Saturday, 31 March 2012

Metronic Global: syndicates and receivables

Article in Business Times: "Transparency will benefit all market players" by Francis Fernandez.

"DO we have syndicates operating in the local stock market? The answer is probably "Yes". Do we have syndicates operating in the major global equity markets? The answer to that is also probably "Yes".

However, can we prove our suspicions with facts, the answer to that is most likely "NO".

Does the financial markets need market makers and are all market makers syndicates? The answer to that question is probably tangled with a bit of white, black and a whole lot of grey".

"Do we have market makers here in Malaysia? The answer to that officially is a resounding "NO", but the market makers, nevertheless, exist unofficially at least.

Hence recent reports that Bursa Malaysia gave verbal instructions to brokerages to stop their proprietary day traders (PDTs) from trading in Metronic Global Bhd and Ariantec Global Bhd are disturbing.

What Bursa Malaysia did is good, but why the reports on the market regulator engaging with the brokers are disturbing is because, when Bursa Malaysia gives out instructions on some particular securities, it must provide the information to all investors at the same time.

I do believe that is why it has a website. If all investors have the same information, then they will be able to make an informed decision based on facts, and not on reports that can later be denied or confirmed.

Most investors do not read the same newspapers, hence some will gain from those reports, while other will lose out".

I wrote about Metronic Global in the past, it is a company with quite a few issues, some dating from a long time ago. This is their statement from June 30, 2011 about RM 44.5 million outstanding receivables:
"In relation to the related party receivables due from the Main Contractor Related Party, subject to the finalization of the claim certification by JKR and the subsequent disbursement of payment from the Ministry of Finance, the Company expects the outstanding receivables to be fully recovered through progressive disbursements to be made by the Government of Malaysia not later than 31 December 2011."

But according to its most recent statement, nothing has changed:

Its share price made a rollercoaster ride with the entry of a new investor, Datuk Raymond Chan Boon Siew, buying 33 million shares (5.2%):

Volume is very high, reaching 845 million on March 21, 2012. Remarkable, since the total number of shares is only 635 million.
We have to wait and see how this story will evolve.

Friday, 30 March 2012

Rafael Hui "to attend to other commitments"

This statement comes from the AIA group in Hong Kong:

"The board of directors (the “Board”) of AIA Group Limited (the “Company”) announces that, Mr. Rafael Si-Yan Hui has tendered his resignation as independent non-executive director of the Company with effect from 29 March 2012 in order to attend to other commitments".

And what are those "other commitments"?

They are revealed here:

"Hong Kong's richest property tycoons, Thomas and Raymond Kwok who jointly head Sun Hung Kai, and former Chief Secretary Rafael Hui have been arrested by the ICAC for suspected corruption."

Thanks to David Webb's website for the tip.

By the way, Rafael Hui has been released today, but the announcement of the AIA group could have been "a tiny bit" more clear about the reasons of his resignation.

Sun Hung Kai Chairmen Arrested in Hong Kong (updated)


Shares of SHK in HK are down about 13% today on the news. Sun Hung Kai Loses $5.8 Billion as Billionaire Kwoks Arrested

Interesting development in Hong Kong. From the past when Walter Kwok was ousted by his own brothers:

"Walter Kwok also said in his filing that he wanted to investigate the reasons why construction contracts were frequently awarded by Sun Hung Kai to a select number of contractors. In addition, Walter Kwok's proposal to hire an auditor to review the company's management and suggest measures for improvement weren't heeded, the filing said, noting that these disagreements eventually led to his removal. The company rejected the claims he made in his filings, and a court refused to issue an order to block Walter Kwok's removal."

Was Walter Kwok right after all?

The Wall Street article:

Two billionaire brothers who are among the city's most powerful property tycoons and the city's former No. 2 official were arrested Thursday on suspicion of bribery in a case that gets to the heart of city's business culture and its economy.

The Kwok brothers and their families control Sun Hung Kai Properties Ltd., one of the world's biggest real-estate developers and a company that has itself been hit in the past by bitter family feuds and a kidnapping. The company built some of the most famous towers in Hong Kong's skyline, including its three tallest buildings. In a city where a small group of powerful organizations control real estate, transportation and communications, the sight of two tycoons walking into law-enforcement offices to answer questions in a corruption case was riveting.

"It's been a long time since such senior figures in the construction industry have been subject to such attention," said Steve Vickers, chairman of Asia investigations for FTI Consulting Inc.

Thomas Kwok, 60 years old, and Raymond Kwok, 58, were arrested Thursday by Hong Kong's antigraft agency, Sun Hung Kai said in a statement late in the day. The Independent Commission Against Corruption also arrested the city's former No. 2 official, Rafael Hui, also on suspicion of bribery and on suspicion of misconduct in public office, a person familiar with the situation said. Sun Hung Kai said the Independent Commission Against Corruption searched the company's offices on Thursday.

The Kwok brothers couldn't be reached, and names of their lawyers couldn't be learned. Attempts to reach Mr. Hui or his office were unsuccessful.

The Kwoks are co-chairmen of a real-estate empire with a stock-market value of $37.25 billion and properties stretching across southern China, Shanghai and Beijing. The company's shares were halted from trading early Thursday, about 20 minutes after the market opened.

No charges have been filed against the individuals. Hong Kong's laws, which are modeled after the British legal system, empower law-enforcement agencies to detain or offer bail to suspects before deciding whether to file criminal charges against them. The three men left ICAC offices late Thursday, though no further details were available about the case. The ICAC declined further comment on the case.

The ICAC is a unique law-enforcement agency. It was set up in the 1970s as an independent body to tackle what was then rampant corruption among Hong Kong's police force. The agency reports directly to the city's chief executive.

Wednesday, 28 March 2012

Buffett ahead in bet on stocks beating hedge funds

Buffett made a bet that mutual fund (with low expenses) will outperform a fund of hedge fund (with high expenses) over a 10 year period. Buffet is ahead.

US$1m bet: Funds that invest in hedge funds can't beat the stock market

(NEW YORK) Warren Buffett made a friendly bet four years ago that funds that invest in hedge funds for their clients couldn't beat the stock market over a decade. So far he's winning.

Winning: Mr Buffett's Vanguard fund returned 2.2% from the start of the bet in 2008 while hedge funds fell 4.5%. His argument is that funds of hedge funds cost too much

The wager that began on Jan 1, 2008, pits the Omaha, Nebraska, billionaire against Protege Partners, a New York fund of hedge funds co-founded by Ted Seides and Jeffrey Tarrant. Protege built an index of five funds that invest in hedge funds to compete against a Vanguard mutual fund that tracks the Standard & Poor's 500 Index.

The winner's charity of choice gets US$1 million when the bet ends on Dec 31, 2017.

The Vanguard fund's low-cost Admiral shares returned 2.2 per cent, with dividends reinvested, from the start of the bet through Feb 29, as stocks rebounded from a 12-year low in March 2009. The hedge funds fell about 4.5 per cent, based on Protege's index returns for the first three years and results since then for the Dow Jones Credit Suisse Hedge Fund Index, which has roughly tracked the group of unidentified funds when adjustments are made for extra fees.

'Hedge funds of funds have underperformed because of high fees and mediocre manager selection,' said Brad Alford, head of Alpha Capital Management in Atlanta, who opened a mutual fund of funds in January 2011 designed to replicate the performance of hedge funds, only with lower charges and the flexibility for clients to pull money out daily.

Funds of funds have seen clients flee in the past five years. Some of the largest US public pension funds, including those in Massachusetts, South Carolina and New York, started investing directly in hedge funds instead of going through an intermediary in an effort to reduce fees and boost returns.

The amount of money they control has fallen by about one-fifth to US$630 billion as of the end of 2011, compared with a year-end peak of US$780 billion in 2007, according to Hedge Fund Research.

Mr Buffett's argument, like the large pension funds, is that funds of hedge funds cost too much, according to a statement he posted on, a website backed by the non-profit Long Now Foundation that fosters 'long- term thinking'. In addition to the 2 per cent management fee and 20 per cent performance fee that hedge funds typically charge, the funds of funds add another layer of fees, on average 1.25 per cent of assets and 7.5 per cent of any gains, according to data compiled by Bloomberg.

Protege said in its statement that because hedge funds can make bets on rising as well as falling prices of stocks, bonds, currencies and commodities, they are able to beat the S&P 500 even after fees, and that sophisticated investors such as fund-of-fund managers 'with the ability to sort the wheat from the chaff' will earn returns that amply compensate for the extra costs.

The returns of Protege's index from 2008 through 2010, reported in Fortune magazine a year ago by long-time Buffett friend and chronicler Carol Loomis, are similar to those of the Dow Jones Credit Suisse Hedge Fund Index, after adjusting for the added fees charged by hedge fund of funds. That index fell 2.5 per cent last year, and rose 4 per cent in the first two months of 2012.

Protege took the lead in the first year of the bet as its fund of funds index lost 24 per cent and Vanguard's fund declined by 37 per cent. Mr Buffett narrowed the gap in subsequent years. The S&P fund returned 27 per cent in 2009, compared with a gain of 16 per cent for the hedge funds, according to Fortune. The stock fund rose 15 per cent in 2010 as the hedge funds advanced 8.5 per cent.

The 81-year-old Mr Buffett, who is chairman of the holding company Berkshire Hathaway, ended last year neck and neck with the Protege funds as the Vanguard fund climbed by 2.1 per cent and the Protege hedge funds lost an estimated 3.75 per cent.

The first two months of this year pushed the Vanguard fund ahead as stocks returned 9 per cent, more than twice the gains of hedge funds. -- Bloomberg

Tuesday, 27 March 2012

Research 'sell' notes decline as conflicts persist

Only 9% of the recommendations from investment banks and brokerage firms globally are a "sell", from 20% ten years ago:. "research teams still appear conflicted between their conviction and their bank's client list". It makes their research not very useful.

A mere 9% of recommendations are a 'sell' right now

While so-called 'Chinese walls' were set up after regulators and legal cases shed light on the role analysts and bankers played in inflating the 1990s technology bubble, research teams still appear conflicted between their conviction and their bank's client list.

A mere 9 per cent of analyst recommendations by investment banks and brokerage firms globally are a 'sell' right now, based on 120,029 recommendations issued on nearly 17,000 companies, according to a Reuters study of StarMine data.

Ten years ago, sell orders jumped to nearly 20 per cent after a series of rules were put into place to wipe out banker-analyst conflicts. It's now back in the single digits and in some cases headed to levels last seen in the 1990s.

'Research is associated, rightly or wrongly, with an organisation and if somebody puts out a sell recommendation people don't like that,' said David Baran, co-founder of Tokyo-based hedge fund, Symphony Financial Partners.

An analyst with a negative view on a stock will often prefer to keep that belief tight, fearing pressure from top bankers seeking business from the company or being shut out by its senior executives.

'In general, it's difficult for a lot of the analysts who could be negative or negatively biased on a company and expect to see them welcome at the next investor meeting or get access to the management,' said Mr Baran.

The survey of data from StarMine, a Thomson Reuters product, showed just 6 per cent of the recommendations in the United States were 'sell' as compared with 10 per cent in Asia and 14 per cent in Europe.

Some analysts, when convinced of a stock's imminent drop, have been confident enough over the years to issue 'strong sells'. Around the world those calls now account for just 2.5 per cent of the recommendations.

That 6 per cent figure in the United States is nearing the 3 per cent mark that stayed in place before and during the tech bubble, according to a study published in the Journal of Accounting and Economics, before post-crash rules were put in place to encourage more honest research.

A major pressure on analysts to award a 'buy' rating has always been from their bank's 'sell side' - the equity sales staff who can pitch the recommendation to a fund client and earn a commission on a resulting order to buy a block of shares through the bank.

That remains the case, even though the analysts' role in directing revenues to the trading desk appears to be shrinking.

Greenwich Associates produced a recent study saying that most of the growth in the Asian commission pool between the third quarter of 2010 and the same period in 2011 occurred in Q4 2010, while trading conditions were challenging for much of 2011.

In Asia, where countries and regulations vary widely causing the region to be difficult to understand even for the biggest fund houses, sell side research does help filter ideas and assess where some of the investment flows might be. -- Reuters

(HONG KONG) More than a decade after US regulators moved to clean up the stock research industry at investment banks, analysts across the globe are as hesitant as ever to issue negative research on companies they believe are destined to struggle.

Saturday, 24 March 2012

SC: No basis for further action over E&O, AirAsia

From the Business Times comes the below article. Conclusions: No action in the trading of the shares of E&O or AirAsia, still investigating MAS shares.

Enforcement on possible insider trading is quite poor in Malaysia, although there are many suspected cases, not only regarding penny stocks or speculative counters, but also regarding "blue chips". One of the worst recent cases is the possible insider trading of Proton shares, prior to the announcement of a General Offer by DRB-Hicom.

The Securities Commission (SC) says it has found no basis for further action in its probes into the trading of shares of Eastern & Oriental Bhd (E&O) and AirAsia Bhd prior to the listed firms' respective deals.

The SC had set up an independent committee consisting of two senior independent commission members to supervise the review in the case of E&O.

"After investigating the matter, including obtaining the opinion of two industry experts to determine the materiality of the information on E&O's share price, the SC found that there is no basis to take further action on the matter," said an SC spokesman in response to queries from Business Times yesterday.

The SC also said that it had conducted a review on the trading of shares in the run-up to the announcement of the Malaysia Airlines-AirAsia share swap and collaboration agreement on August 9 2011, and of Sime Darby's 30 per cent purchase of E&O on August 29 2011.

On the MAS-AirAsia deal, the SC said it conducted a review on both the companies' share transactions. It said it engaged a market expert to provide independent expert opinion.

"Based on the SC review and the opinion of the market expert, the SC found no basis to take further action on the AirAsia share transactions," it said.

"The SC has, however, commenced investigation into possible insider dealing of MAS shares during the relevant period," it said.

It gave no further details.

Wednesday, 21 March 2012

Family firms 'need to have better governance'

Article from Business Times (Singapore) about family businesses listed on the SGX. Also very relevant for Malaysia (and other Asian countries), with so many family businesses.

Results are decent, "however, family firms tend to score poorly on the Governance and Transparency Index (GTI), which indicates a low level of compliance to good governance practices".

Study finds 52% of firms listed on SGX are family-owned

FAMILY firms in Singapore form the majority of SGX-listed companies and are a significant pillar of the economy, but they should look to better governance practices and careful succession planning to secure their long-term competitiveness.
These were the findings of a 2011 study of SGX-listed family firms by Marleen Dieleman, Yupana Wiwattanakantang and Shim Jungwook, done in collaboration between NUS Business School's Centre for Governance, Institution and Organization (CGIO) and Family Business Network Asia (FBN Asia).

It surveyed 743 SGX-listed companies, identifying firms owned or influenced by an individual or multiple individuals linked by family ties as family firms.

Dr Dieleman, senior researcher and associate director, CGIO, NUS Business School, revealed the findings to an audience of about 160 senior executives of SGX-listed companies and members of the Australian Institute of Company Directors yesterday.

The study, based on company reports from 2010, as well as a sample size of all SGX-listed firms, showed that family firms constituted 52 per cent of companies listed on SGX.

Notably, a similar study done more recently by Credit Suisse suggested that family-owned listed firms in Singapore formed an even larger majority, of 63 per cent.

Additionally, the family firms outperformed non-family firms, achieving a 5 per cent return on assets as opposed to 3 per cent in non-family firms. This data is also consistent with other studies on family firm performance in developed economies, as well as in Asia.

Stability and continuity in ownership and management structure to implement long-term investment strategy, rather than short-term, profit-oriented models, were cited as contributory to this stellar performance.

Dr Dieleman also spoke of 'patient capital', in that 'people put their own money so they work very hard for their firms, in fact I know of some investors who only invest in family firms because they know that they have their own money in too.'

Interestingly, family firms are also at the forefront of championing gender diversity, with 42 per cent having at least one female director, as opposed to 36 per cent in non-family firms.

In terms of education, family firms have also defied the stereotype of well-qualified business leaders, with 54 per cent of board members in family firms not having a bachelor's degree, which is about double the figure in non-family firms.

However, family firms tend to score poorly on the Governance and Transparency Index (GTI), which indicates a low level of compliance to good governance practices.

They are clearly under-represented in the GTI's top 20, with only three family firms being included.

Also, 44 per cent of family firms fail to comply with the code of governance, with both chairman and CEO being the same person.

Tenure of family firm directors who are family members stood at 19 years, with the longest-serving director having served for 52 years. This suggests that family firms might have marked advantages in terms of maintaining relationships with stakeholders, as well as an intimate knowledge of the firm and its business model.

'Looking at family firm boards, we see that families tend to maximise their influence over the firms by occupying CEO and chairman positions. In doing so, family firms derive benefits such as stability, a long-term orientation, and clear decision-making structures,' said Dr Dieleman. 'But business families should also ensure they maintain a strong and independent element in their boards, which will ultimately contribute to the long-term sustainability of family firms.'

Therefore, this high average director tenure driven by long-staying family members, could be a double-edged issue, which also necessitates the need for good succession planning, even including people outside the family, to embrace the future ahead.

'The firm has a risk of being entrenched or rigid, because people stay very long, so it is important to have trusted (but also critical) outsiders to complement your own expertise and insight into the business as an owner,' explained Dr Dieleman.

Employing external talents to complement those within the family seems to be a viable solution, with 40 per cent of firms opting for succession to persons outside the family.

Given that many founders are passing on their business, Dr Dieleman advises that if 'you're a superman entrepreneur, an owner of a very successful family business, you'll tend to think that your successor should have all the same skills as you have', but in reality 'if the descendents don't have the same aggressive, entrepreneurial skills, that might not be a problem. You'll have to look at what the firm will need in the future rather than a copy of the founder'.


Sunday, 18 March 2012

Marc Faber: Beware The Unintended Consequences Of Money Printing

Fron the Business Insider:

Marc Faber does not mince words. He believes the money printing policies of the Federal Reserve and its sister central banks around the globe have put the world's currencies on an inexorable, accelerating inflationary down slope.

The dangers of money printing are many in his eyes. But in particular, he worries about the unintended consequences it subjects the populace to. Beyond currency devaluation, it creates malinvestment that leads to asset bubbles that wreak havoc when they burst. And even more nefarious, money printing disproportionately punishes the lower classes, resulting in volatile social and political tensions.

It's no surprise then that he's feeling particularly defensive these days. While he generally advises those looking to protect their purchasing power to invest capital in precious metals and the equity markets (the rationale being inflation should hurt equity prices less than bond prices), he warns that equities appear overbought at this time.

On Inflation

First of all, I do not believe that the central banks around the world will ever, and I repeat ever, reduce their balance sheets. They’ve gone the path of money printing and once you choose that path you’re in it, and you have to print more money.

If you start to print, it has the biggest impact. Then you print more - it has a lesser impact unless you increase the rate of money printing very significantly. And, the third money printing has even less impact. And the problem is like the Fed: they printed money because they wanted to lift the housing market, but the housing market is the only asset that didn’t go up substantially.

In general, I think that the purchasing power of money has diminished very significantly over the last ten, twenty, thirty years, and will continue to do so. So by being in cash and government bonds is not a protection against this depreciation in the value of money.

On His Love for Central Bankers

Basically the U.S. had a significant increase in the average household income in real terms from the late 1940s to essentially the mid-1960s. And, then inflation began to bite and real income growth slowed down. Then came the 1980s and in order not to disappoint the household income recipients you essentially printed money and had a huge debt expansion.

So if you have an economic system and you suddenly grow your debt at a very high rate, it's like an injection of a stimulant of steroids. So the economy grew at a relatively fast pace, but built on additional debt. And this obviously cannot go on forever and when it comes to an end, you have a problem. But the Fed had never paid any attention.

The Fed is about the worst economic forecaster you can imagine. They are academics. They never go to a local pub. They never go shopping -- or they lie. But basically they are a bunch of people who never worked a single day in their lives. They’re not businessmen that have to balance the books, earn some money by selling goods, and paying the expenditures. They get paid by the government. And so these people have no clue about the economy.

And, so what happens is they never paid any attention to excessive credit growth -- and let me remind you, between 2000 and 2007, credit growth was five times the growth of the economy in nominal terms. In other words, in order to create one dollar of GDP, you had to borrow another five dollars from the credit market. Now this came to an end in 2008.
Now the Fed never having paid any attention to credit growth, they realized if we have a credit-addicted economy and credit growth slows down we have to print money. So that’s what they did. But believe me it doesn’t take a rocket scientist to see that if you print money you don’t create prosperity. Otherwise, every country would be unbelievably rich because every country would print money and be happy thereafter.

On The Unintended Consequences of Money Printing

In the short term, it has been working to some extent in the sense that equity prices are up and interest rates are down. And, so companies can issue bonds at extremely low rates. But every money printing exercise in the world leads to unintended consequences at a later point. And, this is the important issue to remember. We don’t know yet for sure what the unintended consequences are.

We know one unintended consequence, and this is that the middle class and the lower classes of society, say 50% of the U.S. has rather been hurt by the increase in the quantity of money in the sense that commodity prices in particular food and energy have gone up very substantially. And, since below 50% of income recipients in the U.S. spend a lot, a much larger portion of their income on food and energy than to say the 10% richest people in America and highest income earners, they have been hurt by monetary policy. In addition, the lower income groups, if they have savings, traditionally they keep them in safe deposits and in cash because they don’t have much money to invest in the first place. So the increase in the value of the S&P hasn’t helped them, but it helped the 5% or 10% or 1% of the population that owns equities. So it's created a wider wealth inequality and that is a negative from a society point of view.

Why are young people shunning Bursa?

Blog from Anil Netto why so few young adults invest on Bursa Malaysia. He also refers to a query he emailed to Bursa that went unanswered. I am afraid I have had very similar experiences with Bursa.

The comments to this article are also telling.

"Few young adults are investing in the Kuala Lumpur stock market. A survey has revealed that only 12 per cent of investors are in the 20-29 age group, while 59 per cent involve those 40 years and above.

Some have cited possible reasons: the high risk factor involved in investing in the stock market; young people preferring to spend their money on property, cars and movies;  a lack of education about how to invest, etc.

I have my own theories.

Perhaps young adults, now with more access to independent information, are looking for more stable, secure investments rather than the speculative roller-coaster ride that is the Bursa Malaysia, especially in these days of economic uncertainty.

Or quite simply, many young adults don’t have enough spare cash to invest as their income levels are unable to cope with the rising cost of living. After buying a house and a private vehicle (due to the inadequate public transport) – and you know expensive those can be – and having to cope with rising fuel and food prices, how much spare cash do you think young adults will have left over to invest in the Bursa? Of course, there are study loans to repay as well.

Some of these young people might even think, why should we let the tycoons with access to capital (the young investors’ hard-earned money) earn huge profits – sometimes in ‘cronyistic’ or monopolistic businesses – in return for meagre dividends? Maybe they can see more clearly through the whole charade?

The other issue is one of confidence – or the lack of it. My emailed query to the Bursa in November 2009 has gone unanswered despite a reminder. I had posed the question to Bursa: if a listed firm fails to meet the minimum 25 per cent public shareholding spread requirement, what is the maximum duration allowed for it to comply? Is there a time limit at all?"

Saturday, 17 March 2012

"Secret dealings" at the Securities Commission?

I am really interested what the "secret dealings" of the Securities Commission are, hopefully they will be revealed further. Article from Malaysian Insider about the interesting court case that a minority investor of E&O has initiated against the Securities Commission. Court cases are always good in Malaysia, lots of information is revealed.

"High Court judge Abang Iskandar Abang Hashim should have disclosed he previously worked at the Securities Commission (SC) before hearing a suit against it by an E&O Bhd shareholder, the regulator’s lawyers argued today.
The lawyers contend he would know of “secret dealings” when hearing asuit filed by Michael Chow Keat Thye against the SC for failing to compel conglomerate Sime Darby Bhd to buy remaining shares after it bought a 30 per cent stake in the property developer for RM776 million."

Friday, 16 March 2012

Singapore: Where firms are found wanting in corporate governance issues

From Business Times (Singapore), by Jamie Lee

When it comes to corporate governance issues involving Singapore-listed entities, companies fare worst in the area of shareholder rights.

More encouraging: SMRT Corp was ranked in the top 10 companies based on the overall index in fiscal 2010
This is the finding of a running corporate governance study.
Under the Singapore Corporate Governance Index, which is managed by Singapore Management University's Sim Kee Boon Institute for Financial Economics, companies are scored on their performance in five categories that are aligned with OECD governance principles: rights of shareholders, equitable treatment of shareholders, roles of stakeholders in corporate governance, disclosure and transparency, and board responsibilities.

Their performance in each category was based on a data review of Singapore listings from fiscal 2007 to fiscal 2010.
The poorest score was on shareholder rights, with a mean of 35.28.

The study, presented by Associate Professor Jeremy Goh at a corporate governance event, showed that few companies made public their shareholder meeting minutes.

The use of cross-ownership, or pyramid shareholding, is a common practice, he also noted in a working paper on the index.

Companies also do poorly when it comes to explaining the roles of stakeholders in corporate governance.

For example, while they recognise their obligations towards their employees, few companies touch on environmental issues.

Companies scored best on equitable treatment of shareholders, with a mean of 89.08, as several of them made proxy voting easy for shareholders, the study showed.

The top 10 firms based on the overall index in fiscal 2010 include Cerebos Pacific, Singapore Exchange, SMRT Corporation, and WBL Corporation, though the specific ranking was not revealed.

In line with several other studies in China, Hong Kong, Korea and Thailand, findings from the index also showed that good corporate governance is associated with higher market valuation, though Prof Goh was quick to point out that causality has not been established.

'It could be the other way round - that big firms have the resources to do the right thing,' he said.
The index will now be used as part of research in determining winners for two corporate governance awards - the Singapore Corporate Governance Award (SCGA) and the Most Transparent Company - which are given out by the Securities Investors Association (Singapore) or SIAS.

This was established under a three-year agreement between SIAS and SMU that was signed yesterday.

SIAS also plans to incorporate the use of an integrity index in its evaluation for the SCGA from this year onwards.

The integrity index - developed by global consultancy Corporate Executive Board - evaluates companies on issues such as how it encourages employees to speak up against unethical behaviour within the firm.

Thursday, 15 March 2012

EPF plans to invest more in foreign holdings

Good news regarding EPF, it will raise its overseas holdings to 30% by 2017. The maximum currently allowed is 23% of its portfolio, but strangely enough, it invests only 13% abroad.

Large Government Linked Funds own a much too big piece of the local shareholding, smothering the market, leading to a small free float. Another problem is that, unfortunately, often their interests are not aligned to those of minority investors.

It will raise overseas holdings to 30% by 2017, says CEO
(KUALA LUMPUR) Malaysia's Employees Provident Fund (EPF), the second-largest state-run pension system in the Asia-Pacific region, plans to raise holdings of overseas investments to 30 per cent by 2017 to boost returns.

Boosting returns: EPF, Malaysia's state-run pension system, will start a programme to buy global bonds in the second quarter to rebalance its overseas portfolio to be in line with domestic investments, according to its CEO

The retirement fund, with RM470 billion (S$195 billion) in assets, is currently allowed to invest in foreign holdings as much as 23 per cent of its portfolio, said chief executive officer Azlan Zainol, who manages the fund. EPF's investments abroad now account for 13 per cent and will need to be increased, upon government approval, as the fund would be at least RM600 billion to RM700 billion in five to six years, he said.

'We will continue to focus on areas that will give stable returns for this year and the next few years to come,' Mr Azlan said in an interview in Kuala Lumpur on Tuesday. 'These asset allocations that we've been working on have done us well and have contributed to our income reasonably well and have mitigated all kinds of risks that we are facing.'
The Kuala Lumpurbased manager posted RM27.2 billion of gross income from investments last year, 13 per cent more than it earned in 2010, helped mainly by realised gains in domestic and global equities, according to data published on its website.

The fund outperformed South Korea's National Pension Service, with US$305 billion, which posted a preliminary 2.3 per cent return in 2011, according to the nation's Ministry of Health and Welfare.

EPF was the second-largest sovereign pension fund in Asia excluding Japan, behind the Korean fund, according to a ranking by consultants Towers Watson & Co that was released in September.

EPF will start a programme to buy global bonds in the second quarter to rebalance its overseas portfolio to be in line with domestic investments, Mr Azlan said.

Stocks account for about 80 per cent of the overseas investments compared with 35 per cent in the domestic market, he noted.

The majority of EPF's assets are currently invested onshore, primarily in government bonds. The yield on the nation's benchmark 10-year debt is about 1.5 percentage point above similar-dated Treasuries.
'Technically, we can go up to 42 per cent in equities but we don't want to,' Mr Azlan said. 'We will try and keep it within 35 per cent - even at 35 per cent, I feel you're walking at the edge.'

EPF, which has been a net seller of domestic equities this year, plans to increase its holdings of Malaysian stocks, Mr Azlan said. He said he likes banking, utilities, plantations and companies with high-dividend payouts, strong management and that are well-run.

'Generally, I am quite confident the market will be OK, but from certain angles, I hope there will be some troughs,' Mr Azlan said, adding that the market's valuations are 'attractive'.

The fund's focus will be on South-east Asia with 'the strongest growth in Indonesia over the long term', Mr Azlan said.

EPF also has investments in the UK, the US, Japan and Australian stock markets, while it will invest in China through Hong Kong, he said.

The fund has no plans to apply for an investment manager licence in China, he added.

EPF held RM124.6 billion, or 27 per cent of its assets, in government bonds at the end of December, making it the single largest shareholder in that asset class in Malaysia.

It also held RM160.7 billion in loans and corporate bonds, RM167.2 billion in stocks, RM14.9 billion of money-market bills and RM1.8 billion in properties.

The fund paid out RM24.5 billion to members in 2011, equivalent to a 6 per cent dividend rate, the most since 2000. It paid 8.5 per cent between 1983 and 1987, the highest since its inception in 1952, according to data provided by EPF.

EPF collects more than RM2 billion on average every month from its 13 million members, who make a compulsory 11 per cent monthly contribution while employers add another 12 per cent.

Membership is mandatory for working Malaysian citizens, or non-Malaysian citizens who are permanent residents.

Among the fund's investments, Mr Azlan expects RHB Capital Bhd's proposed takeover of OSK Investment Bank Bhd to be completed by the middle of this year. The fund owns 45 per cent of RHB Capital.

The acquisition will be financed via a combination of new shares and cash and will reduce EPF's stake in RHB Capital to 41 per cent, he added. -- Bloomberg

Investigation into China Sky's affairs ongoing: SGX

We refer to Mano Sabnani's letter titled 'China Sky must be kept functional' (BT, March 13).

As the frontline market operator, the Singapore Exchange (SGX) is responsible for maintaining a fair, transparent and orderly marketplace in the interests of the investing public. For this purpose, the exchange requires prompt and comprehensive disclosure of information by companies. Only then can investors properly assess the risks and rewards of their investment to make their investment decisions with confidence.

If companies' disclosure is inadequate, the exchange will query them with the aim to clarify, and where appropriate, elicit disclosure. If the information is questionable or its reliability in doubt, the disclosure will be investigated so that investors can have confidence in the data used as a basis of their investment decisions.

However, SGX does not operate listed companies; it is the responsibility of the management and the board of directors, who determine the course and nature of their companies. Shareholders have the right and authority to compel the managements and boards to act for them and safeguard their interests in the companies.

Mr Sabnani and likeminded shareholders can seek an EGM or work with investor organisations like SIAS.

SGX shares the concerns of shareholders of China Sky Chemical Fibre that knowing the true and accurate state of affairs of the company is critical. However, the matter is currently under investigation. Hence, the exchange is unable to comment further.


YTL Cement, AirAsia Thai, PetOne

Some of YTL Cements minority shareholders are still holding on to their shares, event though they will be delisted. I like that. According to this article in The Edge, YTL Corp owns 93.2% of YTL Cement shares, while it needs 94.7% to compulsory acquire them. Even then, minority shareholders might object and go to court.

Minority shareholders will still be protected under the Company's act, but not under the Listing guidelines of Bursa Malaysia. I own many shares in unlisted Malaysian companies, and knowing that there is no Bursa Malaysia or Securities Commission to help is actually a plus. I have learned to come up for my own interest instead of issuing complaints to the authorities that lead to nowhere. In certain areas (like Related Party Transactions), shareholders have quite some power. There will not be many minority shareholders, and it is normal to band together, which is almost impossible to do in a listed company. The only thing that is really disadvantageous is a ready market to sell ones shares on, and for many people that will be a big negative.

AirAsia Thailand will be listed somewhere in July 2012. At least that is the plan, as announced in The Star. But plans often change whenever AirAsia is involved.

"AirAsia Thai has been operationally profitable since the second quarter of 2010, based on the notes to the accounts of AirAsia. However, AirAsia has not been able to recognise these profits due to accumulated losses of these units that have yet to be reversed to zero."

In other words, over its lifetime AirAsia Thai has actually lost money. It will be interesting to read the IPO document.

PetOne is reprimanded by Bursa Malaysia:

"The RM3.737mil difference was a deviation of 360% mainly due to the oversight of the company to provide for the depreciation value of vessel, failure to recognise rebate payable arising from lease agreements and doubtful debts in that financial year."

It is a small amount of money, but still good that Bursa Malaysia is on top of this. However, I would like to see the same kind of commitment towards companies that are not on the fringe, like blue chips, GLC's etc. On average they might have arranged things better, but they are not exactly flawless either.

Wednesday, 14 March 2012

China Sky must be kept functional

Amazing numbers, market cap of Singapore listed China Sky is down from SGD 2,000,000,000 (RM 4.8 Billion!) to only SGD 83,000,000 (-96%) before it was suspended.

A couple of fair questions in this "Letter to the Editor". Especially if the company would be a normal, operating business.

However, my gut feeling (based on the numerous red flags) tells me that this company is toast and that the net asset value per share of SGD 0.77 is not a good indication of the current situation. I would be very worried for a total loss, if I were shareholder of this company.

From The Business Times (Singapore), March 13, 2012

THE standoff between the Singapore Exchange (SGX) and China Sky Chemical Fibre has been well documented. There is now also an investigation by the Commercial Affairs Department (CAD) into some matters involving the company.

Trading in the stock remains suspended, and I am concerned about how the company is being run now and whether its business and assets are being protected.This is a large company by most standards, and it has been profitable and a leader in the synthetic leather industry in China for some years.

China Sky has more than 800 million shares in issue and, as recently as September 2007, its shares traded as high as $2.50 apiece, with the company capitalised at more than $2 billion.

The shares have since come down a long way to 10 cents each (before suspension). However, the net asset value per share remained at 77 cents at the end of September 2011.

While the market cap had shrunk to about $83 million, shareholders' equity stood at $627 million at the end of September 2011 with no debt on the balance sheet.

Meanwhile, the three independent directors (IDs) have quit the board and, recently, the CEO and CFO also resigned.

My question is: who is running the company? There are large assets and a good business at stake.

The SGX queries relating to the abortive land transfer, interested-person transactions relating to an ID and even the repair/ maintenance charges are small in relation to the size of the company and the amount of shareholders' funds at stake.

I hope we are not losing sight of the woods because of our focus on the individual trees. SGX has a duty to protect the interests of many minority shareholders who invested in this company during its IPO when there was much fanfare on its merits.

I would like to know what SGX is doing to ensure the board of China Sky remains functional, and who is in charge of operations and finance, given the resignation of the CEO and CFO. The entire assets and business of China Sky could now be at stake - vulnerable to loss of clients, staff, reputation, and even its business assets and cash reserves.

SGX should nudge the chairman and remaining directors at China Sky to strengthen the company's board and top management team quickly. There is a need to expedite the process of ring-fencing the company and its business/cash before it is too late.

I am sure many small shareholders are in the same frame of mind and are equally worried about how the company is faring at this point of time.

Mano Sabnani

KL's RM800-900 minimum wage plan out this month

Updated version

"Even former premier Mahathir Mohamad has weighed in, saying the move would bankrupt Malaysia"

If people in Malaysia can't even be paid a measly RM 800 per month for a full time job, then Malaysia deserves to go bankrupt, I am sorry to say (please note that my wife and daughter are actually Malaysians).

Malaysia is earning tens of billions of RM a year in oil and gas (and is also rich in other commodities), has huge amounts of fertile land suitable for palm oil, rubber and the like, has a young and multi-cultural population, no natural disasters, and all of this at a very strategic location. You simply can't get more lucky than that.

Blogger Salvatore Dali just happened to write about this today, and I agree, in the long run having ample resources is disadvantageous. It is the "Dutch disease", called after my home country where a huge amount of natural gas ready for export was found in the sixties.

If Malaysia does go bankrupt, then I think it will be because of corruption and wastage, not because of introducing measly minimum wages.

For instance, in my home country The Netherlands, minimum wages are more than RM 5,000 per month, and the last time I checked they are doing pretty ok.

Minimum wages will force employers to be more productive, and that is exactly what is needed and long overdue. Some industries might decline or worse, but others will thrive, especially the ones that rely on services to and consumption by the lower income group. Crime will also be reduced, since poor people have an alternative. There might be some short term shocks, but in the long term I think it will all pan out well.

Malaysia has one of the highest degrees of inequality and minimum wages will initiate a change for the better.
I would propose to start with minimum wages of say RM 800, and to slowly increase them each year by say RM 50 to 100 until a reasonable amount is reached.

On the other hand, I would limit the number of foreign workers (in a humane way, by strongly reducing new visa's) and would be strict at enforcement against employers who hire illegal workers.

[Please don't take the above too serious, I am not an economist, nor will I ever be one, just wanted to give my 2 cents]

From The Business Times (Singapore), March 13, 2012

Minimum wage to pave way for Najib's other delayed reforms: govt source

Prime Minister Najib Razak and his Cabinet have yet to complete the plan, according to the official, who spoke on condition of anonymity because the talks are private.

Malaysian government sources, who declined to be identified because of the sensitivity of the issue, told Reuters that the Cabinet had approved setting the minimum wage at RM800 (S$332) to RM900 per month, depending on location.

The minimum compares with RM760 per month, which according to a government survey roughly represents the poverty income line in Malaysia and the gross pay that workers take home in the key manufacturing sector of this trade-reliant country.

'The Cabinet approved (the minimum wage) about two weeks ago and the government has explained this to industry groups,' said a source with direct knowledge of the matter yesterday.
'There is some reluctance, but we are moving on with it,' the source said. 'The prime minister could announce it either this week or next week.'

The move is a major part of Mr Najib's new economic model launched in 2010 to transform the country from a middle- income economy to developed nation status by 2020 via market reforms and greater focus on services.

Mr Najib is preparing for elections due in early 2013, and a minimum wage would follow an October budget that featured cash payments to low-income families - a step that's helped increase his approval rating.

Thailand and Vietnam plan to boost minimum pay, and Singapore last month introduced a permanent programme for handouts to low-income people, as policymakers throughout the region seek to address wealth gaps as Asia leads global growth.

'It's clear that elections are the motivation but what is unclear is if this will be a blanket minimum wage or whether it will be differentiated by sectors or by state,' said Kit Wei Zheng, an economist at Citigroup Inc in Singapore. 'There will be a loss of competitiveness if it's a blanket hike across all sectors. The government is aware of the pitfalls.'

Mr Najib announced in October 2010 that Malaysia intended to adopt a minimum wage policy as part of its long-term economic planning.

'We are waiting for the government to make a decision,' said Shamsuddin Bardan, executive director of the Malaysian Employers Federation. 'We have expressed our concerns about the rates and sectors to be involved during our consultations.'

The minimum wage has faced heavy opposition from Malaysian employers, who have said imposing the policy too quickly will erode competitiveness in a country that has kept costs low for decades to hold onto investments from Dell Inc and Intel Corp.

Even former premier Mahathir Mohamad has weighed in, saying the move would bankrupt Malaysia, once known as South-east Asia's electronics hub.

The Malaysian Employers Federation painted an even bleaker picture, forecasting that the minimum wage would wipe out four million jobs and 200,000 companies.

Yet in recent years Malaysia has fallen off the investor radar as it struggles to compete with Indonesia with its ample, cheap labour and South Korea with its highly developed electronics sector and skilled workforce.

The minimum wage would also pave the way for Mr Najib's other delayed reforms, the second government source said, which could help Malaysia reduce its budget deficit.

The government aims to cut the fiscal gap to 4.7 per cent this year.

The reforms include a goods and services tax that would widen Malaysia's narrow tax base, which largely relies on revenue from state oil company Petroliam Nasional Bhd, and rolling back some food and fuel subsidies. -- Bloomberg, Reuters

(KUALA LUMPUR) Malaysia will announce plans for a minimum wage this month, a government official said, bringing the nation in line with South-east Asian neighbours strengthening support for those with lower incomes.

Tuesday, 13 March 2012

Non-bumi to head securities regulator

"Ms Zarinah had explained to staff in an internal memo that was leaked that it was 'just part of his normal acquisition, with all purchases made in the open and duly reported to Bursa'. The memo added: 'Naturally, he had no knowledge of the Sime Darby purchase at the time as this is a sale by the major shareholders and the board was not told of the negotiations until later.'

This email did not make matters better. It could be perceived as influencing the outcome of investigations that were (and still are) ongoing

"she had been credited with 'establishing a robust regulatory and governance framework which has contributed to the growth of the market, and investing resources in building regulatory capacity'."

I agree that there has clear progress at the SC during her leadership. Unfortunately, the recent controversies will overshadow that (partly).

From The Business Times (Singapore), by Pauline Ng

MALAYSIAN Prime Minister Najib Razak has appointed Ranjit Ajit Singh as the new Securities Commission (SC) chairman succeeding Zarinah Anwar, effective April 1.

Ms Zarinah: The outgoing chairman has been in a difficult position recently despite her achievements over the last six years

Currently one of the SC's two managing directors - the other being Nik Ramlah Mahmood, who was appointed deputy chief executive - Mr Singh is the first non-bumiputra to head the regulatory body since it was established in 1993.

Ms Nik Ramlah is a lawyer by training and has served the SC for over 18 years; she is also the executive director of enforcement.

The appointments by Mr Najib, who is also finance minister, comes after weeks of industry speculation that Ms Zarinah would not be staying on after six years at the SC - including two one-year extensions - because of the recent controversy concerning Sime Darby's acquisition of a 30 per cent stake in E&O from its three biggest shareholders including GK Goh Holdings.

Minorities were unhappy that the conglomerate had not included them in its offer and one shareholder, Michael Chow Keat Thye, has brought a legal suit against the commission to overturn the offer waiver accorded to Sime.

Moreover, filings to the exchange also showed that Ms Zarinah's husband Azizan Abdul Rahman - E&O chairman and shareholder since 2002 - had raised his stake in the developer prior to Sime's offer.
Ms Zarinah had explained to staff in an internal memo that was leaked that it was 'just part of his normal acquisition, with all purchases made in the open and duly reported to Bursa'.

The memo added: 'Naturally, he had no knowledge of the Sime Darby purchase at the time as this is a sale by the major shareholders and the board was not told of the negotiations until later.'

Her explanation notwithstanding, she was put in a difficult position despite her previous achievements at the SC, where she had been credited with 'establishing a robust regulatory and governance framework which has contributed to the growth of the market, and investing resources in building regulatory capacity'.

Industry players believe Mr Singh to be a suitable successor. A financial economist and accountant, he has served the SC since 1994 in a number of areas including supervision and market oversight (where he is currently executive director), strategy and risk management, financial policy and economics.

The country's biggest Indian political party - the Malaysian Indian Congress (MIC) - was particularly pleased with Mr Singh's elevation as there had been concerns that he might not get the promotion, ostensibly because of the government's well-known pro-bumiputra policies.

In Mr Najib's tenure, however, more non-bumiputras have been promoted to head government departments and institutions as well as appointed to the boards of state-linked companies, including Petronas.

Monday, 12 March 2012

Raking Muck, part 5 & 6

David Webb published the 5th part and 6th part of the "Raking Muck" series.

From the last part:

"We'll bring this hexalogy to a close. We've given you enough reasons to avoid investing in all of the listed companies named at the top of this article, as well as any company which uses the same advisers, particularly on a regular basis. We've also laid out evidence surrounding a substantial number of dubious transactions that the SFC, ICAC or CCB should investigate, and we've drawn attention in the "regulatory notes" boxes to a number of deficiencies in HK's regulatory framework which facilitate some of these schemes.

Once in a while, the authorities do actually listen and act. Examples include our article Cooking with Gas (4-Apr-2004) which was eventually followed by an ICAC investigation and convictions in 2010, and a trilogy of articles about the Styland Network in 2002. Just last week, 10 years later, the SFC won a landmark ruling ordering the former Chairman and his wife (who was an executive director) to pay HK$85m in compensation (plus a lot of interest since 2000). The case was actually heard in Jan-2011 but it took 14 months for Justice Aarif Barma to issue his judgment, which says something about the strain the courts are under and the need to raise the budget for the judiciary. It will be interesting to see whether the couple pay up. The court has disqualified them as directors for 12 years, but their son is now CEO of Styland and they still own 22.72% of it. No criminal charges were brought against the couple.

Other series include the tetralogy of articles in 2009 on China Public Procurement Ltd (1094) and China Railway Logistics Ltd (8089), amongst others. No public action has been taken on those. There was also our articles on EganaGoldpfeil, after which the company collapsed. The SFC has commenced action against the directors seeking disqualification orders and HK$2.13bn of compensation, but no criminal charges have yet been brought despite an investigation by the Commercial Crime Bureau."

David Webb is doing all the work, free of charge, and "Once in a while, the authorities do actually listen and act". For a high-income country like Hong Kong, that is very disappointing. One reason why they are only rated a "B" country in Corporate Governance, similar to Singapore.

Thursday, 8 March 2012

Raking Muck, Part 3 & 4

David Webb continued with his series "Raking Muck", Part 3 and Part 4.

In the latter one the following text, describing the situation in Hong Kong:

"Regulatory note: the "Independent Financial Adviser" system in the Listing Rules and Takeovers Code is a waste of shareholders' money and gives investors false comfort. However bad a company's proposal is, the company will almost always be able to find an "IFA of last resort" to say that the proposal is fair and reasonable, and investors may then be misled into voting in favour. When investors do vote a proposal down, it is usually against the advice of the IFA. The system is a gravy train for shoddy IFAs. It would be better to scrap the requirement for an IFA, and require the company to justify its proposal on its own, taking whatever advice it wants to prepare the circular. If the company can't convince shareholders of the merits, then it risks being voted down.An alternative would be a jury-pool system where IFAs are randomly assigned to deals by the regulator. Pricing for the work could be determined by an annual tendering exercise. A firm would only qualify for the next year's jury pool if investors had actually agreed with the firm's recommendations by passing or rejecting proposals at least (say) 80% of the time. We proposed a similar such system in 2001."

It all sounds very similar compared to the situation in Malaysia. Independent advice in Malaysia is also not worth the paper it is written on. It actually often does more damage than it does good: it costs time (the delay to write the report) and money (paid for by the shareholders), and can be used as an excuse by Government Linked Funds to vote in favour, regardless how bad the deal is.

Pelikan rewarding shareholders?

"KUALA LUMPUR (March 7): Pelikan International Corporation Bhd plans to reward its shareholders with one treasury share for evey 50 existing shares held for FY ended Dec 31, 2011."

Shareholders own Pelikan relative to their shareholding. If Pelikan holds the treasure shares, cancels the treasure shares or tranfers them to the shareholders, in all three cases nothing changes for the shareholders. They still hold the same piece of the same pie. 

Pelikan, a well known international brand, was brought to the Malaysian market with quite some excitement. That excitement has fizzled out. These are the last quarterly results, they look bad, is that why they try to comfort the shareholders with an empty gesture?

Wednesday, 7 March 2012

The Board Of Directors: Role and Responsibilities

Great post from a VC (Venture Capitalist), Fred Wilson, about the Board of Directors, from a very practical point of view. He is from New York City, which might explain the rather open culture. In Malaysia, too many Boards are just ticking the boxes. It is very, very seldom that a member of the Board openly disagrees with the CEO or Chairman.

This is the first of a series of MBA Mondays posts on the topic of The Board Of Directors. I want to dig into the role and responsibilities of the Board as a way to kickoff this series. But first a few disclaimers. I am not a lawyer and I am not giving out legal advice on this topic. I am a practicioner and am telling you the way I see it and what I've learned over the years. I think both are important perspectives. You will have to look elsewhere for the legal view on this topic.

The Board of Directors is the governing body for a company. All major decisions will need to be ratified by the Board. You will need the Board's approval to sell your company. You will need the Board's approval to hire or fire a CEO. You will need the Board's approval to do a major acquisition. You will need the Board's approval to do a major financing, including an IPO. On all matters of major strategic importance, the Board will need to be engaged, involved, and supportive.

However, the Board should not run a company. That is the role of the CEO and his/her senior management team. The Board's job is to make sure the right team is at the helm, not to be at the helm themselves. Boards that meddle, that get too involved, that undermine the management team are hurting the company, not helping the company.

Boards work for the company. The company is their responsibility. They must always act in the best interests of the company and its major stakeholders; the employees, the customers, the shareholders, the debtholders, and everyone else that is relying on the company to deliver on its promises.

Some would say that the company works for the Board. But I think that is wrong. The company works for the market (and I am using the word market in all of its meanings) and the Board and the management team work for the company. Every director must put the interests of the company first and their interests second. This is called fiduciary responsibility.

About ten years ago, I was in a Board meeting when management told the Board that they had uncovered significant accounting issues in a recently acquired company. This was a public company Board. And these accounting issues had flowed through to several quarterly financial statements that had been reported to the public. Every Board member who was also a material shareholder (me included) knew that the minute this information was disclosed, our shareholdings would plummet in value. But there was no question what we had to do. We had to hire a law firm to investigate the accounting issues. We had to immediately disclose the findings to the public. And we had to terminate all the employees who had an involvement in this matter.

Things like fiduciary responsibility seem very theoretical until you find yourself in a moment like this. Then they become crystal clear. Directors often must act against their own self interests. They must do the right thing for the company, its shareholders, and its stakeholders. There is no wiggle room on this rule. For directors, it is the golden rule.

The hard thing about being a director is that many times, the right answer is not clear. Should we accept this extremely generous offer and sell the company? Should we ask the CEO to leave the company? Should we go public or wait a few more years? There are no formulas that you can run to tell you the answers to these questions. There is no "right answer." Only time will tell if the right decision was made. And even then, there will be debate.

Debate is what good Boards do. They put the key issues on the table and discuss them. Good directors are deeply engaged in the important issues and they are upfront and open about their opinions on them. They are respectful of the other Directors and listen carefully to opposing opinions. Boards should try to reach a consensus and then act on it. Board should not procrastinate on the big decisions. Boards need a leader to drive them. That leader is commonly called the Chairman. I plan to write an entire post on the subject of the Board Chair as part of this series.

There are many CEOs who want to manage their Board. That is a mistake in my opinion. A great Board manages itself and treats the CEO as a peer and gives the CEO's opinion great weight. But a great Board is not a rubber stamp. A great Board pushes the CEO and the company to make the most of the opportunities in front of the company. It makes sure that the CEO and the management team are pushed out of their comfort zone from time to time. It asks the hard questions that must be asked.

Boards are fluid. They should evolve. Members should come and go occasionally. There should not be too much churn but some churn is good. Board members should not coast. Board members should not treat their seat as a right (even if it is). Boards should always be looking for new blood.

I will end with a somewhat controversial statement in light of the way some of the most successful tech companies are run. Boards should not be controlled by the founder, the CEO, or the largest shareholder. For a Board to do its job, it must represent all stakeholders' interests, not just one stakeholder's interest.

Monday, 5 March 2012

Silver linings in the Silver Bird cloud?

The Star published on March 3, 2012 an article about Silver Bird, called: "Silver linings in the Silver Bird cloud".

The optimism from the writer, Errol Oh, stems from the fact that Silver Bird did announce its (otherwise horrific) results on time. But if the results were not announced on time, that would also have been a huge red flag.

And another assumption of Oh: "it may well be because the auditors are mindful of the fact that their work is subject to the scrutiny of the Audit Oversight Board (AOB)".

My guess at this moment is that Silver Bird simply ran out of money, and alarm bells started to go off, not really a surprise. Not sure if the AOB had anything to do with that.

Was there any red flag that investors, auditors or authorities might have foreseen that troubles at Silver Bird were brewing?

For the readers of Where is ze Moola's blog it should not have come as a surprise what has happened, the huge amount of  articles about Silver Bird were literally littered with red flags. But apparently they stayed unnoticed with many, including the authorities.

No matter how I look at what has happened, I don't see any silver lining at all, I only see very dark clouds for Silver Bird and its shareholders.

PNB's offer price for SP Setia: "not fair, not reasonable"

The independent circular from AmInvestBank has been issued in relation to the Mandatory General Offer for SP Setia by PNB. Their recommendation for the normal shareholders:

"Not fair and not reasonable", it is very, very rare in Malaysia that this advice is given.

The reason is two-fold:
  1. The Board of Directors issued this statement September 2011: "The Board has met to consider the Offer and are of the view, based on external valuations of the Company by investment analysts published before receipt of the Offer, that the Shares Offer and Warrants Offer fundamentally undervalues the Company."
  2. PNB did not issue a "delisting threat", in other words it would try to keep the listing status of SP Setia
This is exactly the way it should be, shareholders have an opportunity to exit, but are not forced to accept.

Offers with "delisting threat" have a very high percentage chance of succeeding, the share price rises just below the offer price, many impatient shareholders sell at that price. Fund managers often are not allowed to hold shares in de-listed companies and also sell, and the 90% barrier is breached after which the share is delisted. Also, independent advisers almost always recommend to accept the offer, at best they will value the offer as "not fair but reasonable" since at least it offers an opportunity to exit.

My recommendation is: simply don't allow companies to issue the "delisting threat" in combination with the General Offer. It makes Bursa much more fair for minority investors.

Sunday, 4 March 2012

Warrant of arrest for SJAM head

We posted before about SJAM and its rather curious investment in Maxbiz. Finally after almost two years the Securities Commission issued a warrant of arrest for the head of SJ Asset Management (SJAM):

Why did it take the Securities Commission so unbelievable long to issue this? It looked crystal clear from the start of the investigation (July 2010) that something was very, very wrong here.

Interestingly, the Securities Commission had already warned before about SJAM on its own website, in words that could not be more clear "a scheme to defraud":

Both this list of unauthorised websites/investment products/companies and individuals and the referral list by IOSCO are, by the way, highly recommended, great service in a country where so many cheating schemes (especcially pyramid schemes) seem to thrive. With very limited and slow enforcement, people should stay alert themselves. I hope the lists will be updated regularly.

Some more information about the rather mysterious ties between SJAM and Maxbiz can be found here and here.

Interesting quote from Tan Whai Oon: "For a listed company, we don't normally ask for board representation. there is supposed to be much more transparency in listed companies, there is supposed to be corporate governance and independent board members".

This sounds all rather naive, to hear this from a fund manager in the Malaysian context, may be that is why he is rumored to have gone to Nepal?

Some high net worth customers of CIMB were referred to SJAM, as this article from PWM (Professional Wealth Management) shows: CIMB striving to stand out from the Malaysian crowd. CIMB will definetely stand out from the crowd through this recommendation, but not for the good reasons, their "holistic approach to wealth management" didn't seem to work, at least in this case:

Many, many questions remain in this case:
  • How much of their money will clients from SJAM receive back?
  • How long was this scheme going on (from The Star: "Subsequently, a senior finance executive of the company spilled the beans on the accounts that have apparently been cooked since 2001")?
  • Which company was responsible for auditing the accounts of SJAM?
  • Where were the regulators all those years?
  • When will finally some justice be done?
  • When will all the issues surrounding Maxbiz and Geahin be clarified?
  • Etc, etc, etc.