Speech by Law Minister K Shanmugam at the Singapore Corporate Awards 2009

23 APR 2009

23 Apr 2009 Posted in Speeches

Dr Tony Tan, Chairman of the Singapore Press Holdings,

Distinguished guests,

Ladies and gentlemen,

Stating the obvious, this year’s ceremony is being held against a very different economic backdrop, compared to last year’s event. Last year, I stood here as a host, reading out lines from an infamous Malaysian lawyer who was alleged to be able to write judgments for judges. And we could all afford to laugh at that. This year, if only we could have such a laugh.
This year, that lawyer has gone missing. Unfortunately, apart from him, a few well known financial institutions have also gone missing. The speed, severity and global nature of the economic crisis have been quite staggering.
It is inevitable that there would be reactions to the crisis. And the reactions have been quite wide ranging, in keeping with the fact that almost every part of the world, with significant economic activity, has been affected. Commentators have sought to analyse and dissect what happened and why it happened. And not too surprisingly, failure of corporate governance and regulatory oversight are frequently cited as being amongst the key reasons for the systematic failure in some countries, at the epicentre of this economic meltdown.
In the US , the crisis has spread from the financial sector to almost all other sectors. The workers on the shop floor, doing their honest day’s work, have seen their livelihoods affected. In the US , calls for greater regulatory oversight, greater corporate governance and greater control on executive compensation have gained a lot of traction. Such calls are riding on an almost irresistible tide of public opinion.
The sentiment for greater regulation presents both an opportunity, as well as a risk - and whatever happens in the US will impact on us. What is the opportunity and what is the risk?

The Opportunity
The opportunity is this: for several years, the dogma of the market as being the ultimate self correcting arbiter, on all issues, was almost unshakeable. But as many sensible people recognised, that was not quite so.
Now there is general agreement that market functioning has to be supported by adequate regulatory framework and supervision. This is not a new insight. Almost everyone accepted this previously. But, the ideology in the boom years was such that the balance was struck in a way that led to inadequate regulatory framework and regulatory agencies which were not fully empowered - though many countries swore that they had a sound regulatory system.
As a result of this crisis, the ideology of treating the market as the repository of all wisdom, no longer has the same force. The balance may well now be altered to put more emphasis on regulation and regulatory agencies to supervise the markets. That is to be welcomed.

The Risk
At the same time, the current situation, and the move towards greater regulation, also poses a risk: the public mood is quite sour. Super expensive umbrella stands, lavish overseas parties and office redecorations at inappropriate times have all been fuel to the fire. In the public mind, a picture has formed: that executive excesses and irresponsibility of financial institutions are the cause of the current downturn.
There is strong public pressure to do something, almost anything. Riding on public anger, the risk now is that the pendulum may swing too far the other way. Public opinion and anger must be carefully considered in policy making. But if they become the predominant drivers of policy, then we can potentially have a situation where there is a move, from a philosophy of under regulation, to one of over regulation. That is the risk.
We have all seen or dealt with large scale frauds, bubbles, and market excesses and their fallouts having systemic impact. Inevitably, there will then be calls for greater regulation. But in truth, in most of those situations, the then existing regulations would have been adequate. The failures were usually due to exuberance within the market, coupled with laxity in enforcement of regulations. The answer to that is not over regulation.
Over regulation usually ends up tying up legitimate businesses, without really affecting the fraudsters, or avoiding market excess. No rule, or law, by itself can prevent criminality, nor can it prevent irrational exuberance or speculative excess.
In the current crisis, many sober people accept that the regulatory framework has to be strengthened, particularly in cross border situations. There is a clear lacuna. But there is also respectable opinion which points out that a good part of what went wrong was due not because there were no regulations, but because there was no enforcement of the regulations.
The crisis was at least partly due to a market philosophy which paid lip service to prudence and encouraged excessive risk taking by everyone, including those who should have been the very epitome of prudence - insurance companies and banks.
Would more laws in future prevent the market excesses that led to the huge bubble that in turn led to the crisis? The law can require that banks do a proper credit check before they lend on a mortgage - but the law cannot ensure that outcome. This crisis was caused fundamentally by factors similar to those which caused previous crises: excessive speculation, poor credit quality, easy money, house owners who could buy houses without having an income to pay mortgages, people drawing on mortgages to spend on consumption and so on.
I do not suggest that there is no need for additional regulations. There is a need. But going too far in that direction is not going to help. We have to wait and watch to see how the pendulum swings and what the consequences are, and how all of that will affect us.

Singapore
We have been somewhat fortunate that in Singapore, an appropriate balance had been struck, between recognising the centrality of the markets in a modern globalised economy, and at the same time, also recognising the importance of both having an effective regulatory framework and regulators who were empowered to perform their functions.
During the good times, there was a good deal of chafing that MAS and other regulators were not more adventurous. But markets are now discovering that it is better for regulators to have been boring rather than having been adventurous. And because of our approach, our financial system is in good shape. Our regulatory approach has helped us.
But we have to be prepared that when the dust settles, there will be a new paradigm. While we cannot predict with any certainty everything that is going to happen, one thing is relatively certain: Hereafter, there is going to be even more intense scrutiny of corporate actions and greater demands on corporate governance.
Rather than wait to see what happens, we should continue to move towards ensuring that there is an entire corporate governance ecosystem that is effective. That requires:
1. Regulators who have to be effective, without being over arching. We can't forget that we thrive by being an open, innovative economy. To get the balance right in regulation and enforcement is important but is never easy.
2. Boards - The Chairmen, Audit Committees, Independent Directors and top management all play crucial roles. Much will in particular be expected of independent directors. They cannot simply make up the numbers.
3. Professional groups representing accountants, auditors, lawyers and business consultants will need to play an active role in setting standards and promulgating best practices for the business they are advising.
It will certainly be interesting in the corporate world, but thankfully, (and hopefully) not as interesting as the past year.
Let me end with a somewhat amusing diversion - it has little to do with Corporate Governance but throws an unusual light on how loansharks and bankers are viewed and is reflective of the times we live in. There was an article in The New Paper today on loansharks. It carried the view of two Grassroots leaders. I will read a summary that I received on the article:
1. "Francis Han felt that loan sharks "help people on the spot, "don't check your background" or "ask for a guarantor", and that this was "fantastic". An analogy was drawn between how loansharks could be legalised, as prostitutes were.
2. On the government's suggestion to make it a criminal offence to borrow from loansharks, Henry Ling believed that legalising loansharks would create more flexibility in the system. He asked how different a licensed loanshark would be from the 172 legal moneylenders here.
3. [Punch line] There was only "a small difference between a bank and a loanshark", Han added, as sticking notices and taking away defaulters' stuff could be a form of harassment too."
Bankers have some way to go towards redeeming themselves.
My heartiest congratulations to all the winners. Good night.

Last updated on 27 Nov 2012