A tree falls in a forest story

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An honorable member of the Coffee Shop Has Just Posted the Following:

New birds investigate old bird, of course this type of outcome lar.
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If a tree falls in a forest and everyone claims he or she did not hear it, did it make a sound? That metaphysical question could probably keep philosophers in business for another century.

For regulators, though, a similar question demanding a more immediate answer has arisen in the wake of Singapore Post’s recently concluded corporate governance special audit: If a disclosure lapse has allegedly zero impact on a deal decision, is it still a breach that warrants regulatory action?

If it is, then letting it slide - whether in appearance or otherwise - could inadvertently open the doors to moral hazard.

Regulators are no doubt aware of this and to their credit, they have responded quickly to say they are looking into the investigation findings. Still, the public needs stronger assurance that a disclosure breach is fundamentally unacceptable in a quality market - regardless of whether it was deliberate or allegedly had zero impact.

In a summary of the special audit findings released last week, SingPost’s special auditors found that SingPost director Keith Tay was "arguably in breach of section 156(1) of the Companies Act" for not declaring his interest in SingPost’s 2013 acquisition of Famous Holdings "as soon as practicable”.

They also found he had breached some fiduciary duties under the Companies Act relating to that deal and to SingPost’s acquisition of Famous Pacific Shipping (NZ), or FPSNZ, in 2015.

The special auditors said, though, that Mr Tay’s 2015 omission appeared to not have been deliberate.

While regulators have thus far declined to say whether they are investigating Mr Tay or SingPost for potential breaches, the Singapore Exchange has issued a firm statement, saying it is “reviewing the findings" and "will take disciplinary action for any breaches of the listing rules and refer breaches to the relevant authorities, if necessary".

The Accounting and Corporate Regulatory Authority (ACRA), which deals with breaches of the Companies Act, has also said it would “work with the relevant agencies to review the findings from the special audit report to assess if any regulatory action is warranted".

But ACRA added: “In this regard, ACRA will take into account key considerations such as the sufficiency of public interest, whether any harm has been occasioned by the alleged breach and the culpability of the relevant parties."

Therein lies the rub. Regardless of ACRA’s intentions, one way to read the phrasing of its statement is that if a breach seems to have caused no damage and nobody is interested. ACRA may decide to take no action against the rule violation.

Surely that can't be right. Going by that possible reading, several concerns follow.

First, what can be read into the special auditors' seemingly pointed note that their “interviews suggest" that Mr Tay’s lack of timeliness in disclosures would have made no difference to the decisions to enter into the Famous acquisitions?

Second, how much were the auditors constrained in their questioning by the fact that the scope of their investigation was prescribed by the terms of reference for their probe? And consequently, how much should the interview results be allowed to tip the balance for regulatory action?

On the first issue: The special auditors have been careful to stop short of saying it is their own view that Mr Tay's disclosure lapses made no difference.

For instance, they wrote: “Our interviews suggest that the lack of timeliness in the disclosures would have made no difference to the decisions to enter into the Famous acquisitions." And again: "Our interviews suggest that it would have made no difference to the decision to enter into the FPSNZ Acquisition if MrTay had declared his interest to the SingPost Exco."

Notably, the auditors did not say whether they are convinced by the results of those interviews.

This leads to the second issue - that is. what questions the special auditors were allowed to ask their interviewees in the first place.

On the one hand, the auditors have declined to say whether their line of questioning was restricted to a binary "buy or don't buy", or had also taken into account other significant deal factors such as valuations.

On the other, it would also likely be difficult for the directors interviewed to know for sure what they would have done back in 2011 had they known from the very start about Mr Tay's conflict of Interest.

Unfortunately, the special auditors have refused to shed light on what reasons their interviewees gave when claiming Mr Tay’s lack of timely disclosure had zero effect on the deal decision.

This leaves minority shareholders in the dark as to whether SingPost may have over paid for deals due to the alleged disclosure breaches.


If the breaches subsequently attract little to no clear regulatory sanctions, the public might interpret that to mean directors can get away with poor disclosure as long as other board members agree but only after the feet that it made no difference. Such outcomes will potentially lead to moral hazard.

This danger applies to all directors, including the board chairman who is ostensibly in charge of keeping board matters shipshape.

While SingPost’s special audit was triggered by one inaccurate statement in a deal disclosure, it has unearthed flaws in the way the entire board functions; and all board members ought to share responsibility for die shortcomings.

The Famous acquisitions might not be the only deals affected by director disclosure failures: and minority shareholders may never find out if there were other lapses due to information asymmetry.

A firm demonstration from regulators that directors cannot expect to get away with disclosure lapses - no matter how allegedly accidental, uninteresting or impact-less will go a long way to assure shareholders and other market players.

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© MelissaTanBT


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