By Mak Yuen Teen
On Friday, October 30 at 11 am, Raffles Education Corporation (REC) will convene its AGM by electronic means.
Yesterday, October 26 at 6.27 pm, the company posted its “response to substantial and relevant questions from shareholders” for the AGM. This episode once again shows the unsatisfactory nature of shareholder meetings that are currently conducted by electronic means.
The response to a number of the questions are in my view wholly inadequate. However, there is little opportunity for shareholders to ask follow-up questions because the deadline for submission of questions is today, October 27 at 11 am. Many of the questions were submitted by Mr Oei Hong Leong, who has direct and deemed interests of 13.53% in the company – these questions were posted on the Save Raffles Education website (https://save-raffles-education.com/) and were sent on October 13.
Mr Oei requested that the company respond at least one week before the AGM, which would still give the company about 10 days to respond. Yet it chose to respond less than 48 hours before the deadline for voting, which is Wednesday, October 28 at 11 am. Shareholders are now expected to vote before satisfactory answers are given. Under such circumstances, shareholders should vote against all the resolutions. Granted, given the shares controlled by Mr Chew Hua Seng, the controlling shareholder, this is unlikely to make a difference to the voting outcomes. Nevertheless, shareholders should not vote in support if the board is not forthcoming.
Before I discuss some of the responses which I consider to be unsatisfactory, it is worth pointing out that on October 20, REC responded to a set of four queries from SGX. The fourth query pointed out an omission in the FY2020 annual report. In the Notice to the AGM dated October 8, the company had stated that Mr Lim How Teck, the lead independent director, is up for re-election and that the information as set out in Appendix 7.4.1 of the Listing Manual can be found under “Supplemental Information on Directors Seeking Re-election” in the annual report. SGX pointed out that there is no such information and asked the company to provide it. This is not the first time that issuers had neglected to provide such information but they have come to realise that there are no sanctions for omitting such information required by the listing rules, so there is no incentive for them to get it right. Incidentally, REC also did not include the supplemental information last year when two directors stood for re-election.
REC provided the supplemental information together with the response to SGX’s queries on October 20. The supplemental information indicates that Mr Lim is currently a Chairman/director of seven private companies and three listed companies, including REC. Not listed in the supplemental information, but in the annual report, is that Mr Lim is also an adviser, special adviser or senior adviser to 15 other companies. It is clear that Mr Lim is an extremely busy person. Under the best of times, that is just too many commitments for one person in my view, but REC is facing significant challenges in its business.
Under “Other Principal Commitments including Directorships Past (for the last 5 years)”, only his appointment as senior advisor of Bain Capital Partners LLC is listed. This is incorrect because he resigned as lead independent director from SGX-listed Swissco Holdings on May 2, 2017, after judicial managers were appointed in April 2017. Are there other omissions in the supplemental information provided?
Are shareholders expected to vote for his re-election with incomplete information? Is the disclosure of incomplete information acceptable?
Let me now turn to some of the replies to shareholders’ questions. Question 5 was directed at the external auditors, BDO LLP. Provision 11.3 of the Code of Corporate Governance 2018 states that “the external auditors are also present to address shareholders’ queries about the conduct of the audit and the preparation and content of the auditors’ report”. Clearly, the spirit with virtual AGMs is that the external auditors would address such queries in the company’s response to shareholders’ questions. The shareholders’ questions here are whether the auditor foresees any going concern issues given some of the negative indicators relating to the company’s financial performance and position, future projected costs, and Covid-19; asking the auditor to substantiate its views with specific details; and whether the auditor has verified management representation in relation to the company’s financial health and to highlight any concerns.
The auditor’s response was a boilerplate one, merely referring to the independent auditor’s report in the annual report. That is hardly answering questions about “the conduct of the audit and the preparation and content of the auditors’ report”. One would have thought more information about how the auditor had assessed the company’s going concern status and verified management representation would be provided.
The company also provided a standard response to Question 8(b) about the independence of Mr Teo Cheng Lok John given his long tenure and familiarity with the CEO and management. This includes the NC, with the concurrence of the board, having “rigorously reviewed” his suitability and independence.
What I find particularly lacking in the REC’s board is an independent director who has significant experience in the education industry. In fact, none of them appears to have any experience in the industry at all. The three independent directors comprise one with experience in business finance and accounting, with significant experience in the shipping industry; another with an accounting background; and the third with a banking background. This would limit the ability of the independent directors to ask pertinent questions and constructively challenge management proposals in matters relating to its core business. It is not a board that appears to be fit for purpose.
On Question 9(b), shareholders asked for details about the due diligence process when the company makes investment and divestment decisions, and undertake other corporate actions such as placements. Question 9(c) asked if the company enters into joint ventures or other corporate actions without ascertaining the background and financial resources of its partners. While the questions clearly arose from what happened for the Proposed Acquisition that was approved at its EGM on September 30, 2020, the questions from shareholders go beyond this specific acquisition. Yet the company merely said that the proposed acquisition has already been conclusively approved.
Question 10(d) pointed out that the company’s disclosures of remuneration are not in compliance with the Code. It also asked why there is a need to keep the remuneration of directors confidential, since there is no risk that Mr Chew or the non-executive directors will be poached. Question 10(f) asked the company to disclose the key performance indicators for Mr Chew. Question 10(g) asked for disclosure of the maximum variable bonus and other variable remuneration elements that may be payable to Mr Chew. Question 10(h) asked for disclosure of the percentage of profit share if there is a profit-sharing arrangement.
The company refused to comply with the Code and merely said it has reviewed the practice of the relevant industry and is satisfied that disclosures in bands is sufficient for the CEO and directors. It said “disclosure in bands serves to provide a balance between detailed disclosure and confidentiality without prejudicing the interests of the shareholders”. Clearly, REC has chosen to follow the practices of the non-transparent companies as there are companies that do provide exact disclosures. It fails to explain why there is a need to keep Mr Chew’s and the non-executive directors’ remuneration confidential or why such disclosures may prejudice shareholders’ interests. There is no likelihood of any of them being poached.
The board also claims that “there is sufficient transparency on the Company’s remuneration policies, level and mix of remuneration….and the relationships between remuneration, performance and value creation” and that its disclosures are consistent with the intent of Principle 8 of the Code. Without disclosure of the range of variable bonuses payable, such as maximum bonus payable or specific key performance indicators, how are shareholders supposed to satisfy themselves that there is a “relationship between remuneration, performance and value creation”? It’s like teaching maths and laying out an equation that X = Y + Z. X is in the range of $750k to $1 million. What are the values of Y and Z?
The board’s claim about “sufficient transparency” is but an empty claim.
