Monday, 9 June 2014

Director interlocks and conflicts of interest

Excellent article by Eugene Kang in the Business Times (Singapore), even more important in the Malaysian business context, where situations like conflict of interest, related party transactions, holding shares under trustees, mixing politics and business etc. is all very common. Some snippets:

"Interlocks between firms in the same industry are referred to as horizontal interlocks. From a governance perspective, directors are required to discharge their duties and responsibilities as fiduciaries of their firms. However, an interlock between rival firms can create serious conflicts of interest if it prevents an interlocking director from exercising his objective judgement and discharging his fiduciary duties to both firms. In certain jurisdictions, horizontal interlocks attract anti-trust scrutiny. For instance, the Clayton Antitrust Act in the US currently prohibits, with certain exceptions, one person from serving as a director of two rival firms."

One prime example in the Malaysian context was the joining of forces between AirAsia and MAS and the huge conflict of interest that occurred, about which I wrote here and here.

"Vertical interlocks are formed between firms in a buyer-seller relationship. A director that represents a buyer owes a duty to secure the lowest possible price from the seller. Conversely, a director that represents a seller owes a duty to secure the highest possible price from the buyer. When the same director represents both firms, it is easy to see how a conflict of interest arises."

The Tune Group is a prime example of a network of both horizontal and vertical interlocks, owning a travel agency through which one can book an hotel room from Tune Hotels, can book an AirAsia X ticket, which is branded by and using a long list of other services from AirAsia (which itself has other daughter companies in Thailand and Indonesia), using Tune Insurance as the insurance company, etc.

One example how things can go horribly wrong is Metronic Global, about which I wrote several articles. Metronic  Global was basically a sub-contractor for a related party and had a huge amount of receivables from that party, which it still hasn't been able to receive after many years. Worrisome is that the current management hardly seems to do anything about it, although the amount of money involved is huge (more than RM 40 million). The investigative accountant report highlighted some very serious issues.

A similar situation of vertical interlock arises at Ranhill Energy, about which I wrote here.

The authorities (Securities Commission and Bursa Malaysia) should play a much more active role in these kind of cases. Conflict of interest was one of the primary reasons behind the huge destruction of capital in the Asian Crisis in 1997/98.

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