By Mak Yuen Teen

On 5 October 2023, Best World International Limited (BW) issued a response to queries that it had received from SGX on 4 October regarding its remuneration and dividend policies. The SGX queries were as follow:

“1. The Exchange has received feedback regarding the Company’s dividends and remuneration policy. In this regard, it was highlighted that the Company’s directors were paid high remuneration level yet no dividends were declared by the Company.

 2. Principle 7 of the Code of Corporate Governance 2018 requires the level and structure of remuneration of the Board and key management personnel to be appropriate and proportionate to the sustained performance and value creation of the company, taking into account the strategic objectives of the company. Please disclose

(i) the Remuneration Committee’s considerations in determining the remuneration of the Board; and

(ii) the board’s assessment on the concerns regarding a lack of dividends and high remuneration level, including the basis for its assessment.”

I had on 1 August 2023 published an article titled “Not the Best World for Shareholders” in The Business Times and a longer version on this website, where I had questioned the remuneration paid to the group’s co-chairman/CEO/managing director Ms Dora Hoan, co-chairman and president Ms Doreen Tan, and executive director and COO Mr Huang Ban Chin. I also questioned how the remuneration committee (RC) had determined that their pay was commensurate with their individual and corporate performance as claimed in the BW’s corporate governance reports and how the benchmarking for remuneration was carried out, including how the peer companies were selected. I also pointed out the lack of dividends since FY2019.

In my view, the company’s response to SGX queries falls far short of addressing the concerns of shareholders.

Remuneration

BW said the following in its response regarding the remuneration of its executive directors (EDs).

“The Board would like to clarify that for FY2022, more than 90 per cent of each executive director’s (“ED”) annual remuneration is in the form of performance-based bonus calculated with reference to the audited group profit before tax of the immediate preceding financial year. This was duly disclosed in the Company’s annual report presented to shareholders at the Company’s AGM in April 2023. The AGM in April 2023 adopted and approved the Company’s audited consolidated financial results for FY2022.”

It seems the company is implying that since the remuneration was disclosed in the annual report and the AGM adopted and approved the audited financial results in the annual report, the shareholders had approved the remuneration. Technically speaking, the disclosure of remuneration was included in the corporate governance report. Neither the corporate governance report nor the annual report for that matter – other than the audited financial statements, directors’ statement and auditors’ report – were voted on by shareholders.

The company did not include a separate resolution for shareholders to vote on the remuneration policy and packages of the EDs, unlike the requirement in many of the more developed Western markets, where this is now often required at least on a non-binding basis. If the BW board is genuine in wanting to get shareholders’ approval or endorsement of the remuneration paid to the EDs, it could include a separate resolution seeking independent shareholders’ approval or endorsement. There is nothing in the law or listing rules here that prohibits such a resolution being included at the AGM.

BW also said: “The annual remuneration package for each of the EDs has progressively been more performance-based, as the group increased its turnover and profitability over the years. This started after the Group was listed in 2004 on the Singapore Exchange. The practice of structuring the annual remuneration of the EDs to be substantively performance-based and benched-marked against the annual group profitability is widely recognized and accepted in Singapore, especially for Singapore-listed companies whose controlling shareholders or founders are in management.”

Remuneration that is linked to any performance measure is by definition “performance-based”. Just because the remuneration has become progressively more performance-based, or that more than 90 percent of the EDs’ remuneration is performance-based, does not mean that the remuneration is appropriate and not excessive, or that the performance-based remuneration policy does not pose significant risks.

For example, significant performance-based remuneration could be accompanied by a high absolute base salary, a low threshold for earning bonuses, or a high profit-sharing percentage, resulting in excessive remuneration. Linking the performance-based remuneration solely or substantively to annual group profitability also does not take into account the level of investment and cost of capital involved in increasing profits, and other factors that affect the long-term value of a company. As I pointed out in my earlier article, BW’s ROE has been on a general downward trend from FY2018 and its share price is now about half its peak share price over the period from FY2014 to FY2022.

Further, is linking the bonuses of the top three executives solely to profit consistent with the company’s statement in its corporate governance report which 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.”? How does the company motivate good individual performance for the EDs if their bonuses are determined solely by the overall profit of the company, and in the case of the two co-founders, their remuneration range and breakdown are identical every year from at least FY2014 to FY2022?

How is the remuneration policy which pays bonuses solely on the basis of annual profits compliant with the mandatory Principle 7 of the Code of Corporate Governance 2018 which requires that “the level and structure of remuneration of the Board and key management personnel to be appropriate and proportionate to the sustained performance and value creation of the company, taking into account the strategic objectives of the company.” (emphasis mine). An increase in annual profit does not mean that there is sustained performance or that value is being created for the company, and how does basing the bonus solely on annual profit take into account the strategic objectives of the company?

Can the RC truly say that the EDs’ pay is fair, bearing in mind that the two co-founders were each paid $12.5 to $12.75 million and the COO $7.5 to S$7.75 million? The total remuneration paid to the directors of the company for FY2022 was $32.383 million, or 17% of the FY2022 group profit before tax of $188.663 million.

The BW CEO is paid more than the CEO of OCBC Bank, which has a profit before tax of 37 times and a market capitalisation of 78 times that of BW. Her remuneration makes her one of the highest paid CEOs for companies in similar sectors in the world, with many of these companies far larger and more profitable than BW. For instance, L’Oréal, the world’s largest cosmetics company, which reported 7.45 billion euros in operating profit in 2022, paid its CEO a relatively modest 10.4 million euros in comparison. His remuneration was put to shareholders vote, with 97.21% voting in favour.

Claiming that BW’s remuneration policy is common practice especially for Singapore-listed companies whose shareholders or founders are in management does not make the policy appropriate, as the remuneration policies of many of these companies are what the controlling shareholders want, not what is in the best interest of the companies. While there may be reasons for differences in remuneration policies between companies with controlling shareholders who are involved in management compared to professionally-managed ones, simply benchmarking to similar companies whose remuneration policies may themselves be flawed is not going to result in appropriate and fair remuneration.

The company also said that in 2019, the Board on the recommendation of RC, engaged Korn Ferry (KF), to provide independent advice to the RC on the components structure in relation to the remuneration for the EDs. It said that KF’s report was duly disclosed in the Company’s public response to the queries of the Securities Investors Association (Singapore) on the Company’s annual report for FY2021 on 24 July 2022. However, in the company’s FY2019 annual report, it had said that no independent remuneration consultant was appointed that year.

The company said that “KF reviewed and validated the aggregate quantum and compensation structure of the EDs against 22 comparable listed companies in Singapore where the controlling shareholders are similarly in management as in the case of Best World. The Board is satisfied that the level and structure of the EDs’ annual remuneration, as approved, are appropriate and commensurate with their value add to the Group.” Can the company confirm if KF in fact recommended or endorsed the level and structure of each of the ED’s remuneration?

As I mentioned in my earlier article, I find it difficult to identify any company listed on SGX, let alone 22 comparable companies, where the controlling shareholders are similarly in management and which would result in remuneration which is even remotely comparable to BW’s. Unfortunately, BW has not disclosed which are the peer companies to enable shareholders to make comparisons. In contrast, L’Oreal did so and the peer group of 14 companies includes companies such as Estée Lauder, GSK, Kimberly Clark, Kering, LVMH, Procter & Gamble and Unilever.

Dividends

In response to the query on the lack of dividends since FY2019, the company said it had conducted share buybacks on an equal access basis and the total amount of cash given back to shareholders who participated in the equal access offers is approximately $140 million. BW claimed that these equal access offers enhanced total shareholder return.

Share buybacks are not the same as dividends. Shareholders who participate in them will forthwith no longer hold those shares and receive dividends. The effect of share buybacks in companies with major shareholders is to increase the stake of the major shareholders while reducing the free float. It is arguably akin to privatisations and general offers using the company’s resources.

While share buybacks could potentially enhance shareholder value if done for the right reasons, a recent study by Tan Yi Jie and me of share buybacks over a 12-year period by companies listed in Singapore, Hong Kong and Malaysia, found that in general, they are not accompanied by an increase in total shareholder returns over one-year to three-year periods following the buybacks. If anything, the evidence suggests that total shareholder returns tend to be lower on average for companies that do more share buybacks.

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The views in this article are the author’s personal views.