Is it smart investing to buy shares in a family-owned company that appoints mainly relatives to the Board and pays them handsomely, even if the company reports losses and pays no dividends?
Would you put your money in a company where the majority of sales was actually made to a party incorporated overseas owned by a relative of the company’s major shareholder, but this fact was not disclosed?
What about a company that bought an overseas-incorporated business that had assets of only S$100,000 but paid S$10 million? What if that overseas business was never heard of again and never once contributed to profits?
How about a company that announces that it is diversifying into a new business but does not have any directors on its Board who have experience in that business?
It may come as a surprise, but these are actual, real-life examples drawn from practices of listed companies.
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A logical and rational investor would surely shun companies with such practices, yet awareness of the need to gauge the quality of management as well as standard of corporate governance being practised by potential investments, is not high at all among retail investors.
In my 25 years of writing for the Business Times, I never once came across a research report from any investment house that looked at these non-quantitative factors. Instead, reports focus only on published financial statements, or the latest company announcements or corporate updates.
In my view, there is a glaring gap in the content of traditional investment courses which focus on basic principles such as diversification, asset allocation, dollar-cost averaging and mainly fundamental analyses using published financial data.
The undeniable reality, however, is that when it comes to buying a company’s shares, the investor is really putting his or her faith in that company’s management.
If for example, the chief executive officer (CEO) turns out to be an idiot, the chance of losing money is increased. Worse if the CEO is crooked, or worse still, an idiot who is crooked. The same applies to the Board of Directors.
After all, what’s the use of relying on corporate announcements if the management or the Board has practised reckless non-disclosure of material information, or if the directors adopt a cavalier approach when deciding what shareholders should know?
How can investors include governance considerations, or to put it more accurately, gauge the quality and integrity of management, when evaluating companies?
Information sources for smart investing
One excellent source is the “3 Questions” sent by the Securities and Investors Association (Singapore) to several hundred companies ahead of their Annual General Meetings to alert shareholders who aim to attend these meetings, on the issues that should be raised which can be found here.
These questions focus on
- the latest financial results
- the company’s strategy and
- corporate governance
Of late, SIAS also questions companies on their sustainability strategies.
Companies are encouraged to post their replies to these questions either on their websites or on the Singapore Exchange’s website. Readers are urged to take a look at these questions as they can be truly eye-opening.
There are also two free tools readily available – the GTI score which applies to all entities listed on the Singapore Exchange (SGX), and the GIFT scores which are specifically tailored for REITs and business trusts.
GTI is Singapore Governance and Transparency Index, which was developed via a collaboration between the NUS Business School’s Centre for Governance and Sustainability, CPA Australia and the Singapore Institute of Directors.
The base score is based on board responsibilities, rights of shareholders, engagement of stakeholders, accountability and audit, and disclosure and transparency.
Disclosure and transparency include the quality of annual reports and announcements of related party transactions, while shareholder rights assess whether shareholders are able to vote on remuneration issues and how the company deals with conflicts of interest.
The GTI score for every listed company appears on the extreme right column when SGX’s free stock screening tool is launched.
Meanwhile, data on GIFT, which stands for Governance Indices for Trusts, can be found on the website Governance for Stakeholders which is run by one of GIFT’s co-creators, noted governance advocate, NUS Prof Mak Yuen Teen.
Developed together with private investor and research analyst Chew Yi Hong, GIFT takes the GTI one step further by incorporating trust-specific considerations.
According to the authors, they are currently revamping their methodology so there was no GIFT ranking for 2024. However, there is sufficient historical data for investors to go through and familiarise themselves with the important considerations when evaluating REITs and Business Trusts.
Familiarising oneself with both GTI and GIFT frameworks and scores will surely help investors understand how to gauge the quality of management in companies. This applies not only to the investing public but also research analysts who should be including governance considerations in their recommendations, but rarely do.
Using these frameworks to complement fundamental analysis should therefore provide a more complete picture of investment suitability.
Of course, there’s no guarantee that investing in a well-governed company will be profitable or yield superior investment returns. It will however, mean that the chance of losing money to fraud or crooked practices should be minimised.
Also note that some research has suggested that high-scoring companies do outperform their less-well-run counterparts. When you think about it this makes some sense, as over time, the market will quite logically avoid poorly run companies.
