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Investors want answers and change

21 May 2016

WHEN the chief executive of a company suddenly resigns, that raises a red flag or two.

But when that resignation comes very soon after the company’s chief financial officer quits to “pursue other career aspirations”, red flags should be raised very firmly.

A recent case, in which the independent director was revealed to be not independent at all, brings the above situation into sharp focus. The company concerned in this recent uproar is a government-linked logistics and e-commerce group, which was once lauded as being among the region’s best-governed companies.

At the end of last year, the company was forced to announce an embarrassing oversight in its governance. Initially, the company announced the second acquisition through a public statement, in which the company said that “none of the directors or controlling shareholders of the company had any interest, direct or indirect, in the transaction”.

Subsequently, the company announced that the independent director in question was in fact a non-executive chairman and was also a shareholder in the advisory firm that had played a role in the acquisition. This subsequent announcement, admitting that this independent director had a personal interest in the advisory firm, was a clear omission but one which the plc put down to a mere administrative oversight. Really?

To blame the omission on little more than a clerical error would be feeble because the independent director’s relationship with the same advisory firm had been declared in a separate announcement for a different transaction two years earlier. In fact, this same advisory firm advised on, and arranged a total of three transactions for this plc. This is the same advisory firm that is owned by this independent director. Clerical error?

Upon query, the plc did not have any record of board meetings in which this independent director actually abstained from any of the board’s discussions and deliberations on the said acquisition. The investing community did eventually learn that this independent director had abstained from voting on the latest acquisition.

Two glaring issues arise out of this point: One, if this independent director had actually voted on the acquisition, why did he do so? Two, if he had actually abstained from voting on the deal, why not say so and have it reflected clearly in the board’s minutes of meeting?

Curiously, it was only after there was a public uproar among investors over the governance oversight that the company issued another public statement saying that the independent director in question had asked the chairman of its board to appoint a special auditor to give his opinion on how strong the company’s corporate governance was.

We find it mind-boggling that an independent director with such a clear conflict of interest, is the one requesting a special auditor to review the corporate governance standards of the plc? Surely, this should come under the purview of the company’s audit committee?

Those cynical of the company’s much-vaunted governance standards wryly pointed out that both the independent director and chairman have served as independent non-executive directors on this company’s board of directors for almost 18 years. Adding to this very complex and cosy relationship, this same director has been designated as the lead independent director due to his long tenure and history with the plc.

Corporate governance

So much for winning an award for being best in class for corporate governance.

In the middle of last year, the same independent director and the equally long-serving chairman were re-elected to the board. This was done after the plc commissioned a head-hunting firm to interview the board’s other directors to find out if the two were indeed independent. Most would agree that commissioning such an interview process was stretching the well-known “box-ticking corporate governance approach” to another level altogether.

We reviewed the board’s composition and found with no surprise that the plc’s board was expanding simply because its members were not being rotated off or retired. One would have thought that it would have been better if the head-hunters were asked to advise the plc as to whether the enlarged board of directors was at an optimal size.

The plc then surprisingly announced that the special governance audit on the independent director would be carried out by the same external audit firm that the plc currently engages. The plc claimed that this is a different division within the same external audit firm; one has to wonder whether or not the left hand of the same audit firm would be likely to accuse their own colleagues, albeit those in a different division, of an oversight in governance.

The plc’s strong ties with this audit firm go back a good 12 years. So investors are supposed to readily accept that this special auditor that is tasked to look into the company’s corporate governance issues is from the very same audit firm? Surely, there are other competent audit firms?

Again, it was only after the investing community made a fuss that the company appointed another audit firm to act jointly with the earlier appointed special auditor.

One thing is clear: we sometimes need public outrage about such questionable practices in order to have an effective way to push change in a plc. The worrying fact is that very often, senior management, and board members assume that it is their right to behave a certain way and almost imply that giving a feeble  and weak response should be enough to satisfy ignorant investors; ‘I didn’t do anything wrong’ should not be a way out by management or board members.

If you don’t know that you could be violating a rule, you should ask for an opinion. It is not on, if you have to wait for someone to publish your faults before you even own up.




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