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Sakmongkol ak 47

ariff.sabri@gmail.com

Tuesday 18 May 2010

Sime Darby: Controls and Reporting.





In the 80's and 90's, Sime Darby was led by a very able CEO- I am not sure what the position was called back then. It was always associated with the name of Tengku Ahmad Yahaya. Sime has had Tan Siew Sin and the legendary Tun Ismail Ali as chairmen. The chairmen always took more than cursory interest in the running of this conglomerate. It was after all a company owned by the government doing business and earning money for the government.
I am not going into a discussion about fiduciary duty. This was touched by a former employee of Sime who wrote to Din Merican who operates a popular blog here.
I am sure the management committee at Sime Darby is provided with weekly reports and the reports are also made available to the chairman and board members. I am also sure that the same people are provided with monthly budget reports wherein details about CAPEX and OPEX are clearly stated against ESTIMATES and ACTUALS.
In other words, with such tooth combing reports and analyses, it would be impossible for anyone in the leadership hierarchy in Sime who matters to overlook glaring variations. Especially if these variations were very abnormal. Unless of course many of them were sleeping in their jobs.
If, despite these internal controls, abnormal behaviour of OPEX and CAPEX items took place, it would only suggest that committees and people pouring watch over the financial health of Sime Darby weren't doing their job properly. Either they were negligent or some fraud was taking place at all operating levels.
If (a) negligence took place and (b) fraud was committed then responsibility over unchecked irregularities must be borne by the leadership at every operating and supervisory level. It will also mean that every leadership level from top to bottom must be held accountable and be told to take the leave of absence.
It isn't just right and even handed to ask ONLY for the CEO's resignation without also asking those who supervise him and those responsible for delivering him OPEX and CAPEX results to share the responsibility.
Then what about those responsible for the shareholders?- Khazanah, PNB, or whoever. Aren't there people assigned to look after their investment portfolios? If the financial abnormalities took place over a period, persons responsible in Khazanah or PNB and other shareholders are also not doing their jobs efficiently. There must be people assigned by the shareholders at THEIR side looking after the performance of their investment portfolios. They too should be held responsible for negligently carrying out their duties.
This brings us then to the issue of reporting. Now let's look at reporting. Has anyone prepared a detail report of this matter to the PM? He hasn't been making any announcement on the matter suggesting that he has yet to receive full and honest report about the matter. Obviously the Slime Sime BOD hasn't got around to preparing a brief for the PM.
My question then is, if the Sime Board has showed callousness and lacks focus, would we be comforted that it is also they who shall furnish the report to the PM?
That these abnormalities could happen over time and yet remain unattended save for some 'doing something' gestures by the audit committees and work groups etc, revealed one crucial weakness on the part of the government when handling its GLCs. There isn't a body supervising and monitoring or coordinating the performance of the GLCs.
Now is a good time for the leadership of this country to form a specially constituted supra supervisory body looking after the performance of all GLCs in this country. It's some sort of a PMC looking after, the performance of all GLC and reporting independently to the PM or the minister assigned to look over GLCs and such bodies.

14 comments:

Anonymous,  18 May 2010 at 08:24  

I so so agree with Dato Sak. How can the Chairman smirkingly announce the news without feeling an ounce of guilt. The whole board should be dismissed. Orang bawah kita kena kesian sikit becos sometimes they are pressured by the orang atas to minimize bad news and paint rosy pictures. This is what Khazanah & merchant bankers are good at...play with numbers till the numbers jadi kelam kabut.
Totally agree that there should be a body monitoring these GLCs.
Rgds, Miss Pei.

Anonymous,  18 May 2010 at 10:28  

If I am not mistaken, this merger of companies to form Sime was done during the Slimeball KJ era. Why is he so quiet?

walla 18 May 2010 at 10:56  

3/3

The front lines from here who are there see them. But they are not trained to question. They are only trained to take and follow orders from the headquarters. That's how conglomerates centralize power. Because they are run by politically-appointed stereotypes who carry the same DNA as their masters whose only role in life is to centralize power.

The new signals are overlooked or whitewashed even as they are captured by the core information system. The system is error-free but its output is used by humans who are error-prone. Why rock the boat when headquarters is brimming with confidence, they ask themselves before they turn off the lights?

One is reminded of the battle of Arnhem. One MI leftenant delivered aerial photos to show an entire panzer division in the bushes. A gruppe Schutzstaffel, to boot. His concerns were pooh-poohed by the brass because they were itching to just go and do it. Thus, a bridge too far.

The information system does its job. It takes input and crunches output. This is presented at the weekly project update meeting sat by the project team and one board representative. The legal adviser and internal auditor are perhaps absent. The former is busy bespoking a general contract. The latter is not called because the project hasn't yet started.

None of the team members know law. The lawyer doesn't know their logistics and the board representative cannot decipher the hidden messages between the lines of code that the system is churning out.

And that's how it can all start to go downhill. The reverse-flow valves jam and three years down the line, the reactor reaches critical mass. A meltdown takes place.

So let's have a supra-overseeing body for GLCs? There are two enjoined ways to do it. One, compose it with people with many years of hands-on industry experience in exactly that industry, subset same but from some other related market. Two, it maintains consistent independent external auditor mode; they don't interact with anyone in the GLC except for the requirements of their remits.

There's however a nagging question. If the administration here can ignore the recommendations of even a Royal Commission over something fundamental to the running of the nation, why should anyone be confident it won't ignore the recommendations of a GLC Oversight Body fundamental to the running of government-linked corporations?

The only solution to that seems to be to have a Citizens Oversight Body to oversee the GLC Oversight Body that will oversee the GLCs independent of the federal administration.

Then the question revolves on who are to compose that COB? SOB's?

This country is being run into the ground. Its undercarriage has fallen off midair. Like Sime in the middle of the projects, it can't land, it can't climb and cost-savings measures have removed all parachutes. Only aviation fuel pegged at USD100 will keep it going until it runs on ballast. Or the hot air of Umno.

The danger of politicians getting involved in commerce is that they can only bring to the table their airy-fairy nature. They are after all Galileo's with telescopes shooting for the stars. But to get to those exoplanets, you need Leeuwenhoek's to draw the precise maps and microscope forward the right paths.

Looking at the monumental losses in this GLC, we are seeing stars alright.


repost:

http://is.gd/ce0hN

walla 18 May 2010 at 10:56  

2

And because the presenter is the proposer, eighty percent of the slides will be to go ahead with the project. Twenty percent will be to scenario potential downsides and justify how much of the risks can be accepted against the potential rewards.

Some of the board members will take out and clean their glasses as those numbers unroll on the screen. All will find it too irksome to bother reading the accompanying comb-bound volume of the proposal proper, the one with excel spreadsheets on B4-sized paper. At most, they would have read a para here, a sentence there; the brain cannot digest too many numbers; it cries for a neat chart. But charts hide rebel elements.

In any case, as the meeting progresses, the risk:reward ratio moves dynamically until it reaches a tipping point. Some of the board members will then tip it over towards the proposer because they are driven by the need to do something, anything - to reach a target, to fill the blank, to appear to be making progress, even to impress. Or perhaps it's the euphoria of a memorably exciting night before with someone. Or the promise of an outing for two to some remote island. As they dream that, their silk-socked toes feel the rich inner leather of their A.Testoni shoes and their hands finger the fine lacquer finish of their Pelikan's. Indeed, life has its rewards, they muse as they adjust the lapels of their Cerruti 1887 coats.

During the entire episode, maybe one or two out of twelve or thirteen will hesitatingly ask a few simple probing questions. These will be answered with some confidence and perhaps a hint that the questions are perhaps too solicitous. Then the board will come to a decision. Agreeing in principle, go ahead full steam or go ahead subject to reconfirmation of some minor issues. All this will be minuted by an attentive secretary embellished by SASA.

As the proposer returns to his room with his sidekicks, there is a sense of relief, triumph even. They go for a hearty lunch or dinner and exchange suggestions of the next spa to check out.

Meanwhile on the other side of the globe, things are not moving so smoothly. The seismometers show unexplainable readings. Raw material prices are up. Skilled labours are getting harder to find. Markets are changing by the second. There is also something wrong at the site. And the regulatory regime for the gestation period is also in some vibrational mode owing to new kids on the political block there.

walla 18 May 2010 at 10:56  

If the GLCs are offshoots from politically-linked enterprises, then we may expect their management would be politically-motivated appointments.

This means they enter by minimum entry requirements for the post and that persuaded by the need to achieve affirmative policy semblance.

The checkpoint is whether their appointments will be controversial. This will be determined by the person making or recommending the appointments who would be expected not to appoint people too different from himself since he, being a politician or political linker, will not have the skills to assess the candidate properly from a professional angle, and thus will minimize his own inadequacy by the simple expedient of picking someone favorable for political mileage while fuss-free from potential controversy in the future. In short, a CYA-type.

And once such boards are appointed, they will add new members who will only differ from them by some general words-of-mouth or pointer in a curriculum vitae written ten years ago.

So what we have will be replication of the same DNA code. If the code is originally simple, then the appointee will also fit the same mold and be simple.

But the world has become more complex by the day. There's a thing called dynamics of managing diversity. Applied to a conglomerate, we are thus looking at diversified interests but managed by simplifying minds who will probably have no clue about what they should really be looking out for and no foresight about potential flareups from diversity unprofessionally managed. Furthermore, they don't know who and how to ask for really relevant advice or even how to qualify them.

Which means at best they will ask basic and simple questions whenever facing commercial cul de'sacs. And thus get basic and simple answers when more has to be elaborated in detail to flesh out the underlying risks.

Now they have said the problem was risk management. Please, apart from funeral services, which business has no risk?

Let's say there was some study done on a potential project in a new market. The study would have been initiated by the division concerned whose people would have been wined and dined by the people on the other side; it is a fact of commercial dealmaking that the credibility of a project is inversely proportional to the size of the first entertainment provided; the bigger and more sumptuous the welcoming, the more alert to hidden triggers the receivers should be.

In any case, as the proposal is articulated, some of the board members will aye or nay whether it meets the vision of the conglomerate.

As the board breaks for tea with more enthusiasm than concern, the vision itself may become enlarged by the proposal. After all, it's not their money, and size does matters.

When the day comes, the proposer will make his presentation. It will be an animated color powerpoint of some thirty slides. Because there is only so much space one can write on a slide, everything will be summarized. In the process of summarizing, some things will get rounded, others shaved, and the final analysis may even boil down to a choice of just a graph or pie chart that will trigger decision on a billion-ringgit sized escapade.

kuldeep 18 May 2010 at 11:14  

A body like the fourth floor of the previous PM?

I think the world is much more complex now with all the accountancy rules and all.I am not sure if many people are capable of understanding the intricacies.

Looking at MAS recently announced results there is an accumulated loss attributable to shareholders in the balance sheet of RM 5.3 billion..and looking back to the 2004 to 2007 there was no such numbers in the balance sheet.And I can't recall MAS declaring such P&L losses of that magnitude in 2008 till now.So,its kinda puzzling.Maybe an expert accountant can explain.

And Contract Accounting can even be more puzzling cos its based on "estimated profit",thus,someone must say the contract is running at a loss before provisioning sets in.And thats no easy call when claims etc are pending .

Small contractors worry only about cashflow i.e can have cash in pocket after meeting obligations.But the new new finance wizards reckon thats old hat and not representative enough.

Its a complex world indeed,

Anonymous,  18 May 2010 at 11:20  

Morn Dato i think you are one of the last few thinking politicians left in the country why don't you stand as a independent if u are not picked by umno.As i see it you are miles ahead of these circus reps that we have in the parliment..just a thought sory if you are offended.

Wenger J Khairy 18 May 2010 at 16:39  

Dear Dato',
I would disagree with the suggestion that a supra government body is needed as it will be powerless to act within the confines of corporate law.

What we need is the major shareholder to do something. If indeed Government is the major share holder, then Government can instruct its representative to move a motion to vote out the BoD.

If Government refuses to do that, then the Government shows that is unwilling or unable to correct these inadequacies in its investee company.

Essentially its up to the Chairman of MoF Inc.

I for one am still surprised that by and large the public gets very concerned about multi billion ringgit losses. It seems, the public is already desensitized. A billion here, a billion there makes no difference to perception. Maybe if we suddenly do a trillion dollar screw up, maybe then the public will wake up.

However this is not without repercussions. The public vents its anger in the ballot box. It seems if the Chairman of MoF Inc refuses to do change a minor BoD of a GLC, then the public may be compelled to change the Chairman himself. After all, wasn't it a couple of years back that the thought of a non BN government was greeted with the same phrase "Never in a 100 yrs".

And maybe Sime can learn something else from another GLC L'Enfant terrible . MAS for all its famed wings just declared a profit. I was shocked. MAS = Profit? No way!

And lo and behold it was revealed, the profit was due to Late Delivery charges from Airbus. Without it MAS would have a loss.

The CEO however said, we must not look at it from an accounting point of view. After all the funds parked with Airbus would surely have had an opportunity cost.

Wow! New angle. A balance sheet of a couple of billion and still yet to be able to turn an Operating Profit. No sir, MAS can only turn a profit by "investing". Because that what he means.


Perhaps MAS should change its business to a bank. It seems to be more profitable when trading pieces of paper rather than flying passengers.

Out of a point of principle, I do not fly MAS.

Donplaypuks® 18 May 2010 at 21:11  
This comment has been removed by the author.
Donplaypuks® 18 May 2010 at 22:59  

Based on Wenger KJ's and others' comments I am also prompted to ask if MAS is in the biz of flying passengers or lurching from Q to Q on fuel hedging gains and other compensations?

The actual results for Q1 2010 would be a loss of $77 million turned into a PAT of $310 million given fuel hedging gains of $58 million and Air Bus compensation of $329 million! Hedging losses in Q4 2009 exceeded $600 million and current contracts are hedged at $100 up to end 2011.

It's also a little curious that until a few months ago it was PMB that was doing all the aircraft financing and leasing, yet MAS has claimed the full compensation from Air Bus??!!

Remember that MAS rescue and restructuring cost the Rakyat some $8 billion!!

Note too that Protons's profits since 2007 have been propped up by a mysterious MoF R&D Grant (read bailout, $192 million in 2007/8 alone).

How long can these GLC's go on kidding themselves?

dpp
we are all of 1 race, the Human Race

Anonymous,  18 May 2010 at 23:09  

"I understand from internal sources that Musa Hitam does not get along with Zubir and has the habit of getting involved in management matters, acting more like an Executive Chairman."

Hey, this is exactly what was happening in MAS (and still is)during Jala and Fuaad .

Kuldeep, you are right about MAS, the RM15 billions company has been losing more than 2 billions per annum since 2005 and the Chairman still fiddling while Rome is burning.

White Midas

Anonymous,  19 May 2010 at 03:25  

Dato', ini bukan cakap bodek ok? Najib is a fool if he dont include you in his inner circle/think tank. Rosmah tak mau kot?

loveMyKris

Wenger J Khairy 19 May 2010 at 09:51  

DonPlayPuks,

It's also a little curious that until a few months ago it was PMB that was doing all the aircraft financing and leasing, yet MAS has claimed the full compensation from Air Bus??!

On this point, I agree with you.

Anonymous,  19 May 2010 at 15:04  

I have to remind people that this is NOT the first time Sime Darby got into trouble. Pre-merger day, Sime Darby ran into financial trouble going into banking, and other sectors. People forget that Sime Darby going into banking was opposed by those that ran the company for decades who was pushed out. To recover after that fiasco, it brought back former managers who predicted Sime Darby was going to get into trouble again. Then the merger happened which was really justified with the idea that the larger it was the more risk it could take to go overseas. Those who understood the company well was already sounding it was a bad idea because they knew that empowering managers with more risk taking mean more foolish risk. Well, guess who was proven right?

The bottom line is simply this. If the managers of these GLC was that good to be able to expand overseas and new type of business, they would just go out and start their own business. What does it mean? GLCs in Malaysia are guardians and perhaps used for scale and patient investing. Its not meant to lead entreprenurially and adventures. So everytime a GLC decides to do something adventurous and exciting, its likely they are just playing around with the people's money. GLC should not bid for govt projects that private sector can do. It should not take over assets that private sector can buy.

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