Case study assignment Sime Darby-R.M.A.Hasan Chowdhury (ID-1600061).pdf

7/26/2019 Case study assignment Sime Darby-R.M.A.Hasan Chowdhury (ID-1600061).pdf

1/13

THE SIME DARBY FINANCIAL FIASCO (CASE STUDY) 1

MASTERS IN ISLAMIC FINANCE PRACTICE

(MIFP)

INCEIFIE5023: Ethics and Governance

Submitted to:

Prof.Dr. Syed Abdul Hamid Syed Ahmad Aljunid

Submitted by:

R.M.A. Hasan Chowdhury

Student ID: 1600061

Case Study -The Sime Darby FinancialFiasco


2/13


Summary

In May 2010, Sime Darby Berhad announced that its earnings may be cut by up to RM964 million due to

losses in its Energy & Utilities Division, from cost overruns in four projects. Following the announcement, its

share price plunged to RM7.47 on 27 May 2010, a 10-month low. In this case, we look at some of the events

leading to the loss as well as the actions taken by the board of directors in response. The objective of this

case study is to allow a discussion of issues such as board composition, the board's role in oversight, and

responsibilities of the board versus management.

Crucial terms of the Case study

Sime Darby.

Corporate Governance.

Datuk Seri Ahmad Zubir.

Fiasco.

Objectives of the Case study:

The objectives of this case is to allow a discussion of issues such as board composition, the board's role in

oversight, as well as duty & responsibilities of the board versus management.

Discussion Questions Are:

1. The board of Sime Darby includes very experienced and high profile directors. How can such a

board fail so spectacularly to safeguard the interests of the company?

2. What are the critical attributes of an effective board? To what extent does the Sime Darby board

possess such attributes?


3/13


3. Should the board members also be held accountable and not just Datuk Seri Ahmad Zubir Murshid?

4. On hindsight, if you were one of the directors on the main board of Sime Darby, what would you

have done back in 2005?

Question number # 01

Q1. The board of Sime Darby includes very experienced and high profile directors. How can such a

board fail so spectacularly to safeguard the interests of the company?

As stated in the annual report 2009 of Sime Darby, the system of checks and balances at the boardroom and

top management level is sturdy and robust, befitting its status as a sprawling multinational corporation.

Not counting Ahmad Zubir, Sime Darby has 12 directors. Half of these are independent directors and all 12

are non-executive directors. Together, they form a team with deep and varied experience and knowledge.

Among the independent board members are stalwarts such as Tun Musa, Raja Tan Sri Arshad Raja Tun

Uda, Datuk Seri Panglima Andrew Sheng and Tan Sri Dr Ahmad Tajuddin Ali.

You cantaccuse the board of being sleepy. There are some heavyweights there, Yet, the directors have

missed the extent of Sime Darbysproject woes until, reportedly, PwC went to Tun Musa to express its

concerns over the energy and utilities division. Furthermore, we could be noticed that none of the

professionals and ex regulators on the board as mentioned above had enough business experience such

that they depended more on the advice of Zubair rather than overseeing his business decisions.

One of the main responsibilities of board members is to maintain financial accountability of the organization.

Board members act as trustees of the organizations assets and ought to exercise due diligence to ensure

good management of the organization and a sound financial system. In order to maintain stability position in


4/13


the market, the board has to work hand in hand, share the same objectives and good strategy

implementation.

Board members, as stewards of public trust, must always act for the good of the organization, instead of their

own benefit. They should exercise reasonable care in every decision making by minimizing the potential risk

of the organization. Take for example, in 2008, internal audit of Sime Darby discovered some losses incurred

in oil and gas segment, which was brought to the attention of the audit committee, but the losses were

reported as immaterial losses with the clarification from the CEO. In this case, the board failed to exercise

reasonable care in decision making and interest of the company was affected.

In addition, poor corporate governance was criticized by internal auditor as they discovered there was a huge

amount RM1.7 billion cost overruns blew up. The question raised is what are the roles of independent

directors of Sime Darby? In general, conflict of interests is common when the management team or the board

failed to the make right decision in good faith of the company. For instance, the board has the responsibility

to ensure all the financial information about the company is accurate and precise. As an independent director,

he or she must strengthen the responsibilities of audit committees, and improves the quality of financial and

shareholder disclosures. Furthermore, Sime Darby is one of the greatest listed companies in Malaysia and

they must have accountability and transparency in order to satisfy all the major shareholders for example

Permodalan Nasional Berhad.

In the finding, some principles of corporate governance practiced by Sime Darby Fiasco are questioned, the

discussion as below:


5/13


A.

Deficiency of leadership & strategic orientation:

The practice of patronage where corporate positions at the helm of GLCs, and their perks are part of a reward

system for political contributions past present or future. The appointments are also political, recommended

or endorsed by politicians or their cronies. Little wonder many of the CEOs & directors are bestowed honorific

titles or affiliated to ruling political parties. They are not there necessarily for competence; certainly not

corporate governance!

B.

Over attentiveness of power in the board or management:

Tun Musa has been chairman since 2007. The losses were incurred in Simes Engineering OilGas Division

in relation to Bakun Dam and Qatar. Assuming Tun Musa had visited Qatar, Simes Board and him have

regularly been kept informed of the Groups operating performance; Bursa Malaysia requires quarterly

financial results to be disclosed accuratelyto the market on a quarterly basis; and statement of former Prime

Minister, Tun Dr Mahathirthat he was informed of Simes cost overrun and delay three years ago (in 2007)

when TunMusa became Chairman. If it were true as what highlighted that Tun Musa acted like executive

chairman to involve in/ inquire into management matters by reason of his notgetting along all that well with

CEO Zubir (the Assumptions) then how could he plead ignorance or defense to lack of supervision of

Simes finances as part of his fiduciary duty?

C.

Deficiency of transparency and vague policies or enforcements:

The main is the direction of the conglomerate and all other GLCs. Eventually the government should shoulder

some responsibility for not properly defining the scope and objectives of the GLCs. What is the main purpose

of GLCs?


6/13


The investment evaluation process for GLCs should be more transparent and stringent because they are

public trust companies. GLCs should have a clear risk barometer or level that they should not break. Should

GLCs be further burdened with public projects and at the same time expected to deliver profitability as public

listed companies?

The essential role of the board of directors is to ensure that all the organization matters must be in transparent

manner, in order to guide effective decision making which Sime Darby failed to do so. In this case, the minority

shareholders were expected the board to be fully accountable and conduct a forensic investigation and make

its findings transparent to shareholders in a prompt manner.

D.

Poor meeting and conduct:

12 board meetings were conducted in year 2009. Not many listed companies in Malaysia hold these meetings

this frequently. In addition, there are seven board committees and they each meet several times a year. On

top of these, Sime Darby has set up a supervisory committeesteam to assist the board in the oversight of

the respective divisions (of the company). The board has identified certain non-executive directors to sit on

these committees.

Clearly, this is not a case of the directors having limited exposure to the companys management and affairs.

So how is it that the many warning signs had not prompted the board to initiate a probe to review the energy

and utilities divisions operations? Or just wonder if the directors had asked the right questions at the right

time!

E.

Agency problem/information asymmetry:

In April 2008, for example, reports were released claiming that Sime Darby Engineering Sdn Bhd (Sime

Engineering) had incurred cost overruns of between RM120mil and RM150mil in its offshore engineering,


7/13


procurement, construction, installation and commissioning project for Maersk Oil Qatar (MOQ). However, the

boards soon after declared that the articles werent correct. Furthermore, in February 2009, also alleged that

there had been costs overruns in the same project, but the figure mentioned was far bigger.

F.

Efficiency of Audit Committee:

The committee establishes procedures for accepting confidential, anonymous concerns relative to financial

reporting and internal control matters. Often referred as whistleblower policy, the procedures allow

individuals to voice out questions and issues without fear of retribution. Although Raja Arshad is a

distinguished and well-respected corporate individual with impeccable credentials, he might not be the best

choice to lead Sime Darbys audit committee. Given that the independent auditors are PwC, never mind that

it has been almost five years since he had left the PwC. However, PwC is likely to insist that his position in

the audit committee does not change how the firm conducts its audit of Sime Darby. Furthermore, if it is true

that PwC went straight to Musa to express its concerns over the energy and utilities division, this perhaps

shows that the firm was not dependent on Raja Arshad as an intermediary to the board.

Sime Darbys whistleblowing policy encourages employees to report wrongdoings by anybody in the

company to the authorities. It also provides for complaints and reports to submit directly to a senior

independent director or the audit committee chairman should the complainant believe that the group is better

served if the report was addressed to levels higher than the management. According to its websi te, Sime

Darby has over 100,000 employees. Could it be that not even one of them raised the alarm over the problems

in the energy and utilities division? Or if there had been such complaints, were they handled appropriately?


8/13



Q2. What are the critical attributes of an effective board? To what extent does the Sime Darby board

possess such attributes?

The boardsrole is to provide entrepreneurial leadership of the company within a framework of prudent and

effective controls which enables risk to be assessed and managed. An effective board develops and

promotes its collective vision of the companyspurpose, its culture, its values and the behaviors it wishes to

promote in conducting its business. In particular:

It provides clear direction for management;

It demonstrates ethical leadership, displaying and promoting throughout the company behaviors

consistent with the culture and values it has defined for the organization;

It creates a performance culture that drives value creation without exposing the company to

excessive risk of value destruction;

It makes wellinformed and highquality decisions based on a clear line of sight into the business;

It creates the right framework for helping directors meet their statutory duties under the Companies

Act 1965, and/or other relevant statutory and regulatory regimes;

It is accountable, particularly to those that provide the capital for the company; and

It thinks carefully about its governance arrangements and embraces evaluation of their effectiveness.

An effective board should not necessarily be a comfortable place. Challenge, as well as teamwork, is an

essential feature. Diversity in board composition is an important driver of a boardseffectiveness, creating a

breadth of perspective among directors, and breaking down a tendency towards group think. However, in

the corporate milieu of GLCs such as Sime Darby, as a case of the wider political milieu, there is a wide gap

between the powerful and the powerless. The latter defer to the former. They dont challenge those in


9/13


powerful positions whether these positions relate to a corporate, a government department or political party.

Those at the helm are tolerated in their shenanigans and excesses. They are part of privileges to be enjoyed

at the top. If someone challenges them, one finds that whatever recourse sought from the various institutions,

regulators and government agencies will not only lead to nowhere but invite a backlash. The reasons are that

the top decision makers of these institutions, regulators and government agencies are equally occupying

their positions due to political patronage and played by the same rules i.e. listen to those in power!

The practices of patronage where corporate positions at helm of GLCs and their perks are part of reward

system for political contributions past present or future. The appointments are also political, recommended

or endorsed by politicians or their cronies. Little wonder many of the CEOs & directors are bestowed honorific

titles or affiliated to ruling political parties. They are not there necessarily for competence; certainly not

corporate governance to contribute to effective boards! The gravity of the crime of mismanagement can easily

be overlooked if they are the cronies of those in the powerful position. Knowledge and expertise is also not

at all important so long as you follow orders from the top.

It was reported that, the Board of Directors failed to safeguard Sime Darby shareholders and contributed to

the RM1.7 billion cost overruns blew up, by allowing Sime Darby Fiasco to engage in high risk accounting,

and inappropriate conflict of interest transactions. The Board witnessed numerous indications of questionable

practices and potential cost overruns by Sime Darbys Energy & Utilities Division which included Sime

Engineering management, but chose to neglect it which may affect the interest of Sime Darby shareholders,

employees and business associates.


10/13



Q3. Should the board members also be held accountable and not just Datuk Seri Ahmad Zubir

Murshid?

The board is collectively responsible for ensuring that the organization has systems in place to monitor and

adequately control the organizationsmaterial risks and that there is adequate and effective operational

procedures, internal controls for assessing, measuring, controlling, monitoring and reporting of risks.

As board members, they are fully accountable for Sime Darby organization and, thus, responsible for

governing in a way that effectively and clearly delegates both direction and protection and assures both. If

they did not do that, they shirked their responsibility and failed their accountability in so doing. So the key

question for boards like Sime Darby is, did they serve their governance duty and someone below failed in

their responsibilities and the board did not know it? The Policy Governance is designed to assure the board

says (and checks) what it must say and check and there should be no out of compliance situation the board

doesn't know about, unless the organization is hiding it. Then the board has a different problem.

Examining further this issue of principles of corporate governancetrue, there was external probe was

likely defined within the parameters set by the Board and take directions from the Board. If the Board were

in the front line of Publicsfocus as to whether its directors have breached their fiduciary duties of oversight

then whosoever on the Board, including the Chairman, who by position and conduct know or ought to know

or have known about the gathering storm of cost overruns since 2007 and have power and responsibility to

sound the early alert/alarm and mitigate these losses but have not done so ought, if accountability were the

first objective, resign or, at the least tender resignation as gesture.


11/13


If everyone stays put because Datuk Seri Ahmad Zubir had taken the fall, how could any of the rest of board

member who might be responsible for lack of vigilance be eventually held accountable when he is allowed to

remain on the Board to exert a measure of control on how the external investigators and task force

investigate?

Can Board members be entrusted the objectivity to exercise oversight over investigations of the adequacy

or otherwise failings of their own conduct and discharge of fiduciary duties? Certainly, I am not saying that

the entire team of Sime Board should resign. For then there will, on the practical side, not be continuity of

remaining board members with sufficient knowledge to organize (with or without) new directors the conduct

and oversight of these investigations by external investigators and task force. However, those whose

oversight over these divisions losing huge sums, including the Chairman and independent directors and

whoever independent director serving as chairman of the Boards Committee chairman (Audit committee)

should have their roles immediately evaluated to determine they are prima facie accountable to resign in

accord with the very principles of corporate governance that the Bursa/Securities Commission have been

preaching. At least those accountable should been seen tendering their resignations.

According to Tun Dr Mahadhir, the former Prime Minister, he claimed that the cost overruns in the Bakun

project were almost RM1.8bil and said that responsibility for the Sime Darby Fiasco should be shared. The

former prime minister said action should be taken not just against chief executive officer Datuk Seri Ahmad

Zubir but also all who were involved in the debacle.


12/13



Q4. On hindsight, if you were one of the directors on the main board of Sime Darby, what would you

have done back in 2005?

I would like to see a change in the perception that GLC (government-linked company) is a dirty word. It is the

common perception that GLCs get what they want and are allowed to get away with poor performance, at

best, and utter incompetence if not blatant corruption, at worst.

I would like to see Sime Darby be regarded as a bastion of leadership in ability, innovation and execution. I

would like to see Sime Darby be regarded as a multinational corporation that has actually competed

internationally without any support from anyone and has won contracts and projects.

In line with the corporate objectives highlighted above, some considerations would have done in 2005 are:

To appoint directors equipped with related and relevant skills and the knowledge to perform task-

specific duties, such as the evaluation of the firmsinternal control and accounting procedures, to

enhance the quality of information gathered, of the solutions to problems, and of the views held and

judgments made during the decision-making process. Also, outside directors with a variety of

specialist knowledge will be valuable to the creation of a strong and informed board, in particular, in

justifying their views on and concern with management propositions.

From the report, it can be concluded that the huge loss incurred was due to the problem of cost

overrun and probably the mismanagement in the power and util ity division of the conglomerate that

led to failure of completion projects as scheduled. The issue here is about efficiency and within the

context of corporate governance there are a lot of loopholes in the company and they are serious

enough as to cause this serious problem concerning the figures of the company. In relation to that,


13/13


long-term structural management problems shall be identified and the board will involve itself in a

special exercise to look at these structural issues. The need to cite about management structure,

staff qualifications, procedures, feedback channels and checks and balances as examples of these

governance issues in the company.

To initiate a review of the organization and reporting structure of the Sime Darby Group with the aim

of providing and promoting a culture of ownership and accountability across the Group, strengthening

the level of control and enhancing the Boardsoversight of the Divisionsoperation.

A common code of conduct is written for employees of a company, which protects the business and

informs the employees of the company's expectations. It is ideal to form a document containing

important information on expectations for employees.

The setting up of a whistle-blowerpolicy so that the staff can facilitate the free flow of opinions, for

the negative or positive.

Remediation actions at the Energy & Utilities which include:

Realignment of the organization chart to improve risk management

Initiation of operational improvement including project bidding processes, tightening of control over

project costs and strengthening of project management

To scrutiny the role of organization plays in society to ensure that in the quest for profit, the

organization does not exploit the environment and respect human right of the citizen in the society.

Case study assignment Sime Darby-R.M.A.Hasan Chowdhury (ID-1600061).pdf

Documents

Transcript of Case study assignment Sime Darby-R.M.A.Hasan Chowdhury (ID-1600061).pdf