21November2019

Agenda Daily

CALLING FOR ACCOUNTABILITY AT SIME

With losses running into the billions, the enlarged corporate behemoth Sime Darby is besieged by problems, among them a probe for graft and other criminal abuses. There has clearly been a lapse by both the management and board members. An overhaul is timely.

 

WHEN SIME DARBYBHD’S CHAIRMAN TUN MUSA

Hitam and President and Chief Executive Officer Datuk Ahmad Zubir Murshid feted a band of bloggers at the Sime Darby Convention Centre last year, everything about the iconic plantation-based company was rosy. Musa parleyed freely with the bloggers, the majority of whom were meeting him in person for the first time, assuring them that the enlarged Sime Darby was all good news.

I was included by virtue of my blog, and also because I was among the writers who were critical of the merger between Sime Darby, Golden Hope Plantations Bhd and Kumpulan Guthrie Bhd in 2007.

One of my fears was that Permodalan Nasional Bhd (PNB), the controlling shareholder of the three plantation companies, could end up putting all its eggs into one basket.

But against the might of the government (of Tun Abdullah Ahmad Badawi) and the market makers, including the hugely influential Datuk Mohd Nazir Abdul Razak of CIMB Bhd, who were pushing for the mega-merger, there was no way that the dissenting voices of the troublesome writers and bloggers would gain currency.

So, why should Musa say anything other than tell the bloggers that they had been wrong and unfounded in questioning the merger?

Impressed, the bloggers rushed to their laptops to echo Musa’s optimism. Why not? On the surface, the company was doing well. Palm oil and rubber prices were good and its share price had recorded a double-digit increase.

By the end of November 2007, Sime’s share value had soared 24% on Bursa Malaysia, advancing RM2.10 to RM11, and those who dabbled in them made a handsome killing.

Where did all the good times go?

ALAS, the good stmy did not last long! By the time Musa met the bloggers for the second time some weeks ago, sans this writer, the good times had ended and Sime Darby was about to announce a massive drop~in profit and a large write-off!

On Aug 26, four days shy of the 53rd anniversary of the country’s independence, the group announced a net profit of RM726 million for the year ended June 30, 2010, but booked in foreseeable losses of RM2.1 billion for its beleaguered energy and utilities (E&U) division.

It blamed the 43% reduction in the pre-tax profit from the 2009 level to three troubled oil and gas projects, namely, Qatar Petroleum (QP), Maersk Oil Qatar (MOQ) and its marine operations.

A Sime Darby Press statement issued on Aug 26 said the E&U division had reported operating losses of RM1.75 billion after making additional provisions of RM777 million for the fourth quarter of 2010.

‘Including the RMi.3o9 billion provisions up to the third quarter of 2010, the total provisions for the foreseeable losses and impairment for the full year amounted to RM2.086 billion,’ it said.

The additional provisions, said the group’s acting President and CEO Datuk Mohd Bakke Salleh (pronounced baki), were based on reports of technical consultants and their estimates of costs to complete the projects.

Blaming the losses on isolated bad decision making and poor execution, Mohd Bakke, in a meeting with four bloggers (con this one) on Sept 1, said the group was not giving up its E&LT businesses.

‘The group is now on a stronger footing to focus on rebuilding its oil and gas business and strengthening its competitive position in other core businesses.’

Sime Darby registered the full-year pre-tax profit of RM 1.7 billion on the back of a 6% increase in revenue to RM33 billion despite the massive provisions.

Reaffirming commitment to the oil and gas business, Mohd Bakke said the new management had identified the problems that had led to the losses and initiated steps to turn the division around.‘We are collaborating with strategic partners to strengthen our capabilities,’ said Mohd Bakke.

The division is now segregated into China and non- China operations, each headed by an Executive Vice- President. Additionally, newappointments have alsobeen made to key management positions in the E&U division. The group, he said, has also been reviewing its organisational and reporting structure to enhance ~ oversight at the divisional level and accountability across the group.

Mohd Bakke, the first outsider in Sime Darby’s history to be appointed to the top job, was positive about the prospects of the group.

‘We have defined four key thrusts to bring Sime Darby back to a leadership position, namely, turning around the E&U division, maximising the potential of all core businesses, instituting a culture of high performance and reviewing the group’s portfolio mix.’

The importance of board Members

WHEN Sime Darby was being set up as the platform for the merger of the plantation companies, detractors had warned that conflicting corporate cultures could cause the unraveling of the enlarged entity.

The management of the enlarged group overcame the problem by ‘excluding’ several key personalities from Golden Hope and Guthrie from its management team.

With the benefit of hindsight, Mohd Bakke, who hails from the commercial arm of the Federal Land Development Authority (Felda), said the exclusion of these people had deprived Sime Darby of some of the best and most experienced planters and estate managers in the country.

While problems emanating from these cultural differences were said to have been largely solved, the emerging culture in the enlarged entity saw the company neglecting some of the key elements in its proven management philosophy and practices.

Sources say Sime Darby started to rely on outside expertise and intermediaries instead of continuing to rely and build on internal expertise and knowhow, which saw the group entering into partnerships and joint ventures with lesser-known parties in areas where its own expertise was second to none.

Sadly, this new adventurism has gone way beyond innovation and efficiency. There is a strong suspicion that graft and other criminal abuses were involved. The Malaysian Anti-Corruption Commission is investigating.

Fortunately for the group, the plantation sector continues to perform well. The division registered an operating profit of RM2.1 billion, an increase of 23% from 2009.

This was mainly due to higher crude palm oil (CPO) prices of around RM2,311 per tonne as opposed to RM2,177 in 2009 and higher fresh fruit bunches (FFB) production from Indonesia and better performance of downstream operations.

The downstream and midstream operations registered a profit of RM124 million against a loss of RM63 million in 2009, an improvement of 297% over that of the previous year.

In the meeting with the bloggers, Mohd Bakke was positive that both FFB production and the oil extraction rate will continue to be on the rise with the implementation of better plantation and milling practices.

Whereas Mohd Bakke’s credentials as a turnaround executive are impeccable, there’s only so much one man can do. He has to cultivate the support and acceptance of the top management of the group, which in itself is a monumental task, given the fact that Sime Darby is highly diversified and employs over 100,000 people.

Also, the revamping of the management alone will not be sufficient to rehabilitate the confidence in the iconic company. The board too has to be overhauled. There has clearly been a neglect of fiduciary duties by board members.

Irrespective of the outcome of the ongoing forensic audit of the E&U division, which is expected to be made public by the end of this month, the board should resign en block or, at the very least, accept the moral responsibility for the debacle.

This brings us to the question of board composition, not only of Sime Darby, but also of other government- linked companies (GLCs).

Undoubtedly, Sime Darby has a very illustrious board — two ‘Tuns’~as one blogger pointed out. But for the issue at hand, that illustrious board has failed the shareholders — not a few thousand of them, but millions by virtue of Sime Darby being a PNB company.

Serious thought must be given to the practice of appointing illustrious personalities to the board of GLCs. They can be illustrious, but more importantly, they must be knowledgeable. A knowledgeable board is certainly more convincing than a board made up of illustrious men and women.

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