Independent or irrelevant directors?

First published by Business Times on 3 August 2015

By Mak Yuen Teen

SWIBER’S tardy disclosures, sudden announcement of a winding-up application, mass resignations of executive directors, reversal of its winding-up application and retraction of a resignation announcement have befuddled and angered investors. Singapore Exchange’s chief regulatory officer has – quite rightly – said that there will be investigations and regulatory actions may be taken.

When Swiber won in the small-cap category of the Singapore Corporate Governance Award in 2012, its group chief executive Francis Wong had this to say: “… We also continue to review our processes to improve each aspect of corporate governance to be in line with best practices. Swiber’s board is mindful of the interests of its stakeholders … Swiber will continue to be a steward of excellent corporate governance practices across its operations.”

Swiber’s approach to corporate governance disclosures and practices has not changed much over the years, and, given the recent events, those words ring hollow now.

Mr Wong was one of the three executive directors who suddenly jumped from the burning platform on July 28, said a company announcement, although it was later said that the group chief financial officer did not in fact do so. Meanwhile, Swiber’s executive chairman Raymond Kim Goh resigned as non-executive chairman of Vallianz Holdings, a related company of Swiber, on July 27 “due to health reasons”, but has apparently stayed healthy enough to remain on the Swiber board.

The company’s corporate governance report says all executive directors signed separate service agreements which can be “terminated by either party, giving not less than six months’ notice to the other”. The service agreements have turned out to be as watertight as the company’s disclosures, given that the executive directors were able to resign with immediate effect, leaving the company adrift.

Swiber is another case of a company that has highly questionable corporate governance practices and disclosures that investors, creditors and other stakeholders appear to have overlooked, perhaps because it was considered, as one media report put it, a “darling in the Singapore oil and gas sector”. In 2008, it made it into Forbes Asia’s list of 200 Best Under a Billion.

BOARD OF DIRECTORS

Let’s start with its board of directors. Before the recent resignations, Swiber had a board of nine directors – six executive directors and three independent directors. Therefore, while it met the guideline of one-third of independent directors in the Singapore Code of Corporate Governance, the executive directors far outnumbered the independent directors in decision making by the board, which was a management board rather than an oversight board.

Although the company technically separated the chairman and CEO roles, the chairman is an executive chairman, so must one question the effective separation between the chairing of the board and the day-to-day running of the company. Further, both the chairman and the deputy group CEO, Yeo Chee Neng (also known as Darren Yeo), are controlling shareholders. Therefore, the board is effectively controlled by management and controlling shareholders.

The company appointed a lead independent director, Yeo Jeu Nam, who has been on the board for just under 10 years and who also serves as an independent director of Vallianz. While serving as a non-executive director on the boards of both Swiber and its related company Vallianz does not necessarily preclude him from being considered independent on either board under the Code, it may suggest a close affiliation with the management and major shareholders of the two companies, as the chairman and CEO of Swiber were respectively non-executive chairman and non-executive deputy chairman of Vallianz (until the recent resignation of the former). Further, there are almost certainly situations where he will face conflicts in discharging his fiduciary duties to both companies.

Although Yeo Jeu Nam has experience in two major accounting firms, he was on the consulting side of those firms; his biography suggests that he does not have an accounting or finance background. Neither do the other two independent directors. One of them is Chia Fook Eng, who has a marine engineering background. Before his appointment in 2009, he was an advisor to Swiber’s board on “matters relating to the Group’s business”. There would be questions about whether he should be considered independent.

The third independent director is lawyer Oon Thian Seng, a founding partner of Oon & Bazul LLP here. The law firm’s website says Mr Oon “is noted for his ability to handle disputes involving highly technical issues and is regularly instructed by clients in the oil & gas, banking, international trade, insurance, shipping and construction industries” and is an expert on shipping matters. In the 2015 corporate governance report, Swiber disclosed that it had dealings with his law firm, although he had declared that he is not involved directly or indirectly in work that his law firm does for Swiber. Nevertheless, as a major partner, he clearly has a financial interest in the work. Again, there would be questions about his independence.

Therefore, collectively, the independent directors bring relevant industry experience but appear lacking in financial and accounting expertise; there are also doubts about their independence.

Further, one must wonder about their role and authority, given the overwhelming dominance of management and controlling shareholders on the board. Like the executive directors, they owe fiduciary duties to the company and therefore their action (or inaction) leading up to, and during, the recent events should be scrutinised in any regulatory inquiry.

Much of the affairs of Swiber are undertaken through its executive committee, which includes only the six executive directors, again raising questions about the role of the independent directors. It is also interesting that the group CEO is a member of the Audit Committee, which is not in accordance with the Code.

The remuneration disclosures and practices of Swiber are even more questionable, with almost a total disregard for the recommendations of the Code. It discloses the remuneration of its six executive directors in a single band of “S$500,000 and above” and the remuneration of the independent directors in a single band of “below S$250,000”. It cites the “competitive nature of the company’s business” and “sensitivity of information” as reasons for non-disclosure. One must ask if the independent directors should have pushed for greater transparency, at least for the fees paid to themselves. Surely, the risk of the controlling shareholders and the independent directors being poached is non-existent.

In disclosing the percentage breakdown for different remuneration components, Swiber lumps the annual cash bonus with performance incentives, the latter referring to “long-term cash incentive plan and long-term performance-driven plan”. The percentages for this component in the latest annual report ranged from 56 per cent to 91 per cent for the six executive directors. Since the controlling shareholders up to that point did not participate in the share option or share plans, we can surmise that the performance incentives for them are generally in cold, hard cash (although as mentioned shortly, this was to change after the recent AGM and, in 2013, when the controlling shareholders received Vallianz shares under their Swiber remuneration). In the case of the executive chairman-cum-controlling shareholder, his bonus / performance incentive was 91 per cent of his total remuneration; for the deputy CEO-cum-controlling shareholder, it was 73 per cent.

Instead of naming and disclosing the remuneration of the five key management personnel who are not directors and CEO at least in bands of S$250,000, Swiber chose to disclose the top 10 without naming them. Again, it cites “confidentiality” and “competition”. Further, for eight of them, the top band is disclosed as “S$450,000 or more”. Swiber also does not disclose the aggregate total remuneration for the top five as a group as recommended by the Code – nor does it do so for the top 10.

Since the company chose to be non-transparent about the exact remuneration of its executive directors, I attempted to gauge how much they were actually getting. Note 33 for “Related Party Transactions” in the 2015 annual report said the total key management personnel remuneration was US$9.086 million. The relevant accounting standard provides a definition of “key management personnel”, but companies have discretion as to who are included, and are not required to disclose who they are.

I assume that key management personnel for Swiber include the six executive directors and three non-executive independent directors on the board. I then subtracted the US$297,000 for directors’ fees to remove the amount of fees that were paid to the non-executive directors (although Swiber’s executive directors do receive directors’ fees, so not all of these fees are paid to the non-executive directors). That comes to about US$8.8 million. Using an exchange rate of US$1: S$1.35, this amounts to about S$12 million. Therefore, I estimate that the average remuneration of each of the six executive directors is closer to S$2 million than S$500,000. Of course, mine is only a ballpark estimate, but the company can hardly blame me for being wrong, given the opaqueness of its disclosures. This is a good example of how misleading unlimited band disclosures such as “S$500,000 and more” can be.

In 2013, key management personnel remuneration as disclosed under the “Related Party Transactions” note jumped from under US$8.2 million in 2012 to US$18.5 million. Although profits showed a healthy increase that year, operating cash flows went from negative S$69 million to negative S$87 million. The directors’ remuneration section in the corporate governance report remarkably shows that none of the executive directors, except for the CFO, received any bonus or performance incentives. Either the company misreported, or the additional share remuneration the key management personnel received were considered salary or benefits. Neither explanation puts the company in a good light.

SHARES AS COMPENSATION

Note 35 in the 2014 annual report disclosed that the major source of the big remuneration increase was a transfer of 89.78 million Vallianz shares “to certain key management personnel as part of employee compensation expenses” for 2013. The fair value of these shares was US$14.1 million. It was also disclosed that the transfer of shares actually took place on March 7, 2014.

Since Mr Goh and Mr Darren Yeo are directors of Vallianz, their change in interest in the shares of Vallianz was disclosed in two Vallianz announcements on March 10, 2014. From those announcements, we can see that Mr Goh got 23 million shares, and Mr Yeo, 10 million. At the then-heady Vallianz share price of 15 cents each, the actual value of those shares alone was S$3.45 million and S$1.5 million respectively – again, a far cry from S$500,000.

Although the chairman and deputy CEO are controlling shareholders, they collectively own – directly or indirectly – only about 18 per cent of the company. However, their key management roles in the company will act like leverage in enhancing their control of the company.

Where there is effective control with relatively low economic interest (effective ownership), minority shareholders probably face the greatest peril. This is because the relatively low economic interest will lead to lack of strong alignment with the company’s interests, while at the same time opening the way for control over key decisions.

Where there is low effective ownership, major shareholders would be much better off receiving their “returns” through remuneration rather than through dividends. Swiber does not have a formal dividend policy and has paid dividends only sporadically to ordinary shareholders in the last six years. In contrast, since 2010, it has paid its key management personnel, including its controlling shareholders, remuneration totalling US$69.2 million.

At its April 2016 AGM, Swiber had sought shareholders’ approval for the proposed adoption of a new share option scheme and performance share scheme, and to allow the grant of options at a discount of up to 20 per cent. In a departure from past practice, it sought shareholders’ approval to allow the two controlling shareholders to participate in these schemes. They abstained from voting and the resolutions were passed, although nearly a quarter or more of votes cast were against these resolutions, with 46 per cent voting against discounted options.

The company did not explain the rationale for the change in remuneration policy for the controlling shareholders in its notice of AGM. Perhaps it was a sign that the company was running out of cash to pay the executive directors their “S$500,000 and more” remuneration packages.