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Certified Mediator Non Executive Director OpenSys(M) Bhd sweeseng@tm.net.my www.leesweeseng.com copyright
Studies have shown that a majority of those corporate failures were traceable to the predominance of one individual or several working in concert in the board. Invariably fraudulent practices were found. Failure of checks and balances mechanism.
Directors - Issues of compliance & profitability Directors - Issues of conformance & performance Shareholders - Questions at AGM & EGM on companys performance Shareholders Nomination of independent directors? External auditors
HIH - deficiency of the group was estimated to be between A$3.6 billion and A$5.3 billion
(Royal Commission Enquiry)
Enron - At the conclusion of the claims reconciliation process, the allowable claims against the company are expected to be approximately $63 billion, and the cash and equity assets available for ultimate distribution are expected to be around $12 billion
(Enron's acting CEO and chief restructuring officer)
Tyco - The company had lost more than $9 billion in 2002, and was facing a staggering $11 billion of debt maturing in calendar year 2003
(Tyco Annual Report 2003)
WorldCom - WorldCom Inc. said it discovered another $3.3 billion in accounting irregularities on top of the $3.8 billion it announced in June 2002 (http://money.cnn.com/2002/08/08/news/worldcom/) Perwaja Steel Losses and debts totaling RM10 billion (National Audit Department)
Enrons Values
In their 1998 Annual Report, their values are spelt out as: Communication We have an obligation to communicate. Here, we take the time to talk with one another and to listen. We believe that information is meant to move and that information moves people. Respect We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment.
Enrons Values
Integrity We work with customers and prospects openly, honestly and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we wont do it. Excellence We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be.
Parmalat
Italian dairy-foods giant Parmalat has prosecutors scrambling to find out what happened to $8.5 billion to $12 billion in vanished assets. Some 38% of Parmalat's assets were supposedly held in a $4.9 billion Bank of America (BAC) account of a Parmalat subsidiary in the Cayman Islands.
Business Week
Parmalat
But Bank of America reported that no such account existed. In the ensuing investigation, Italian prosecutors say they've discovered that managers simply invented assets to offset as much as $16.2 billion in liabilities and falsified accounts over a 15-year period, forcing the $9.2 billion company into bankruptcy on 27 Dec 2003.
Business Week
Parmalat lacked board independence. At the time of the last public filings, the board comprised nine insiders, one affiliated outsider, and just three independent directors. The company was familyowned and went public in 1990. Its structure is fairly typical of the Italian market as a whole.
Institutional Shareholder Services
Enriched themselves through salary, bonuses, grants of stocks and stock options, other profits. Skilling received approximately US$200 million from sale of Enron stock options, netting over US$89 million in profit and was paid more than US$14 million in salary and bonuses.
http://news.findlaw.com/hdocs/docs/enron/usvlay70704ind.pdf
Lay received US$300 million from sale of Enron stock options, netting over US$217 million profit and paid more than US$19 million in salary and bonuses Causey received more than US$14 million from sale of Enron stock and options, netting over US$5 million profit and paid more than US$4 million in salary and bonuses.
http://news.findlaw.com/hdocs/docs/enron/usvlay70704ind.pdf
Amongst other things: Compensation amounting to millions paid to executive officers, loans extended to executive officers which were later forgiven, related party transactions, certain executives utilizing Tyco's corporate resources to fund personal ventures and property acquisitions, to increase their own personal wealth.
http://news.findlaw.com/hdocs/docs/tyco/nykozlowski91202ind.pdf
(CEO),
The first trial of Kozlowski and Swartz, who are accused of looting the company of $600 million, ended in a mis-trial in April 2004. Prosecutors retrying the men say they'd like to begin proceedings in September 2004
http://www.forbes.com
Factors of collapse included poor management, trading while insolvent and other breaches of the Australian Corporations Act 2001. Directors paid themselves large bonuses while the company was insolvent.
http://www.lawbookco.com.au/academic/CorporateMisconductezine/pdf/Gerald%20Minimizing%20Corporate%20Collapses.pdf
It is futile to attempt to offer a prescription for all companies The governance of corporate entities comprehends the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It includes the practices by which that exercise and control of authority is in fact effected.
4 Areas of Transparency
Directors remuneration and severance package Related party transaction Corporate Governance Statement Corporate Fraud system of checks and balances, timely disclosure
Section 137 (5)(d) Compensation for loss of office shall not include any bona fide payment by way of pension or lump sum payment in respect of past services where the value or amount does not exceed the total emoluments of the director in the 3 years immediately preceding his retirement or death.
Civil Consequences
In an announcement made to Bursa Malaysia on 22 Oct 2002, a company claims on the payments made to 3 defendants, who were past Directors of the company, amounting to approx RM55m, the majority sum on this claim was based on compensation for loss/termination of office amounting to approx RM24m which were not approved by the Board of Directors or the shareholders.
Civil Consequences
In the same announcement, the company claims on the return of two motor vehicles which were disposed to the 1st and 2nd Defendants at a substantially less than the true market value and without the approval of the shareholders.
Criminal Consequences
Directors duty upon discovery of fraud:
In another announcement on 12.9.2002 a police report was lodged on fictitious invoices to the value of RM259,315,572.96. The police report was made pursuant to a decision of a Special Board of Directors meeting.
7.25: Fees payable to non-executive directors shall be by a fixed sum, and not by a commission on or percentage of profits or turnover. Salaries payable to executive directors may not include a commission on or percentage of turnover.
7.26: Fees payable to directors shall not be increased except pursuant to a resolution passed at a general meeting, where notice of the proposed increase has been given in the notice convening the meeting.
7.27 A director shall not vote in regard to any contract or proposed contract or arrangement in which he has, directly or indirectly, an interest.
132D
Dealings by officers in securities Prohibition on abuse of information obtained in official capacity Approval of company required for disposal by directors of companys undertaking or property Approval of company required for issue of shares by directors
132E
Substantial property transactions involving directors 132F Exception and definition 132G Prohibited transaction involving shareholders and directors Division 3A, Part IV Substantial Shareholding
Transparency - Disclosure
PART G LR - Continuing Listing Obligations 5.11 Disclosure obligations (1) An issuer must furnish to the Exchange for public release, its unaudited/ audited financial statements covering the profit and loss position and the balance sheet position on a consolidated basis within 3 months after the close of the half year, or such period as may be approved by the Exchange, which statements shall state whether there is any abnormal circumstance that has affected or will affect the business and financial position of the issuer.
Transparency - Disclosure
8.11 Standard disclosure for circulars (1) A listed issuer must ensure that any circular issued to the securities holders of the listed issuer:(a) is factual, clear, unambiguous, accurate, succinct and contains all such information as securities holders and their professional advisers would reasonably require and reasonably expect to find in a circular of that nature, for the purpose of making an informed decision;
Transparency - Disclosure
8.11 Standard disclosure for circulars (b) is not false, misleading and/or deceptive; (c) is balanced and fair (d) avoids over-technical language, and is expressed to the extent possible in language comprehensible to the layman; and (e) explains, if the consequences or effects of the information on the listed issuers future prospects cannot be assessed, why this is so.
Transparency - Disclosure
LR: Chapter 9 Continuing Disclosure 9.01 (2) The disclosure requirements consist of the following:(a) Corporate Disclosure Policy of the Exchange (Parts B to H); (b) Preparation of announcements (Part I); (c) Immediate disclosure requirements (Part J); (d) Periodic disclosure requirements (Part K); and (e) Disclosure requirements for specific listed issuers (Part L).
Transparency - Disclosure
(3) Continuing disclosure is the timely and accurate disclosure of all material information by a listed issuer to the public. (4) Continuing disclosure ensures a credible and responsible market in which participants conduct themselves with the highest standards of due diligence and investors have access to timely and accurate information to facilitate the evaluation of securities.
Despite having conducted corporate training sessions covering areas like the Companies Act, 1965, and corporate governance for more than 101,000 directors of private firms since 2001, companies continue to blatantly flout the law, with over half of them failing to submit their annual returns last year.
The Star, Tuesday July 13, 2004
During the first five months this year, the 1,106 cases filed by the CCM against firms for various companies act violations already exceeded the 951 cases filed for the whole of 2003. Approximately 57,000 offences yield the CCM some RM10mil in fines every year.
The Star, Tuesday July 13, 2004
Intensive monitoring and surveillance of PN4 companies by the SC have revealed a variety of breaches and mismanagement by the directors and senior officers of these companies. Over the past 2 years, the SC has examined the books of 31 PN4 companies.
Source Securities Commission
Offences uncovered from these investigations include insider trading and market manipulation as well as corporate governance transgressions such as purchasing assets at inflated prices or selling assets at deflated values, submission of false/misleading information, schemes to defraud and misutilisation of proceeds of capital raising exercises.
Source Securities Commission
Access to cheaper sources of funds Encourage investment Promote sustainable productivity and growth Create opportunities to strengthen a company's internal processes and thereby enhancing business
78% Yes 78% Yes 76% Yes 76% Yes 73% Yes
Avoidance of certain companies Decrease/increase of holdings in certain companies Avoidance of certain countries Decrease/increase of holdings in certain countries
Conclusion
The key to good corporate governance lies in substance, not form. It is about the way the directors : create and develop a model to fit the circumstances of that company and then test it periodically for its practical effectiveness. take control of a regime they have established and for which they are responsible.
The Hon Justice Owen Royal Commissioner in HIH Enquiry
Conclusion
One thing is clear, though. Whatever the model, the public must know about it and about how it is operating in practice. Disclosure should be a central feature of any corporate governance regime. Shareholders, potential shareholders and the wider public are entitled to real, meaningful detail about the way the directors say they are carrying out their stewardship role.
The Hon Justice Owen Royal Commissioner in HIH Enquiry