Issue 159: Prioritising risk, engagement in governance code review; Singapore's data centre retreat

Business Times

10 hours ago

This week in ESG: MAS official outlines approach of Code of Corporate Governance review; PwC forecasts data centre growth in Asia-Pacific
Corporate governance
New codewords? Risk and engagement
As Singapore reviews its Code of Corporate Governance to complement efforts to revitalise the stock market, risk management and stakeholder engagement should be priority areas to beef up.
Monetary Authority of Singapore (MAS) assistant managing director Lim Tuang Lee says that the Corporate Governance Advisory Committee (CGAC), which is undertaking the review, will adopt a 'broader consultative approach ' to seek feedback from investors and companies of various profiles.
Two subcommittees – announced in May – will support key thrusts of the review. The first subcommittee will consider how to improve implementation of the code, including practice guidance suited for companies' operating contexts, size and industry.
The second subcommittee will consider new code provisions on corporate culture, board effectiveness and risk management in emerging areas such as artificial intelligence.
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In a speech this week, Lim said facilitating a 'more meaningful and practical application' of the code could mean that a 'one-size-fits-all approach may not be the way' to achieve the code's desired outcomes.
The review is taking place amid a national effort to spark more action in its stock market. The regulatory aspect of that effort involves a more decisive move towards a disclosure-based regime.
Messaging on the stock market revitalisation and code review can be misconstrued as more of the same.
After all, the creation of the Singapore Exchange (SGX) through the merger of the Stock Exchange of Singapore and the Singapore International Monetary Exchange in 1999 was part of a move to liberalise Singapore's financial regulatory system and capital markets by embracing a risk-based regime. The caveat emptor approach has been a pillar of the Singapore stock market for more than two decades, or at least that has been the official line. Except that now we have learned that there were still remnants of a merit-based system lurking in the listings approval process and that some rules may have been too onerous, so it's time to cleanse the system to be purer. Caveat emptor with less caveats. Buyers truly beware.
And one might think that eschewing 'one-size-fits-all' in the code is a funny thing to say since the code is already enforced under a comply-or-explain regime. This means that any company that chooses not to adhere to any part of the code faces no penalty as long as it explains the non-compliance. To be any more accommodating and less one-size-fits-all might have to mean doing away with a code altogether.
Of course, it makes some sense when you dig up the details. Effective market regulation is always going to be some balance between regulatory enforcement and market discipline, and it's perfectly reasonable to determine that the correct calibration this time needs to shift towards more market discipline.
Also, the governance code is primarily a principles-based code, so it's important that companies with different circumstances – a family-controlled company has very different governance dynamics from one with more dissipated ownership, for example – are supported by practice guidance that accounts for variation.
Notwithstanding the issues with messaging, the most important thing for the code review is that the trajectory is towards a more disclosure-based regime.
Such regimes lean heavily on boards to ensure that company disclosures are timely, accurate and adequate. Boards in turn depend on management to obtain the information being disclosed.
That's why regulators around the world have been paying closer attention to boards' accountability on risk management and internal controls. In London , the revised 2024 governance code makes it clear that boards are responsible for establishing and maintaining risk management and internal control frameworks, and must report on their effectiveness in annual reports. Hong Kong 's new code, which took effect in July, makes it mandatory for boards to review the effectiveness of risk management and internal control systems annually and to disclose details about those systems in annual reports.
Internal controls can include oversight over corporate culture, especially when it comes to ensuring a commitment to ethics and integrity in the company. It's often said that deliberate hiding of fraud can be extremely challenging to detect. A corporate culture that emphasises the right values is one way to minimise that risk.
It's worth considering whether the Singapore code should expect more from boards with regard to risk management and internal controls. In five full years of available data from SGX Regulation (SGX Regco), potential listing rule breaches – where the regulator issues show-cause letters to companies – related to timeliness of financial and sustainability reports, annual general meetings, internal controls and other corporate governance issues have trended upwards.
The numbers come from ongoing investigations, so the date of the potential offence may not correspond with the date that the letter was issued. It's also possible that some companies are targets for more than one enforcement action, so a higher number doesn't mean potential delinquency is more widespread. Furthermore, higher breach numbers might reflect more effective enforcement instead of a higher offence rate. Notwithstanding those limitations, the fact is that the occurrence of concerning governance lapses has not shown clear improvement.
Singapore may also need to strengthen board oversight of risk and internal control systems to accommodate a recent court ruling that a director may be a 'sentinel' but not a 'sleuth'.
That ruling makes clear that it's not the director's 'duty of supervision and oversight to pick up fraud unless there are tell-tale or warning signs'. Internal controls become more important under these rules.
Another aspect of the Singapore code that might deserve some emphasis is the board's role in engaging with stakeholders. From an investor's perspective, increasing the opportunities and channels through which a company can share and obtain information is important as the market tilts further towards disclosure-based regulation and a regulatory preference for continuous disclosures. From the company's point of view, regular contact with various stakeholders helps it to stay abreast of risks and opportunities in a volatile and uncertain world.
However, as MAS's Lim observes, 'too many companies here limit themselves to the bare minimum disclosure requirements, and in doing so, they've missed the opportunity to articulate strategic visions and plans for companies'.
The revised Hong Kong code is more prescriptive about the details that companies are expected to provide in reporting about shareholder engagement. For example, companies are expected to disclose the nature and number of shareholder engagements by independent and non-executive directors.
The right approach for Singapore's code is for the CGAC to determine, but stakeholder engagement is an area widely seen to be ripe for improvement.
The timing couldn't be better for a refresh of the governance code. For the CGAC, the challenge lies in finding the right calibration to put boards in the best position to help their companies navigate a global economy and trade relationships that are undergoing drastic changes, as well as a Singapore stock market that is heading into its own transformation.
Net zero
On the sidelines of the data centre race
Singapore is losing market share in the data centre space, but this is one sector that the water- and renewable energy-starved nation might be ready to sit out.
A report by PwC forecasts 8 per cent compounded annual growth for data centre capacity in Singapore between 2024 and 2028. That's the lowest rate out of 14 Asia-Pacific markets analysed by the consulting firm. While Singapore's data centre capacity might expand from 1 gigawatt (GW) to 1.4 GW in that period, it would be overtaken by Malaysia, which could see capacity grow from 0.5 GW to 1.6 GW.
As a region, Asia-Pacific's data centre capacity will grow 21 per cent per year from 2024 to 2028, more than doubling capacity from 12.2 GW to 26.1 GW. That growth will be driven by digital technologies, including cloud computing, 5G wireless networks and artificial intelligence.
Singapore is a major regional hub for trade, finance, logistics as well as a stable location both in terms of natural disasters and politics. Those would normally make Singapore an ideal location for data centres, but the nation's ability to keep pace with its neighbours is severely limited for a number of reasons.
Land-scarce Singapore is not yet fully self-sufficient in water and has to import the liquid from Malaysia. The country has also committed to peak greenhouse gas emissions by around 2030 and to achieve net zero emissions by 2050, which are ambitious targets given that Singapore is almost completely reliant on natural gas for electricity and expects to have to import renewable energy to meet those goals.
Data centres are notoriously huge consumers of electricity – for powering the servers that occupy the centres – and water – to cool said servers. Unless and until data centres become significantly more efficient in their energy and water usage, or Singapore is able to generate or procure low-carbon electricity at a cheap enough rate, data centres are a bad fit for Singapore.
Singapore copes by adopting a strategy that focuses on lower-volume research and development, hoping to attract developers to build and test green data centre technologies instead of competing on capacity.
But the truth is that everyone else also has to deal with the huge energy and water appetites of data centres. PwC predicts that the electricity consumption of data centres in the Asia-Pacific's top six markets will outpace the growth of renewable energy generation capacity in those countries. The renewable energy gap in these markets will grow from between 200 and 300 terawatt-hours (TWh) in 2024 to more than 500 TWh in 2030.
Data centre growth in many Asia-Pacific countries will threaten the ability of those countries to achieve their climate goals, and policymakers may have to choose between one or the other in the coming years. Singapore may be making its choice now, but others could soon have to confront that reality as well.
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