By Mak Yuen Teen

On 23 April, City Developments Limited (CDL) will hold its AGM. CDL should be commended for conducting its AGM using virtual meeting technology, allowing shareholders to participate in person or virtually. In 2024, it was one of only 17 issuers with a primary listing on SGX to conduct its AGM using the hybrid format – most issuers reverted to only having a physical format.

But there are more important corporate governance issues that CDL shareholders should be concerned about. At its coming AGM, there are three sets of resolutions that I think shareholders should pay particular attention to and consider whether they should vote against these resolutions. They should ask questions about them at the AGM. These resolutions relate to the re-election of directors who are retiring and seeking re-election [Resolutions 4(a) to (c)], the re-election of the two new directors who were appointed to the board under highly contentious circumstances on 7 February 2025 [Resolutions 5(a) and (b)], and the re-appointment of KPMG LLP as auditors and to authorise the directors to fix their remuneration [Resolution 6]. The five directors standing for re-election are all “independent directors” (IDs) – I put “independent directors” in quotes because there are questions regarding the true independence of at least some of these directors.

A brief recap

On 18 March, I published the first of a planned series of articles on lessons from the saga involving CDL.  That article shone the spotlight on the Singapore Institute of Directors (SID), highlighting the fact that one of the two new IDs appointed, Ms Wong Su Yen (WSY), was the immediate past Chairman of the institute. Her appointment without going through a proper nominating process makes a mockery of the SID’s own Nominating Committee (NC) Guide setting out “best practices” in nomination and appointment of directors and is not in compliance with the Singapore Code of Corporate Governance. I wrote about broader issues that this raised about the governance of SID.

Earlier, on 12 March, CDL had announced that Mr Kwek Leng Beng (KLB), its Executive Chairman, has discontinued his lawsuit against his son, Group CEO Mr Sherman Kwek (SK), and the other six directors. Both will retain their roles while all the other directors will also remain, including the two IDs, Ms Jennifer Duong Young (JDY) and WSY. The feud, which became public on 26 February, ended as suddenly as it began.

The discontinuance of the lawsuit, however, does not address corporate governance issues that may affect the long-term performance and sustainability of the company. It is difficult to see how the current board can be effective.

CDL’s corporate governance is problematic

In the dispute, both sides cited adherence to high corporate governance standards to justify their actions. KLB said he was proud of the fact that CDL was ranked second in the Singapore Governance and Transparency Index (SGTI). This is partly a reflection of the limitations of the SGTI – which I will address in a subsequent article – and partly a reflection of the overall standard of corporate governance of listed issuers here.

Earlier signs of trouble in the boardroom

In January 2021, I wrote an article calling for more governance, or “G”, at CDL. This followed the resignation of three directors from the company. On 19 October 2020, Mr Kwek Leng Peck (KLP), KLB’s cousin, resigned as a non-executive non-independent director (NINED). He cited disagreements with the board and management in relation to the group’s investment in Sincere Property Group (SPG) in China, as well as its continuing provision of financial support to SPG, and reservations with the group’s approach in the management of Millennium & Copthorne Hotels Limited (M&C).

KLP’s resignation was followed by the exit of ID Mr Koh Thiam Hock (KTH), who had served on the board for just over four years, on 29 December 2020. He said that having shared his observations, concerns and suggestions on the group’s investment in SPG with all members of the board, he was of the view that it is most appropriate to step down.

A few days later, another ID, Ms Tan Yee Peng (TYP), resigned. She had served for less than seven years. Her reasons were also related to the group’s investment in SPG and she disagreed with the board and management about the handling of the investment after the acquisition.

The concerns of the directors who resigned over the investment in SPG turned out to be well justified.

Missteps in China

CDL first made its move to invest in SPG in May 2019. By the end of the next financial year, it had impaired 93% of its total investment in SPG to the tune of S$1.78 billion, which resulted in it reporting a net loss of S$1.8 billion in 2020. In September 2021, CDL divested its interest in SPG for just US$1. When the father-and-son feud started and KLB sought his son’s removal as group CEO, he pointed to past business decisions under SK, including a S$1.9 billion loss from the SPG investment and poor returns from UK property ventures.

The reality is that such investments would have required board approval, and the directors who approved the investments would also bear some responsibility. However, even the best boards can make bad commercial decisions and even if some directors disagree with decisions, it does not mean that decisions were wrong at the time they were made. It also does not mean that all the directors who stayed behind agreed with the decision as not all board decisions are based on consensus. Arguably, if all directors always agree on a decision, that could be a sign of lack of constructive dissent. Further, boards often have to rely on management and other advisers for such decisions – although often more than they should.

To put the decision to invest in SPG into perspective, it was only in August 2020 that the Chinese government introduced the “three red lines” policy which capped three different debt ratios for the real estate sector. This was what ultimately brought the sector in China to its knees. It came only after CDL’s entry into a definitive agreement in April 2020 to acquire a 51.01% controlling interest in SPG, with an option to purchase another nine percent for about S$0.16 billion.

Nevertheless, the Chinese property market was already in some trouble when CDL started its big acquisition move, which became more evident by the time it entered into the definitive agreement. For example, Chinese property giant Evergrande saw its year-on-year revenue growth fall from a high of around 50% between 2015 and 2018 to just 2% and 6% in 2019 and 2020 respectively, with its gross profit margin showing a sharp decline of 12% from 2018 to 2020.

However, my purpose is not to look backwards.

Is the current Board capable of effective decision-making?

The more important issue is whether the current board at CDL is conducive to healthy debate and decision-making that is well-informed, independent and objective.

Prior to the falling out between father and son, IDs were likely to have already found it difficult to express truly independent views. Having an executive chairman already poses a significant challenge to board oversight of management, and even more so where the CEO is a family member, and the family is the controlling shareholder.

Is the current board, with the addition of the two new IDs, likely to be more effective in discharging its responsibilities of overseeing management and operations?  Highly unlikely.

It is difficult to imagine how the “majority” and “minority” directors and the father and son who were fighting with each other can work together in the board and make rational decisions.

Significant changes in board composition needed

The board should review its composition and initiate a proper search for new IDs. The problem is the board is now a divided one and it may be difficult to undertake a search and nominating process that all the directors trust. To provide more independent views on the suitability of candidates and assist in the board in assessing candidates, the board can perhaps consider co-opting one or more non-board members into the NRC – those without any ties to the current directors. Although this is not usual, what has happened at CDL is far from usual. The rules state that the NC should comprise at least 3 directors, with a majority including the chairman being independent. It does not preclude the board from co-opting non-board members into the NC.

I also believe the CDL board with 11 directors is too large. Further, although it has global operations, it still has a very Singapore-centric board, with only one out of the 11 directors being a non-Singaporean, and even his principal place of residence is here. This is a common issue with many large companies here with international operations – a failure to achieve geographic diversity with their boards.

Like many companies in Singapore and this part of the world, the directors’ skills matrix (reproduced below) disclosed by CDL reflects a rather superficial assessment of directors’ skills.

With the departure of one ID and addition of two new IDs, the list of skills has remained unchanged – just more of some and less of others. How does the board determine whether a director has a certain skill? The skills matrix shows 4 directors with legal skill but I can only see two directors with a legal background – if we count KLB who has a law degree from a long time ago. And every single director has “strategic planning and leadership and management” skill and 10 out of 11 has “risk management” skill.

Interestingly, skill in corporate governance is not listed. Is this perhaps an inadvertent admission about the lack of such a skill on the board or is it just assumed that all directors are naturally blessed with this skill so there is no need to include?

I think many boards need to review their director skill assessments and move away from such superficial assessments.

Beyond this, one may question whether CDL’s disclosure about its corporate governance in its latest annual report is accurate, particularly pertaining to the role of the NC in the appointment of directors to the board and board committees. I believe the departure from the Code in the appointment of the two new IDs last December without the involvement of the NC should be more clearly disclosed and explained in the annual report – as required under the listing requirements.

Connected independent directors

There are other practices at CDL that cast doubt on the true independence of certain IDs, largely related to its process for recruiting IDs.  Since 2012, it has had four retired partners from its external auditors, KPMG, joining the board as IDs. All have held audit roles at KPMG, with at least three having been audit partners, although there is no information to suggest that they were involved in audits of CDL or its related entities.

Three became lead IDs and also Chair of the Audit and Risk Committee (ARC), which is supposed to oversee the work of the external auditor.  At various times, there were two ex-KPMG partners serving on the ARC, including one as Chair. This suggests a close relationship between KPMG and the company, which may raise questions about the independence of the IDs – and the independence of the auditors too. To be fair, one of these IDs resigned over disagreement with the SPG investment, suggesting her independence was not impaired. But this does not mean the others’ independence was not impaired. Importantly, independence is not just about actual independence but perceived independence.

Provision 10.3 of the 2018 Code of Corporate Governance states: “The AC does not comprise former partners or directors of the company’s existing auditing firm or auditing corporation: (a) within a period of two years commencing on the date of their ceasing to be a partner of the auditing firm or director of the auditing corporation; and in any case, (b) for as long as they have any financial interest in the auditing firm or auditing corporation.” Under the 2012 Code, the cooling off period was just one year.

One of the ex-KPMG partners, Mr Eric Chan Soon Hee (CSH), joined CDL board in February 2012 and became lead ID, Chair of the ARC and RC, and a member of the NC and Board Committee (BC) [Note: CDL had a Board Committee until FY2020, chaired by KLB, whose main objective is to assist the board in the approval of matters which include routine banking-related matters and release of non-price sensitive announcements]. He was audit partner at KPMG from 1989 to 2001 and transaction services partner until Sep 2011. When he joined the CDL board in February 2012 (or just five months after he retired from KPMG), the revised 2012 Code which recommended a one-year cooling off had not been introduced yet.

CSH resigned on 22 June 2018. That very same day, he was appointed as independent Chairman of M&C REIT Management Limited and M&C Business Trust Management Limited, managers of CDL Hospitality Trusts. In assessing CDL Hospitality Trusts for the Governance Index for Trusts (GIFT), developed by Chew Yi Hong and me, we redesignated CSH to non-independent because of his prior directorship at CDL. This was part of the reason why CDL Hospitality Trusts was ranked 37 out of 43 trusts in the last edition of GIFT published in 2022. We do not believe that IDs who move across different entities within a group should be considered independent.

The second ex-KPMG partner who joined CDL’s board, TYP, was audit partner from 2003 to 2010 and principal advisor to KPMG from 2010 to 2011. She joined CDL’s board on 7 May 2014 and was a member of ARC, BC and NC, and Chair of Board Sustainability Committee (BSC) at various times. She resigned on 4 January 2021 over disagreement relating to the SPG investment. At the time she joined CDL’s board, there was only a one-year cooling off period under the Code so she was well past the cooling off period.

Another ex-KPMG partner, Lim Yin Nee Jenny (LYN), retired as a partner in 2001, continued to be an advisor for KPMG until January 2004, and then joined M&C Reit Management and M&C Business Trust Management, the manager and trustee-manager of CDL Hospitality Trusts, as lead ID and ARC Chair in 2006, before retiring in 2017. In June 2018, she joined CDL and became lead ID, ARC and Remuneration Committee (RC) Chair, and a member of its NC and BC.

The fourth ex-KPMG partner, Lee Jee Cheng Philip (LJC), joined CDL’s board on 4 January 2021. He was audit partner from 1995 until his retirement in September 2018, and had also held roles of Head of Real Estate, Investment Banking, Private Banking, Head of an Audit Business Unit, and Head of People at KPMG. He is the current LID and ARC Chair, and was also a member of the NC and RC before the NC and RC were merged on 21 February to form the NRC. He is now also a member of the NRC.

Even though all the ex-partners of KPMG who joined CDL’s board or its related entities were past any applicable cooling off periods under the Code,  a steady stream of retired partners from the auditor joining the board of a client does not look good at all.

CDL has another ID who is not an ex-KPMG partner, who joined the board after serving as IDs of related entities.  Mr Daniel Marie Ghislain Desbaillets (DMGD) was appointed as an ID of M&C REIT Management Limited and M&C Business Trust Management Limited in 2010, and was then appointed as an ID of Millennium and Copthorne Hotels plc in 2016 before its privatisation. He joined CDL board in November 2020. Again, I would not consider him to be independent given his long relationship with the group. He is one of the directors standing for re-election at the coming AGM.

However, CDL is by no means alone in moving IDs across different group entities or appointing IDs from firms with significant business or other relationships with the company, including external audit firms. At least in this case, the partners have retired from the external auditing firm. We have come to accept that current partners from other organisations with business relationships with the company, particularly law firms, can still be considered independent. Other markets with higher standards frown on such practices. Clearly, Singapore’s standards are not that high.

Auditor-client relationship and long auditor tenure

KPMG is a long-standing auditor for CDL. Unfortunately, auditor tenure is not required to be disclosed in Singapore. The earliest annual report for CDL I can find is for 1999 and it shows that KPMG was already the external auditor. Some markets, such as US and EU, require auditor tenure to be disclosed. Hard limits on auditor tenure and/or mandatory retendering of the audit after a certain number of years also apply in certain markets.

In UK, guidance for FTSE350 companies states that auditor tenure should be disclosed. In Australia, the proposed fifth edition of its corporate governance principles and recommendations recommended that this be disclosed, but this edition was eventually not adopted for other reasons. There are calls in these countries to make disclosure of auditor tenure mandatory. Given that long tenure is often considered a threat to auditor independence, it is surprising that similar calls have not been made here and more done to enhance auditor independence.

KPMG was also a long-standing major tenant in Hong Leong building and used to have offices in City House, owned by CDL.

While there are no indications that there are issues with the audits for CDL, such close and long relationships between the external auditor and company would at least raise perception issues about independence of the external auditor.

It is likely that such situations would have come under scrutiny in other markets but audit firms, including the Big 4, do not face the same oversight and scrutiny here compared to other developed markets. The fact that there was a stream of retired partners joining CDL as IDs makes this worse.

KPMG should probably advise its partners to avoid joining boards of client companies soon after they retire – and not rely on ticking the boxes on cooling off periods in the Code.

But perhaps it is also time for CDL to consider retendering its audit and appointing a new auditor. CDL shareholders should consider whether they should vote in support of the resolution to re-appoint KPMG as auditor at the coming AGM.

_______________________

The author is a corporate governance advocate. He does not hold shares in CDL. The views in this article are his personal views.