INCEIF

The Global University of Islamic Finance

IE2001
Ethic and Governance
COUSRE ASSIGNMENT
( Case Study: SIME DARBY BEHARD)
INCEIF CIFP PROGRAMME PART II

This assignment paper is a partial fulfillment of Module IE2001 of

Part II of Certified Islamic Finance Professional (CIFP)

Lecturer: Prof. Dr. Syed Abdul Hamid Aljunid Professor

of Corporate Governance and Ethics, INCEIF

Student Name: Abukar Mohamed Jimale

Student ID: 1100389
SEMESTER JUNE 2015
Date of Submission
July 24, 2015
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?

As known the company is properly managed and controlled by the board with
the help of all their stakeholders including shareholders and management team.
The board of directors is a crucial part of the corporate structure. They are the link
between all the stakeholders. Its primary role is to monitor the management of the
company on behalf of shareholders. In fact, the strength and survival of any
corporation depends on a balance of two distinct powers: the power of those who
owns the corporation and the power of those who run it. A corporation depends
on shareholders for capital, but reserves the day to day running of enterprise
for management.

The development of corporate governance has been effected by theories from

a number of disciplines including finance, economics, accounting, law, and
management and organization behavior.
Following are the features of corporate governance:
o It helps to ensure that an adequate and appropriate system of control
operates with in a company
o It also prevents any single individual from wielding too powerful an influence
o It is concerned with the relationship between company management, board
of directors, share holders and other stake holders
o It aims to ensure that the company is managed in the best interest of
shareholders and other stake holders
o It tries to encourage both transparency and accountability

Every person is a vocational and professional and required by honesty and fear of
Allah, and to respect and protect the good work and responsibility to the society.
Therefore board members are required in accordance with the procedures in the
company to effectively fulfill the legal obligations to the company as a member of
the general mandate of protecting and directing the activities and interests of the
company to achieve a common goal. Once this point is to look for the special
interests that have come to the end it comes to lost and depreciation in general,
especially those who were in charge of the company

Also taking into consideration the exercise of board powers vary with types of
ownership, control and board structure meant that there is segregation of role
and responsibility of board members and management (day to day running
executives). This means that every member has its particular or single role or
duties and obligations required to play in good faith and in complaint with the
company law as well as giving a consideration of all stakeholders and
specifically shareholders.

As it come into view, all board members have not taken the responsibility of
failure occurred during the project period except two to three members or
some committees of the board who required exercising their role and
responsibilities independently and reinforces sound regulation and
supervision. This contributes towards maintaining market confidence and
project success, and strengthening transparency and accountability. Its
emphasis is to be value-oriented, develop integral system to promote
fairness and justice and to ensure compliance with the codes of the
company but instead no appreciation of laws of meetings, they did not give
any consideration to their shareholders concern while the remaining board
member also have not been aware of potential ethical and legal issues that
can adversely affect the position of the company as their ethical leadership
board had to gather relevant information and feedback from all levels of the
company and Inclusion of ethics-related criteria in employees' annual
performance reviews and in the evaluation and compensation of
management.

However, as appears there is negligence responsibility side by side. Because

each and every director is fiduciary therefore the board is to take
responsibilities of all operations of the company in playing its role in
integrity and honesty manner to satisfy shareholders as they are capital
providers of the company taking into account the following integral points:

• To provide entrepreneurial leadership of the company by ensuring

adequate resources and appropriate controls and risk management.
• This ought to be part of board charter and ought to be made public.
• Performance of this role is translated through the responsibilities and
functions of the board.

• Effectiveness of boards is measured and evaluated as part of

accountability in governance.

• Effectiveness depends on performance of component entities within the

board

As well as here there are some features of good ethics required from the
board as the factors indicate the success of an ethics program as the
following:

Leadership: that executives and supervisors care about ethics and

values as much as they do about the bottom line.
Consistency between words and actions: that top management
“Practices what it preaches”. This is more important than formal
mechanisms such as hotlines for people to report wrongdoing.
  Fairness: that it operates fairly. To most employees, the most important
ethical issue is how the organization treats them and their co-workers.

Openness: that people talk openly about ethics and values, and that ethics
and values are integrated into business decision-making.

Everyone in the world is a constant responsibility to be accountable to Allah

one day be a Muslim or non Muslim. The hallmark of Islamic business ethics
lies in the high values that underpin the business operations and transactions.
Islam stresses the practice of justice and equality, truthfulness and
transparency, and protection of minorities, accountability and adequate
disclosure, just as it prohibits all forms of exploitation, in all walks of life,
including business dealings: in Islamic law, there is no equivalent of the
maxim ‘buyer beware’ (caveat emptor).

However, according to April & August 2008 events in the case the board
members take no notice the reported issues and they responded by issuing a
statement denying the allegations and are seen to provide weak
oversight, or worse, to be complicit in allowing management greed,
rewarding underperformance and failing to prevent corporate excess and
even cost overruns reported. The impact of ineffective non-executive
directors in the company also resulted such that failure due to many things
which wrongly done by the board such ah their negligence of their roles and
responsibilities firstly, lack of expertise and resource for the required
substantial Transportation and Installation work, making consultancy fees
that wrongly paid and mismanagement of the time as well as lack of
overseeing of all of them.
 2. What are the critical attributes of an effective board? To what extent does
the Sime Darby board possess such attributes?

a. What are the critical attributes of an effective board?

The boards should meet frequently and should monitor executive

management. For a company to be successful it must be well governed. A
well-functioning and effective board of directors is the goodness and
excellence sought by every ambitious company. A company ’ s board is its
heart and as a heart it needs to be healthy, fit and carefully nurtured for the
company to run effectively. Signs of fatigue, lack of energy, lack of interest
and general ill health within the board’s functioning require urgent attention
and care. The free and accurate flow of information in and out of the board is
as essential to the healthy operating of the corporate body as the free and
unhindered flow of blood is to the healthy functioning of the human body.

From the burgeoning academic and practitioner literature on boards of

directors, as well as from the recommendations of the various codes of
practice, we have compiled a lighthearted ‘ recipe ’ for a ‘ good board ’ as
follows:
Formula for a „good board‟

 The board should meet frequently

 The board should maintain a good balance of power
 An individual should not be allowed to dominate board meetings and decision
making
 Members of the board should be open to other members‟ suggestions
 There should be a high level of trust between board members
 Board members should be ethical and have a high level of integrity
 There must be a high level of effective communication between
 members of the board
 The board should be responsible for the Financial statements
 Non-executive directors should (generally) provide an independent viewpoint
 The board should be open to new ideas and strategies
 Board members should not be opposed to change
 The board must possess an in-depth understanding of the company‟s
business
 The board must be dynamic in nature
 The board must understand the inherent risks of the business
 The board must be prepared to take calculated risks: no risk no return
 The board must be aware of stakeholder issues and be prepared to engage
actively with their stakeholders
 As education becomes increasingly important, board members should not
be averse to attending training courses
 Keep on a low heat and stir frequently!

Also there are about seven habits fit for every company board that need to be
considered which related to above formula and as the following in detail:

1. Own the strategy

Most boards convene special strategy meetings and retreats, but typically
they sit through presentations of the executive team's plans. Effective
boards ensure non-executive directors contribute to developing the
strategy, and feel a sense of ownership of the strategy. The more a board
understands and owns the strategy, the more responsive it can be to help
seize opportunities such as major acquisitions when they arise.
2. Build the top team

Boards have a key role to play in selecting, developing, evaluating, and

planning the succession for the executive team. Leading Private Equity firms
view their involvement in building the executive team as a top priority- -and a
clear factor in creating market value. The challenge facing many directors is
how to be effective in this role in the presence of a forceful CEO or
CEO/chairman.
3. Match reward to performance

CEO remuneration is the most controversial issue for most boards: they
want to attract the best talent, and yet the remuneration benchmarks just
keep on rising. Part of the solution lies in ensuring that exceptional pay
requires exceptional performance. Effective remuneration systems
measure what matters--and only what matters. They pay for performance,
with real downside for mediocre results. And they ensure that rewards are
simple, transparent and focused on sustained value creation, balancing
short-term and long-term focus.
4. Ensure financial viability

Sarbanes-Oxley has had its main impact here, focusing on the probity of
financial reporting and the audit process. Yet beyond issues of process and
compliance, boards have a role in taking key financial decisions, such as
ensuring appropriate levels of debt leverage, and scrutinizing major
investments and acquisitions for value. Directors must be able to understand
as well as trust the numbers to provide a challenge where necessary.
5. Match risk with return

Boards typically have formal processes for assessing and managing

operational risk that incorporate commercial, financial and legal
considerations. Yet few boards understand the true risks inherent in their
companies' strategies. This is critical: 70% of acquisitions fail to create
value and 70% of moves into new markets away from the core business
also fail.
 6. Manage corporate reputation

Doing what's right for the board and the company means not succumbing
unduly to outside pressures. If boards are to avoid the trap of "check-box"
compliance and short-term focus, they need to take action to reclaim control
over the agenda, and target those investors who are in for the long term.
Transparency and effective communication are key.
7. Drive effective board process

An effective chairman, who values and upholds the role of the board, is
vital. The chairman sets the tone from the top, ensures a governance model
that works in practice, focuses the agenda on issues of performance, builds
a team of directors with the right mix of skills and experience, and reviews
board effectiveness regularly. A board's ability to add value depends
heavily on how effectively directors can work with the chairman and CEO.

Directors must overcome diverse challenges and constraints if they are to

perform their roles effectively. Some of these challenges are structural; some
arise from wrong-headed external pressures, while others stem from poor
team dynamics or shortcomings in values, capabilities and focus. What's
needed is a robust blueprint against which boards can set their own
aspirations and make progress towards enhanced performance. It will take
as much to restore trust in boards and to ensure that pressures from outside
the boardroom focus on the need to perform rather than conform.

b.To what extent does the Sime Darby board possess such attributes?

The Sime Darby board should possess such attributes in behaving and
fulfilling all the above formula and habits for good board. And on the other find
an experienced team at the beginning of any project and also to have
resources and tools to necessary for such that operations. All these
measures can lead to the board possess such useful features and
attributes.

Therefore, it needs to be borne in mind that inside directors have an

essential role to play in achieving the appropriate balance between outside
and inside directors on boards, which is an essential ingredient for an
effective board, as the inside directors provide valuable information about the
firm’s activities, while outside directors may contribute both expertise and
objectivity in evaluating the managers’ decisions. The corporate board, with
its mix of expertise, independence, and legal power, is a potentially powerful
governance mechanism.
3. Should the board members also be held accountable and not just
Datuk Seri Ahmad Zubir Murshid?

Yes of course, as there is power of any of the board members has to exercise
on behalf of the company and I believe in that the board has misused their
responsibility therefore they should be liable for that of misusing and
breaching their duties because they had to exercise their independence to
support and protect the interest of the company and minority
shareholders through overseeing and regularly monitoring of all project plans
and implementations.

Board Responsibilities include:

 Reviewing and adopting strategic plan

 Reviewing adequacy of internal control systems
 Identifying principal risks and ensuring the implementation of appropriate
systems to manage these risks
 Succession planning and attracting, retaining and rewarding management
 Developing investor relation program and shareholder communications
policy
 Oversee the decisions of management
 Monitor the business conduct of management
 Monitor financial reporting, regulatory compliance and ethical conduct of
management

The above responsibilities are for all the board members and they have not
performed their duties of such as reviewing adequacy of internal control system,
identifying risks, overseeing the decisions of management and monitoring the
business conduct of management and etc. For that reason board members have
neglected some of their responsibilities which enabled all misusing activities and
transactions occurred during the said failed projects and caused huge losses and
financial difficulties faced the Sime Darby Company and its subsidiaries.

There was a separated responsibility of directors in the company. As such the

responsibilities of the nominating and governance committee include:

 Identification of qualified individuals to serve on the board

 Hiring consultants as necessary

 Determine governance standards for the company

 Manage the board evaluation process

 Manage the CEO evaluation process

Therefore, such above directors have also breached their duties because it
was they had to stand between the lines when hiring the necessary
consultants as well as manage the CEO evaluation process.

On the other side of Mr. Murshid, directors have a responsibility to use their
powers in ways that seem best for the company and its shareholders. They
should be accountable to the owners of the company, the shareholders, for
the ways in which they have exercised their powers, and or the
performance of the company.

They have duties to the company. it is right If a person is guilty of a breach of

duty, there should be a process for calling him or her to account. There might
be an established disciplinary procedure, for example, in a court or before a
judicial panel, with a recognized set of punishments for misbehavior.

The director holds a position of trust because he/she makes contracts on

behalf of the company and also controls the company’s property. Since this

is similar being a trustee of the company, a director has fiduciary duties.

However, these are duties to the company, not its shareholders.

If a director were to act in breach of his fiduciary duties, legal action could be
brought against him by the company. In such a situation, ‘the company’ might
be represented by a majority of the board of directors, or a majority of the
shareholders, or a single controlling shareholder.

Presumably, an accusation of breach of fiduciary duty would focus on a

particular action or series of actions by the director concerned. If the court
were to find a director in breach of his fiduciary duties, it might order him to
compensate the company for any loss it has suffered and account to the
company for any personal profit he/he has made from his actions.
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?

As known directors and officers of the company are entrusted with power to
exercise on behalf of the company meant that each member of the board has
its role to play in skill, care and diligence manner. If I were one of them I would
play just my role and perform my duties and responsibilities of work in
compliance with principles of corporate governance.

Suppose I am of executive directors of the company first will do

assessment of the risks in projects and its consequences in consultation and
sharing information with other directors in accordance with company law, then
we would know the degree of risks and benefits available in continuation of
projects. For example, we saw that the project requires a panel of tools and
more I review the budget we have, whether it is sustainable and
profitable for company, we will get better and I just look at the interest of the
company and other stakeholders.

In 2005 the management of the company has decided to make an

advertisement for QP project but the basic question is this decision fit for or fair to
the company? …..The answer is no. It was very better that such decision
happened in director‟s meeting for approval of shareholders, directors and
management team. The board also seems that there is no place to stay because
when this is necessary to take a role in order to get cooperation.

In case of difficulties in operations of the projects, a special committee to

re-assess and monitor will be created for additional duty of care, skill and
diligence. A daily report should be developed and share to company to
determine progress or take corrective action in case of deviation.
All of the above are proper measurement for 2005 events including whether
to buy or build vessels and other equipment necessary for the projects to
utilize time or to completely stop.

In case of some corporate governance issues or ethical problems arisen from

directors power exercising three key tests of whether a director or officer is in
breach of his/her fiduciary duties in carrying out a particular transaction or
series of transactions:

o The transaction should be reasonably incidental to the business of the

company. If it is not related to the business of the company in any way, it
would be a breach of fiduciary duty. For example, the CEO of a building
construction company might decide to trade in diamonds and lose large
amounts of money in these diamond trading transactions.
o The transaction carried out should have been ‘bona fide‟, which means in
good faith, with honesty and sincerity. If it is not, it would be a breach of fiduciary
duty.
o The transaction should also have been made for the benefit of the company,
and not for the personal benefit of the director. A director has a fiduciary duty to
avoid a conflict of interest between himself personally and the company, and
must not obtain any personal benefit or profit from a transaction without
the consent of the company.

In other words, it would be a breach of fiduciary duty for a director to make a

secret profit from a transaction by the company in which he/she has a
personal interest.

Suppose, for example, that a company wishes to buy some land and has
identified a property for which it would be prepared to pay a large sum of
money. The CEO of the is company might secretly set up a private

company of his own to buy the property, and then sell this on to the
company of which he/she is CEO, making a large profit in the process. The
actions of the CEO would be a breach of fiduciary duty, because his/her
actions would not have been bona fide, and he/she would have made a secret
profit at the expense of the company.

I also do best plying my role as non-executive director as following:

• To bring independent judgment to bear on the issues of performance and

conformance
• To oversee those activities by giving space for CEO to operate and to
intervene when necessary
• Review and appraise CEO’s performance

• Caution–independence vs exercise of independence.

Other duties that are in my mind include:

 Duty to act in a lawful manner
 Duty of disclosure to communicate honestly with shareholders
 Duty to inquire/monitor to ensure adequately receive and report
corporate information
5. 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?
 Duty to Exercise Care, Skill and Diligence

There is an objective test for whether a director has met the standards of care
and skill expected under the law. A director is expected to exercise a degree
of care that is reasonable to expect from a director. Again, this area of the law
is one where a combination of common law and statutory duties applies.

The statutory duty of care and diligence provides that a director of a

company must exercise their powers and discharge their duties with the
degree of care and diligence that a reasonable person would exercise if they:
1. Were a director of a company in the company's circumstances and
2. Occupied the office held by, and had the same responsibilities within the
company as, the director in question.

A director’s performance is to be judged objectively, due consideration must be

given to the position that the director holds in the company, and the company’s
particular circumstances.

The common law has also laid down a standard set of duties expected of
directors, which includes the duty to act with reasonable care and diligence.
So, in determining whether a director has breached the statutory standard of
care and diligence, the court will have regard to the company's
circumstances, and the director's position and responsibilities within the
company.
The duty of directors depends upon the size of the company and whether
they are full-time senior managers or non-executive directors. While it is not
always possible for directors of a large public company to have a hands-on
approach to all the affairs of the company, they should have a good general
understanding of the business of the company. In addition, directors should
be aware that the developing complexities of modern commercial life have
intensified what the community expects of them.

Non-executive directors are distinguished from executive directors in that

they are not bound to give continuous attention to the affairs of a
corporation, but rather, their duties are more of an intermittent nature to be
performed at periodic board meetings and at meetings of any committee of
the board they sit on.

The Corporations Act does not expressly set any required degree of skill and
therefore the court decisions will determine this on a case by case basis. The
word "diligence" imports application of skill where required, but says nothing
as to the degree of skill required. Therefore, to understand the meaning of the
statutory duty it is necessary to refer to the standards embodied in case law.

It has been held that the responsibilities of directors require that they take
reasonable steps to place themselves in a position to guide and monitor the
management of the company. The case law suggests that:

1. A director should acquire at least a working understanding of the

business and finances of the corporation, accordingly, a director
should become familiar with the fundamental operations in which the
corporation is engaged
 2. Directors are under a continuing obligation to keep informed about the
activities of the corporation

3. Directorial management does not require a detailed inspection of day-

to-day activities, but rather a general monitoring of corporate affairs and
policies, accordingly, a director should attend board meetings regularly
and

4. Whilst directors are not required to audit corporate books, they should
maintain familiarity with the financial status of the corporation by a regular
review of relevant financial statements.

A director may be appointed to a company because of their special

expertise in an area of the company's business, in which case, whether or not
the director has breached their duties of care and diligence will be tested by
reference to the knowledge and expertise possessed by persons with that
same skill and expertise. Thus, if any director does possess special skills
they will be expected to perform at that higher level in relation to the affairs of
the company relevant to those skills, whilst still giving attention to the other
affairs of the company that could reasonably be expected of any other
director.

The following are examples of a director breaching their duty to exercise

reasonable care and diligence:

1. Convening a meeting of shareholders where the notice convening the

meeting contains misleading and incorrect statements
2. Continuing to trade even when advised of insolvency
3. Taking high risks without attempting to assess the benefits which might be
obtained in return for the risk
4. Failing to monitor and supervise the company's accountants
 5. Failing to ensure that the company made loans in accordance with its
authorized practices
6. Signing cheques carelessly without ensuring that the cheques were
properly payable to the named payee and otherwise drawn and
presented in accordance with the company's authorized business
practices
7. Failing to ensure that the company had a proper system of controls and
audit to avoid any defalcation by officers and employees and
8. Signing an insurance policy which had been completed by another
person and which the director does not read.

 Duty to Act in Good Faith in the Best Interests of the

Corporation

The Corporations Act provides that a director of a corporation must

exercise their powers and discharge their duties in good faith in the best
interests of the corporation and for a proper purpose.

This duty is both a statutory and common law duty and is a civil penalty
provision. It is clear that a company director is required to act honestly in
dealings with the shareholders and to ensure that the shareholders are not
misled. When shareholders are approached for approval, they must
receive all the information necessary to enable them to make a fully
informed decision.

Although honesty is necessary it is not enough. The standard formulation of their

duty is that directors must act "bona fide in what they consider not what the court

may consider – is in the best interests of the company".

However, many cases have held that directors may breach their duty even if
they are acting in what they genuinely consider to be an honest manner,
because they have failed to give proper consideration to the interests of the
company (including making a decision which no reasonable board could
consider to be within those interests). Situations of this kind tend to arise
when circumstances induce directors to believe that the company‟s interests
correspond with their own interests or with the interests of some other person.
In these circumstances, directors then act without considering the company's
interests as a separate entity.

In contrast to directors’ onerous duties of good faith and loyalty, the

Common law historically expected very little of directors in terms of the

standard of care and skill. Some authors argue that the common law gave
directors the freedom to manage companies incompetently.
6. 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?

The claim made by Datuk Sri Zubair, the board’s chairman of Sime-Darby
Compans dated the 23rd December 2010 was based on an accusation against
four directors including: Dato’ Seri Ahmad Zubair @ Ahmad Zubi bin Haji Murshid,
Dato’ Mohamad Shukri bin Baharom, Abdul Rahim bin Ismail, Abdul Kadir Alias
and Mohd. Zaki bin Othman (together, “Defendants”) in connection with the Qatar
Petroleum Project (“QP Project”), the Maersk Oil Qatar Project (“MOQ Project”)
and the project relating to the construction of marine vessels known as the “Marine
Project”

This filed suit was about seeking damages and reliefs totaling at least
RM340mil over three loss-making energy projects.

Fiduciary duties required from the above four directors to exercise were
• Each and every director is a fiduciary
• Relationship of trust between directors and company as a whole
• Act in good faith
• Within powers
• For a proper purpose
• In the interest of the company
• And therefore avoid or prevent conflict of interest

The classic statement of justification is that directors owe to shareholders, or

perhaps to the corporation, two basic fiduciary duties:
 The duty of loyalty
 The duty of care.
There are at least two additional core duties that directors have today:
 The duty of disclosure
 The duty of extra care

1. Duty of Loyalty

The most important fiduciary duty is the duty of loyalty. The decision
makers within the company should act in the interests of the company, and
not in their own interests. The easiest way to comply with this duty is not to
engage in transactions that involve a conflict of interest. We often call these
"self-dealing" transactions. The concept is that the directors are dealing with
them, and may not reach an agreement that is fair to the company.
2. Duty of Care

The second core duty of directors, in situations where they do not have a
conflict of interest, is the duty of care -- the duty to pay attention and to try to
make good decisions.
3. The Duty of Disclosure

The third core fiduciary duty of directors, which has been required for public
companies for a long time, is to provide reasonably complete disclosure to
shareholders in two cases: when shareholders are asked to vote, and when
the company completes a conflict-of- interest transaction.

When the disclosure involves a conflict-of-interest transaction, without a

shareholder vote, there is no obvious remedy. Once a shareholder learns the
true facts, he can bring a duty of loyalty lawsuit directly, and recover damages
or not. The violation of the duty of disclosure, although it made it harder for
shareholders to uncover the true facts and bring the duty of loyalty claim, is
not directly relevant once the claim is brought. Perhaps one could hold the
directors liable if there was a gross failure to put into
place procedures intended to ensure good disclosure. Or perhaps, if there is
not proper disclosure, the directors should retain the burden of showing that
the transaction was entirely fair.

In short, the above four directors breached their duty to exercise

reasonable care and diligence as following:

1. They are experience in management and their leadership activities

contain misleading and incorrect statements or they have not or
violated application of their duty of disclosure.
2. Continuing of their transactions even when reported losses in 2005 and
2008.
3. Taking high risks without attempting to assess the benefits which might
be obtained in return for the risk of above said projects and
4. Paying wrongly consultancy service fees in violation of their duty of care
and diligence