Saturday, 10 September 2011

Harsh fines for non-executive independent directors?

I noticed the following article in The Star, July 2, 2011:

The writer, Datuk Jeyaraj Ratnaswamy, was chairman of the Audit committee of Golden Plus Holdings Bhd (GPlus), he was reprimanded and fined RM 200,000, the same as all fellow Board members. 

"To subject these directors to such hefty fines and penalties seem rather harsh, more so when they are not in any position to control events, which are mainly the domain of the executives. The members of the audit committee and in particular, the audit committee chairman, are there by reason of a Bursa Malaysia listing requirement. At least one of them must be a member of the Malaysian Institute of Accountants (MIA).
They are only able to play a role of advising at directors’ meetings and/or not approving questionable acts and transactions, but are never in a position to dictate when an act is to be accomplished by the company, for example, the issuance of quarterly financial statements, annual audited financial statements and the like.
These matters are directly under the control of the executives, who if they choose not to comply on a timely basis for whatever reason, leave the non-executive directors with almost little or no choice in being able to ensure timely adherence."

I strongly object to the above opinion. Directors have a fiduciary duty to act in the best interest of the shareholders. It is their obligation to perform their duties and report back to the shareholders or authorities, also in the case that they are not able to do their duty. If they don't do that, and even consistently so, they should be punished severely. Bare in mind that the above Director joined GPlus in 2006.

Here is the link to the reprimands from Bursa Malaysia, dated 22 June 2011:

"Bursa Securities first issued a directive for GPLUS to appoint a SA (Special Auditor) on 26 August 2008 due to various facts and circumstances including the numerous breaches of the listing requirements at the material time by the company and uncertainty and concern with regards to the management of the business and financial affairs of GPLUS by the provisional liquidator (“PL”) appointed over GPLUS and its subsidiaries on 27 March 2008 vis-a-vis compliance of the listing requirements by GPLUS.

Notwithstanding the removal/cessation of the PL on 10 May 2010 and that GPLUS had submitted its outstanding financial statements, Bursa Securities maintained and required compliance of the SA Directives. In this regard, Bursa Securities remained concern of the uncertainty as to the management of business and financial affairs of GPLUS and the financial figures and various items set out in GPLUS’ annual audited accounts for the financial year ended 31 December 2009, particularly pertaining to GPLUS’ subsidiaries in China which contributed more than 99% and 87% of the total revenue and assets of GPLUS Group respectively as at 31 December 2009.

The directors had refused to comply and blatantly disregarded Bursa Securities’ directives to appoint PWC as the SA and allow the commencement of the special audit notwithstanding the numerous directives by Bursa Securities, the court orders procured on 10 August 2009 and 10 May 2010 by Bursa Securities and GPLUS’ execution of PWC’s letter of engagement dated 11 August 2009.

GPLUS and the directors only proceeded to appoint PWC on 17 December 2010 and paid the mobilisation fee to PWC on 27 December 2010 after Bursa Securities had obtained an order from the High Court on 29 November 2010 to specifically compel GPLUS to appoint PWC as the SA and perform all the obligations pursuant to PWC’s letter of engagement, failing which, the directors of GPLUS may be in contempt of the court order and liable to committal proceedings."

I think actually, given the explanation of Bursa Malaysia, that the fines are rather light, not heavy.

The following article is from BusinessInsider, August 31, 2011:

2 Hedge Fund Managers Fined $111 Million Each For Being Empty Suits

"The Grand Court of the Cayman Islands recently found two hedge fund managers of a now-defunct fund guilty of willful neglect their duties fining them $111 million each. This case is significant because it's the first time in the context of a failed fund that the court has found two directors guilty of willful neglect or default in the discharge of their duties, HedgeWeek reported. Long story short, they were fined for sitting on the board of their relative's hedge fund and doing nothing. They were empty suits who never attended a board meeting and signed documents without reading them, according to the Cayman Islands court judge who ruled on the case. “Directors of Cayman Islands investment funds can no longer live under the misconception that they are immune from liability for a company's losses if they do not themselves take an active role in the company's business," said Shaun Folpp, a managing associate at Olgier Cayman who acted on behalf of the plaintiff."

To fine two managers for USD 111 million each and to actually collect that money is two different things, but the message off this judgment is loud and clear.

I haven't witnessed a single case of a Director in Malaysia standing up against the management of the company (often the same as the Majoriy Shareholder), voicing his/her concerns, voting against any of the numerous questionable proposals. I therefore encourage Bursa Malaysia & Securities Commission to strongly increase enforcement, name and shame the perpetrators through public reprimands, hand out meaningful fines in relation to the offences and to aim for multi-year jail sentences in the more serious cases.

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