"Harapkan pagar, pagar makan padi."
Saturday October 30, 2010
Bursa raps and fines Liqua, six former directors
PETALING JAYA: Liqua Health Corp Bhd and six former directors were publicly reprimanded yesterday and fined a total of RM1.63mil by Bursa Malaysia Securities for failing to discharge their duties.
In addition, Liqua’s former managing director Goh Bak Ming and former executive director See Keng Leong were required to pay back Liqua a total sum of RM15.67mil, which equalled the amount the company had paid to Wynsum Healthy Living Sdn Bhd for the sale and distribution of certain health products. A total sum of RM13.2mil obtained from banking facilities were paid to Wynsum.
“Notwithstanding the payments made to Wynsum, the products were never delivered,” according to a Liqua statement.
Bursa Securities said it had found that the former directors of Liqua failed to ensure the payments made to Wynsum and the corporate guarantees issued to secure the financing “were fair, and reasonable,” as well as “not to the detriment of Liqua and its shareholders.”
Goh was slapped with a RM1mil fine, while See RM500,000. The other four directors Dr Fei Chong Ming, Ng Weng Cheong, Leow Yan Seong@ Liew Pin and Rohaya Hashim were fined RM10,000 each.
Showing posts with label corporate governance. Show all posts
Showing posts with label corporate governance. Show all posts
Monday, 1 November 2010
Tuesday, 12 October 2010
Warren Buffett says in future Wall Street chiefs should go broke - and their wives
Warren Buffett, the billionaire investor, has hit out at pay practices on Wall Street, attacking the lack of reform despite two years passing since the financial crisis struck.
The 80-year old billionaire said: 'Wall Street does a lot of good things and then it has this casino.'
"People have a propensity to gamble, and it gets made easier and easier for them," Mr Buffett told a conference in Washington DC yesterday. "One of the problems we still have is we have unbalanced incentives for managers of huge financial institutions."
In future, chief executives of banks who need government assistance should "go broke", said Mr Buffett. Their wives "should go broke, too", he added.
The prospect of another round of bank bonuses is likely to inflame public opinion in the US, where the broader economic recovery is flagging.
Banks have been forced to split off some of their riskier trading activities because of the Dodd-Frank law - the financial reform act signed into law in the summer - but critics say it does little to remove the incentives to pursue short-term profits.
Mr Buffett's company, Berkshire Hathaway, is a major investor in American banks, with a stake in Goldman Sachs and Wells Fargo.
The 80-year old billionaire, who runs the company out of Omaha, Nebraska, with his long-term colleague Charlie Munger, said "Wall Street does a lot of good things and then it has this casino. It's like a church that's running raffles on the weekend."
As in Britain, banks are keen to counter an impression that they are failing to do enough for the recovery. Goldman Sachs, for example, last week began an advertising campaign designed to show its role in helping create jobs.
Despite the difference in the fortunes of those on Wall Street and many Americans in other industries, analysts have said that banks may decide to cut jobs in coming months as trading revenues decline. Meredith Whitney, for example, has forecast that up to 80,000 finance jobs could go over the next 18 months.
"It's quite clear that stocks are cheaper than bonds," Mr Buffett said. "I can't imagine anyone having bonds in their portfolio when they can own equities."
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8044789/Warren-Buffett-says-in-future-Wall-Street-chiefs-should-go-broke-and-their-wives.html
Banks have been forced to split off some of their riskier trading activities because of the Dodd-Frank law - the financial reform act signed into law in the summer - but critics say it does little to remove the incentives to pursue short-term profits.
Mr Buffett's company, Berkshire Hathaway, is a major investor in American banks, with a stake in Goldman Sachs and Wells Fargo.
The 80-year old billionaire, who runs the company out of Omaha, Nebraska, with his long-term colleague Charlie Munger, said "Wall Street does a lot of good things and then it has this casino. It's like a church that's running raffles on the weekend."
As in Britain, banks are keen to counter an impression that they are failing to do enough for the recovery. Goldman Sachs, for example, last week began an advertising campaign designed to show its role in helping create jobs.
Despite the difference in the fortunes of those on Wall Street and many Americans in other industries, analysts have said that banks may decide to cut jobs in coming months as trading revenues decline. Meredith Whitney, for example, has forecast that up to 80,000 finance jobs could go over the next 18 months.
Mr Buffett also told Fortune magazine's Most Powerful Women conference that investors are "making a mistake" if they chase a rally in bonds. The price of US two-year government bonds has raced to a record high this week as investors see little to spark a more robust recovery.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8044789/Warren-Buffett-says-in-future-Wall-Street-chiefs-should-go-broke-and-their-wives.html
Sunday, 10 October 2010
Kiss corporate governance goodbye when punishment meted is not commensurate with the crime
Saturday October 9, 2010
Too little punishment for too much
A QUESTION OF BUSINESS
By P. GUNASEGARAM
If directors continue to get away with a mere slap in the wrist for major offences, you can kiss corporate governance goodbye.
POOR Securities Commission! It goes to all that effort and pain to bring corporate miscreants to book and what happens, they go free – more or less. For what is a hefty fine when the amount they defrauded is many times more than that?
That is an affront to the public which sees white-collar criminals get away with far less in terms of sentences although many millions of ringgit are involved. Comparable common thefts see much more punishment.
Then, there are the corollary effects. The confidence and integrity of the market itself becomes affected when the investing public, both local and overseas, become disillusioned with standards of corporate governance here. What incentive is there to behave when you can get away with so much for so little?
For corporate crime to be seriously reduced, two things need to happen immediately. First, the courts must realise the seriousness of these crimes and mete out the necessary punishment, even when the plea is guilty.
Second, agencies responsible for enforcing legislation must do their part to investigate and bring to book those who break the law. The Securities Commission seems to be doing its part when it comes to securities laws but the same cannot be said of the Companies Commission of Malaysia when it comes to enforcing the Companies Act.
If these two things don’t come together, we can pretty much say goodbye to the attempts by some of our regulators and enforcement agencies to increase corporate governance standards and bring about a much higher standard of behaviour among our corporate chieftains, standards which are abysmally low right now.
Let’s take the latest such case. It was reported earlier this week that a former director of a de-listed company, Pancaran Ikrab, broke down and wept when a judge handed down a custodial sentence of one day (yes, that’s right) and a fine of RM2mil for fraud involving millions.
Former managing director Ngu Tieng Ung committed two counts of financial fraud involving RM15.5mil 13 years ago. Sessions Court judge S.M. Komathy Suppiah allowed Ngu, 43, to pay the fine in 12 instalments starting next month, to be paid by the fifth of each month or a 30-day jail sentence if he fails.
“Are you crying because you are happy or sad?” she asked a sobbing Ngu, who did not respond. At this juncture, Ngu’s counsel Ng Aik Guan went up to the dock to speak to him and later told the judge that Ngu was “too emotional”, The Star reported.
Meantime, the Securities Commission only thinly disguised its disappointment with the sentencing. It said in a statement on Oct 5: “Datuk Lybrand Ngu Tieng Ung was convicted by the Kuala Lumpur Sessions Court today for two counts of securities fraud.
“He had utilised RM15.5 million of Pancaran Ikrab Bhd’s (PIB) funds in October 1997 to finance his entry into the company. The monies financed his purchase for the controlling shareholding in PIB. PIB was then listed on the Second Board of the Kuala Lumpur Stock Exchange.
“When he resumed the post of director of PIB, he had caused in total RM37 million to be transferred out of the company. This amount was never recovered and was written off in its accounts. This resulted in PIB being financially distressed and its listing status was taken over by DCEIL International Bhd on July 19, 2004.
“The penalty for securities fraud is a minimum fine of RM1 million and imprisonment of not more than 10 years. Sessions Court judge, Puan S.M. Komathy Suppiah sentenced Ngu to 1 day imprisonment and a fine of RM1 million for each offence. The imprisonment terms to be served concurrently.”
Now, the scale of the offence becomes much clearer. Ngu used RM15.5mil to finance his purchase of shares in Pancaran Ikrab and caused RM37mil to be transferred out of the company, making in all a massive RM52.5mil.
And all he got was a day’s jail and a fine of RM2mil. Why? And there was nothing said about restitution or return of the monies.
If you think this was an isolated instance of a person committing corporate fraud receiving a light sentence, you are wrong. Just this year alone, there have been a number of light sentences given.
In March this year, the Kuala Lumpur Sessions Court convicted Chan Kok Suan, the former managing director of Granasia Corporation Bhd for submitting false statements to the Securities Commission as part of the application for an initial public offering.
Chan was convicted under section 32B(4) of the Securities Commission Act and was fined RM500,000, in default 10 months imprisonment, according to the SC.
In February, the Kuala Lumpur Sessions Court convicted Ooi Boon Leong and Tan Yeow Teck for knowingly authorising the furnishing of a misleading statement by MEMS Technology Bhd, a company listed on the then Mesdaq market, to Bursa Malaysia Securities Bhd.
The Sessions Court sentenced each accused to a fine of RM300,000 (in default two years imprisonment).
Last November, the Securities Commission secured a conviction against Datuk Tan Hooi Chong for abetting Kiara Emas Asia Industries Bhd in the misappropriation of the rights issue proceeds amounting to almost RM17mil between Dec 16 and 31, 1996.
Tan pleaded guilty to the offence under section 32(6) of the Securities Commission Act 1993 read together with Section 40 and Section 109 of the Penal Code. Tan had also admitted to misutilising the rights issue proceeds for his personal benefit. He was fined RM600,000.
The common thread through all these convictions, and many earlier higher profile convictions, is that none of them was custodial (except for the latest one-day custodial sentence) even though the offences were serious and in many cases involved millions of ringgit.
But let’s look at another case. In March, former Perbadanan Komputer Nasional Bhd chief executive officer Zulkifli Amin Mamat was sentenced to four years’ jail and three strokes of the rotan for criminal breach of trust involving RM1.61mil.
Why the anomaly? Is criminal breach of trust very different from what these other directors were doing? Obviously not.
That must mean, if we take other more sinister conclusions out of the equation, that judges don’t seem to understand the seriousness of corporate crime and the extremely deleterious effects they have on the capital markets and thousands and millions of shareholders of public-listed companies.
The only way that such lack of understanding or otherwise can be overcome is for the Chief Justice, Tun Zaki Azmi, himself to step in. Zaki has been working tirelessly to reduce backlogs and has taken strong, controversial steps in this direction. But the lack of punishment of corporate crime is one area that demands immediate attention too.
It will be no exaggeration to say that the future of the country depends on it because no country has been able to reach the pinnacles of progress and achievement without a healthy corporate sector. And you can’t have that without adequate punishment of the bad hats.
● Managing editor P. Gunasegaram does not only believe that justice delayed is justice denied. He also believes that justice denied is, well, justice denied. Period.
http://thestar.com.my/columnists/story.asp?file=/2010/10/9/columnists/aquestionofbusiness/7191225&sec=A%20Question%20Of%20Business
Too little punishment for too much
A QUESTION OF BUSINESS
By P. GUNASEGARAM
If directors continue to get away with a mere slap in the wrist for major offences, you can kiss corporate governance goodbye.
POOR Securities Commission! It goes to all that effort and pain to bring corporate miscreants to book and what happens, they go free – more or less. For what is a hefty fine when the amount they defrauded is many times more than that?
That is an affront to the public which sees white-collar criminals get away with far less in terms of sentences although many millions of ringgit are involved. Comparable common thefts see much more punishment.
Then, there are the corollary effects. The confidence and integrity of the market itself becomes affected when the investing public, both local and overseas, become disillusioned with standards of corporate governance here. What incentive is there to behave when you can get away with so much for so little?
For corporate crime to be seriously reduced, two things need to happen immediately. First, the courts must realise the seriousness of these crimes and mete out the necessary punishment, even when the plea is guilty.
Second, agencies responsible for enforcing legislation must do their part to investigate and bring to book those who break the law. The Securities Commission seems to be doing its part when it comes to securities laws but the same cannot be said of the Companies Commission of Malaysia when it comes to enforcing the Companies Act.
If these two things don’t come together, we can pretty much say goodbye to the attempts by some of our regulators and enforcement agencies to increase corporate governance standards and bring about a much higher standard of behaviour among our corporate chieftains, standards which are abysmally low right now.
Let’s take the latest such case. It was reported earlier this week that a former director of a de-listed company, Pancaran Ikrab, broke down and wept when a judge handed down a custodial sentence of one day (yes, that’s right) and a fine of RM2mil for fraud involving millions.
Former managing director Ngu Tieng Ung committed two counts of financial fraud involving RM15.5mil 13 years ago. Sessions Court judge S.M. Komathy Suppiah allowed Ngu, 43, to pay the fine in 12 instalments starting next month, to be paid by the fifth of each month or a 30-day jail sentence if he fails.
“Are you crying because you are happy or sad?” she asked a sobbing Ngu, who did not respond. At this juncture, Ngu’s counsel Ng Aik Guan went up to the dock to speak to him and later told the judge that Ngu was “too emotional”, The Star reported.
Meantime, the Securities Commission only thinly disguised its disappointment with the sentencing. It said in a statement on Oct 5: “Datuk Lybrand Ngu Tieng Ung was convicted by the Kuala Lumpur Sessions Court today for two counts of securities fraud.
“He had utilised RM15.5 million of Pancaran Ikrab Bhd’s (PIB) funds in October 1997 to finance his entry into the company. The monies financed his purchase for the controlling shareholding in PIB. PIB was then listed on the Second Board of the Kuala Lumpur Stock Exchange.
“When he resumed the post of director of PIB, he had caused in total RM37 million to be transferred out of the company. This amount was never recovered and was written off in its accounts. This resulted in PIB being financially distressed and its listing status was taken over by DCEIL International Bhd on July 19, 2004.
“The penalty for securities fraud is a minimum fine of RM1 million and imprisonment of not more than 10 years. Sessions Court judge, Puan S.M. Komathy Suppiah sentenced Ngu to 1 day imprisonment and a fine of RM1 million for each offence. The imprisonment terms to be served concurrently.”
Now, the scale of the offence becomes much clearer. Ngu used RM15.5mil to finance his purchase of shares in Pancaran Ikrab and caused RM37mil to be transferred out of the company, making in all a massive RM52.5mil.
And all he got was a day’s jail and a fine of RM2mil. Why? And there was nothing said about restitution or return of the monies.
If you think this was an isolated instance of a person committing corporate fraud receiving a light sentence, you are wrong. Just this year alone, there have been a number of light sentences given.
In March this year, the Kuala Lumpur Sessions Court convicted Chan Kok Suan, the former managing director of Granasia Corporation Bhd for submitting false statements to the Securities Commission as part of the application for an initial public offering.
Chan was convicted under section 32B(4) of the Securities Commission Act and was fined RM500,000, in default 10 months imprisonment, according to the SC.
In February, the Kuala Lumpur Sessions Court convicted Ooi Boon Leong and Tan Yeow Teck for knowingly authorising the furnishing of a misleading statement by MEMS Technology Bhd, a company listed on the then Mesdaq market, to Bursa Malaysia Securities Bhd.
The Sessions Court sentenced each accused to a fine of RM300,000 (in default two years imprisonment).
Last November, the Securities Commission secured a conviction against Datuk Tan Hooi Chong for abetting Kiara Emas Asia Industries Bhd in the misappropriation of the rights issue proceeds amounting to almost RM17mil between Dec 16 and 31, 1996.
Tan pleaded guilty to the offence under section 32(6) of the Securities Commission Act 1993 read together with Section 40 and Section 109 of the Penal Code. Tan had also admitted to misutilising the rights issue proceeds for his personal benefit. He was fined RM600,000.
The common thread through all these convictions, and many earlier higher profile convictions, is that none of them was custodial (except for the latest one-day custodial sentence) even though the offences were serious and in many cases involved millions of ringgit.
But let’s look at another case. In March, former Perbadanan Komputer Nasional Bhd chief executive officer Zulkifli Amin Mamat was sentenced to four years’ jail and three strokes of the rotan for criminal breach of trust involving RM1.61mil.
Why the anomaly? Is criminal breach of trust very different from what these other directors were doing? Obviously not.
That must mean, if we take other more sinister conclusions out of the equation, that judges don’t seem to understand the seriousness of corporate crime and the extremely deleterious effects they have on the capital markets and thousands and millions of shareholders of public-listed companies.
The only way that such lack of understanding or otherwise can be overcome is for the Chief Justice, Tun Zaki Azmi, himself to step in. Zaki has been working tirelessly to reduce backlogs and has taken strong, controversial steps in this direction. But the lack of punishment of corporate crime is one area that demands immediate attention too.
It will be no exaggeration to say that the future of the country depends on it because no country has been able to reach the pinnacles of progress and achievement without a healthy corporate sector. And you can’t have that without adequate punishment of the bad hats.
● Managing editor P. Gunasegaram does not only believe that justice delayed is justice denied. He also believes that justice denied is, well, justice denied. Period.
http://thestar.com.my/columnists/story.asp?file=/2010/10/9/columnists/aquestionofbusiness/7191225&sec=A%20Question%20Of%20Business
Friday, 11 June 2010
Obligations of independent directors - Kenmark eye opener
Friday June 11, 2010
Obligations of independent directors - Kenmark eye opener
Whose business is it anyway - by John Zinkin
IN conversations since Sime Darby Bhd and Kenmark Industrial Co (M) Bhd hit the headlines, I was struck forcefully by how often the people I met did not realise fully what the obligations or liabilities of independent directors actually are.
Perhaps it is timely to restate in simple terms what independent directors are supposed to do; and why being an independent director should not be seen as a reward for past services that does not require an active involvement in the deliberations of the board.
It is a serious duty that requires much more than just being honest and attending the required number of board meetings. As such, directors must continuously upgrade their skills and understanding of the environment in which their companies operate, investing in training to do so.
Directors must act honestly and in good faith in the best interests of the company on whose board they sit. This means that if there is conflict between the interests of the company and the people they represent as nominees, they are required by law to think of the best interests of the company and not of the people who nominated them. This is easy to say, but often difficult to do.
Ethical behaviour does not just require directors to behave ethically personally; it also requires them to see to it that the company conducts its business in accordance with the law and with a high standard of commercial morality.
This raises interesting issues about whether a company should break the law and pay the associated fine because it costs less to do so in the short term than complying with the law. Ethical behaviour would suggest not breaking the law even if it was cheaper to do so.
It is also important to remember that directors’ fiduciary duty means that they must comply with the spirit of the law and not just the letter of the law – which explains why Goldman Sachs looked so bad when they were testifying to Congress, justifying their actions on the grounds that they were legal only. As the cross-examination demonstrated, fiduciary duty of directors is not just to shareholders, but also to customers and clients as well; all the more so, if what is being offered is highly technical, complex and opaque with the potential to lose clients their money.
Directors should remember this and insist on a wider fiduciary duty if they are serious about preserving the company’s “licence to operate” in the long term.
Being diligent
This does not just mean attending the requisite number of board meetings and preparing for each board meeting by reading the board papers. Directors must devote enough time to remain familiar with the changing nature of the company’s business and environment, including mastering the impact on the business and its risk profile of the evolving political, legal, social and competitive context in which the company operates.
They also must understand the asset intensity of the business and how it changes over time by being able to relate the balance sheet items to the amount of business they generate: for example, how much working capital is needed to generate a dollar of sales, how does it compare over time and with the competition?
Are there legitimate ways of reducing the asset intensity of the business and improving the return on capital employed, or are the means by which this is being done through the use of off-balance sheet items merely a form of dangerous financial engineering?
It also means that directors must personally know the first- and second-line managers of their company well enough to be able to contribute intelligently to the succession planning process for which they are responsible. They need to know this if they are to undertake that most difficult role of all – terminating the non-performing CEO without causing a major disruption to the business.
One of the most difficult roles is to ensure that minority shareholder rights are respected when there is a controlling shareholder – be it the founding family or the government. There are the obvious issues raised by differing perspectives on strategy caused by different risk appetites and time horizons of majority and minority shareholders.
There is also the issue of related party transactions which need to be vetted carefully to ensure that money invested by public shareholders is not being “upstreamed” or siphoned off to the advantage of the controlling shareholder via a related party transaction.
Directors must avoid all conflicts of interest wherever possible. Should a conflict arise, they must adhere scrupulously to the provisions laid down by the law and the constitution of the company in dealing with such conflicts. Should the conflict be continuous or material, the director involved should consider resigning after taking into account the impact of resignation on the other members of the board.
Directors cannot disclose confidential information without prior agreement from the board even if the people who nominated them require it – this is because their primary duty is to the company on whose board they sit.
It goes without saying that directors cannot abuse their access to confidential information and use such information for “insider trading”.
# The writer is CEO of Securities Industry Development Corp, the training and development arm of the Securities Commission.
Obligations of independent directors - Kenmark eye opener
Whose business is it anyway - by John Zinkin
IN conversations since Sime Darby Bhd and Kenmark Industrial Co (M) Bhd hit the headlines, I was struck forcefully by how often the people I met did not realise fully what the obligations or liabilities of independent directors actually are.
Perhaps it is timely to restate in simple terms what independent directors are supposed to do; and why being an independent director should not be seen as a reward for past services that does not require an active involvement in the deliberations of the board.
It is a serious duty that requires much more than just being honest and attending the required number of board meetings. As such, directors must continuously upgrade their skills and understanding of the environment in which their companies operate, investing in training to do so.
Directors must act honestly and in good faith in the best interests of the company on whose board they sit. This means that if there is conflict between the interests of the company and the people they represent as nominees, they are required by law to think of the best interests of the company and not of the people who nominated them. This is easy to say, but often difficult to do.
Ethical behaviour does not just require directors to behave ethically personally; it also requires them to see to it that the company conducts its business in accordance with the law and with a high standard of commercial morality.
This raises interesting issues about whether a company should break the law and pay the associated fine because it costs less to do so in the short term than complying with the law. Ethical behaviour would suggest not breaking the law even if it was cheaper to do so.
It is also important to remember that directors’ fiduciary duty means that they must comply with the spirit of the law and not just the letter of the law – which explains why Goldman Sachs looked so bad when they were testifying to Congress, justifying their actions on the grounds that they were legal only. As the cross-examination demonstrated, fiduciary duty of directors is not just to shareholders, but also to customers and clients as well; all the more so, if what is being offered is highly technical, complex and opaque with the potential to lose clients their money.
Directors should remember this and insist on a wider fiduciary duty if they are serious about preserving the company’s “licence to operate” in the long term.
Being diligent
This does not just mean attending the requisite number of board meetings and preparing for each board meeting by reading the board papers. Directors must devote enough time to remain familiar with the changing nature of the company’s business and environment, including mastering the impact on the business and its risk profile of the evolving political, legal, social and competitive context in which the company operates.
At a minimum this means directors must understand the make-up of the revenues and costs in the profit and loss account and be able to ask probing questions when the ratios show signs of changing as these are early warning indicators of eroding profitability.
They also must understand the asset intensity of the business and how it changes over time by being able to relate the balance sheet items to the amount of business they generate: for example, how much working capital is needed to generate a dollar of sales, how does it compare over time and with the competition?
Are there legitimate ways of reducing the asset intensity of the business and improving the return on capital employed, or are the means by which this is being done through the use of off-balance sheet items merely a form of dangerous financial engineering?
It also means that directors must personally know the first- and second-line managers of their company well enough to be able to contribute intelligently to the succession planning process for which they are responsible. They need to know this if they are to undertake that most difficult role of all – terminating the non-performing CEO without causing a major disruption to the business.
One of the most difficult roles is to ensure that minority shareholder rights are respected when there is a controlling shareholder – be it the founding family or the government. There are the obvious issues raised by differing perspectives on strategy caused by different risk appetites and time horizons of majority and minority shareholders.
There is also the issue of related party transactions which need to be vetted carefully to ensure that money invested by public shareholders is not being “upstreamed” or siphoned off to the advantage of the controlling shareholder via a related party transaction.
Directors must avoid all conflicts of interest wherever possible. Should a conflict arise, they must adhere scrupulously to the provisions laid down by the law and the constitution of the company in dealing with such conflicts. Should the conflict be continuous or material, the director involved should consider resigning after taking into account the impact of resignation on the other members of the board.
Directors cannot disclose confidential information without prior agreement from the board even if the people who nominated them require it – this is because their primary duty is to the company on whose board they sit.
It goes without saying that directors cannot abuse their access to confidential information and use such information for “insider trading”.
# The writer is CEO of Securities Industry Development Corp, the training and development arm of the Securities Commission.
Thursday, 10 June 2010
Buffett (2002): Three suggestions to help an investor avoid firms with management of dubious intentions.
After enthralling readers with a wonderful treatise on how good corporate governance need to be practiced at firms in his 2002 letter to shareholders, Warren Buffett rounded off the discussion with three suggestions that could go a long way in helping an investor avoid firms with management of dubious intentions. What are these suggestions and what do they imply? Let us find out.
The 3 that count
The master says, "First, beware of companies displaying weak accounting.There is seldom just one cockroach in the kitchen." If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes.
On the second suggestion he says, "Unintelligible footnotes usually indicate untrustworthy management. If you can't understand a footnote or other managerial explanation, its usually because the CEO doesn't want you to."
And so far the final suggestion is concerned, he concludes, "Be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don't advance smoothly (except, of course, in the offering books of investment bankers)."
Attention to detail
From the above suggestions, it is clear that the master is taking the age-old adage, 'Action speak louder than words', rather seriously. And why not! Since it is virtually impossible for a small investor to get access to top management on a regular basis, it becomes important that in order to unravel the latter's conduct of business; its actions need to be scrutinized closely. And what better way to do that than to go through the various filings of the company (annual reports and quarterly results) and get a first hand feel of what the management is saying and what it is doing with the company's accounts. Honest management usually does not play around with words and tries to present a realistic picture of the company. It is the one with dubious intentions that would try to insert complex footnotes and make fanciful assumptions about the company's future.
We would like to draw curtains on the master's 2002 letter to shareholders by putting up the following quote that dispels the myth that manager ought to know the future and hence predict it with great accuracy. Nothing could be further from the truth.
CEOs don't have a crystal ball
The master has said, "Charlie and I not only don't know today what our businesses will earn next year; we don't even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to 'make the numbers' will at some point be tempted to make up the numbers."
Hence, next time you come across a management that continues to give profit guidance year after year and even meets them, it is time for some alarm bells.
http://www.equitymaster.com/p-detail.asp?date=8/20/2008&story=2
The 3 that count
The master says, "First, beware of companies displaying weak accounting.There is seldom just one cockroach in the kitchen." If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes.
On the second suggestion he says, "Unintelligible footnotes usually indicate untrustworthy management. If you can't understand a footnote or other managerial explanation, its usually because the CEO doesn't want you to."
And so far the final suggestion is concerned, he concludes, "Be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don't advance smoothly (except, of course, in the offering books of investment bankers)."
Attention to detail
From the above suggestions, it is clear that the master is taking the age-old adage, 'Action speak louder than words', rather seriously. And why not! Since it is virtually impossible for a small investor to get access to top management on a regular basis, it becomes important that in order to unravel the latter's conduct of business; its actions need to be scrutinized closely. And what better way to do that than to go through the various filings of the company (annual reports and quarterly results) and get a first hand feel of what the management is saying and what it is doing with the company's accounts. Honest management usually does not play around with words and tries to present a realistic picture of the company. It is the one with dubious intentions that would try to insert complex footnotes and make fanciful assumptions about the company's future.
We would like to draw curtains on the master's 2002 letter to shareholders by putting up the following quote that dispels the myth that manager ought to know the future and hence predict it with great accuracy. Nothing could be further from the truth.
CEOs don't have a crystal ball
The master has said, "Charlie and I not only don't know today what our businesses will earn next year; we don't even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to 'make the numbers' will at some point be tempted to make up the numbers."
Hence, next time you come across a management that continues to give profit guidance year after year and even meets them, it is time for some alarm bells.
http://www.equitymaster.com/p-detail.asp?date=8/20/2008&story=2
Buffett (2002): The primary job of an Audit committee and the four questions the committee should ask auditors.
Buffet explained some key corporate governance policies in his 2002 letter to shareholders. After driving home his views on independent directors and their compensation, he has now turned his attention towards the audit committees that are present at every company.
Audit committees - Substance and not form
The primary job of an audit committee, says Buffett, is to make sure that the auditors divulge what they know. Hence, whenever reforms need to be introduced in this area, they have to be introduced keeping this aspect in mind. He was indeed alarmed by the growing number of accounting malpractices that happened with the firm's numbers. And he believed this would continue as long as auditors take the side of the CEO (Chief Executive Officer) or the CFO (Chief Financial Officer) and not the shareholders. Why not? So long as the auditor gets his fees and other assignments from the management, he is more likely to prepare a book that contains exactly what the management wants to read. Although a lot of the accounting jugglery may well be within the rule of the law, it nevertheless amounts to misleading investor. Hence, in order to stop such practices, it becomes important that the auditors be subject to major monetary penalties if they hide something from the minority shareholders behind the garb of accounting. And what better committee to monitor this than the audit committee itself! Buffett has also laid out four questions that the committee should ask auditors and the answers recorded and reported to shareholders. What are these four questions and what purpose will they serve? Let us find out.
The acid test
As per Buffett, these questions are -
1. If the auditor were solely responsible for preparation of the company's financial statements, would they have in any way been prepared differently from the manner selected by management? This question should cover both material and nonmaterial differences. If the auditor would have done something differently, both management's argument and the auditor's response should be disclosed. The audit committee should then evaluate the facts.
Toe the line or else...
Buffett goes on to add that these questions need to be asked in such a manner so that sufficient time is given to auditors and management to resolve any conflicts that arise as a result of these questions. Furthermore, he is also of the opinion that if a firm adopts these questions and makes it a rule to put them before auditors, the composition of the audit committee becomes irrelevant, an issue on which the maximum amount of time is unnecessarily spent. Finally, the purpose that these questions will serve is that it will force the auditors to officially endorse something that they would have otherwise given nod to behind the scenes. In other words, there is a strong chance that they resisting misdoings and give the true information to the shareholder.
http://www.equitymaster.com/p-detail.asp?date=8/13/2008&story=1
Audit committees - Substance and not form
The primary job of an audit committee, says Buffett, is to make sure that the auditors divulge what they know. Hence, whenever reforms need to be introduced in this area, they have to be introduced keeping this aspect in mind. He was indeed alarmed by the growing number of accounting malpractices that happened with the firm's numbers. And he believed this would continue as long as auditors take the side of the CEO (Chief Executive Officer) or the CFO (Chief Financial Officer) and not the shareholders. Why not? So long as the auditor gets his fees and other assignments from the management, he is more likely to prepare a book that contains exactly what the management wants to read. Although a lot of the accounting jugglery may well be within the rule of the law, it nevertheless amounts to misleading investor. Hence, in order to stop such practices, it becomes important that the auditors be subject to major monetary penalties if they hide something from the minority shareholders behind the garb of accounting. And what better committee to monitor this than the audit committee itself! Buffett has also laid out four questions that the committee should ask auditors and the answers recorded and reported to shareholders. What are these four questions and what purpose will they serve? Let us find out.
The acid test
As per Buffett, these questions are -
1. If the auditor were solely responsible for preparation of the company's financial statements, would they have in any way been prepared differently from the manner selected by management? This question should cover both material and nonmaterial differences. If the auditor would have done something differently, both management's argument and the auditor's response should be disclosed. The audit committee should then evaluate the facts.
2. If the auditor were an investor, would he have received - in plain English - the information essential to his understanding the company's financial performance during the reporting period?
3. Is the company following the same internal audit procedure that would be followed if the auditor himself were CEO? If not, what are the differences and why?
4. Is the auditor aware of any actions - either accounting or operational - that have had the purpose and effect of moving revenues or expenses from one reporting period to another?
Toe the line or else...
Buffett goes on to add that these questions need to be asked in such a manner so that sufficient time is given to auditors and management to resolve any conflicts that arise as a result of these questions. Furthermore, he is also of the opinion that if a firm adopts these questions and makes it a rule to put them before auditors, the composition of the audit committee becomes irrelevant, an issue on which the maximum amount of time is unnecessarily spent. Finally, the purpose that these questions will serve is that it will force the auditors to officially endorse something that they would have otherwise given nod to behind the scenes. In other words, there is a strong chance that they resisting misdoings and give the true information to the shareholder.
http://www.equitymaster.com/p-detail.asp?date=8/13/2008&story=1
Buffett (2002): "Independent" directors: How independent are they?
Warren Buffett complained about failings of independent directors in his letter to shareholders for the year 2002. Let us go further down the same letter and see what other investment wisdom he has on offer.
'Independent' directors: How independent are they?
It is a known fact that Buffett pays a great deal of attention to the management of companies before investing in them. And the reasons behind this obsession may not be difficult to find. Since it is the management that is responsible for making most of the capital allocation decisions in a business, which in turn are central for creating long-term shareholder value, it is imperative that a management allocates capital in the most rational manner possible.
However, as we saw in the last article, the list of managers or CEOs with a 'quick rich' syndrome is swelling to dangerous proportions, thus forcing shareholders to pin all their hopes on the board of a company or more importantly on the independent directors for a bail out. But as mentioned by Buffett, most independent directors (including him) on several occasions have failed in their attempt to protect the interest of shareholders owing to a variety of reasons.
After narrating his experience as an independent director, the master moves on and gives one more example where independent directors have failed miserably to protect shareholder interest. The companies under consideration are investment companies (mutual funds). The master says that directors in these companies have only two major roles,
Even in an era where shareholdings have gotten concentrated, some institutions find it difficult to make management changes necessary to create long-term shareholder value because these very institutions have been found to be sailing in the same boat i.e., neglecting shareholder value so that only a handful of people benefit. Buffett goes on to add that thankfully there have been some people at some institutions that by virtue of their voting power have forced CEOs to take rational decisions.
Let us hear in Buffett's own words, his take on the issue:
Master's golden words
Buffett says, "So that we may further see the failings of 'independence', let's look at a 62-year case study covering thousands of companies. Since 1940, federal law has mandated that a large proportion of the directors of investment companies (most of these mutual funds) be independent. The requirement was originally 40% and now it is 50%. In any case, the typical fund has long operated with a majority of directors who qualify as independent. These directors and the entire board have many perfunctory duties, but in actuality have only two important responsibilities:
On the increased ownership concentration and how certain people are forcing managers to act rational, Buffett has the following to say - "Getting rid of mediocre CEOs and eliminating overreaching by the able ones requires action by owners - big owners. The logistics aren't that tough: The ownership of stock has grown increasingly concentrated in recent decades, and today it would be easy for institutional managers to exert their will on problem situations. Twenty, or even fewer, of the largest institutions, acting together, could effectively reform corporate governance at a given company, simply by withholding their votes for directors who were tolerating odious behavior."
He goes on, in my view, this kind of concerted action is the only way that corporate stewardship can be meaningfully improved. Unfortunately, certain major investing institutions have 'glass house' problems in arguing for better governance elsewhere; they would shudder, for example, at the thought of their own performance and fees being closely inspected by their own boards. But Jack Bogle of Vanguard fame, Chris Davis of Davis Advisors, and Bill Miller of Legg Mason are now offering leadership in getting CEOs to treat their owners properly. Pension funds, as well as other fiduciaries, will reap better investment returns in the future if they support these men."
'Independent' directors: How independent are they?
It is a known fact that Buffett pays a great deal of attention to the management of companies before investing in them. And the reasons behind this obsession may not be difficult to find. Since it is the management that is responsible for making most of the capital allocation decisions in a business, which in turn are central for creating long-term shareholder value, it is imperative that a management allocates capital in the most rational manner possible.
However, as we saw in the last article, the list of managers or CEOs with a 'quick rich' syndrome is swelling to dangerous proportions, thus forcing shareholders to pin all their hopes on the board of a company or more importantly on the independent directors for a bail out. But as mentioned by Buffett, most independent directors (including him) on several occasions have failed in their attempt to protect the interest of shareholders owing to a variety of reasons.
After narrating his experience as an independent director, the master moves on and gives one more example where independent directors have failed miserably to protect shareholder interest. The companies under consideration are investment companies (mutual funds). The master says that directors in these companies have only two major roles,
- that of hiring the best possible manager and
- negotiating with him for the best possible fee.
Even in an era where shareholdings have gotten concentrated, some institutions find it difficult to make management changes necessary to create long-term shareholder value because these very institutions have been found to be sailing in the same boat i.e., neglecting shareholder value so that only a handful of people benefit. Buffett goes on to add that thankfully there have been some people at some institutions that by virtue of their voting power have forced CEOs to take rational decisions.
Let us hear in Buffett's own words, his take on the issue:
Master's golden words
Buffett says, "So that we may further see the failings of 'independence', let's look at a 62-year case study covering thousands of companies. Since 1940, federal law has mandated that a large proportion of the directors of investment companies (most of these mutual funds) be independent. The requirement was originally 40% and now it is 50%. In any case, the typical fund has long operated with a majority of directors who qualify as independent. These directors and the entire board have many perfunctory duties, but in actuality have only two important responsibilities:
- obtaining the best possible investment manager and
- negotiating with that manager for the lowest possible fee.
On the increased ownership concentration and how certain people are forcing managers to act rational, Buffett has the following to say - "Getting rid of mediocre CEOs and eliminating overreaching by the able ones requires action by owners - big owners. The logistics aren't that tough: The ownership of stock has grown increasingly concentrated in recent decades, and today it would be easy for institutional managers to exert their will on problem situations. Twenty, or even fewer, of the largest institutions, acting together, could effectively reform corporate governance at a given company, simply by withholding their votes for directors who were tolerating odious behavior."
He goes on, in my view, this kind of concerted action is the only way that corporate stewardship can be meaningfully improved. Unfortunately, certain major investing institutions have 'glass house' problems in arguing for better governance elsewhere; they would shudder, for example, at the thought of their own performance and fees being closely inspected by their own boards. But Jack Bogle of Vanguard fame, Chris Davis of Davis Advisors, and Bill Miller of Legg Mason are now offering leadership in getting CEOs to treat their owners properly. Pension funds, as well as other fiduciaries, will reap better investment returns in the future if they support these men."
Buffett (2002): "Independent" directors must be business-savvy, interested and shareholder oriented, and who think and speak "independently".
In Warren Buffett's 2002 letter to shareholders, we got to know the master's views on derivatives and the huge risks associated with them. Let us go further down the same letter and see what other investment wisdom the master has to offer.
The demise of the good CEO?
The great bull run of the 1980s-1990s in the US also brought with it a host of corporate scandals. A lot many CEOs, in their attempt to amass wealth quickly did not think twice to do so at the expense of their shareholders. It is fine for a CEO to take home a hefty pay package if the company he heads has put up an impressive performance. But to rake in millions when the shareholders i.e., the real owners of the business get nothing or only a tiny percentage of what the CEOs earn, amounts to nothing but daylight robbery. This is of course impossible without the complicity of the board of directors, whether voluntary or forced. Sadly, these people are increasingly failing to rise to the responsibilities entrusted to them by the shareholders, allowing CEOs to get away scot-free. It is this very issue of corporate governance that the master has talked about at length in his 2002 letter to shareholders. Alarmed by the rising incidents of CEO misconduct, Buffett argues that in a room filled with well-mannered and intelligent people, it will be 'socially awkward' for any director to stand up and speak against a CEO's policies and hence he fully endorses board meetings without the presence of the CEO. Furthermore, he is also in favour of 'independent' directors provided they have three essential qualities. What are these essential qualities and why he deems them to be so important? Let us find out in the master's own words.
The master's golden words
On the nature of directors, Buffett said, "The current cry is for ‘independent’ directors. It is certainly true that it is desirable to have directors who think and speak independently - but they must also be business-savvy, interested and shareholder oriented."
He goes on to add, "In my 1993 commentary, those are the three qualities I described as essential. Over a span of 40 years, I have been on 19 public-company boards (excluding Berkshire's) and have interacted with perhaps 250 directors. Most of them were ‘independent’ as defined by today's rules. But the great majority of these directors lacked at least one of the three qualities I value. As a result, their contribution to shareholder well-being was minimal at best and, too often, negative. These people, decent and intelligent though they were, simply did not know enough about business and/or care enough about shareholders to question foolish acquisitions or egregious compensation. My own behavior, I must ruefully add, frequently fell short as well: Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders. In those cases, collegiality trumped independence."
The demise of the good CEO?
The great bull run of the 1980s-1990s in the US also brought with it a host of corporate scandals. A lot many CEOs, in their attempt to amass wealth quickly did not think twice to do so at the expense of their shareholders. It is fine for a CEO to take home a hefty pay package if the company he heads has put up an impressive performance. But to rake in millions when the shareholders i.e., the real owners of the business get nothing or only a tiny percentage of what the CEOs earn, amounts to nothing but daylight robbery. This is of course impossible without the complicity of the board of directors, whether voluntary or forced. Sadly, these people are increasingly failing to rise to the responsibilities entrusted to them by the shareholders, allowing CEOs to get away scot-free. It is this very issue of corporate governance that the master has talked about at length in his 2002 letter to shareholders. Alarmed by the rising incidents of CEO misconduct, Buffett argues that in a room filled with well-mannered and intelligent people, it will be 'socially awkward' for any director to stand up and speak against a CEO's policies and hence he fully endorses board meetings without the presence of the CEO. Furthermore, he is also in favour of 'independent' directors provided they have three essential qualities. What are these essential qualities and why he deems them to be so important? Let us find out in the master's own words.
The master's golden words
On the nature of directors, Buffett said, "The current cry is for ‘independent’ directors. It is certainly true that it is desirable to have directors who think and speak independently - but they must also be business-savvy, interested and shareholder oriented."
He goes on to add, "In my 1993 commentary, those are the three qualities I described as essential. Over a span of 40 years, I have been on 19 public-company boards (excluding Berkshire's) and have interacted with perhaps 250 directors. Most of them were ‘independent’ as defined by today's rules. But the great majority of these directors lacked at least one of the three qualities I value. As a result, their contribution to shareholder well-being was minimal at best and, too often, negative. These people, decent and intelligent though they were, simply did not know enough about business and/or care enough about shareholders to question foolish acquisitions or egregious compensation. My own behavior, I must ruefully add, frequently fell short as well: Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders. In those cases, collegiality trumped independence."
Wednesday, 16 December 2009
Excellent corporate governance essential to good results
Excellent corporate governance essential to good results, says Teh
Tags: Bursa Malaysia Bhd | Excellent corporate governance | Good business performance | NUBS | Overall Excellence Award | Public Bank Bhd | TanSri Dr Teh Hong Piow | Transparency Index Award
Written by Financial Daily
Monday, 14 December 2009 11:21
KUALA LUMPUR: Excellent corporate governance is essential to good business performance as well as in ensuring that the interests of investors and all other stakeholders are well taken care of, said Tan Sri Dr Teh Hong Piow, the founder and chairman of one of Malaysia’s most renowned banking groups.
Teh and his management team should know about the correlation between good corporate governance and strong financial results given that PUBLIC BANK BHD [] has had an unbroken profit track record for over 40 years. The banking group has won numerous awards locally and overseas for its exemplary corporate governance.
“The board, management and staff of Public Bank will remain steadfast and committed in ensuring the highest level of corporate governance at Public Bank so that the interests of investors and all other stakeholders are well taken care of,” he said in a statement last Friday.
He said this after the banking group on Thursday yet again grabbed the top awards for excellence in corporate governance.
Teh lauded the Minority Shareholder Watchdog Group (MSWG) for launching the Malaysian Corporate Governance (MCG) Index, a premier index for investors to gauge corporate governance levels of public-listed companies in Malaysia.
Teh
The MCG Index is an extension of MSWG’s corporate governance survey collaboration with Nottingham University Business School (NUBS) in 2004 – 2008.
Teh expressed pride that Public Bank had won the Overall Excellence Award and the Best AGM Conducted in 2009 Award under the MCG Index 2009, especially as Public Bank had been ranked No 1 for four consecutive years in the MSWG–NUBS corporate governance surveys conducted in 2004–2008.
He said the Overall Excellence Award was a testimony to Public Bank’s strong corporate culture inculcated in the staff with everyone delivering as a team. Apart from Public Bank, BURSA MALAYSIA BHD [] was jointly awarded the Overall Excellence Award. Bursa also won the Best Governance and Transparency Index Award.
This article appeared in The Edge Financial Daily, December 14, 2009.
Tags: Bursa Malaysia Bhd | Excellent corporate governance | Good business performance | NUBS | Overall Excellence Award | Public Bank Bhd | TanSri Dr Teh Hong Piow | Transparency Index Award
Written by Financial Daily
Monday, 14 December 2009 11:21
Teh and his management team should know about the correlation between good corporate governance and strong financial results given that PUBLIC BANK BHD [] has had an unbroken profit track record for over 40 years. The banking group has won numerous awards locally and overseas for its exemplary corporate governance.
“The board, management and staff of Public Bank will remain steadfast and committed in ensuring the highest level of corporate governance at Public Bank so that the interests of investors and all other stakeholders are well taken care of,” he said in a statement last Friday.
He said this after the banking group on Thursday yet again grabbed the top awards for excellence in corporate governance.
Teh lauded the Minority Shareholder Watchdog Group (MSWG) for launching the Malaysian Corporate Governance (MCG) Index, a premier index for investors to gauge corporate governance levels of public-listed companies in Malaysia.
Teh
The MCG Index is an extension of MSWG’s corporate governance survey collaboration with Nottingham University Business School (NUBS) in 2004 – 2008.
Teh expressed pride that Public Bank had won the Overall Excellence Award and the Best AGM Conducted in 2009 Award under the MCG Index 2009, especially as Public Bank had been ranked No 1 for four consecutive years in the MSWG–NUBS corporate governance surveys conducted in 2004–2008.
He said the Overall Excellence Award was a testimony to Public Bank’s strong corporate culture inculcated in the staff with everyone delivering as a team. Apart from Public Bank, BURSA MALAYSIA BHD [] was jointly awarded the Overall Excellence Award. Bursa also won the Best Governance and Transparency Index Award.
This article appeared in The Edge Financial Daily, December 14, 2009.
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