Singapore Post Limited’s Corporate Governance

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Table of Contents

Executive Summary
Introduction
Problem Statement
Discussion
Recommendations
Conclusion
References

Executive Summary

This case study highlights a corporate governance saga at Singapore Post Limited (SignPost), which is Singapore’s designated Public Postal Licensee. The events started unfolding in December 2015 when SignPost publicly admitted that on July 18, 2014, in its announcement to Singapore Exchange (SGX), it had failed to disclose that Keith Tay, its lead independent director, had vested interests in the acquisition of Famous Holdings in 2013. Tay held a 34.5 per cent stake in Stirling Coleman Capital Limited (SCCL), which was the financial advisor of three companies, Famous Holdings Pte Ltd (FHPL), F.S. Mackenzie Limited (FSM), and Famous Pacific Shipping (New Zealand) Limited (FPSNZ) during their acquisition by Signpost. However, SignPost did not disclose this information to shareholders and other relevant stakeholders in what it termed as an “administrative oversight”. In its announcement, SignPost however noted that Tay did not take part in any voting by the board on matters relating to the acquisitions. After these revelations, a public outcry ensued and the company initiated a special audit to determine the conflict of interest that surrounded the said buyouts. Regulators and shareholders were concerned with the results of the special audit report. The Monetary Authority of Singapore (MAS) promised to take action against SignPost if it flouted any legislation under its purview. The Singapore Stock Exchange (SGX) indicated that it was going through the audit report to establish whether disciplinary actions were needed for any breaches by SignPost’s board members. In general, this case allows learners and other interested parties to understand the importance of corporate governance in an organization, especially the role of the board of directors in making managerial decisions.

Introduction

Corporate governance as a system of best practices offers stringent guidelines on how a board of directors should manage and oversee an organization’s operations. The guiding principles of corporate governance include transparency and accountability among other related attributes to ensure that a company is run in a way that protects shareholders’ investments. Therefore, the board is expected to be transparent to shareholders in its decisions and accountable for its actions. In the absence of good corporate governance practices, the board of directors is likely to make unsound business decisions leading to loss making or the collapse of otherwise healthy organizations.

Poor corporate governance could also lead to a financial crisis. According to Haat et al. (2008), the 1997 Asian financial crisis was primarily caused by a lack of sound corporate governance among organizations in the region. Additionally, scandals surrounding Enron, WorldCom, Xerox, and Parmalat among others are mainly attributed to poor corporate governance practices. The foregoing arguments underscore the importance of studying corporate governance issues surrounding the SignPost. The organization’s board of directors deliberately failed to disclose important information to the public concerning the acquisition of three firms. This paper discusses the corporate governance issues associated with the acquisition of FHPL, FSM, and FPSNZ by Signpost starting from 2013 including recommendations of actions that the organization could undertake to repair the broken shareholders’ trust.

Problem Statement

Corporate governance demands the board of directors in any organization to observe the principles of transparency and accountability. However, when SignPost acquired FHPL in 2013, and later, through FHPL, acquired FSM and FPSNZ, the board of directors violated the principle of transparency. The board failed to disclose that Keith Tay, the lead independent director at SignPost, held a 34.5 per cent stake at SCCL – the company that had been contracted as the financial advisor by the sellers during the acquisition process. Such vested interests should have been declared and announced publicly to the shareholders and any other related authorities, such as SGX and MAS. Instead, the board made an outright lie by stating, on the SGX website in 2014, that none of its directors had any interests in the acquisition.

The second problem – that of accountability, arises from the first one. In 2015 when the board of directors finally decided to admit the failure to disclose Tay’s interests in SCCL, it blamed the omission on an “administrative oversight” instead of taking full responsibility by being accountable for its actions. Media reports would later implicate the board by revealing that the company’s external lawyers, Roydk & Davidson, had clearly informed the board about the alleged oversight. However, the board refused to act on this information and thus kept it a secret until 2015.

Discussion

The Transparency Problem

The main corporate governance issue surrounding SignPost’s case is the lack of transparency in its acquisition of FHPL, FSM, and FESNZ. According to Fung (2014), transparency and disclosure (T&D) “are essential elements of a robust corporate governance framework as they provide the base for informed decision making by shareholders, stakeholders and potential investors in relation to capital allocation, corporate transactions, and financial performance monitoring” (p. 72). Transparency is central to any sound corporate governance practices, which explains why many rules and regulations have been put in place to ensure timely and accurate disclosure of all relevant information to the affected stakeholders. Corporate governance should lead the way in setting standards of corporate ethics that should be followed to reduce or eliminate unscrupulous corporate practices to ensure a fair business environment.

I believe that SignPost’s board of directors deliberately decided not to disclose information concerning Tay’s stakes at SCCL. This assertion holds because according to the information provides, “Media reports highlighted that SignPost allegedly decided not to act to correct the omission on the advice of their external lawyers, Rodyk & Davidson, who later stated that their advice would have been different if they had read the incorrect announcement” (Bernile et al., 2017, p. 6). Additionally, the board admitted that Tay did not take part in any form of voting regarding the acquisitions in question. This admission points to the fact that the board knew about Tay’s interests at SCCL, but failed to act appropriately. Therefore, it suffices to argue that on contrary to the board’s claim, the omission was not an “administrative oversight” but a deliberate violation of sound corporate governance practices.

However, it could be argued that the failure to disclose Tay’s stakes at SCCL was inconsequential because it did not influence or affect the ultimate approval of the acquisitions according to the findings of the special auditor’s report. Critics would claim that the issue was exaggerated through clever media reporting and vocal activist shareholders without in-depth knowledge on how boards work. Nevertheless, this argument would be erroneous in many ways. First, the problem of lack of transparency thus the failure to disclose important information on clear conflict of interest during the acquisition sets the wrong precedence for the management of SignPost. According to the Harvard Law School Forum on Corporate Governance (2016), as part of core guiding principles of corporate governance, the board of directors approves corporate strategies “that are intended to build sustainable long-term value; oversees the CEO and senior management in operating the company’s business, including allocating capital for long-term growth and assessing and managing risks; and sets the “tone at the top” for ethical conduct” (para. 11). The main problem with the SignPost board’s decision lies in setting the wrong ethical conduct at the top of the organization’s management.

The future of the organization’s ethical conduct rests on the precedence set at the top by the current board of directors. Therefore, the poor corporate governance practice of not observing transparency when dealing with shareholders concerning the acquisition of the said firms was wrong. As Fung (2014) argues, the concept of transparency is changing drastically in contemporary times, especially in the wake of the many corporate governance scandals. As such, boards are being tasked with greater responsibilities of being proactive and make all the necessary disclosures to the concerned stakeholders instead of being reactive. SignPost’s board was simply being reactive after the resignation of the CEO, Wolfgang Baier on December 10, 2015. This approach to corporate governance is wrong because it could have far-reaching repercussions in the future. While the decision not to disclose Tay’s information to shareholders did not have any immediate impact on the approval of the acquisitions in question, such a practice should not be encouraged. To understand the graveness of such corporate governance practice, the widely studied case of Enron could offer important insights.

Enron Corporation was one of the biggest companies in the US’s energy sector with a stellar market performance for many years. However, in one of the biggest corporate scandals of the 21st century, the company collapsed in 2001 after filing for bankruptcy on December 2 with the revelation of widespread financial malpractices hidden in its poor corporate governance. The management exploited accounting loopholes and concealed their crimes through poor financial reporting to hide the fact that the company had debts running into billions of dollars. The case of Enron is relevant in understanding SignPost’s case, specifically because the two are joined by failure to report a conflict of interest. According to Dibra (2016), “in 1999, Enron’s board waived conflict of interest rules to allow chief financial officer, Andrew Fastow, to create private partnerships to do business with the firm” (p. 285). This decision, which was clearly in violation of corporate governance best practices, would allow the company to conceal its debts and liabilities leading to its collapse. The issue of conflict of interest takes the centre stage in these two cases.

On the one hand, Enron’s board of directors decided to interfere with rules governing conflict of interest and made it public and legal. However, this one decision led to the collapse of one of the biggest companies in the US. Ultimately, corporate governance failed with the board failing to protect the shareholders’ interests as part of its primary mandate. On the other hand, the board at SignPost decided to flout conflict of interest rules by allowing SCCL to represent the sellers in the acquisition process. However, while the Enron board was transparent to indicate that it had waived conflict of interest rules, the SignPost’s board acted in secrecy and in clear violation of the corporate governance principle of transparency. Either way, lack of transparency in the two cases led to adverse outcomes. Enron collapsed and shareholders lost billions of dollars in investment. On the part of SignPost, there was widespread public outcry and shareholders lost confidence and trust in the organization.

Therefore, the problem with the SignPost board’s lack of transparency is not pegged on the outcome of the acquisitions in question, but on the long-term implications of such corporate governance practices. Nobody knows what could have happened if Wolfgang Baier had not resigned. Perhaps, lack of transparency and failure to disclose important information could have become part of the organization’s corporate culture. The outcome of such as culture is clear – the organization would ultimately collapse due to poor corporate governance. Shareholders would lose their investments with SignPost becoming another case of failed corporate governance in modern times.

Lack of Accountability

The board of directors is accountable to shareholders as part of sound corporate governance. As Fung (2014) posits, “Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information” (p. 73). In the case of SignPost, the disclosure that Tay was a significant shareholder in SCCL was not timely. While the initial acquisition was done in 2013, the disclosure was made in 2015. Shareholders could do little with this information concerning their investment decisions in the organization. Additionally, even after admitting that it had made a mistake, the board did not take full responsibility for its actions. On the contrary, it issued a statement saying that such an important decision was an “administrative oversight”, instead of admitting wrongdoing as part of being accountable to shareholders.

The Special Audit Report on this incident highlighted several aspects that I believe sought to clear the board of any wrongdoing. Among others is the claim that SignPost was not required to disclose Tay’s involvement with SCCL under the SGX Listing Manual. However, the board had clearly stated that none of its directors had interests in the acquisition of FHPL, but it attributed this to an error. The claim of an error as echoed by the board when it termed the same an “administrative oversight” is a veiled attempt to pacify the lack of accountability. Media reports later claimed that the board was warned about the omission by its external lawyers but it chose not to disclose the information. Therefore, it suffices to argue that the board did not make an error – it violated the core principle of accountability in corporate governance.

Recommendations

The most outstanding repercussion of the SignPost board’s lack of transparency and accountability is that shareholders lost trust in the organization. Therefore, the board should take specific steps to win back the lost trust and ensure that shareholders continue supporting the organization through investments. The board should do the following:

The first step is to appoint a reputable chairperson with a track record of integrity. This goal was achieved with the appointment of Simon Israel as the organization’s non-independent chairman effective May 11, 2016. As an awardee of a Public Service Medal and a director of reputable companies, Israel was the most suitable person to rebuild shareholders’ trust.
Establish a strong ethical culture at the top of the organization. The board, together with the CEO in consultation with the relevant stakeholders, should create a culture of legal compliance coupled with integrity. This culture should be communicated and implemented at all levels of management.
An effective compliance program should be put in place to support the quest for legal compliance and ethical standards. This program should be detailed enough to state how the board and management should conduct their affairs. Shareholders should never be misinformed, hence the need for robust communication channels and protocols to ensure timely and full disclosures of information.

Conclusion

The SignPost case sheds light on the challenges facing corporate governance in contemporary times. The failure by the board of directors to deliberately withhold important information on conflict of interest surrounding the acquisition of Famous in 2013 is an indication of poor corporate governance practices. The board violated two core principles of corporate governance – transparency and accountability. The shareholders were supposed to be informed about Tay’s interests in SCCL to make informed decisions. Additionally, the claim that the board made an “administrative oversight” is wrong because the available evidence shows that the board was warned about the same by its external lawyers. Therefore, on top of lacking transparency, the board lacked the needed accountability to shareholders as the owners of the organization. While Tay’s involvement with SCCL did not affect the decision to approve the acquisition, the tendency to conceal information creates poor organizational culture defined by secrecy, which could easily lead to malpractices as shown in Enron’s case. The board made the right decision to appoint Israel as the group’s chairman as it would restore shareholders’ trust. However, more is needed, especially the establishment of an effective compliance program to ensure transparency and accountability.

References

Bernile, G., Joshi, H., & Rao, V. (2017). A corporate governance breach at signpost. Singapore Management University. 1-17.

Dibra, R. (2016). Corporate governance failure: The case of Enron and Parmalat. European Scientific Journal, 12(16), 283-290.

Fung, B. (2014). The demand and need for transparency and disclosure in corporate governance. Universal Journal of Management, 2(2), 72-80.

Haat, M. H. C., Rahman, R. A., & Mahenthiran, S. (2008). Corporate governance, transparency and performance of Malaysian companies. Scholarship and Professional Work. 1-35.

Harvard Law School Forum on Corporate Governance. (2016). Principles of corporate governance. Web.

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