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 sweeseng@tm.net.my 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 Partys Responsibility

Directors - Issues of compliance & profitability Directors - Issues of conformance & performance Shareholders - Questions at AGM & EGM on companys 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)

Enrons 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.

Enrons 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 wont 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 WorldComs 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 soothsayers words have become synonymous with unheeded warnings since they were penned by Shakespeare some 400 years ago. Caesars response`He is a dreamer; let us leave him: passis 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

Directors remuneration and severance package Related party transaction Corporate Governance Statement Corporate Fraud system of checks and balances, timely disclosure

Dick Grassos 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 companys 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 companys 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 issuers 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 3.0 6.0 6.0 2003 9.0 3.5 4.0 7.0 6.5

Source: CLSA Emerging Markets Reports on Corporate Governance 2001-2003

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