INCEIF

The Global University in Islamic finance

Kuala Lumpur, Malaysia

CIFP IE2001
Ethics and Governance

Case Study : The Sime Darby Financial Fiasco

_________________________________________________________

Semester June 2015

Name: Nasarudin Bin Che Ahmad

Matric No: 1300455

Lecturer: Prof. Dr. Syed Abdul Hamid Aljunid

Abstract
_________
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.

Key terms of the research

1. Sime Darby 2. Corporate Governance 3. Datuk Seri Ahmad Zubir 4. Fiasco

Objectives of the research:

The objective of this case is to allow a discussion of issues such as board composition, the
board's role in oversight, and responsibilities of the board versus management.

Table of content

Page

Question No 1

4-6

Question No 2

Question No 3

Question No 4

9 - 10

Question No 5

11

Question No 6

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DISCUSSION QUESTIONS
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 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 cant accuse the board of being sleepy. There are some heavyweights there, Yet, the
directors have missed the extent of Sime Darbys project 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 in 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
organisation. Board members act as trustees of the organisations assets and ought to exercise due
diligence to ensure well management of the organisation and sound financial system. In order to
maintain stability position in 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 company was affected.
In addition, poor corporate governance was criticised 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 make right decision in good faith of company. For
instance, the board has the responsibility to ensure all the financial information of the company is
accurate and precise. As an independence director, he or she must strengthen the responsibilities
of audit committees, and improves the quality of financial and shareholders 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:

i)

Lack of absence of leadership & strategic orientation.

The practice 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!

ii)

Over concentration of power in the board or management.

Tun Musa was chairman since 2007. The losses were incurred in Simes Engineering Oil
Gas 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 accurately
to the market on quarterly basis; and statement of former Prime Minister, Tun Dr Mahathir
that he was informed of Simes cost overrun and delay three years ago (in 2007) when Tun
Musa became Chairman. If it were true as what highlighted that Tun Musa acted like
executive chairman to involve in/enquire into management matters by reason of his not
getting 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?

iii)

Lack of transparency and unclear 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?
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.

iv)

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
committees team 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!

v)

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, 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.

vi)

Effectiveness 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 website, 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?

Q2.

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

The boards role 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 companys purpose, its
culture, its values and the behaviours it wishes to promote in conducting its business. In particular
it:
i) provides clear direction for management;
ii) demonstrates ethical leadership, displaying and promoting throughout the company
behaviours consistent with the culture and values it has defined for the organisation;
iii) creates a performance culture that drives value creation without exposing the company
to excessive risk of value destruction;
iv) makes wellinformed and highquality decisions based on a clear line of sight into the
business;
v) creates the right framework for helping directors meet their statutory duties under the
Companies Act 1965, and/or other relevant statutory and regulatory regimes;
vi) is accountable, particularly to those that provide the capital for the company; and
vii) 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
boards effectiveness, 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 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.
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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 organisation has systems in place to
monitor and adequately control the organisations material 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 organisation 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 organisation is hiding it. Then the board has a different problem.
Examining further this issue of principles of corporate governance true there was external
probe was likely defined within parameters set by the Board and take directions from the Board.
If the Board were in the front line of Publics focus 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.
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
organise (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.

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:
i)

To appoint directors equipped with related and relevant skills and the knowledge to
perform task-specific duties, such as the evaluation of the firms internal 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.

ii) 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 utility 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, 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.
iii) 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 Boards oversight of the
Divisions operation.
iv) 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.
v) The setting up of a whistle-blower policy so that the staff can facilitate the free flow of
opinions, for the negative or positive.
vi) Remediation actions at the Energy & Utilities which include:
a) Realignment of the organization chart to improve risk management
b) Initiation of operational improvement including project bidding processes, tightening
of control over project costs and strengthening of project management
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vii) To scrutiny the role of organisation play in society to ensure that in the quest for profit, the
organisation does not exploit the environment and respect human right of the citizen in the
society.

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Q5.

What do you understand by the duty of 'skills, care and diligence''? How is it
different from the duty to act in good faith in the interest of the company?

The directors of a company would typically hold some degree of expertise as such a higher
standard of competence is expected of them in managing the affairs of the company. Modern
company legislation applies an objective standard which judges a director's actions in the context
of what a reasonably prudent person would do in comparable circumstances. As such, to act
honestly and in good faith with a view to the best interests of the company and display the care,
diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
These duties are owed to the company itself. But they protect present and future shareholders,
present and future creditors of the company, employees and even the public at large.
The duty of care imposes on directors a duty of competence or skill - i.e., a requirement to act
with a certain level of skill; and a duty of diligence. The duty of skill and diligence must be
performed to a certain "standard of care". A director in discharging the duties of his office must
act honestly and must exercise such degree of both care and skill and diligence as would amount
to the reasonable care which an ordinary man might be expected to take in the circumstances on
his own behalf. Directors must exercise their powers with reasonable skill and care. If a directors
actions fall below the basic standard of care and skill, he or she may be held personally liable for
compensation to the company. At common law, directors will not be liable for errors of
judgement but they will be liable for gross negligence.
The duty to act in good faith of the company requires a director acts honestly and in good faith of
the company. The duty of loyalty is a personal duty and cannot be delegated (the "no-delegation
rule"). Among other implications, it means that a director is not allowed to profit from his or her
office (the "no-profit rule") and must avoid all situations in which his or her duty to the
Corporation conflicts with his or her interests (the "no-conflict rule").
In this case, the Chief Executive Officer and top management of Sime Darby Group may not
have the proper or right attitude. They may conduct unethical practices which contradict the best
practices of corporate governance. The management may also trespass their power and do not
comply with the boards decision. Due to non-compliance with the duties and responsibilities of
boards of directors, troubled conglomerate Sime Darby Berhad filed a lawsuit against former
chief executive officer Datuk Seri Ahmad Zubair and four other key officers over the losses
incurred in three projects. The Sime Darby claimed that, the defendants, inter alia, restitution for
monies wrongfully paid out, damages for losses suffered, profit reduction , aggravated damages
and costs. In its statement of claim, Sime Darby alleged that the accused had been grossly
negligent for allowing Sime Darby Engineering to pursue engineering, procurement,
construction, installation and commissioning (EPCIC) project in which it had no prior
experience. Furthermore, the defendants also accused of awarding EPCIC jobs to similar
inexperienced subcontractors and for failing to pursue claimed for the work not done.

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Q6. Based on the case, what grounds can be used to justify the claim made by Datuk Sri
Zubair that the directors had breached the duty of skills, care and diligence in his
counter suit?
Datuk Sri Zubair filed a counter suit against 22 directors, including Tun Musa Hitam, Tun
Ahmad Sarji Abdul Hamid, Tan Sri Ahmad Tajuddin Ali and Datuk Seri Andrew Sheng. Datuk
Zubair claimed selective prosecution of the defendants for collateral purpose and abuse of
process, without regard of the collective responsibility of the main board in Sime Darby's
losses. In his statement of defence then, Datuk Zubair had explained that Sime Darby's main
board retained control over the management and ultimate decision-making process of the Sime
Darby Group.
There are two grounds can be used to justify the claim made by Datuk Zubair, the directors had
breached the duty of skills, care and diligence:
1)

In the cases mentioned above there was a strong likelihood that some of the independent
directors were not independent in mind and had structural bias towards their colleagues on
the Board especially for those directors who have been working for 28 years. It is also
likely that group think resulted in the selection of directors who were less inclined to be
suspicious of people like them. The majority of the Board of Sime Darby, comprise of
former civil servants or government investment agency appointees. Many members of the
Board moved in similar social, work and political circles and were possibly inclined to
accept the assurances of the CEO or Chairman who came from the same background, that
there was no financial mismanagement in spite of red flags raised by the auditors. It is
difficult for them to demand higher level of accountability when the Chairman or CEO is a
person with strong political connections which raises the issue of power distance. Many of
the Board members in government linked companies are Malays and in Malay culture,
criticisms and challenges against those in authorities or from a higher social hierarchy are
considered rude and causing loss of face is often avoided. Criticisms if any, is only
tendered in mild language and often after showering the powerful person with praises.
Power distance may also inhibit directors from criticising founders of the Board to whom
they may owe their position. Furthermore in-group collectivism results in directors
tendency to sweep matters under the carpet as pursuing controversial issues may
compromise their loyalty to their in-groups. There is a strong tendency to defend in-groups
even in the face of overwhelming evidence that someone in that in-group has committed a
wrong. This is because loyalty is highly valued.

2)

An increase in the number of independent directors under such conditions may result in
greater assertiveness as they would be able to put forward their views as a group.
Nevertheless this will not always ensure independent and vocal boards as half the Board of
Sime Darby comprised independent directors, but this did not prevent its financial losses.
So where is the role of independent directors in Sime Darby? Usually the conflict of
interest happens in this field where the independent directors failed to ensure that the
financial information was accurate and satisfied all the stakeholders in the organization. In
the case of Sime Darby, none of the independent directors in the board had enough business
experience such that they depended more on the advice of Datuk Zubair rather than
overseeing his business decisions. Indeed as an independence director, he or she must
strengthen the responsibilities of audit committees, and improving the quality of financial
and shareholders disclosures.

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