Sunday, May 16, 2010

Sime's Energy debacle: Failure of corporate governance?

Was it not John F. Kennedy who said, "Victory has a thousand fathers, but defeat is an orphan"? And, so it came to pass that the erstwhile Sime Group CEO, Datuk Zubir, was made an orphan in the wake of a provisioned loss of RM964 million.

This near-billion Ringgit provision is constituted by RM200 million from the Qatar Petroleum (QP)project, RM159 million from the Maersk Oil Qatar (MOQ) project, RM459 million from the MOQ marine project and, RM450 million from the Bakun Hydroelectric project. All of which comes under the Sime Energy Division.

How that happened is an interesting tale that is likely to be kept under a shroud of secrecy until stakeholders and public pressure demand a full disclosure. It may be that one highly charismatic and persuasive Division CEO prevailed over his superiors through sheer charm and wile. Or, it may be something else.

What we know is that way back in 2008, Sime's internal audit team had red-flagged the QP project to the Sime audit committee at group level.

The reaction was the formation of a "work group" comprising Sime Group-level directors. In other words, in true "Yes Minister"-style, a committee was set up to look into the issue.

Why it took between 2008 to May, 2010 for major action to be taken is, in my view, as serious a matter as the issue of the losses itself. (Errata: I just learnt that the working group was actually only formed in October 2009. So, to be fair, the working group has worked at an urgent pace given the complexity of the matters at hand.)

It is also reported that the Chief Financial Officer Tong Poh Keow had recommended provisions to be made for the losses. This was not done. Had it been done, investors and stakeholders would have been alerted to the escalating losses. Why the provision was not made is also a mystery. Some may tersely surmise an attempt to bury the issue or, worse still, an expression of sheer naivete that by ignoring the issue and, leaving it to the "work group" the issue will, in Zen-like fashion, go away into another Universe.

So, while some may now say that it took great courage for the Sime Group board of directors to get rid of Zubir and, before that, the Sime Energy CEO, the question that will linger for a long while is, why it took so long?

Why did a high-powered "work group" that was tasked to look into the growing financial debacle of QP (and, very likely the brief expanded to include MOQ and Bakun) take such a long time, almost 2 years, to take any action?

The Sime honchos can argue until the cows come home that since action is now being taken, investors and stakeholders should have any fears allayed. It may not play out in this way.

Granted that the decisions made at Sime Energy were done prior to the great merger of Sime, Golden Hope and Guthrie. But, it will not escape the notice of many that corporate exercises are de riguer in corporates the size of Sime Darby. It happens all the time. The difference is in the magnitude, that's all.

The concern here is the issue of failure of corporate governance at 2 levels, namely:
  • The obvious matter of strengthening the governance of new project proposals, especially, the risk management issues. No doubt, ex post facto, this is in place to more rigorously examine new project proposals.
  • The less obvious and, more immediate matter is, how a multinational corporation like Sime dealt with the issue. Why did it take so long before facts could be gathered and necessary advice obtained? This is especially intriguing when the blogosphere was already rife with chatter about the QP and MOQ debacle for nearly 2 years.
There is a lively indignance out there in the public domain that is demanding to see more heads rolling. There is also a growing point of view that the Sime Group board should fall on their own swords and resign in toto. Clearly, people are not in a charitable mood.

I, for one, prefer to bite my tongue and, call upon Sime's corporate leaders to come up with more disclosures and provide more background and context to the debacle so that investors and stakeholders can make a more informed decision.

This is the time to say more rather than less. In a sense, if one has come out of the closet fully nude, one may as well point to each wart and explain it!

One final matter that needs looking at, not just at Sime but, within the corporate and regulatory community is whether independent, non-executive directors need to be given a more substantive role and, be remunerated in commensurate terms with greater responsibilities?

In an organisation the size of the Sime behemoth, independent, non-executive directors should be devoting at least 20 hours a week and, working very, very closely with the Internal Audit Department so that the chain of command is independent of the line and division managers.

As I understand it, in most large corporates, Sime included, the Internal Audit Department reports directly to the CFO and, nominally to the board of directors. There are so many possible conflicts of interest in this structure that I don't even know where to begin.

That said, I should end with a reminder that, in this saga, it was the Sime internal auditor that red-flagged the matter from the outset.

The real story, as the journos would say, is why it took the Sime Group-level senior management AND the board of directors soooo long to gather facts and, make hard decisions. That is the story that needs to come out at some point.

1 comment:

donplaypuks® said...

"The reaction was the formation of a work group comprising Sime Group-level directors. In other words, in true "Yes Minister" style, a committee was set up to look into the issue."

Spot on and we all know a camel is a horse invented by a committee! And also in true 'Yes, Minister' style, the purpose of a committee is not to find out the truth or expose the perpertrators of misdeeds, but to delay and obfuscate until people forget!!

The decision to finally fire CEO Zubir cannot be faulted since the buck stops there. But SD also has a Chairman, Musa Hitam, who in reality is not a non-executive non-intefering (by all accounts he is most interfering) director; in M'sian GLC's they are usually not. It's time for him to go as well without any golden shakes given losses of over RM 2 billion and the earlier mega forex losses at a Sime subsidiary.

More than that, as is very common in M'sian Plc's, non-executive directors are appointed more often than not on the recommendations of the CEO/MD who is also usually from the party who owns controlling shareholding interests in the Plc.

Thus independent exec and non-exec Plc directors are beholden to the controlling shareholders and it will be a cold day in hell when one of them opposes the Chairman's or CEO's bull-dozing proposals!!

It's also time for Khazanah and PNB to stop packing these GLC's with their 'yes sir, no sir, three bags full sir' nominees. They should get a truly qualified AND experienced management by opening up the opportunites to ALL M'sians and even consider employing proven foreign CEO's,

we are all of 1 race, the Human Race