First published in Business Times on September 22, 2016

By Mak  Yuen Teen

SBI Offshore (SBIO) and its boardroom tussle challenge the boundaries of good corporate governance and raise important questions about independence, competencies and attributes of directors, and difficulties that small and medium-sized enterprises (SMEs) often face in putting together a skilled and diverse board, as well as the role of sponsors in contributing to good governance of Catalist companies.

Before the recent appointment of new directors, SBIO had a five-member board – a little small (as the board itself acknowledged) but not unusual for an SME. Its small board size was helped by having only one executive director (the CEO) and only one major shareholder with a seat on the board (the non-executive chairman), allowing it to still have a majority of independent directors. Among its four non-executive directors, three have backgrounds in accounting, finance and insurance, while the other is a lawyer. What appeared to be lacking among the non-executive directors was any significant prior experience in the business that the company was in or was attempting to diversify into.

It may be difficult for SMEs like SBIO to attract good independent directors at reasonable fee levels. In FY2015, the total fees paid to SBIO’s non-executive directors was S$126,000, or an average of S$31,500 per director. This is probably about 15-25 per cent of the average for the larger listed government-linked companies (GLCs). Yet, the job of an SME director can be more demanding than for a GLC director. For SMEs, the potential pool of good independent directors may be rather small, and they often end up with directors who lack the desired skills, experience, commitment, and other personal attributes.

THE FOUR PROPOSED DIRECTORS

The three requisitioning shareholders proposed the appointment of four directors. Two of them – Hui Choon Ho and Lau Yoke Mun – were to assume executive director positions. As a former executive chairman and CEO of the company, Mr Hui would bring relevant industry and senior management experience.

He could have been a suitable replacement for current CEO Chan Lai Thong or otherwise added something to the board – from the skills and experience standpoint. The board was not questioning the relevance of his skills and experience, but his alleged interference in the operations of the company as a shareholder and his alleged involvement in two contradictory acquisition agreements which had potentially serious implications.

In this regard, I was rather shocked that Jen Shek Voon, former audit committee (AC) chairman of SBIO – an experienced AC chairman and former senior partner of a Big Four firm – was quoted as saying: “We have heard enough about PwC (its report). This whole report is a red herring.” (“Shareholder move to oust SBI Offshore CEO stalls”, BT, Sept 17).

In the case of Mr Lau, he is said to have over 30 years of experience in finance and accounting, although he also has some general management and other experience, and had a short stint in the company as an employee and service provider, where his responsibilities included finance, business development, and corporate matters. He does not have any experience as a listed company director. The value he adds to the board from a skills and experience viewpoint is less clear to me. In his case, the board has concerns about his conduct and performance as a former employee and service provider.

As for the other two proposed directors – Ong Nai Pew andGeoffrey Yeoh Seng Huat – the board felt that they would bring relevant experience. Dr Ong was considered to have “relevant experience, skills and expertise in the area of investment strategy planning and economics research”, while Mr Yeoh had “relevant experience, skills and expertise in the area of project financing, and could contribute to the diversity of the skills and expertise required of the board in view of the recent diversification into the solar energy business”. The board deemed them to be independent.

Given that Dr Ong owns 5.7 per cent of the total issued shares, he is “technically” independent from a shareholding perspective, based on the 10 per cent shareholding threshold set out in the Code of Corporate Governance 2012. The fact that Dr Ong and Mr Yeoh have been proposed by Mr Hui and Tan Woo Thian – who own 11.7 per cent and 13.8 per cent respectively – also does not necessarily mean that they are not independent as the Code deems a director to be prima facie non-independent under such circumstances only if there is a direct association between the nominated director and the “10 per cent shareholder”. However, in practice, it is often difficult to establish whether there is a “direct association”.

A more thorough assessment of the independence of Dr Ong and Mr Yeoh should consider relationships between them and Mr Hui and Mr Tan – and whether they are independent in character and judgement. However, most companies here make only rudimentary assessments of director independence.

Independence aside, if Dr Ong and Mr Yeoh are appointed, the board may still lack sufficient diversity in competencies, as these two directors would add mostly finance-related expertise and experience.

The day before the EGM, the company appointed four new directors, increasing the number of directors to nine. They are: James Kho Chung Wah, Lawrence Kwan Hon Kay, Ling Yew Kong, and Mark Edward Pawley. Mr Kho and Mr Pawley have a finance and investment-related background, and Mr Kwan has a corporate secretarial background. Mr Pawley does not have prior experience as a listed company director.

Mr Kho and Mr Pawley’s background looks similar to that of several of the current directors and those proposed by the requisitioning shareholders. Mr Ling’s background is described as “strategic advice and chart new directions” for the various companies that he has been involved with over the last few years. He is executive director and CEO at China Sky and also became executive chairman at Anwell Technologies in 2015 when it went into judicial management. He has also been executive chairman at Firstlink Investments Corporation since 2005 and still retains the position after the company was delisted at the directive of the Singapore Exchange (SGX) in 2011. In total, he holds 23 directorships, although mostly in private companies. In Mr Ling’s case, my main concern is his ability to commit time.

Basil Chan – who joined the board last year and who was the audit committee chairman and lead independent director – has since resigned, bringing the board size back down to eight directors.

Under normal circumstances, a board appointing new directors just before an EGM called by shareholders to appoint and remove directors may be seen as a blatant attempt to frustrate shareholders’ right to change the board. It is certainly not a blueprint for companies facing shareholder revolt. However, I can understand why the SBIO board did it, especially given the questions surrounding two of the proposed directors. Further, shareholders proposing to appoint or remove directors may be acting in their own interest rather than that of the company’s, and shareholders do not owe fiduciary duties to the company, unlike directors.

Nevertheless, given the speed with which the four new directors were parachuted into the company, the newly constituted board may not be fit for purpose.

Rule 226 of the Catalist Rulebook sets out certain responsibilities of sponsors. Rule 226(1) states that “a sponsor taking on sponsorship of an existing issuer must . . . investigate and consider the suitability of each director and proposed director of the issuer and consider the efficacy of the board as a whole for the company’s needs . . .”. It appears that this rule applies to a continuing sponsor when it first takes on the sponsorship of an existing issuer. Rule 226(2) states that a sponsor, in undertaking continuing activities for an issuer, must “advise its issuer on the suitability of directors arising from proposed changes in the issuer’s board of directors”. This clearly is an ongoing responsibility of a sponsor and would be expected of SBIO’s sponsor, Prime Partners Corporate Finance (PPCF).

ASSESSING DIRECTOR SUITABILITY

As mentioned in my earlier commentary (“Stand taken by SBI Offshore sponsor highly disappointing”, BT, Sept 14), I do not agree with how the sponsor handled the proposed appointment of the two directors which the board had concerns about. However, this case raises wider issues as to whether sponsors are really equipped to fulfil their responsibilities, including advising on the suitability of directors. Do sponsors like PPCF have internal guidelines and policies for assessing the suitability of a director? To what extent do they assess the suitability of each director based on their character, competencies and ability to commit time?

At the EGM, a number of shareholders present in person or by proxy expressed that the EGM resolutions should be considered and voted upon only after shareholders are presented with clear outcomes of the investigations arising from the PwC report and the report to the Commercial Affairs Department. The shareholders present then voted on the adjournment of the EGM.

Catalist Rule 730(A)(2) states that all resolutions at general meetings shall be voted by poll. Under the Companies Act, shareholders can demand a poll and any provision in a company’s articles excluding this right shall be void. However, there are two exceptions: the appointment of the chairman of the meeting, and the adjournment of the meeting. SBIO relied on its articles to vote to adjourn the meeting based on a show of hands.

Was it fair that the adjournment of the meeting was voted based on a show of hands, even though it is in accordance with SBIO’s articles? No and yes. No because, in general, shareholder decisions should be based on one-share-one-vote. However, arguably yes in this case because there is a pending investigation relating to one of the proposed directors and the sponsor had asked the board to seek further professional opinion or legal advice for two of the directors. More generally, one can argue a case for decisions to be based on number of shareholders, rather than number of votes, where there is a real risk of minority shareholder interests being trampled over by dominant shareholders.

However, like the appointment of the four directors before the EGM, what happened at SBIO’s EGM could be abused by unreasonable minority shareholders trying to disrupt meetings and thwart shareholders who own much larger stakes.

Unfortunately, in SBIO’s case, ideal governance is off the table and we have to make do with pragmatic governance.

  • The writer is an associate professor at the National University of Singapore (NUS) Business School, where he teaches corporate governance and ethics.