the pros and cons?
Rajeev Peshawaria
CEO, Stewardship Asia Centre
14 April 2022
An updated set of principles for institutional investors in Singapore will be launched at the end of this month, after an eight-week consultation process.
The Singapore Stewardship Principles for Responsible Investors (SSP) were first introduced in 2016, and have been revised by a 10-member Steering Committee led by the Stewardship Asia Centre (SAC) — a non-profit organisation established by Temasek — and supported by the Monetary Authority of Singapore and Singapore Exchange.
SSP are an industry-led effort to encourage responsible investment and promote good stewardship practices among investors.
Such codes or similar guidelines have been introduced in over 20 countries since first kicking off in the United Kingdom, which brought them in after the 2008 global financial crisis, with the aim of transforming traditionally passive institutional investors into actively engaged shareholders.
Towards this goal, institutional investors are encouraged to look beyond the balance sheet in holding company managers and directors to account in meeting their obligations. Investors, in turn, benefit from this engagement by gaining a better understanding of how the returns on their assets are being generated.
Market participants and institutions play an increasingly vital role in providing businesses with access to capital. Active ownership makes use of investors’ rights to shape better corporate behaviour and support practices that sustain long-term value creation.
In general, these investor principles take the form of best practices such as establishing and disclosing a stewardship policy, managing and engaging with investee companies, having a policy to manage conflicts of interest, and disclosing voting policies and voting actions taken. The most common approach is comply-or-explain, where companies are required to comply, and if they don’t comply, they must explain why they have chosen not to do so.
In updating its code, Singapore has chosen to maintain its voluntary approach, meaning there is no specified enforcement of compliance. Signatories commit to apply the principles or explain what they do to fulfil the aim of the principles.
However, one change being introduced is that signatories will at least be strongly encouraged to submit evidence of their stewardship efforts annually to the secretariat for greater accountability.
The revised SSP will also request signatories to integrate environment, social and governance (ESG) considerations into their investment processes. They will also be asked to focus on outcomes in applying the principles, and improve their disclosure on internal governance and structures.
The case for voluntary approach
Should the SSP be enforced by law? If they are not enforced, what are the reasons for formulating them?
The revised set of principles is industry-led, which underscores the importance of engagement. It is formulated as aspirational standards and not statutory law, giving investors the opportunity to do more than just abide by the rules.
With the highly social media-coordinated youth of today, an approach based on rewards and encouragement may be a better way forward.
There are many examples of such guidelines in practice. For instance, the International Standardisation Organisation (ISO) and various industry kitemarks are not obligatory but represent gold stars for achievement.
SAC is also planning an annual list to showcase the successes of the top 25 companies for Steward Leadership in the region.
Worldwide, mandatory compliance is rare because it is hard, in practice, to set a common standard for all companies, given wide-ranging business models. An exception in the Asia-Pacific is Australia, where compliance with the Principles of Internal Governance and Asset Stewardship is mandatory for all asset managers who are members of the Financial Services Council.
The UK Stewardship Code and the Japan Stewardship Code set a higher bar for compliance than the voluntary approach. Signatories of the UK code must submit a stewardship report to the Financial Reporting Council, while institutional investors who support Japan’s code are expected to disclose their intention publicly and adopt the principles on a “comply or explain” approach.
Going by compliance
To be sure, rules and regulations are necessary to ensure the proper functioning of markets. But the objective and the appropriateness of each rule needs to be well defined. Importantly, rules must not create burdensome bureaucracy and costs, and a false sense of security, leading to a lax attitude towards risk.
Moreover, in a complex world of rapidly advancing technologies and fast-evolving financial engineering, rules alone will not be adequate to ensure the right behaviour. Rules in the modern world often play catch up.
The number of corporate frauds and financial crimes reported around the globe suggests that some people will ignore rules in whatever format they are presented.
There will also be others who will seek to dodge them by taking advantage of ambiguities and the small print. As former Enron chief financial officer Andrew Fastow reportedly said in 2015: “You can follow all the rules and still commit fraud, and that’s what I did at Enron.” The American energy company went bankrupt amid an accounting scandal.
Why trust is better
A system that is guided by principles is underlined by trust. In an organisation where relationships are based on trust, people tend to respond faster and more effectively to evolving conditions, and they are self-motivated to do the right thing.
In contrast, in an organisation where management continuously focuses on enforcing rules or policies, employees are trained in tick-the-box behaviours.
When ambiguous situations arise, staff can become incapable of managing risks – and a new rule will be required. Therefore, a value-based approach has a self-sustaining and self-improving quality. With regulations, there is a need to amend them and ensure enforcement when a new situation arises.
And in today’s digitised economy, where data and information double every two years amid the pursuit of cross-border data-driven business models, company or government rules become even more complex and harder to enforce across jurisdictions.
There are also cases where rules can’t be enforced. For instance, it would be impossible to craft a rule that ensures genuine stewardship intent to integrate ESG criteria into business strategies all the time. Hence the term “green-washing”, where a company gives a false impression of how its products are environmentally sound.
At Stewardship Asia Centre, we believe that rather than constantly framing and enforcing rules that ensure people behave correctly, the better way forward is the messaging and teaching of values.
We believe, too, that individuals should do the correct thing and, in fact, do more than the bare minimum required by regulation. This means going beyond fulfilling the letter of the law to also upholding the spirit behind it.