Need To Empower Independent Directors

StarBiz: In what is seen as the first high-profile removal of the head of a government-linked company, Sime Darby Bhd's board of directors has asked its president and group chief executive Datuk Ahmad Zubir Murshid to take a leave of absence prior to the expiry of his contract on Nov 26, 2010.

Sime Darby chairman Tun Musa Hitam said at a press conference yesterday afternoon that Zubir's leaving was in connection with the cost overruns that the group's energy and utilities division had suffered in carrying out projects in Qatar and the Bakun hydro-electric dam.

Datuk Azhar Abdul Hamid, currently head of Sime Darby Plantations, has been appointed as acting group chief executive.

Sime Darby also said it would take a hit of RM964mil in its second half earnings from losses from its energy division.

Primary Purpose

The Board of Directors has primary responsibility for the governance and management of the Company, and fiduciary responsibility for the financial health of the Company.

Responsibilities

In line with the Best Practices of the Malaysian Code of Corporate Governance, the Board of Directors has the following responsibilities: Review and approve the annual corporate plan for the Group, which includes the overall corporate strategy, business development and marketing plan, human resources plan, IT plan, financial plan, budget, regulatory plan and risk management plan Review and approve strategic initiatives including corporate business restructuring or streamlining and strategic alliances Oversee the conduct of the Group's businesses to evaluate whether the businesses are being properly managed Identify principal risks and ensure the implementation of appropriate systems to manage these risks Approval on nomination, selection, compensation and succession policies for the Management Committee members, Board Committee members and Consultative Panel members and the annual manpower budget for the Group, including managing succession planning, appointing, training, fixing the compensation of, and where appropriate replacing senior management Develop and implement an 'investor relations programme' or 'shareholder communications policy' for the Group Review the adequacy and integrity of the Group's internal control systems and management information systems, including systems for compliance with applicable laws, regulations, rules, directives and guidelines (including Listing Requirements, Securities Laws and Companies Act) Review and approve the Financial Statements encompassing annual audited accounts and quarterly reports, dividend policy, credit facilities from financial institutions and guarantees Review and approve the Audit Committee Report and Internal Control Statement for the Annual Report Review and approve the Annual Regulatory Report prepared in accordance with Section 16 of the CMSA Prepare a Corporate Governance Statement on compliance with the Malaysian Code of Corporate Governance for the Annual Report Review and approve investment policies and guidelines for the Company's surplus funds, asset allocation policy and policy on exposure limits on investment with banking institutions Review and approve the capital expenditure, purchase of fixed assets, operating expenditure, variation order and any other matters in accordance with the Authority Limits Document Approval on appointment of external auditors and their related audit fees

I applaud the board of Sime Darby, its a big decision but what is more interesting is that this development is viewed by investors as out-of-the-norm. We should be seeing boards taking more proactive decisions like this. We have had reams of articles and high level meetings on corporate governance, and it would take a misguided person who believe that the majority of board of directors of listed companies on Bursa are truly carrying out their duties, and have teeth. I dare anyone to prove to me otherwise.

All listed companies should do an internal evaluation of the "strength and independence" of their board of directors. As we have many family owned companies on Bursa, many of these boards may still be beholden to the owners of the companies. More importantly, the independent directors may not be as "independent" as the word would suggests.

Do we have a body that oversees the performance of directors, in particular, the independent directors? I think the SC has that role. There are plenty of companies rolling into PN17, and seriously, I think the independent directors could have been more vigilant in many cases. A company does not run itself to the ground overnight. If you look at the the roles and responsibilities stated above, I wonder how many are truly carrying out the tasks properly.

I still think there is plenty of room for improvement. I think especially for those family owned companies in particular. If there is stricter enforcement and regular "request for independent directors to clarify and explain" from SC, I think we will see a tremendous culture change. We need boards to be empowered as they are really supposed to look out for things on behalf of minority shareholders. Confidence in the impartiality of directors is paramount, especially for independent directors.

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Changes To Mergers and Acquisitions Rules

Star Biz: The hotly debated issue on takeover rule changes will be thrashed out at a number of focus groups to be chaired by the Securities Commission (SC) today and tomorrow, industry sources said.

Included in these discussions will be investment bankers, lawyers, accountants, shareholder rights activists, local and foreign-based equity analysts as well as experts from overseas markets, which have undergone similar changes.

One of the more hotly debated issues will be whether to give the right to at least 10% of shareholders to block a takeover deal in a sale of assets situation.

Some investment bankers and their advisors have vociferously denounced this proposal as it could lead to giving minorities too much power and potentially leading to a situation of “greenmailing”. This is where opportunistic investors could purchase enough shares in a firm to threaten a takeover or force the target firm to buy those shares back at a premium.

On the flipside, there are other groups who are applauding the proposal as it affords better minority investor protection.

To recap, the SC had recently issued a consultative paper which proposed to raise the shareholder approval level in an acquisition via assets and liabilities from the current simple majority to 75% shareholder approval.

It also suggested an additional requirement that not more than 10% of shareholders present can object to the deal.

Under Section 132 (c) of the Companies Act, a buyer only needs a simple majority to take out the assets of the listed company.

This allows the buyer to circumvent the Takeover Code, where the threshold to take over a company and de-list it is higher at 90% acceptance of shares outstanding that are not owned by the offeror.

The SC, it is understood, will be seeking to collate all the feedback on the proposals in order to come up with a holistic framework that seeks to protect minorities while at the same time not unnecessarily thwarting value creation through mergers and acquisitions.

However, that will not be easy. As a corporate lawyer pointed out: “On the one hand you have some deals (via the assets and liability route) where minorities have benefited tremendously. On the other hand, you have other deals done in this manner, where minorities have been severely disadvantaged. Striking the right balance is going to be a challenge.”

Not surprisingly, those opposing the proposals would be encouraged to substantiate the views that they presented, sources said.

For example, there have been claims that merger activity will dry up if the new proposals are implemented. (Claims that deals would dry up is such a hollow argument. If something is not fair, why do we claim that implementing fairer rules will hurt ... it will only eliminate those deals that are blatantly unfair to minority shareholders. SO, the drying up of deals is a good thing as those deals are probably blatantly unfair).

The question is, has this happened in other markets?

Markets like Hong Kong, Thailand and New Zealand have all raised the shareholder approval level in asset disposals to 75% from the simple majority. (Aspiring to global best practices, people. Why there is even a discussion is beyond me).

The invited experts from foreign markets are expected to share the experience which changed the rules there and the implications the changes have had on their markets.

Those opposing the current proposals are also encouraged to provide options that would enable better protection of minority rights in such takeovers, it is understood.

It is learnt that one such suggestion is to keep the status quo (in asset sales) but limit the voting rights of major shareholders by, say, half. So for example, all shareholders who own more than 15% of the affected listed company can only exercise 7.5% of their voting power if their company proposes to sell its assets, thereby limiting the dominating effect of large shareholders on such proposals. (This is slipshod proposal, why slice and dice, its seems arbitrary).

However, such a proposal still had limitations as major shareholders could then seek to break up their shareholding using proxies, noted an analyst.

(I think 75% rule is good, and the 10% minority disapproval rate is good to stop a company from being delisted. We have to have rules looking out for minority shareholders, not company owners. It goes back to the very essence and objectives of having a capital market - there are basically two main objectives:
a) to allow a company to raise funds to fund their growth
b) to allow the private investor to participate in that growth

Anything else is secondary... things like cashing out, reduction of risk by owners, etc. Hence SC and Bursa, more SC than Bursa, are there to regulate and ensure fairness, especially to see that minority shareholders are not disadvantaged, because they are weaker ones in this capital markets game.

The 75% rule is a solid proposal. The 10% rule may be up for discussion as it could result in vulture investor groups ganging up to extort higher prices from the company for them to go through the corporate exercise. The 10% rule must be qualified - maybe 2 or 3 independent advisers be appointed to ascertain that the G.O. is fair and that minority shareholders are not unfairly treated, or recommend a final fair G.O. if the 10% deadlock is in place).

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