I was in traveling in the tube from Covent Garden to Holborn in London when my smartphone received notification from the BBC that Boris Johnson is the next PM of Great Britain. The interesting part about the UK is that we get very differing views on his appointment. 55% of Brits said that Johnson will make a terrible prime minister but 72% said he should be given a chance to deliver Brexit before new elections are called. As far as Boris is concerned, he is willing to risk a no deal with the EU. For the sake of Great Britain, I hope that he realizes that rhetoric won’t go far. In essence, he wants to renegotiate Mrs. May’s deal and no Irish backstop agreement which is in complete contrast to the EU’s views. EU wants the withdrawal deal struck by Mrs. May which by the way has been rejected by the parliament 3 times. Anyway, I am glad to be back in KL after a week in London with temperatures soaring up to 38C!
I also had the opportunity to represent Bank Islam Malaysia at the bank tech Asia conference held at the KLCC Convention Center. It is interesting to see the number of bankers converging and trying to fathom whether they will have a job in the next 5 years. The concern is real as technology is taking over banking and bankers who are clueless are advised to look for another job soon. Discussions were held on E KYC, digital banking, the role of fintech and regtech. Most of the speakers themselves don’t have the answer to this phenomenon which is advancing at a rapid pace. Change or be changed.
Do we have what it takes to be the fintech hub of Asia? It would be great to be one but dreams are far from reality. Every jurisdiction would want to be one and startups have a long way to go to make a deep impact, unlike the US. I asked the honorable Prime Minister of Malaysia, Tun Mahathir at a recent Japanese Malaysia business conference on the reasons Malaysian companies being reduced to a mere subcontractor or sub-supplier in the IT industry. I compared with the likes of Samsung Korea and Huawei of China. His response was that there is a lack of funds and R&D initiative. Who do we blame? The government? Far from it! The private sector in Malaysia is still driven by profits.
For this week’s Firasat, Shareen writes on shareholder activism and the role of board of directors. I believe it is an interesting read as it covers many areas of our concern today. There are some individuals sitting on boards of companies even if they are not qualified. Unfortunately, even in the new Malaysia, there exists “parachute candidates”. Whatever happened to the fit and proper test? I have professionally qualified friends who sits in boards and frowning on the quality of some of their directors. The current board of directors themselves who sit in boards need to put their foot down when candidates are parachuted in their respective boards. Don’t blame anyone when the joint responsibility kicks in involving themselves as well. There is a saying, “Don’t cry over spilt milk”
Finally, I hope everyone managed to spend quality time with your loved ones during the public holiday yesterday. As all Malaysians, I look forward to reign of the new Yang Di Pertuan Agong. Both Tuanku and his consort Permaisuri Agong are such a lovely couple. Tuanku himself is a man of many talents and such a humble personality.
The Malaysian Corporate Dilemma – Do I want to be a board member?
“The irony is that the resolutions relating to the re-election of directors were passed but the resolutions relating to directors’ fees were all not approved. So in short, the message that the board got was that ‘we want you to work but we are not paying you’”, stated FGV Holdings Berhad’s (“FGV”) chairman, Datuk Wira Azhar Abdul Hamid. I am sure all of you would have noticed the FGV remuneration saga in newspapers recently which has sparked discussion and criticism in the corporate sector.
FGV, previously FELDA Global Ventures, is a government-linked company which produces crude palm oil. Other than crude palm oil, FGV also produces rubber plantation products, soybean and canola products and sugar products. FGV’s major shareholders include Federal Land Development (“FELDA”) – 33.6%, Armed Forces Fund Board (“LTAT”) – 1.25%, Koperasi Permodalan Felda Malaysia Bhd (“KPF”) – 5%, Employees Provident Fund (“EPF”) – 2% and several other state governments.
Last month on the 25th, FGV just had their 11th Annual General Meeting (“AGM”) which lasted for five hours. During the AGM, FGV’s major shareholders, namely FELDA, LTAT and KPF had voted against three resolutions pertaining to the directors’ remuneration package. Even though the EPF (which holds 2% of the shares in FGV) did not vote against the three resolutions mentioned above, they had nevertheless raised their concerns on high remuneration package of the directors through a letter to FGV.
So what were the three resolutions that the shareholders have voted against? Under the first resolution, FGV sought its shareholders’ approval for the payment of directors’ fees amounting to RM2.55 million in respect of Financial Year 2018. Next, FGV sought its shareholders’ approval on the payment of a portion of director’ fees to non-executive directors up to an amount of RM1.18 million from 26th June 2019 until the next AGM in 2020. The third resolution involved payment of benefits to non-executive directors from 26th June 2019 until the next AGM.
In the first quarter ended March 31 this year, FGV reported a net loss of RM3.37 million. Further, FGV has suffered a net loss of RM1.08 billion in 2018 compared to a net profit of RM130.928 million in 2017. Perhaps the major shareholders rejected the directors’ remuneration package because the company made a loss. The remuneration package amounted to RM5.74 million for Financial Year 2018. This is evident in LTAT’s statement that they are of the view that directors’ pay should commensurate with the current state of affairs at FGV and its prospects ahead.
The main reason why all this sparked discussion in the corporate sector is because despite voting against resolutions pertaining to the directors’ remuneration, the shareholders had voted in with an overwhelming show of support to retain FGV’s chairman, Datuk Wira Azhar Abdul Hamid and other directors on the board. Datuk Wira Azhar commented that “it’s as though the shareholders still want us to be directors but do not intend to pay us” when interviewed by The Edge Markets.
The decision of the major shareholders who has voted against the remuneration package at the AGM was not short of criticism. Particularly, Lya Rahman, the former general manager of the Minority Shareholders Watch Group (“MSWG”) said in her article that this can invite repercussion which put FGV at the risk of mass resignation of the board and consequently, FGV will have to waste more time and resources to recruit new directors. At the same time, LTAT has defended its decision to vote against the directors’ remuneration package by stating that: “We wish to emphasise that this decision was not taken lightly and was reached following considerable discussion and deliberation. The decision was premised on the fact that LTAT strongly believed in shareholder activism, particularly to protect the interests of our contributors, client members of the armed forces”.
While it is understandable from the perspective of financial performance, it seems unfair to ask the board of directors to continue to serve after their remuneration package is rejected by the shareholders. It is hard to expect people to work without being duly compensated for their efforts and commitments nowadays. To be fair, the board of directors should be allowed some sort of allowances and benefits as a form of appreciation towards their hard work. Reports state that the losses incurred by FGV mentioned in the earlier paragraph were due mainly to impairments of assets acquired by the previous management. As stated by FGV, ‘FGV’s abysmal financial performance in 2018 was the culmination of several years of poor choices and decisions that this board was not responsible for but has been forced to address’. Interesting enough, FGV was not the only company which board had decided to impair for past investments after the recent general elections in Malaysia. I wouldn’t be surprised if a new “MFRS” comes into the picture giving new rulings on impairment . The more the merrier right ?
As Lya Rahman noted in her article, the outcome of FGV’s recent AGM may be too harsh on the directors who are all expected to commit and work hard to provide directions to turnaround the company. She also asked to give the newly appointed board of directors some time to bring about a desired degree of turnaround bearing in mind the atrocious financial situation FGV is in right now. After all, the board of directors had only been appointed for the past 18 months to steer the FGV ship in the right direction.
Nevertheless, what is done is done. It is argued that all this could have been avoided if FGV has had discussions with its shareholders behind closed door and reach an understanding before putting the resolutions on directors’ fees at the AGM. Also, if the major shareholders are unhappy with the performance of the board, they should have voiced out their concerns and made it clear to the board of directors before the AGM. Otherwise, the major shareholders should at least warn the board of directors of their decision before the AGM so that the board could anticipate the shareholders’ decision.
It is all too late now because the FGV’s board of directors is in a bind post-AGM and the only option to remedy the situation is to call for an Extraordinary General Meeting (EGM) to seek a fresh mandate on the directors’ remuneration package. As we all know, calling for an EGM will incur more time ,costs and resources which can be better used to manage the array of challenges on the business front that FGV is facing. This is true as an insider stated that the cost for holding an EGM would be at least half-a-million ringgit. Therefore, it is suggested that companies should have sound shareholder communication especially with major shareholders and institutional investors to avoid aftermath like this.
To sum up, this recent FGV remuneration saga may seem to be a case of shareholder activism and is said to be unprecedented in Malaysia. Lessons to be learnt from this are the continuous engagement between shareholders and management. At the same time, not forgetting is the role of directors in this challenging environment. Board client members are now being sued which may deter good people from sitting in the boards of companies. In addition, the remuneration must be attractive enough to get talented individuals and not by virtue of “connections” to certain parties. Unfortunately, politicians or those close to certain politicians are still appointed to the boards of directors. Where have all the professionals gone to ?
In law, the board of directors is conferred with powers under Companies Act 2016 (“CA 2016”) to manage the business and affairs of the company. Although the board may take actions they deemed that are in the best interest of the company, they are still bound by the law and also the shareholders. Section 213 CA 2016 provides that directors must at all times exercise their powers for a proper purpose and in good faith in the best interest of the company. The directors should also exercise reasonable care, skill and diligence.
Further, Section 213(3) CA 2016 specifically provides that a director who contravenes Section 213 CA 2016 commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding three million ringgit or to both. In other words, if a director breached any of his duty under the law, it attracts personal liability and he could be sued for his breach. For this reason, it is conventional for all directors to be paid a fee and given other allowances for their services to attract talented people to be board members. Otherwise, who would want to be a board client member with the accompanying responsibilities and possible liabilities? And for those wanting to be appointed to boards for the glamour and the perks, just ensure that all these comes with responsibilities. You may lose sleep, think again. It truly is a dilemma.
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