Corporate Governance at SingPost

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Table of Contents

Introduction
Problem Statement (Based on the Case Study)
Discussion of the Problem
Recommendations
Conclusion
References

Introduction

Corporate governance describes how power is exercised within corporate entities. It encompasses the multifaceted relationships between the board of directors, the executive management, shareholders, regulatory authorities, external auditors, and other relevant stakeholders (Larcker & Tayan, 2016). Corporate governance differs from the operational management activities which are undertaken by the executive management team. Instead, it is concerned with the overall direction and control of the organization. A board of directors ensures that the firm is well run – it, therefore, dictates the organization’s direction. The board has an oversight role over the executive management and ensures that the organization is accountable to its stakeholders.

At the heart of corporate governance is a system of policies, rules, practices, and principles that helps the board govern the organization. Poor governance has adverse consequences for strategic goals; causing significant financial losses and damage to reputation. SingPost’s case is a classic example of a breach in corporate governance; it did not adhere to the principles of accountability, transparency, and security. All business operations must be underpinned with sound corporate governance, but SingPost became so focused on business deals that it overlooked the essence of good corporate governance. The ramifications of its lapse in corporate governance have been so severe that SingPost has been compelled to replace part of its board and management. This report offers a detailed analysis of the corporate governance breach at SingPost.

Problem Statement (Based on the Case Study)

SingPost had exclusive rights to deliver letters and parcels until they expired. When the legal protection came to an end, new companies entering the postal market led to increased competition for SingPost. Almost at the same time, a disruptive global trend was taking place with the widespread use of Internet-based services such as emails, which led to lower demand for postal mail. SingPost recognized the urgent need to readjust to the new market conditions to ensure its survival as a modern postal service. It hired a new group CEO, Baier, who developed a transformation strategy to expand its service volume in the region through acquisitions and strategic investment into IT, human resource development, and infrastructure (Lee, 2016). The strategy was to expand its operations through five different areas: logistics, retail, financial services, mail, and digital services to contribute more revenue. The new strategic approach was an instant success with an increase in revenue from S$920 million to S$1.15 billion between 2015 and 2016 (Bernile et al., 2017). SingPost also registered a record net profit of S$248 million in 2016.

The problems started when SingPost acquired a 62.5% stake in Famous Holdings Pte Ltd (FHPL) for S$60 million in 2013; it then established its new acquisition as one of its subsidiaries. Through FHPL, SingPost purchased a 100% stake in FSM Mackenzie Limited (FSM) in 2014 (Teen, 2015). The following year, SingPost acquired 90% of the stake in Famous Pacific Shipping (New Zealand) Limited (FPSNZ). The three companies – FHPL, FSM, and FPSNZ – were represented by a financial advisor Stirling Coleman Capital Limited (SCCL) during the acquisition (Lee, 2016). However, a board director at SingPost, Keith Tay, owned 34.5% of the stake and was also its non-executive Chairman SCCL, which represented the sellers during the acquisition (Teen, 2015). Despite the clear conflict of interest, SingPost did not disclose the information to Singapore Exchange (SGX) during its public announcement about the FSM acquisition in 2014. Instead, SingPost stated that none of the company’s directors had a competing interest in the FSM acquisition.

The executive summary of the special audit report in 2016 stated that Keith Tay was “arguably in breach of section 156 (1) of the Companies Act” for not disclosing his vested interests during the acquisition of Famous Holdings in 2013 early enough (Lee, 2016, p. 2). However, the full report revealed that Tay had informed the board of directors of his involvement in SCCL and had therefore not taken part in the vote (Teen, 2015). The report also revealed that Tay was not involved in managing the SCCL’s operations and did not act on behalf of FHPL or SingPost; he did not exert undue influence on the negotiations.

The report attributed SingPost’s failure to disclose director Keith Tay’s involvement in the FHPL acquisition to an administrative oversight rather than a deliberate attempt to conceal information. Despite the omission in the announcement, the Special Audit report argues that “there is no suggestion that Mr. Tay’s vote influenced or otherwise affected the eventual approval of the acquisitions” (Lee, 2016, p. 3). The Special Auditor’s report concludes that the lapse in corporate governance in the scandal was due to carelessness rather than deliberate fraud.

The major corporate governance issues which arise with SingPost’s scandal include a conflict of interest and the board’s failure to protect against such instances. The fact that Mr. Keith Tay, the lead independent board director at SingPost, is a non-executive Chairman and owns 34% of the SCCL’s shares raises the question of whether a conflict of interest occurred. As a board director at SingPost, he has a significant influence on other board members, even without casting a vote on the issue. Another problem is that SingPost lacks a clear policy framework and procedures for Merger &Acquisition transactions but is reliant on “broad guidelines and the work experience of its members” (Lee, 2016, p. 3). The third issue is the board of directors’ failure to disclose accurate information on its public announcement of the FSM acquisition on the SGX. The board of directors is solely responsible for a company’s announcement and should not blame the errors on other professionals.

Discussion of the Problem

The corporate governance issues at SingPost are a result of a lack of balance among the players in the corporate structure who have vested interests in the running of the organization. For instance, the shareholders are concerned that the breach’s adverse impact on profits and reputation can risk their financial interests. With the appointment of new leadership, SingPost will be hoping to win back the stakeholders’ confidence and trust, which are critical to its long-term survival. The lapses in the corporate governance in SingPost demonstrate the need for a clear framework of corporate governance policies, procedures, and practices and make them part of the organizational culture.

Conflict of Interests

A conflict of interest within the perspective of corporate governance occurs when a top executive or a member of the board has other financial interests that conflict with or compete with those of the corporation. It is considered an undesirable ethical breach because it undermines the credibility of the board and the organization by distorting the decision-making capabilities (Safari, 2017). For this reason, most modern organizations require their board directors to sign a conflict-of-interest policy during the appointment and to declare all possible conflicts of interest in board meetings. The policies offer a roadmap that helps the board members to avoid conflicts of interest.

SingPost lacked a comprehensive conflict of interest policy, which could have averted the scandal. SingPost’s lead independent contractor, Keith Tay, was the non-executive Chairman and owned a 34% stake in the financial advisor that represented the sellers during the acquisition (Lee, 2016). This is a case conflict of interests since the board member’s financial interest directly conflicts with that of SingPost. However, Mr. Tay demonstrated due diligence by disclosing to the board his conflict of interest and abstaining from all voting activities related to the buyout. Even though it had minimal impact on major investment decision-making, the conflict of interest was still a significant breach of corporate governance.

Oversight Issues

Effective corporate governance requires the board to maintain oversight on the organizational practices. The board of directors acts as a check and balance against breaches to ensure that the organization does not violate federal laws (Larcker & Tayan, 2016). SingPost had no policy framework underpinning the evaluation and management of Merger and Acquisition transactions. Instead, it relied on a set of broad organizational guidelines and its personnel’s work experience to conduct its M&A operations – these were not violated during the acquisitions. These pitfalls represent a catastrophic failure in the oversight responsibilities of the board of directors at SingPost. Were such policies in place at SingPost, then it could have avoided the conflict of interest that occurred.

Apart from oversight on M&A transactions, the board also has an oversight role over all the announcements made to the public – it needs to ensure that all information passed is reliable, accurate, and truthful. With the public announcement posted on SingPost Exchange that none of the board members had an interest in the acquisition, SingPost misled the public. In the aftermath of the scandal, SGX pronounced following Section 156 of the Companies Act that “the board of a company is ultimately responsible for the announcements made by the company and must not abdicate its responsibility to any professionals, especially where the matters under consideration are factual in nature” (Teen, 2015, p. 4) As such, the board of directors at SingPost failed in an oversight role to ensure the highest standards of transparency when reporting to the public; this blame cannot be shifted to other entities.

Accountability Issues

Accountability is a crucial element of effective corporate governance. In most nations with strong shareholder rights, such as Singapore, the board of directors must be accountable to the organization’s shareholders. As such, shareholders’ interest to generate a return on investment for the shareholders often take precedence over other interests. Nonetheless, excessive shareholder rights can negatively impact corporate governance, creating conflicts among the stakeholders. Effective corporate governance entails balancing the interest of all stakeholders (Naimah & Hamidah, 2017). However, the excessive shareholder power at SingPost led the board to prioritize the shareholders’ interest at the expense of all other stakeholders.

The board focused on expanding the firm’s revenue base through acquisitions, and it forgot the need to remain accountable to other stakeholders such as regulatory authorities. Accountability to all stakeholders is crucial to effective corporate governance. SingPost must be accountable to its investors and the public – it needed to safeguard Singapore’s image as the nation with the most business-friendly regulation in the world. Accountability at all organizational levels ensures a system of checks and balances to harmonize all stakeholder interests. The lack of accountability results in conflicts that endanger the success of the organization.

Transparency

Transparency within an organization entails accurate reporting of financial and non-financial information and ensuring that such information is made available to all stakeholders who might need them for decision-making. Inaccurate information from a corporation can mislead its stakeholders during decision-making, thus harming its relationship with its stakeholders (Safari, 2017). SingPost did not mention the conflict of interest surrounding its lead independent board director, Keith Tay, in its SGX announcement about the FSM acquisition in 2014. Rather than disclose such vital information, SingPost stated that none of its board members has a conflicting interest during the acquisition. However, the Special Audit attributed the erroneous announcement to carelessness rather than a concerted effort to conceal the conflict of interest in the FSM acquisition (Teen, 2015).

Whether the failure to disclose the information was deliberate or accidental, it was a significant lapse of transparency where the public was presented with false information. Transparency requires that information is shared such that all stakeholders with either direct or indirect interests in the organization get a sense of the performance, goals, and management of the organization. It permits all outsiders and insiders to review the company’s business operations and compare it to other firms, thus fostering trust. The diminishing trust and confidence of SingPost’s shareholders on the board are a result of a lack of transparency.

Ethical Violations

The board of directors has an ethical obligation to make decisions that safeguards the best interests of the stakeholders. However, in proceeding with the acquisition of FSM, despite understanding the conflict of interests surrounding its lead independent board director, the board overlooked the interests of shareholders, regulatory authorities, and the public. The principle of shareholder primacy dictates that the board must recognize the importance of shareholders and pursue their best interests. A conflict of interest exposes SingPost to the risk of reputational damage, expensive fines, lawsuits, and financial losses. As such, the board jeopardized its shareholders’ interest, which violates the principle of shareholder primacy. The board did not disclose the information on the conflict of interest in its public announcement posted on SGX (Lee, 2016). The corporation has an ethical obligation to provide its stakeholders with accurate, timely, and reliable information regarding its business operations, performance, and goals.

Recommendations

The appointment of a new non-independent board chairman is an essential step toward reassuring the stakeholders in the scandal’s aftermath. However, apart from the change in leadership, SingPost also needs a change in its organizational culture. It needs to foster a culture among the board that embraces the highest corporate governance levels to balance all stakeholder interests (Larcker & Tayan, 2016). SingPost needs to develop an organizational culture that emphasizes transparency and accountability.
SingPost needs to develop a comprehensive policy framework on conflict of interest on the board. All the board members should sign a conflict of interest policy during their appointment. All board members should disclose their conflict of interest during board meetings. A conflict of interest policy should also stipulate the organization’s approach to a M$A deal involving a conflict of interest, whether it should be accepted or shunned.
SingPost needs to develop a framework of policies and procedures underpinning its M&A transactions rather than depending on broad and ambiguous internal guidelines. A strong policy framework will ensure that all acquisitions and mergers are conducted following corporate governance principles. It will help prevent the reoccurrence of similar breaches in the future.
SingPost needs to establish a board of directors’ committee, ensuring that all public announcements are double-checked to ensure that the information is accurate and reliable. Singapore Exchange asserts that it is the board of directors’ responsibility to make public announcements; it must not be delegated to the staff at any given time. A communications committee is a vital step forward in preventing erroneous announcements in the future.
SingPost needs to adopt a closer collaboration with regulatory authorities to ensure that its business operations adhere to the highest standards of ethical practice. For now, it appears that SingPost is not fully aware of the regulations in place and how they impact its operations. A closer collaboration with these bodies will help make SingPost more conscious of the local regulatory environment.
SingPost needs to offer training to its board members on corporate governance. Moreover, it also needs to conduct consultation on corporate governance to build its competence and adapt its practices to the basic standards.

Conclusion

The modern business environment is multifaceted, encompassing a wide range of stakeholders with different divergent interests. Even in the boardroom, there are constant struggles of power, interests, and ego, which lead to complex group dynamics. Within these complex group dynamics, board members can remain unaware of subtle conflicts of interest. Effective corporate governance entails balancing all the competing interests within and outside the organization to align them with strategic goals. The lapse of corporate governance exemplifies some of the pitfalls of corporate governance and acts as a lesson to other firms. The actual impact of the breach on its decisions regarding the acquisitions was not pronounced. As a result, SingPost may not suffer damaging lawsuits, class actions, and fines. However, it needs to take serious measures to prevent similar breaches in the future. Some of those measures include changing its organizational culture, developing a policy framework, instituting a communications committee, closer collaboration with authorities, and training its board members.

References

Larcker, D., & Tayan, B. (2016). Corporate governance matters: A closer look at organizational choices and their consequences (2^nd ed.). Pearson Education.

Lee, M. (2016) Disclosure lapses did not affect SingPost’s investment decisions, say special auditors. The Strait Times. Web.

Naimah, Z., & Hamidah, I. (Eds.). (2017). The 17^th annual conference of the Asian Academic Accounting Association on the role of corporate governance in firm performance. SHS Web of Conferences.

Safari, M. (2017). Board and audit committee effectiveness in the post-ASX corporate governance principles and recommendations era.Managerial Finance. Web.

Bernile, G., Joshi, H., & Roa, V. D. (2017). A corporate governance breach at SingPost. Singapore Management University.

Teen, M. Y. (2015) Corporate governance concerns at SingPost. The Business Times. Web.

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