Confusing disclosures about substantial shareholder by China New Town

Published June 20, 2015

Mak Yuen Teen

First published in Business Times on June 16, 2015

On June 9, China New Town Development disclosed that its substantial shareholder, Shi Jian, has been required by PRC Changzhou Procuratorate to remain under “custody in designated residence”.

In that announcement, China New Town assured shareholders that  “the measures imposed on Mr. Shi are not expected to have material adverse impact on the financial and operations of the group”.

The company’s announcement on the role of Shi in the company and Group is confusing and appears somewhat contradictory.  In particular, I refer to the following paragraph in the announcement:

“While Mr. Shi is an executive director of the Company, he is not involved in the daily operations of the Company, which is managed by a dedicated team independent of Mr. Shi. Since the daily business and operations of the Group will continue to be managed by the team led by the Chief Executive Officer, Vice Presidents and Chief Financial Officer of the Group, the Board currently does not expect the absence of Mr. Shi would have any material adverse impact on the daily business operations of the Group. Nevertheless, as Mr. Shi is not expected to fulfil his responsibilities as a director during the period when the Measures remain effective, the Board has urgently appointed Mr. Li Yao Min, non-executive director of the Board, to temporarily assume Mr. Shi’s responsibilities of daily operations and decision-making at the Board, to ensure the continued operational efficiency of the Group.”

The company should explain why Shi is an executive director but is not involved in the daily operations of the company. Further, while the first part of the paragraph explains that Shi is not involved in the daily operations of the Company and Group, the latter part of the paragraph states that the Board has appointed a non-executive director to “temporarily assume Mr. Shi’s responsibilities of daily operations and decision-making at the Board, to ensure the continued operational efficiency of the Group”. Shareholders may have a hard time assessing the potential impact of Shi’s house arrest on the company given the rather convoluted disclosures.

Shi is certainly paid like an executive director in recent years. In 2013, he was paid S$252,000 and in 2014, he was paid S$340,000 (prior to that, the company only disclosed remuneration for all directors and key executives in two bands of below $250,000 and $250,000 or more).  Shi’s remuneration in these two years is comparable to or higher than the remuneration of other executive directors and key executives.

Minority shareholders in companies where major shareholders hold executive director titles face the risk that the executive director titles may be merely a way for major shareholders to be paid extra dividends in the form of executive remuneration. Executive remuneration, as in China New Town’s case, is not subject to shareholders’ approval at the general meeting. In cases where major shareholders are drawing executive remuneration, the Singapore Exchange should ask issuers to explain their executive role to ensure that they are not in effect receiving extra dividends. It is not uncommon for issuers, especially those with families or founders as major shareholders, to have multiple directors listed as “executive directors” with no clear functional responsibilities, while also having key executives who are not executive directors with functional responsibilities.

The company’s remuneration disclosures in its annual reports over the last few years are also confusing. Its remuneration policy over each of those years states that the remuneration of the Executive Directors and senior management comprises a fixed salary and a variable component and that the variable component comprises a variable bonus linked to the company’s and individual performance and other variable components. However, the disclosures of actual remuneration mix for all those years, except 2014, show that the remuneration of all the executive directors and senior executives are made up only of fixed salaries (and in some cases a small amount of allowances), with no variable bonuses. So, for the 2010 to 2013 financial years, was it a case of an incorrect remuneration policy being disclosed, the remuneration policy not being applied, the disclosures of remuneration mix being wrong, or all the executive directors and key executives doing such a bad job that none warrant a variable bonus? Perhaps the remuneration committee can clarify the apparent inconsistencies between the remuneration policy and the disclosure of mix of remuneration, and also the role of Shi and his remuneration.

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