By Mak Yuen Teen
On 21 March 2024, shareholders of Best World holding not less than 10% of the voting shares requested that six resolutions be put to a shareholders’ vote at an extraordinary general meeting or the next annual general meeting.
The first resolution asked the company to engage a reputable independent financial adviser (IFA) to advise the Board on an appropriate cash reserves and dividend policy for the Group, announce the recommendation of the IFA and decision of the Board regarding the IFA’s recommendation, and disclose the IFA report.
The second resolution was for the company to announce the recommendation of the Remuneration Committee (RC) to the Board with respect to the remuneration of the executive directors (EDs) for FY2023, and disclose the report prepared by the company’s remuneration consultant, HRGuru, for a benchmarking exercise for the EDs’ remuneration that was supposedly completed in August 2023. If this report cannot be disclosed, the requisitionists wanted the company to appoint another reputable remuneration consultant to review the EDs’ remuneration for FY2023 on terms that would allow the report to be published, and to publish such a report.
The third resolution asked the company to make any discloseable transaction under Chapter 10 of the Listing Manual to be conditional upon approval by shareholders in a general meeting.
The last three resolutions were for the removal of the three independent directors (IDs) – Mr Lee Sen Choon, Mr Adrian Chan Pengee and Mr Chester Fong Po Wai.
Although only the resolutions to remove the directors would likely be considered valid resolutions here if the board adopts a legalistic approach, the proposed resolutions reflect the concerns of minority shareholders regarding how the company is governed and managed over a number of years.
Non-payment of dividends
Take the case of the first resolution. The last time Best World paid a dividend was in FY2019, when it paid an interim dividend. It did not pay a final dividend that year and has not done so since. Each year, the company provides a similar boilerplate explanation for not paying dividends. For example, in its FY2023 annual report released today, 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 2023.”
Based on an analysis of Best World over the last 10 years, it has been profitable every year. Profit before tax increased each year from $5.65 million in FY2014 and peaked at $212.33 million in FY2021. Its net cash flow from operations was positive every year, ranging from $11.12 million in FY2014 to $183.25 million in FY2022, remaining at a very healthy $123.52 million for FY2023, and well in excess of its consistently low net cash outflows from investing activities.
Best World’s cash balance increased from $40.98 million in FY2014 to $608.07 million in FY2023. While it referred to working capital requirements as part of the reason for not paying dividends, its working capital increased from $41.40 million to $482.07 million over the period, and its current ratio was consistently above 2, except for FY2019 when it was 1.9. Its current ratio of 3.21 and debt ratio of 0.32 for FY2023 have never looked better since FY2018. It had negligible or no loans over the past 10 years.
Assuming the company had maintained its FY2018 dividend per share of 5.4 cents (excluding special dividends), it would have paid about $110 million in additional total dividends from FY2019 to FY2023. There would still be about $500 million in cash at the end of FY2023.
Conserving cash by not paying dividends under such circumstances is like stocking up on winter clothing when living in the Bahamas.
Otherworldly remuneration
Regarding the second resolution which relates to the remuneration of the EDs, I had noted in an article last year (“Not the Best World for Shareholders”, Business Times, 1 Aug) that in 2022, SIAS had questioned the company on the remuneration of the three EDs. The company had responded 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.”
It added: “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.” (emphasis mine).
To assess the company’s assertion, I selected SGX-listed issuers that I believed met the criteria stated in the company’s response. I first picked all primary-listed SGX companies with a market capitalisation of between US$500 million and US$1 billion as of 31 December 2023. Best World’s market capitalisation was about US$776.9 million then. I then selected the companies within this range of market capitalisation which have EDs who are also controlling shareholders (defined as having total interest of at least 15% of the voting shares). The list comprised these 14 companies: PropNex, Sinarmas Land, Hong Fok, HRnetGroup, Food Empire, Aztech Global, OUE, UMS, The Hour Glass, Riverstone, Wing Tai, UOB-Kay Hian, Bumitama and Ho Bee Land. Nine had market cap lower than Best World and five had higher market cap. Unlike Best World, all the other 14 companies paid dividends in FY2023. All these other 14 companies paid dividends every year over the past 10 years or since their listing after FY2014, except for one company which skipped dividends for two consecutive years in its early years when it made losses.
The table below shows the 15 most highly-paid EDs in the 15 companies, including Best World, for FY2023.
| Company | Position | Amount (S$000) |
| Best World | Co-Chairman, CEO and MD | 10750-11000 |
| Best World | Co-Chairman and President | 10750-11000 |
| UMS | Chairman and CEO | 8750-9000 |
| Best World | COO | 6500-6750 |
| Sinarmas Land | Executive Director | 5750-6000 |
| The Hour Glass | Managing Director | 5250-5500 |
| Hong Fok | ED and Joint CEO | 5000-5249 |
| Hong Fok | ED and Joint CEO | 4750-4999 |
| Bumitama Agri | Executive Chairman and CEO | 4500-4750 |
| Wing Tai | Chairman and MD | 3750-4000 |
| Food Empire | Executive Chairman (no name – assumed) | 3500-3999 |
| Hong Fok | ED and COO | 3500-3749 |
| Wing Tai | Deputy Chairman and Deputy MD | 3250-3500 |
| Food Empire | ED and CEO (assumed – no name) | 3250-3499 |
| Aztech Global | Executive Chairman and CEO | 3243 |
As we can see, the CEO/MD and President of Best World were the two most highly paid EDs in FY2023, while the COO was the fourth highest paid. When I compared the total ED remuneration to profit before tax for FY2023, Best World at around 17% beats all the other companies (Ho Bee Land made a loss and was excluded from this comparison). UMS at around 15% and Hong Fok at around 14% are the closest to Best World. The total ED remuneration for Best World was twice that of the next highest and it was about five times the median and mean for the other companies.
Since Best World said that they did a benchmarking exercise for FY2019, I decided to look specifically at FY2019. For the 13 companies in my list which were listed then, the total remuneration for Best World’s EDs was just over $20 million. This was 4.7 times the median and 3.2 times the mean. The closest to Best World was Hong Fok with about $14.56 million.
In fact, the CEO/MD and President of Best World were the highest paid of all EDs among the group of 15 companies every year at least since FY2019. They would also be among the highest paid EDs for all SGX-listed issuers over this period. In FY2020, FY2021 and FY2022, the CEO/MD and President were each paid $12.25 – $12.5 million, $12.75-$13 million and $12.5-$12.75 million respectively, while the COO was paid $7.5-$7.75 million, $7.75-$8 million and $7.5-$7.75 million respectively.
Over the past 10 years, total ED remuneration to profit before tax for Best World was never lower than 14% and since FY2019, it has been between 16% and 17%. Hong Fok gives Best World a run in terms of high ED remuneration relative to profit over this period but only takes the silver medal.
Even though some of the other EDs within the other 14 companies received rather high remuneration, most were barely in the race. The ratio of the ED remuneration for Best World to the median for the other companies was 4.7, 8.29, 6.01, 6.08 and 5.13 for the five years starting from FY2019 until FY2023.
It is impossible to reconcile my findings on the company’s remuneration with its statement that “…the current pay for the three executive directors were comparable to the benchmarks”, whether we are referring to FY2019 or any year since then. Granted, I selected the peer companies based on the market capitalisation at the end of 2023 but it is unlikely that the findings would be markedly different if I had chosen the companies based on their size in FY2019. The “peer group of 22 SGX-listed companies of the same size” that was supposedly used in the benchmarking study in FY2019 remains a mystery. Unfortunately, SGX Regco did not query the company on this.
Controlling shareholders-management who are paid modest remuneration
Not all controlling shareholders who are management are paid high remuneration. Warren Buffett, controlling shareholder, Chairman and CEO of Berkshire Hathaway in the U.S., is paid just US$100,000 per year in salary. For FY2022, his other compensation of US$301,589 are the costs of personal and home security services provided to him and paid by the company.
Here in Singapore, there are also examples of controlling shareholders who are management who are paid very reasonably. Mr Wong Teek Son, Executive Chairman and CEO of Riverstone Holdings, was paid a very modest $668,000 in remuneration in FY2023. Since FY2014, the highest he has ever being paid was $2.5 million to $2.75 million in FY2020, when the company’s profit before tax increased from about $51 million to about $275 million. The following year, when profit before tax more than doubled again, his remuneration was just $1 million to $1.25 million. The company has consistently paid dividends since its listing on SGX in 2006 and for FY2023, its dividend payout ratio was in excess of 150%. Riverstone’s market capitalisation of $1.17 billion just shades Best World’s current market capitalisation of $1.1 billion.
Outside of the 14 companies used in my comparison with Best World, QAF has a father and son duo as non-executive chairman and joint managing director who are controlling shareholders. Mr Lam Sing Chung, the non-executive chairman, has elected not to receive a fee, while Mr Lin Kejian, the joint MD, has elected not to receive remuneration.
Buffett did not become one of the richest and most respected business leaders in the world by drawing excessive remuneration, but through dividends from his stake in Berkshire Hathaway – dividends which all shareholders get.
While we cannot expect all controlling shareholders to demonstrate Buffett-like qualities, the starting point for determining the remuneration of controlling shareholders who are management should be the remuneration of professional managers with similar qualifications and responsibilities and in similar companies. I am not saying that they should be paid the same, but remuneration is payment for services rendered as management, not an extra return on capital for controlling shareholders.
Selective capital reduction
On 22 March, Best World announced that the Board is planning to undertake a delisting exercise by way of a selective capital reduction (SCR), whereby the company will cancel the issued ordinary shares of the company held by all shareholders of the company, other than the EDs and their associates. This was just a day after the company received the requisition from the minority shareholders and was announced four minutes before the company announced the requisition. Since the EDs are conflicted, the proposal for the SCR would have been approved by the IDs.
Under the SCR, 150,147,893 of the 430,445,393 of the issued shares of the company, or 34%, held by shareholders other than the EDs and their associates, will be cancelled. Through a capitalisation of retained earnings and the SCR, an aggregate sum of $375,369,733 will be returned to the eligible shareholders.
Although the company referred to its earlier announcements in July 2022 and November 2021 that it was exploring options for a delisting exercise, the timing of the announcement of the SCR may suggest that it is a defensive response to the requisition. However, it appears that the SCR has been under consideration for a while since the company said that it had already received the necessary exemptions from relevant rules of the Takeover Code for the SCR from the Securities Industry Council, even though the announcement of the SCR came just a day after the receipt of the shareholder requisition.
If it was intended as a defensive measure, the proposed SCR appears to have worked. On 1 April, the requisitioning shareholders withdrew their requisition letter, although they reserve the right to issue the requisitions again in the future.
On 3 April, Best World provided further details on the SCR. After conserving cash by not paying dividends for nearly six years, the board decided that it is now in the company’s best interest to use $375.37 million of the $608.07 million in cash to buy out all the minority shareholders. The board did not explain why other options to delist the company were not considered.
While the proposed share price of $2.50 compares favourably with recent share prices prior to the delisting announcement and the net asset value of the company, with premia of over 40% and 82% respectively, the company’s share price would arguably have been depressed by the excessive remuneration and lack of dividends over many years. The net asset value would have been considerably higher if the remuneration for the EDs was closer to their peers.
For example, if Best World had paid the EDs at the median of ED remuneration to profit before tax for the peers used in my analysis for each year from FY2019 until FY2023, I estimated the total remuneration for the EDs would be about $110 million lower over those five years. Profits and therefore net asset value would be considerably higher. Coincidentally, this is about the same amount as the dividends shareholders would have got if the company had maintained its dividend from FY2019.
Minority shareholders may well decide to accept the delisting offer because the alternative of continuing to be saddled with shares with little liquidity, excessive ED remuneration and no dividends may be difficult to stomach. The cover of Best World’s latest annual report says “In the Company of Beauty” but it has been pretty ugly for the company’s minority shareholders.
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The views in this article are my personal views.
