A version of this article was published by The Business Times on 1 August 2023

By Mak Yuen Teen

On 22 June 2023, UOB Kay Hian released a regional morning note on the pay of the CEOs of SGX-listed issuers. It listed the top 20 highest paid CEOs in Singapore in 2022, with the five highest-paid ones being those at DBS ($15.4 million), UOB ($14.2 million), Wilmar ($13.2 million), OCBC ($11.2 million) and Keppel Corp ($8.1 million). A glaring omission from the list is the co-founder, co-chairman, group CEO/managing director of Best World, Ms Dora Hoan, who netted a cool $12.5 to $12.75 million in FY2022. Perhaps UOB Kay Hian did not include Best World because it is not covered by analysts like them.

Ms Hoan’s pay would put her ahead of the CEO of OCBC. What makes it even better for Ms Hoan is that her remuneration is all in the form of cash or benefits, with 7% from annual salary, 92% from annual incentive bonus, and 1% from benefits. They are all short-term remuneration. In contrast, many of the other CEOs on the top 20 list would have part of their remuneration in the form of long-term share-based incentives, and the amounts would include accounting fair values for these incentives, which may not necessarily be what will eventually be realised. The latter will depend on the future share price performance of these companies. There may also be vesting conditions that may not be met.

Three’s company

Best World’s other founder, Ms Doreen Tan, is the co-chairman and president of the company. In FY2022, she was paid in exactly the same remuneration range of $12.5 to $12.75 million as Ms Hoan, with the exact same remuneration breakdown. In fact, based on Best World’s annual reports from FY2014 to FY2022, Ms Hoan’s and Ms Tan’s remuneration are identical every year in remuneration range and breakdown.

Best World has another executive director (ED) and chief operating officer (COO), Mr Huang Ban Chin. His pay is not too shabby either. In FY2022, he was paid in the range of $7.5 to $7.75 million. His remuneration since FY2014 is lower than the two founders but closely tracks their remuneration, with his bonus percentage moving in the same direction as theirs.

Pay for what performance?

Best World’s corporate governance report states: “The RC believes that fair performance-related pay should motivate good corporate and individual performance and that rewards should be closely linked to and commensurate with it.”

It is true that performance-related pay for the three EDs is linked to corporate performance – but corporate performance measured solely by profit before tax – as it has generally increased and decreased with profit over the years.

For Ms Hoan and Ms Tan, the bonus percentage has increased from 27% in FY2014 to 92% in FY2022, while for Mr Huang, it increased from 22% to 91%. For FY2022, each of their pay is about 10 times or more what they were paid in FY2014. Best World’s profit increased every year from FY2014 to FY2021. However, in FY2022, profit before tax fell by 11.14% and profit after tax by 11.49%. The remuneration of Ms Hoan and Ms Tan fell from the range of $12.75 to $13 million, to the range of $12.5 to 12.75 million, but their bonus percentage held steady at 92%. For Mr Huang, it fell from the range of $7.75 to $8 million to the range of $7.5 to $7.75 million, with the bonus percentage remaining the same at 91%.

However, if one were to consider corporate performance from the perspective of relative profitability using a measure such as return on equity (ROE), or share price performance, a very different picture emerges. Best World’s ROE has been on a general downward trend from FY2018. Its share price at the end of FY2022 was about 55% of its peak share price over the period from FY2014 to FY2022 – it is now about 53%.

Given that Ms Hoan and Ms Tan were paid identically since at least FY2014, and that the incentive bonus of the three EDs is based on profit before tax, it is difficult to see how their remuneration can be said to be linked to individual performance, or that there is an attempt to differentiate their individual performances.

“Out of this world” remuneration

In my opinion, whichever way one looks at it, the remuneration policies for the EDs of Best World are questionable and their remuneration  excessive. Although when compared to profit before or after tax, the percentage of remuneration of the EDs has declined from the early years that I have analysed (when profits were significantly lower),  it remains very high. In FY2022,  it was more than 17% of profit before tax and 23% of profit after tax.

Nearly all companies practise pay for performance, but the hurdles for achieving performance pay or the profit sharing percentages may differ vastly.

If we compare Ms Hoan’s remuneration with the remuneration of the ten largest cosmetics companies in the world (arguably an appropriate peer group in terms of industry), she does not do too badly either. These ten companies include five from US, one from France, one from Switzerland and three from Japan. Ms Hoan’s pay would be about S$3 million below that of fourth highest paid CEO, the CEO of French company L’Oreal, the largest cosmetics company by market capitalisation in the world. L’Oreal’s market capitalisation is around US$250 billion, about 428 times that of Best World’s. The smallest market capitalisation among the top 10 is Kose of Japan, which is more than nine times Best World’s market capitalisation.

Further, the number 2 and 3 in these companies are unlikely to be paid anywhere near what Ms Tan and Mr Huang are paid.

No dividends

From the standpoint of minority shareholders, what makes it worse is that Best World stopped paying dividends in FY2019. In FY2022, it said: “In view of the Group’s short and medium term commitment which include but are not limited to, working capital requirements and corporate actions capital needs, as well as taking into consideration the uncertain business climate, no dividends have been declared/recommended by the Board for the financial year ended 31 December 2022. The Board and the Management will periodically assess the economic situation and the financial health of the Company and make further decisions or adjustments to the dividend policy as appropriate.”

It would have been nice for the company to consider these factors before paying out such large amounts of remuneration to the EDs.

Fair, says the RC

However, the remuneration committee (RC) of Best World obviously felt the remuneration is fair.

In 2022, SIAS questioned Best World on the remuneration of the three EDs. In its response, the company said that the incentives of the EDs “are directly linked to the Group’s profitability (i.e., profit before tax excluding any exceptional items) in accordance with their service contracts.” When asked whether the RC benchmarked the remuneration to comparable companies listed on SGX or other exchanges, the company replied: “At the initiative of the RC, a benchmarking exercise was conducted in the year 2019. The competitive study was undertaken based on a peer group of 22 SGX-listed companies of the same size where the executive directors were also controlling shareholders. From the study, the current pay for the three executive directors were comparable to the benchmarks.”

What’s the basis for the RC’s opinion?

Best World’s RC comprises the company’s three independent directors (IDs), Mr Adrian Chan, who is the RC chairman, Mr Lee Sen Choon and Mr Chester Fong. Mr Chan is a lawyer, while the other two IDs have accounting/finance backgrounds.

Based on the company’s annual reports from FY2014, it appears the last time the company engaged an external remuneration consultant was in FY2015, when it engaged RDS Remuneration Data Specialist Pte Ltd (it also did so in FY2014). In the FY2016 to FY2018 annual reports, there does not appear to be any disclosure of the use of an external remuneration consultant.

In the FY2019 to FY2022 annual reports, the company specifically disclosed:  “No independent consultant was engaged for advising on the remuneration of all directors and key management personnel. In its deliberations on remuneration matters, the RC takes into consideration industry practices and norms in compensation in addition to the Group’s relative performance to the industries it operates in as well as the employment conditions within those industries and the performance of the individuals.”

While engaging remuneration consultants is not a panacea, how was the benchmarking exercise done without the assistance of such consultants? So, was the benchmarking information provided by management? How was the “peer group of 22 SGX-listed companies of same size where the executive directors were also controlling shareholders” selected? Why only select peer companies where EDs are controlling shareholders when it is well known that, in such companies, the EDs can often effectively determine their own remuneration since they appoint IDs who serve on the RC?

I struggle to think of how one could select 22 SGX-listed companies of the same size where the EDs were also controlling shareholders. However, even if one were to accept the peer group mentioned, it is hard to imagine that this would result in the remuneration of the EDs to be deemed as comparable to the benchmarks. While remuneration of EDs in such companies is often high and arguably excessive, $12 million plus for a CEO is not a number I recall seeing for such companies – or more than $32 million for three EDs.

Given that none of the RC members appear to have deep expertise in executive remuneration matters, and the fact that no independent remuneration consultant was engaged, how did the RC satisfy itself that the benchmarking exercise was objective and sound, and the remuneration of the EDs was reasonable?

Mr Chan is the Vice Chairman of the Singapore Institute of Directors (SID), which has published a Remuneration Committee Guide. I struggle to see how the way remuneration is set at Best World would be in line with the guide or with the intent of the Singapore Code of Corporate Governance. Certainly, I am not aware that in selecting peer groups for benchmarking remuneration for a company like Best World, it is good practice to select peers where the EDs are controlling shareholders. It does not appear to be in the SID guide.

Best World’s problems

It should also not be forgotten that Best World’s shares were suspended for a long time, following attacks by two short sellers.  Its business model, practices and accounts relating to China were questioned and it is fair to say that there was no definitive all-clear given. Coming back from what is akin to a near-death experience, and paying such generous remuneration while giving nothing to minority shareholders, just does not seem right.

There is nothing much that Best World shareholders can do, except try to sell their shares. Unfortunately, that is all minority shareholders of many SGX-listed companies can do, and many are doing it.

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The writer is Professor (Practice) of Accounting at NUS Business School, where he specialises in corporate governance. He is also a corporate governance advocate. The views in this article are his personal views.