Tuesday, 29 July 2014

Independent directors: use different approach

I have highlighted several times the issue of independent directors, not speaking up for the minority investors (for instance in the case of related party transactions), not trying to unlock value in a company (for instance in the case of privatisation), not voting down (relatively) high wages for the management, etc.

Mak Yuen Teen wrote a letter to The Business Times (Singapore) "Independent directors: use different approach", which is also relevant in the Malaysian context. Some snippets:

.... The question I posed was in response to a discussion about the "nine-year" guideline on independent directors in the 2012 Code of Corporate Governance, under which the independence of directors should be subjected to a "particularly rigorous review" after nine years. In addition to the lack of clear guidance on how a "particularly rigorous review" is to be conducted, I was concerned about relying solely on the nominating committee or the board to determine if a director who has served beyond nine years should continue to be considered to be independent. This is because of the inherent conflict faced by the nominating committee and the board in this.

In fact, the nominating committee and the board are also conflicted in the initial and ongoing assessment of independence of directors, and in other issues such as recommending board appointments and re- election/retirement of directors. In the case of the latter issues, a check-and-balance is having shareholders vote on the election or re-election of directors.

In countries such as Malaysia and Hong Kong, the code of corporate governance recommends that the independence of directors should be subject to a separate shareholders' vote after nine years. If shareholders vote against the independence of the directors in this separate vote, then the company can still choose to retain the director as a non-executive director, but should not label him as an independent director. Alternatively, the board can just redesignate the director as a non-independent, non-executive director, without seeking a shareholders' vote.

At the forum, I had expressed doubt about whether such a shareholders' vote would be effective, if all shareholders get to vote on the continuing independence of the directors after nine years. After all, those who are familiar with our corporate landscape would know that there are many independent directors who have an inter-dependent relationship with controlling shareholders. If the vote is to be meaningful, then controlling shareholders should not vote.

David Webb said about this subject:

Another key issue in Asia is the lack of truly independent directors. "You have tycoons appointing their cronies and golf buddies as ‘independent directors'," notes Webb.

"There are very few really independent directors in Asia who are not tied to management or owners and who are willing to ask difficult questions," he says. "It is important that independent directors be elected by minority shareholders, with controlling shareholders forced to abstain from voting."

He adds that independent directors should be answerable to minority shareholders; so, if they fail to do a decent job, they can be quickly replaced.

Monday, 28 July 2014

Not all charts are the same

I read The Edge of July 21, 2014, and almost fell off my chair:

Aeon, the blue chip, one of my favourite Malaysian stocks, had dropped from about RM 16 to below RM 4. What has happened?

I quickly checked Bursa's website:

Same picture, Aeon's stock down by 75%.

Yahoo then:

Now it is getting strange, the share is indeed down a lot, but "only" around 50%.


And Wall Street:

Hmmm, nothing really happened, the price more or less going flat over the last year.

Checking Bursa's announcements site reveals the answer, a one-for-one bonus and a capital reduction from RM 1 to RM 0.50, so basically the share split in four.

If a bakery sells whole cakes for RM 20 and the next day decides to sell quarter cakes for RM 5, then the price not really fell by 75%, it stayed the same. A proper chart should reflect that.

Can The Edge, Bursa and Yahoo please update their charts?

Selamat Hari Raya to all Muslim readers and happy holidays to all.

Sunday, 27 July 2014

Kenneth Vun in the limelight again

Excellent article in The Star by Errol Oh: "Civil or criminal?".

Former corporate wunderkind Kenneth Vun is once again the subject of a court case filed by the Securities Commission (SC). On Tuesday, the regulator said it had taken enforcement action against him and six others at the Kuala Lumpur High Court for the manipulation of DVM Technology Bhd shares.

The SC has alleged that the seven actively transacted in DVM shares among themselves over a week in March 2006, causing the share price to rise from 11 sen on March 14 to a high of 32 sen on March 20.

The aim of this enforcement action, according to the SC, is to seek a disgorgement of all profits earned by the defendants as a result of the manipulation. The money is meant to be used to compensate affected investors. The SC is also claiming a civil penalty of RM1mil from each of the seven.

The commission also wants the defendants to be barred from becoming directors of listed companies and from trading on the stock exchange for five years.

We welcome enforcement by the authorities. However:

"Regulatory effectiveness is ultimately judged by swift enforcement actions."

Swift? The alleged share manipulation happened March 2006, more than eight full years ago! I would not exactly call that "swift" by any standard.

What determines the course of action that the SC takes in enforcing the law? How does it decide whether to take civil action or to pursue criminal prosecution?

Sure, every case is different; there can’t be a cookie-cutter approach for going after the wrongdoers. And yes, regulators can’t afford to reveal too much about how they probe suspected misconduct and how they go about trying to bring offenders to book.

However, the SC can surely be more transparent and articulate about its enforcement efforts. For example, the 100-page Capital Market Masterplan 2, which outlines strategies to grow the capital market up to 2020, doesn’t have a lot to say about the subject.

Here’s the key part: “Regulatory effectiveness is ultimately judged by swift enforcement actions. There will be greater focus on enhancing processes to expedite investigation and prosecution of cases. Towards this end, enforcement capabilities will be strengthened through the development of specialised investigation and prosecution skill sets.

“In addition, strategies will be developed to maximise the deterrent effects of enforcement actions and to enhance public awareness on the consequences of securities fraud. Greater efforts will also be made to encourage members of the public to volunteer information and evidence of possible violations of securities laws.”

In comparison, one of the four strategic goals laid out in the draft of the US Securities and Exchange Commission’s Strategic Plan for 2014 to 2018 is “foster and enforce compliance with the federal securities laws”. The discussion on this goal occupied 10 of the 39 pages of the plan.

On its website, the Australian Securities and Investments Commission has a 12-page information sheet that explains its approach to enforcement.

It’s time that the SC does more than provide updates on its enforcement policy. People ought to have a good idea of what to expect from the regulator on the enforcement front and what guides its actions when responding to violations of the law.

> Executive editor Errol Oh acknowledges that much of the regulators’ work is unseen. However, enforcement actions are strong indicators of vigilance, effectiveness and integrity.

I can't agree more with the above, the authorities should be more clear about their enforcement strategy. This is important for the shareholders, the public-in-general, but also for whistle blowers and people who file complaints with the authorities.

Kenneth Vun is of course quite well know (although often not for the right reasons), here is the previous decision against him.

Kenneth was the founder of Mesdaq listed FTEC Resources, which changed its name to Tecasia Group and then to Mangotone Group. The name changes didn't help much, the company went suddenly under in 2009, after reporting a RM 100 million loss. Kenneth had already sold his shares and resigned as a director. Large receivables, large inventories, decreasing cash, decreasing revenue, insiders selling, directors resigning, and the company "suddenly" going bust and being delisted. My guess is that the shareholders were looking at a total loss.

I am afraid that we have seen too many of these cases.

Mangotone Group and its six directors were reprimanded and fined by Bursa "for failing to make an immediate announcement of the following defaults in payments of credit facilities".

Was that enough enforcement? I doubt it. I am of the opinion that when companies that appear to be healthy, but do have some clear red flags, suddenly go under, the authorities should order an investigative audit into what really happened.

Vun is also mentioned being one of the major shareholders in Harvest Court, although he denies that.

Related articles by Where is Ze Moola can be found here and here.

Thursday, 24 July 2014

Dutch national day of mourning for MH17 victims

The Netherlands, having its first national day of mourning in more than half a century, today witnessed the arrival of 40 coffins with bodies and remains of those who perished on flight MH17 on July 17.
King Willem Alexander, Queen Maxima and Prime Minister Mark Rutte gathered with about 1,000 relatives of the 193 Dutch victims and foreign officials at Eindhoven airport where two military planes landed shortly before 4 p.m. After the landing, a soldier played ‘The Last Post’ before a minute of silence was observed. Flags on public buildings around the country are flying at half-mast for the day.
The coffins were moved from the planes to waiting hearses one by one as spectators watched in silence.
The bodies will be transported to a military base in Hilversum for identification, a process that may take months, Rutte said at a press conference yesterday. The Dutch are leading the investigation into what happened to the flight, which departed from Amsterdam for Kuala Lumpur.
Text from Bloomberg, video from the NOS.