CORPORATE GOVERNANCE

Report
DIRECTORS’ COMMITMENT
TO ENHANCE
TRANSPARENCY IN A
BUSINESS
By
LEE SWEE SENG
Advocate & Solicitor
LLB.LLM,MBA
Certified Mediator
Non Executive Director
OpenSys(M) Bhd
[email protected]
www.leesweeseng.com
©copyright
Question of the Day - CNN
Q : Do you trust the way big corporations do
business
Yes
No
10% 906 votes
90% 8174 votes
CNN question of the day on 7 July 2004
Studies on Corporate Failures



Studies have shown that a majority of those
corporate failures were traceable to the
predominance of one individual or several
working in concert in the board.
Invariably fraudulent practices were found.
Failure of checks and balances mechanism.
Each Party’s Responsibility





Directors - Issues of compliance & profitability
Directors - Issues of conformance & performance
Shareholders - Questions at AGM & EGM on
company’s performance
Shareholders – Nomination of independent
directors?
External auditors



Independence
Change of auditors
Who audits the auditors?
What Went Wrong?
Spectacular corporate accounting scandals and
failures include:
 Parmalat - fraudulently offered US$100 million
worth of unsecured notes to U.S. investors in
2003, at the same time inflated its assets by at
least US$5 billion
(http://www.washingtonpost.com)

HIH - deficiency of the group was estimated to
be between A$3.6 billion and A$5.3 billion
(Royal Commission Enquiry)

OneTel - resulted in a A$291 million loss in 2000
(http://www.newsweekly.com.au)
What Went Wrong?

Enron - At the conclusion of the claims
reconciliation process, the allowable claims
against the company are expected to be
approximately $63 billion, and the cash and
equity assets available for ultimate distribution
are expected to be around $12 billion
(Enron's acting CEO and chief restructuring officer)

Tyco - The company had lost more than $9
billion in 2002, and was facing a staggering $11
billion of debt maturing in calendar year 2003
(Tyco Annual Report 2003)
What Went Wrong?

WorldCom - WorldCom Inc. said it discovered
another $3.3 billion in accounting irregularities
on top of the $3.8 billion it announced in June
2002
(http://money.cnn.com/2002/08/08/news/worldcom/)

Perwaja Steel – Losses and debts totaling
RM10 billion
(National Audit Department)
Enron’s Values
In their 1998 Annual Report, their values are spelt
out as:
 Communication
We have an obligation to communicate. Here, we
take the time to talk with one another… and to
listen. We believe that information is meant to
move and that information moves people.
 Respect
We treat others as we would like to be treated
ourselves. We do not tolerate abusive or
disrespectful treatment.
Enron’s Values
Integrity
We work with customers and prospects openly,
honestly and sincerely. When we say we will do
something, we will do it; when we say we cannot
or will not do something, then we won’t do it.
 Excellence
We are satisfied with nothing less than the very
best in everything we do. We will continue to
raise the bar for everyone. The great fun here will
be for all of us to discover just how good we can
really be.

Corporate Governance Rating
Corporate scandals have created a market
for a new breed of independent third parties who
provide/sell guidance on which companies
deserve our trust, such as:
 Standard & Poors
 Institute for Corporate Law and Governance
 Institutional Shareholder Services (ISS)
ISS uses a Corporate Governance Quotient that
measures global companies against 61 different
governance criteria. ISS rated Parmalat bottom of
the 69 Italian companies in its listings.
Parmalat
Italian
dairy-foods
giant
Parmalat
has
prosecutors scrambling to find out what
happened to $8.5 billion to $12 billion in vanished
assets. Some 38% of Parmalat's assets were
supposedly held in a $4.9 billion Bank of America
(BAC) account of a Parmalat subsidiary in the
Cayman Islands.
Business Week
Parmalat
But Bank of America reported that no such
account existed. In the ensuing investigation,
Italian prosecutors say they've discovered that
managers simply invented assets to offset as
much as $16.2 billion in liabilities and falsified
accounts over a 15-year period, forcing the $9.2
billion company into bankruptcy on 27 Dec 2003.
Business Week
ISS Findings: Amongst Others
Parmalat lacked board independence. At the time
of the last public filings, the board comprised nine
insiders, one affiliated outsider, and just three
independent directors. The company was familyowned and went public in 1990. Its structure is
fairly typical of the Italian market as a whole.
Institutional Shareholder Services
ISS Findings: Amongst Others
A lack of timely disclosure concerning executive
and director compensation and directors and
officers stock ownership, coupled with a complete
lack of disclosure of progressive practices -- on
such topics as board guidelines, evaluations, term
limits, and retirement age -- contribute to the
remaining poor performance in the company's
comparative rating
Institutional Shareholder Services
Enron, The Indictment:
Richard Causey (Chief Accountant),
Jeffrey Skilling (CEO),
Kenneth Lay (Chairman)
Amongst other things:
 manipulating
Enron's publicly reported
financial results, making public statements
and representations about Enron's financial
performance and results that were false and
misleading
http://news.findlaw.com/hdocs/docs/enron/usvlay70704ind.pdf
Enron: Defendants' Profit
as a Result of the Scheme


Enriched
themselves
through
salary,
bonuses, grants of stocks and stock options,
other profits.
Skilling received approximately US$200
million from sale of Enron stock options,
netting over US$89 million in profit and was
paid more than US$14 million in salary and
bonuses.
http://news.findlaw.com/hdocs/docs/enron/usvlay70704ind.pdf
Enron: Defendants' Profit
as a Result of the Scheme


Lay received US$300 million from sale of
Enron stock options, netting over US$217
million profit and paid more than US$19
million in salary and bonuses
Causey received more than US$14 million
from sale of Enron stock and options, netting
over US$5 million profit and paid more than
US$4 million in salary and bonuses.
http://news.findlaw.com/hdocs/docs/enron/usvlay70704ind.pdf
WorldCom, The Indictment:
Bernard Ebbers (CEO),
Scott Sullivan (CFO)
Amongst other things:
 Fraudulent adjustment to WorldCom’s
expenses and revenue.
 False statements
http://news.findlaw.com/hdocs/docs/enron/usvlay70704ind.pdf
WorldCom, The Indictment:
Bernard Ebbers (CEO),
Scott Sullivan (CFO)
False Statements:
“We are pleased with our industry-leading
incremental revenue growth of US$1.1 billion this
quarter. Commercial services revenues of US$6.4
billion are up 19% year over year.”
Statement made by Ebbers to analysts at a conference in 2000.
Tyco, The Indictment:
Dennis Kozlowski
Mark Swartz (CFO)
(CEO),
Amongst other things:
 Compensation amounting to millions paid to
executive officers, loans extended to
executive officers which were later forgiven,
related party transactions, certain executives
utilizing Tyco's corporate resources to fund
personal ventures and property acquisitions,
to increase their own personal wealth.
http://news.findlaw.com/hdocs/docs/tyco/nykozlowski91202ind.pdf
Tyco, The Indictment:
Dennis Kozlowski
Mark Swartz (CFO)
(CEO),
The first trial of Kozlowski and Swartz, who are
accused of looting the company of $600
million, ended in a mis-trial in April 2004.
 Prosecutors retrying the men say they'd like to
begin proceedings in September 2004

http://www.forbes.com
Adelphia Communications,
The Indictment:
John (CEO), Timothy (CFO),
Michael Rigas (VP Operations), James Brown
(VP Finance), Michael Mulcahey (Dir)
Amongst other things:
 Routinely used Adelphia's corporate aircraft for
their personal affairs, without reimbursement to
Aldelphia, used approx US$252,157,176 in
Adelphia funds to pay margin calls against
loans to the Rigas family.
http://www.newsday.com/business/ny-adelphia-indictment,0,6067514.acrobat?coll=ny-business-headlines
Adelphia Communications,
The Indictment:
John (CEO), Timothy (CFO),
Michael Rigas (VP Operations), James Brown
(VP Finance), Michael Mulcahey (Dir)
These uses of Adelphia funds and assets for the
benefit of the Rigas Family were not presented to
or authorized by the Adelphia Board of Directors,
were not disclosed to the Outside Directors, and
were not disclosed to the public.
http://www.newsday.com/business/ny-adelphia-indictment,0,6067514.acrobat?coll=ny-business-headlines
OneTel: The Collapse
Factors of collapse included poor management,
trading while insolvent and other breaches of the
Australian Corporations Act 2001. Directors paid
themselves large bonuses while the company was
insolvent.
http://www.lawbookco.com.au/academic/CorporateMisconductezine/pdf/Gerald%20Minimizing%20Corporate%20Collapses.pdf
OneTel: Quotes from
Brad Keeling (Director)
“Sometimes you can be good at promoting
something. It becomes very big and you still
might be good at promoting but not good
enough at managing ”
Brad Keeling in his interview with Herald
OneTel: Quotes from
Brad Keeling (Director)
“It probably happens a lot. Whether you're an
engineer or a marketer, when things start to
boom people feel they're invincible and that
feeling of invincibility has to be countered.
Everybody is fallible and you have to realise
what your capabilities are.”
Brad Keeling in his interview with Herald
HIH Insurance: The Royal
Commission Enquiry
“ ‘Beware the ides of March.’ The soothsayer’s
words have become synonymous with
unheeded warnings since they were penned
by Shakespeare some 400 years ago.
Caesar’s response—`He is a dreamer; let us
leave him: pass’—is less well known but
equally apposite. These words sum up the life
and times of HIH, and they resonated eerily
throughout the inquiries I made.”
The Hon Justice Owen
Commissioner
HIH Insurance: The Royal
Commission Enquiry



It is futile to attempt to offer a prescription for
all companies
The governance of corporate entities
comprehends the framework of rules,
relationships, systems and processes within
and by which authority is exercised and
controlled in corporations.
It includes the practices by which that
exercise and control of authority is in fact
effected.
HIH Insurance: The Royal
Commission Enquiry
Cadbury Report - there is a Code of Best Practice :
 Principles are those of openness, integrity and
accountability.
 Openness on the part of companies, within the
limits set by their competitive position.
 Integrity means both straightforward dealing and
completeness.
 Boards of directors accountability is through the
quality of the information which they provide to
shareholders, and the shareholders through
their willingness to exercise their responsibilities
as owners.
4 Areas of Transparency




Director’s remuneration and severance
package
Related party transaction
Corporate Governance Statement
Corporate Fraud – system of checks and
balances, timely disclosure
Dick Grasso’s Accumulated
Pension Fund
Transparency – Executive
Compensation
Companies Act 1965 (Act 125), s 137
137 Payments to director for loss of office, etc
(1) It shall not be lawful —
(a) for a company to make to any director any
payment by way of compensation for loss of
office as an officer of that company or of a
subsidiary of that company or as consideration
for or in connection with his retirement from
any such office; or
Transparency – Executive
Compensation
Companies Act 1965 (Act 125), s 137
(b) for any payment to be made to any director
of a company in connection with the transfer of
the whole or any part of the undertaking or
property of the company,
Transparency – Executive
Compensation
Companies Act 1965 (Act 125), s 137
unless particulars with respect to the proposed
payment (including the amount thereof) have
been disclosed to the members of the
company and the proposal has been approved
by the company in general meeting and when
any such payment has been unlawfully made
the amount received by the director shall be
deemed to have been received by him in trust
for the company.
Transparency – Bona Fide
Payment to Directors

Section 137 (5)(d)
Compensation for loss of office shall not
include any bona fide payment by way of
pension or lump sum payment in respect of
past services where the value or amount does
not exceed the total emoluments of the director
in the 3 years immediately preceding his
retirement or death.
Transparency – Executive Pay
Civil Consequences
 Payments made in breach of the section are
held by the director on trust for the company:
sub-s (1). The directors responsible for the
misapplication of funds (including the recipient)
were held jointly and severally liable to repay
the company with interest in Re Duomatic Ltd
[1969] 1 All ER 161.
Civil Consequences

In an announcement made to Bursa Malaysia
on 22 Oct 2002, a company claims on the
payments made to 3 defendants, who were
past Directors of the company, amounting to
approx RM55m, the majority sum on this
claim was based on compensation for
loss/termination of office amounting to approx
RM24m which were not approved by the
Board of Directors or the shareholders.
Civil Consequences

In the same announcement, the company
claims on the return of two motor vehicles
which were disposed to the 1st and 2nd
Defendants at a substantially less than the
true market value and without the approval of
the shareholders.
Criminal Consequences
Directors’ duty upon discovery of fraud:
In another announcement on 12.9.2002 a
police report was lodged on fictitious invoices
to the value of RM259,315,572.96. The police
report was made pursuant to a decision of a
Special Board of Directors meeting.
Transparency – Executive Pay
Listing Requirements

7.25: Fees payable to non-executive directors
shall be by a fixed sum, and not by a
commission on or percentage of profits or
turnover. Salaries payable to executive
directors may not include a commission on or
percentage of turnover.
Transparency – Executive Pay

7.26: Fees payable to directors shall not be
increased except pursuant to a resolution
passed at a general meeting, where notice of
the proposed increase has been given in the
notice convening the meeting.

7.27 A director shall not vote in regard to any
contract or proposed contract or arrangement
in which he has, directly or indirectly, an
interest.
Transparency – Executive Pay
Appendix 9C LR
10(b) :
the number of directors whose
remuneration falls in each successive band of
RM50,000 distinguishing between executive
and non-executive directors to be disclosed in
annual report.
Malaysian Code on Corporate Governance
B para 4.8 III : The company’s annual report
should contain details of remuneration of each
directors.
Penalties for Breach of LR
Para 16.16 LR
 In the event of any breach of LR, the Exchange
may impose such actions or penalties as it
considers appropriate
Para 16.17(1)(b) LR Against directors
(i) caution letter
(ii) private reprimand
(iii) public reprimand
(iv) fine not exceeding RM1m.
Transparency – Related Party
Transaction
Listing Requirements : Part E
10.02 Definitions
 ‘related party transaction’ means a transaction
entered into by the listed issuer or its
subsidiaries which involves the interest, direct
or indirect, of a related party
1.01 Definitions
 ‘related
party’ means a director, major
shareholder or person connected with such
director or major shareholder.
Transparency – Related Party
Transaction
LR : PART E
10 Related party transactions
(1) For a related party transaction, the listed
issuer
must
make
an
immediate
announcement to the Exchange of such
transaction which announcement shall include
the information set out in Appendices 10A and
10C.
Transparency – Related Party
Transaction
For the above transaction, where any one of the
percentage ratios is equal to or exceeds 5%, the
following must be complied with: circular to shareholders,
 shareholders approval,
 independent adviser appointed
Transparency – Related Party
Transaction
Where any one of the percentage ratios is equal
to or exceeds 25%, the following must be
complied with: circular to shareholders,
 shareholders approval,
 independent adviser appointed,
 Main adviser
Transparency – Related Party
Transaction
10 Related party transactions
(6) A director with any interest, direct or indirect,
must abstain from board deliberation and
voting on the relevant resolution in respect of
the related party transaction.
Transparency – Related Party
Transaction
10 Related party transactions
(8) An interested director in a related party
transaction, must inform the board of directors
of the listed issuer or its subsidiary, as the case
may be, of the details of the nature and extent
of his interest, including all matters in relation
to the proposed transaction that he is aware or
should reasonably be aware of, which is not in
the best interest of the listed issuer or its
subsidiary, as the case may be.
Transparency – Disclosure
Requirements under
Companies Act 1965

132A
132B

132C

132D

Dealings by officers in securities
Prohibition on abuse of information
obtained in official capacity
Approval of company required for
disposal by directors of company’s
undertaking or property
Approval of company required for
issue of shares by directors
Transparency – Disclosure
Requirements under
Companies Act 1965




132E
Substantial property transactions
involving directors
132F
Exception and definition
132G
Prohibited
transaction
involving
shareholders and directors
Division 3A, Part IV Substantial Shareholding
Transparency – Disclosure
Requirements under LR
2.03 Listing Requirement
(2) investors and the public shall be kept fully
informed by the listed issuers of all facts or
information that might affect their interests and in
particular, full, accurate and timely disclosure shall
be made of any information which may reasonably
be expected to have a material effect on the price,
value or market activity in the securities of listed
issuers.
Transparency - Disclosure
PART G LR - Continuing Listing Obligations
5.11 Disclosure obligations
(1) An issuer must furnish to the Exchange for public
release, its unaudited/ audited financial statements
covering the profit and loss position and the
balance sheet position on a consolidated basis
within 3 months after the close of the half year, or
such period as may be approved by the Exchange,
which statements shall state whether there is any
abnormal circumstance that has affected or will
affect the business and financial position of the
issuer.
Transparency - Disclosure
8.11 Standard disclosure for circulars
(1) A listed issuer must ensure that any circular
issued to the securities holders of the listed
issuer:(a) is factual, clear, unambiguous, accurate,
succinct and contains all such information
as securities holders and their professional
advisers would reasonably require and
reasonably expect to find in a circular of
that nature, for the purpose of making an
informed decision;
Transparency - Disclosure
8.11 Standard disclosure for circulars
(b) is not false, misleading and/or deceptive;
(c) is balanced and fair …
(d) avoids over-technical language, and is
expressed to the extent possible in language
comprehensible to the layman; and
(e) explains, if the consequences or effects of
the information on the listed issuer’s future
prospects cannot be assessed, why this is
so.
Transparency - Disclosure
LR: Chapter 9 – Continuing Disclosure
9.01 (2) The disclosure requirements consist of the
following:(a) Corporate Disclosure Policy of the Exchange
(Parts B to H);
(b) Preparation of announcements (Part I);
(c) Immediate disclosure requirements (Part J);
(d) Periodic disclosure requirements (Part K); and
(e) Disclosure requirements for specific listed
issuers (Part L).
Transparency - Disclosure
(3) Continuing disclosure is the timely and
accurate disclosure of all material information
by a listed issuer to the public.
(4) Continuing disclosure ensures a credible and
responsible market in which participants
conduct themselves with the highest
standards of due diligence and investors have
access to timely and accurate information to
facilitate the evaluation of securities.
Corporate Governance in
Malaysia

Despite having conducted corporate training
sessions covering areas like the Companies
Act, 1965, and corporate governance for more
than 101,000 directors of private firms since
2001, companies continue to blatantly flout the
law, with over half of them failing to submit
their annual returns last year.
The Star, Tuesday July 13, 2004
Corporate Governance in
Malaysia


During the first five months this year, the 1,106
cases filed by the CCM against firms for
various companies act violations already
exceeded the 951 cases filed for the whole of
2003.
Approximately 57,000 offences yield the CCM
some RM10mil in fines every year.
The Star, Tuesday July 13, 2004
Cases Investigated Under
Various Sections
Market manipulation
ss 84 and 85 SIA 1983
Furnishing false or misleading statements
s 86 SIA 1983
Falsification of records
s 87(1)(a) FIA 1993
2
1
1
Source – Securities Commission
Cases Investigated Under
Various Sections
Use of manipulative and deceptive devices
s 87A SIA 1983
12
Insider trading ss 89 and 90 SIA 1983
7
Contravention of conditions imposed by the
Commission in approving proposals in
relation to securities s 32(6) SCA 1993
3
False or misleading statements in relation to
proposals submitted to the Commission for
approval s 32B SCA 1993
6
Source – Securities Commission
CLSA Country Ratings
(Malaysia): Trend Analysis
Year
2001
Rules & Regulations
9.0
Enforcement
2.0
Political / Regulatory
environment
2.0
Adoption of IGAAP
5.0
Institutional Mechanisms
& CG culture
5.0
2002
9.0
3.0
2003
9.0
3.5
3.0
6.0
4.0
7.0
6.0
Source: CLSA Emerging Markets Reports on Corporate Governance 2001-2003
6.5
Criminal Prosecution in
Malaysia: Press Release by SC
on PN4 Companies


Intensive monitoring and surveillance of PN4
companies by the SC have revealed a variety
of breaches and mismanagement by the
directors and senior officers of these
companies.
Over the past 2 years, the SC has examined
the books of 31 PN4 companies.
Source – Securities Commission
Criminal Prosecution in
Malaysia: Press Release by SC
on PN4 Companies

Offences
uncovered
from
these
investigations include insider trading and
market manipulation as well as corporate
governance
transgressions
such
as
purchasing assets at inflated prices or selling
assets at deflated values, submission of
false/misleading information, schemes to
defraud and misutilisation of proceeds of
capital raising exercises.
Source – Securities Commission
Benefits of Putting in Place a
Transparent Business




Access to cheaper sources of funds
Encourage investment
Promote sustainable productivity and growth
Create opportunities to strengthen a
company's internal processes and thereby
enhancing business
Good Corporate Governance
Commands a Premium





Eastern Europe/Africa
Latin America
Asia
North America
Western Europe
78% Yes
78% Yes
76% Yes
76% Yes
73% Yes
22% No
22% No
24% No
24% No
27% No
2002 McKinsey Global Investor Opinion Survey
Institutional Investors Punish
Companies with Poor
Corporate Governance
Percentage of respondents
(Multiple responses possible)




Avoidance of certain companies
Decrease/increase of
holdings in certain companies
Avoidance of certain countries
Decrease/increase of holdings
in certain countries
63%
57%
31%
28%
2002 McKinsey Global Investor Opinion Survey
Conclusion
The key to good corporate governance lies in
substance, not form. It is about the way the
directors :
 create and develop a model to fit the
circumstances of that company and then test
it periodically for its practical effectiveness.
 take
control of a regime they have
established and for which they are
responsible.
The Hon Justice Owen
Royal Commissioner in HIH Enquiry
Conclusion
One thing is clear, though. Whatever the
model, the public must know about it and about
how it is operating in practice. Disclosure
should be a central feature of any corporate
governance regime. Shareholders, potential
shareholders and the wider public are entitled
to real, meaningful detail about the way the
directors say they are carrying out their
stewardship role.
The Hon Justice Owen
Royal Commissioner in HIH Enquiry
The End
Thank You

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