By Fianna Jurdant – Senior Policy Analyst, OECD (The Organisation for Economic Co-operation and Development)
Global trends of structural reforms in the last decades induced changes in the ownership structure and business models of stock exchanges, giving rise to new challenges with the potential for conflict of interests in relation to their role in corporate governance.
Asian stock exchanges, in which 47 per cent of all public equity capital in the world is raised through initial and secondary public offerings (IPOs and SPOs), experienced similar developments. This article highlights key messages from the OECD report (hereafter referred to as the Report) published in 2018, The Evolving Role of Stock Exchanges in Asia: Standard-Setting, Supervision and Enforcement of Disclosure Obligations and Corporate Governance Rules. This follows the G20/OECD Principles of Corporate Governance that emphasise, ‘regardless of the particular structure of the stock market, policy makers and regulators should assess the proper role of stock exchanges and trading venues in terms of standard setting, supervision and enforcement of corporate governance rules’.
Asian stock exchanges: how have they evolved?
Stock exchanges in Asia have also gone through their own transformation, affecting their ownership structures and business models. Their different legal status and source of revenues affect their role in standard setting, supervision and enforcement of corporate governance frameworks.
Ownership changes and the privatisation trend Stock exchanges in Asia have generally followed the global trend towards demutualisation and self-listing. While stock exchanges used to be member-owned organisations or government institutions, many stock exchanges in OECD countries moved from a non-profit, mutually owned organisation into a for-profit, investor-owned corporation. Some exchanges went even further by listing their own stock on the exchange. Out of the 18 stock exchanges in the 13 Asian jurisdictions surveyed in the report, half are demutualised, five are self-listed and 15 are self-funded (as of August 2017). See the charts, below.
Funding sources of stock exchanges in Asia can also affect their ability to operate independently, be that market participants, the state or third parties, among others. Also, the changing status of exchanges in Asia is accompanied by the evolution of their revenue structure. Data services, accounting for 19 per cent of total revenue of listed stock exchanges worldwide, only represent eight per cent of Asian stock exchanges displaying this information. Around three-fifths of total revenues are generated by trading services, while other services (e.g. membership fees) increased from 18.. (missing end of sentence: ask client when sending through).
Following de-mutualisation and self-listing, many stock exchanges are now also profit-making companies with an emphasis on promoting trading, this presents potential conflicts of interest that can affect their role in supporting sound corporate governance practices. This is particular the case when an exchange also has a regulatory function or when a significant number of stock exchange board members are themselves investors in listed companies. Further, in some cases when the state owns shares in an exchange, there is a potential for indirect influence of governments. Owning shares of listed companies through state investments funds might discourage them to take action against government-owned or government-linked listed companies.
The evolving role of stock exchanges
A key responsibility of stock exchanges in ensuring sound corporate governance involves issuing listing rules, disclosure standards and monitoring compliance with these standards. Despite the challenges arising from reform measures and a different balance of responsibilities with regulators in Asia, stock exchanges remain key actors in improving the quality of corporate governance practices.
Standard setting: from a direct role to a supporting role The Principles have been widely used across Asia as a benchmark for developing securities regulation and listing rules. There is a range of models in Asia in terms of the roles in exchanges in standard setting of corporate governance standards.
One model is where the securities regulator provides the general direction for standard setting on corporate governance while the stock exchange issues listing rules. The listing rules of the Korea Exchange (KRX), for instance, incorporate corporate governance rules, such as the number of independent directors and the establishment and requirement of audit committees. Another model is when the exchange takes a lead in developing a corporate governance code. This is the case for the not-for-profit government entity in Chinese Taipei. In Vietnam, the CG Code is developed in a collaborative manner by the regulator – the State Securities Commission – and the two stock exchanges. A third approach is when the securities regulator has a dominant role by issuing listing rules while the exchange is responsible for implementing and monitoring them. This is the case in Bangladesh, where the stock exchange monitors and supervises the status of listed companies.
Supervision – paving the way to improve disclosure Stock exchanges are responsible for supervising disclosure requirements and for improving the quality of disclosure. The majority of Asian stock exchanges play a role as front-line regulators in ensuring that the market is fair, orderly and transparent. There are generally three categories of disclosure requirements: periodic disclosures, continuous disclosure of material information and disclosure of corporate governance statements. Stock exchanges participate in the enhancement of corporate governance through the following:
- Monitoring disclosure Stock exchanges are responsible for monitoring compliance with the disclosure requirements defined in the listing rules. This applies to periodic disclosure (e.g. interim statements, financial statements and annual reports)
- Issuance of guidance Even when companies comply with disclosure requirements, the quality of disclosure is still not meeting expectations in many Asian markets. Thus, stock exchanges have issued practical guidance with the aim of helping listed companies better understand and comply with disclosure obligation. This is the case in China, Taipei, Malaysia and Thailand, for instance
- The disclosure of corporate governance standards Some exchanges require listed companies to disclose compliance in annual reports on a ‘comply-or-explain’ basis
- Evaluation systems and benchmarks Reviewing companies’ corporate governance practices allows some exchanges to establish corporate governance evaluation systems. This helps to identify best performers as benchmarks and encourages the adoption of corporate governance initiatives
While the securities regulator remains the main custodian of codes and principles of corporate governance in most Asian economies, stock exchanges often play a supportive role in the supervision and promotion of sound corporate governance practices. To promote compliance with corporate governance codes and listing rules, Asian stock exchanges are leading a set of additional actions including:
- Issuing guides This goes beyond guidance for disclosure requirements and aims at helping listed companies understand and comply with the corporate governance code and listing rules. (Bursa Malaysia p.28)
- Sample reporting templates Singapore provides a template to help companies in their disclosure practices and make the regulator’s supervision easier. In addition, Bursa Malaysia monitors companies’ compliance not only with listing rules but also with the corporate governance code. Further, it engages with listed issuers to address any disclosure gaps noted
- Assessment of corporate governance reports Some stock exchanges monitor compliance and assess the quality of disclosures through corporate governance reports in order to track improvements over time. The Singapore Exchange Limited (SGX) and the Stock Exchange of Hong Kong Limited (SEHK) take this approach
- Training and workshops Some Asian stock exchanges lead training programmes and workshops for directors and issuers. Such initiatives, as in Chinese Taipei and Hong Kong (China), cover different topics, including listing rules requirements and corporate governance in general
Enforcement: The relative powers of stock exchanges
The most challenging role for exchanges is enforcement, given the impact it has on its reputation and credibility. First, the powers of stock exchanges are mainly limited to enforcing breaches of listing rules. Further, limited access to information and insufficient resources restrict the enforcement powers of stock exchanges. In these cases, the assistance of relevant authorities is necessary to achieve results. In order to guarantee shareholders’ rights, enforcement actions need to happen quickly; this raises the issue of whether stock exchanges should take pre-emptive actions, such as injunctions, freezing of assets or suspensions.
According to the report, sanctioning powers of stock exchanges vary widely. Clearly defining the responsibilities of stock exchanges contributes significantly to their implementation of effective enforcement actions. The sanctioning powers available to stock exchanges include imposing sanctions, suspensions and/or de-listing.
“In most Asian economies, stock exchanges often play a supportive role in the supervision and promotion of sound corporate governance practices”
Most stock exchanges have the power to de-list a listed company. However, this enforcement action remains rare for various reasons. First, it might not be an appropriate response, given the adverse effects it incurs on shareholders. Second, the exchanges have a disincentive to de-list companies that contribute to their revenues (e.g. trading revenues, or others) or represent an important market actor.
Among the Asian economies surveyed, four confer comprehensive enforcement powers to their stock exchanges, which actively pursue enforcement actions for breaches of the
listing rules. The jurisdictions are Singapore, Malaysia, Chinese Taipei and Hong Kong (China). Specific committees (i.e. disciplinary, regulatory and/or appeals committees) are set up by exchanges to deal with breaches of listing rules, as in Singapore Exchange and Malaysia. Bursa Malaysia has a wide array of enforcement actions at its disposal. This ranges from warnings and/or public reprimands targeting listed issuers and some of their representatives (e.g. directors, brokers and dealers) to the imposition of fines, or even the suspension of trading or de-listing of a listed issuer – depending on the severity of the breach. The Hong Kong Stock Exchange has comparable powers.
However, in other jurisdictions, stock exchanges do not have all of these sanctioning powers, which usually remain with the securities regulator. The stock exchange in Vietnam can take enforcement actions such as reminders, warnings, suspension or de-listing following the violation of corporate governance rules, however only the State Securities Commission can impose fines. Whereas in India, for example, the vast majority of enforcement powers is conferred on the securities regulator. In their quest for a stronger culture of corporate governance, stock exchanges also benefit from initiative taken by various stakeholders, including institutes of directors, corporate governance centres, institutional investors and minority shareholders organisations, auditors and corporate secretary organisations, promoting good corporate governance practices and regulations. In addition, some stock exchanges pursue training programmes, studies and reports in collaboration with these stakeholders.
Managing conflicts of interest in Asian stock exchanges
As mentioned earlier, the demutualisation of stock exchanges generated a potential for conflicts of interest between their regulatory role, which serves the public interest, and their commercial role as a profit-making company. This situation led to different arrangements introduced by some Asian exchanges with the aim of avoiding possible conflicts of interest.
For example, the Singapore Exchange (SGX) – responsible for the development and enforcement of rules and regulations in the Singaporean securities markets – set up specific safeguards to address the issue of conflicts of interest. It implemented conflict of interest guidelines for self-regulatory organisations and delegated its regulatory power to a subsidiary. The latter’s chief executive is the exchange’s chief regulatory officer who reports to the subsidiary’s board, composed mainly of independent directors and chair. A different setting prevails in Hong Kong, China where the Listing Rules of the exchange and a memorandum of understanding between the exchange and the Securities & Futures Commission (SFC) address conflicts of interest. The Stock Exchange of Hong Kong Limited (HKEx), as a self-listed company, has to comply with its own listing rules regarding the issuance of its securities. Thus, the SFC is in charge of the supervision and the regulation of HKEx and following the terms of the memorandum of understanding, it fulfils the same functions for other issuers in the event of a conflict of interest.
About the Author:
Mrs. Fianna Jurdant is a Senior Policy Analyst in the OECD. She advocates sound corporate governance policies and practices globally. She leads programmes to enhance cooperation with China, India and Indonesia and develops regional initiatives in Asia as well as recently the Middle East and North Africa. Ms. Jurdant also stears OECD’s work on diversity in corporate leadership.
Since 1997, Ms. Jurdant provides policy advice and builds partnerships with governments, business groups, civil society and international bodies, helping to shape policy reform agendas and supporting effective implementation. She leadsa multicultural team in theanalysis and conceptual thinking to develop policy options for improved standards and practices. Her work focuses on: the Role of Stock Exchanges, Public Enforcement and Corporate Governance, Transparency of Backdoor Listings, Board Nomination and Election, Diversity, Board Evaluations and Performance, Related Party Transactions, Disclosure of Beneficial Ownership and Control, amongst others.
1.OECD(2017), OECD Equity Markets Review: Asia 2017.
2.OECD (2015), G20/OECD Principles of Corporate Governance. p.16.
3.OECD (2018), The Evolving Role of Stock Exchanges in Asia: Standard-Setting, Supervision and Enforcement of Disclosure Obligations and Corporate Governance Rules. p. 7