By Mak Yuen Teen

On 18 October 2021, Mr Oei Hong Leong, a minority shareholder of Raffles Education Corporation (REC), sent a letter and list of questions to the board and external auditors for the company’s annual general meeting (AGM) to be held on 30 October 2021. He asked that the questions be answered by 25 October before the deadline for the submission of proxy votes for voting, which is 10 am on 28 October.

As with most AGMs during Covid-19, the meeting will be virtual with no live Q&A and no live voting. For a company that has just received an emphasis of matter on material uncertainty relating to going concern from its external auditor, and with many questions requiring answers, the way the meeting will be conducted is highly unsatisfactory.

The questions sent by Mr Oei cover the audited statement of individual directors’ emoluments requisitioned on 27 September by him pursuant to section 164A of the Companies Act, the annual report, and the circular on the proposed adoption of the performance share plan.

In this article, I will draw extensively from the background information and list of questions sent by Mr Oei which has been uploaded to the Save Raffles Education website (https://save-raffles-education.com/questions-from-oei-hong-leong-for-raffles-educations-agm-on-30-october-2021/). I have independently verified the information I make reference to in this article and added some additional information.

Disclosure of remuneration

REC has not been transparent about  remuneration paid to individual directors and key management personnel over the years. It does not comply with the Code of Corporate Governance, choosing to disclose individual directors’ remuneration only in bands. In the case of key management personnel remuneration, it does not disclose at all, not even the aggregate remuneration for all such personnel.

For directors, it said “the Board is of the view that the disclosure in bands provides a balance between detailed disclosure and confidentiality”. For key management personnel remuneration, it said “disclosing the total remuneration paid in aggregate to  the lean key management team would compromise confidentiality and may affect the retention of competent personnel”. These reasons are unconvincing. Further, in terms of percentage breakdown of remuneration for directors, it only discloses “fees”, “salary” and “others”, with no further information about what comprises “others”.

I am pleased that Mr Oei has exercised his right under section 164A to compel REC to be more transparent. His requisition has now forced the company to release a 12-page audited statement on 15 October which contains the names and emoluments and other benefits paid to every director of the company and its 81 subsidiaries.

In my 2007 report titled “Improving the Implementation of Corporate Governance Practices in Singapore”,  commissioned by MAS and SGX, I encouraged minority shareholders making up 10% or more of shareholders, or shareholders or holding 5% or more of voting shares, to use section 164A to force companies to be more transparent about directors’ remuneration if companies choose to be opaque. At the time when I wrote the report, I was aware of only one company, Natsteel Ltd, where this section has been used. It appears to have been used by Mr Oei then too. I am not aware of any other company for which this section has been used since, until Mr Oei used it again for REC.

Amount and basis for determining remuneration

With the section 164A requisition, we now know that while Mr Chew’s remuneration was disclosed as “Between S$2,750,000 to S$3,000,000” under the remuneration table in the corporate governance statement, his exact remuneration is $2,893,053. Since his base salary is 35% of his total remuneration, it is about $1,012,568. Therefore, he received remuneration under “others” amounting to about $1,880,485, which would largely be his incentive bonus.

In my view, the remuneration paid to Mr Chew is excessive, especially in light of the going concern issue at REC and the fact that while profit before tax was $29.9 million, included in this amount was a fair value gain from investment properties of $13.8 million and gain on disposal of non-current assets held for sale of $28.4 million. REC has never explained how the remuneration of Mr Chew and his family members is determined, and whether such  fair value gains on investment properties and other one-off gains from disposals are included in determining their incentive bonuses.

Over the last 10 years, REC actually has a cumulative loss from core operating activities of more than $150 million if we exclude fair value gains from investment properties and one-off gains from disposals. If Mr Chew’s and his family members’ remuneration is based on profit, they could have been rewarded for these fair value gains and one-off gains. REC should explain the basis for determining the incentive bonuses of Mr Chew and his family members.

Using the mid-point of the remuneration band for Mr Chew from 2012 to 2020 and the actual remuneration for 2021, I estimated that Mr Chew was paid total remuneration of about $19 million over the 10 years. REC said that its performance-based remuneration “is directly linked to corporate and individual performance, both in terms of financial and non-financial, and the creation of shareholder wealth”.  Given the poor financial performance of REC over the last 10 years especially when fair value gains and other one-off gains are excluded, and how the company’s share price has been decimated over the same period, it is difficult to see how Mr Chew’s remuneration is in line with the company’s remuneration policy.

It is also a legitimate question to ask whether REC should continue its education business.

Governance over remuneration

Although the remuneration committee of REC comprises three independent directors and one non-independent non-executive director as members, and is chaired by lead independent director Mr Lim How Teck, all the other directors including Mr Chew attend the remuneration committee meetings by invitation. This is the practice for all the committees. This raises questions as to whether the committees are able to make decisions objectively and independently.

In the case of the remuneration committee, it only met once a year, including in 2021. One wonders whether a remuneration committee meeting only once a year would have spent enough time deliberating on remuneration matters, including about the proposed adoption of the performance share plan to be considered at the coming AGM. 

Valuation of investment properties

The valuation of investment properties, which gives rise to the fair value gains, is flagged every year by the external auditors as a key audit matter since the external auditors’ report started including key audit matters in 2017. Fair value gains from investment properties, which are included in the computation of profit from continuing operations, have been reported in 9 out of last 10 years. Cumulative fair value gains from investment properties over the 10 years amounted to $208.6 million, compared to cumulative profit before tax from continuing operations of $213.6 million over the same period. In other words, cumulative fair value gains from investment  properties is almost as large as the cumulative profit before tax from continuing operations.

The fair value gains could be reversed in the future. If Mr Chew is remunerated based on profit which includes such gains, what happens if the investment properties have to be written down? Is there going to be a clawback of his remuneration?

REC does not disclose the identity of the valuers used, which may also raise concerns about the reliability of the valuation of the investment properties.

Further, over the past 10 years, cumulative net gains from disposals of assets held for sale, investment properties, subsidiaries and available-for-sale securities, which are reported under “other operating income” and included in computing profit from continuing operations, amounted to about $157 million.

Interested person transactions

There is also concern about the number and amount of interested person transactions over the years, mostly related to loans from Mr Chew and his spouse. There is little information provided about these, including their terms. Interested person transactions which are not conducted on an arms-length basis and on normal commercial terms are a well-known risk for minority shareholders in companies with controlling shareholders such as REC.

Based on the disclosures in the annual reports over the last 10 years, the estimated total interested person transactions for Mr Chew and his spouse amounted to about $143 million.

Performance share plan

The company is also seeking shareholders’ approval at the AGM to adopt a performance share plan. Independent directors will be allowed to participate in the plan. I have in the past written articles arguing that independent directors should not be paid in share options or performance shares because such share-based remuneration could affect their independence.

There is also a lot of discretion involved in the grants of performance shares and the independent directors essentially get to set their own terms for these shares, giving rise to  a  conflict of interest. Decisions such as number of shares to be  granted, and if they are true performance shares, parameters such as performance measures, performance targets, performance periods and vesting periods will have to be made by the remuneration committee, whose members are themselves receiving such shares. Performance shares could also result in over-paying the independent directors, especially if other forms of remuneration are not adjusted for the fair value of shares granted.

If Mr Chew is involved in approving the grant of performance shares to independent directors, this creates another conflict because the independent directors are involved in approving his remuneration, while he approves their performance shares.

I think REC shareholders should certainly pay heed to the issues raised by Mr Oei for the coming AGM.