Saturday July 28, 2012

Dealing with a rare situation

Optimistically Cautious by ERROL OH

YOU'RE on the board of a listed company and one of your fellow directors has been accused of insider trading. So what do you do?

Before last week, this would have sounded like a scenario plucked from a test on corporate governance. Not any more.

The directors of Sime Darby Bhd, Guinness Anchor Bhd (GAB) and Scomi Group Bhd must have been all mulling over exactly this question after the Securities Commission (SC) charged lawyer Datuk E. Sreesanthan on July 20 with seven counts of insider trading in the shares of four listed companies between 2006 and 2008.

Described by the SC as a “senior corporate lawyer”, he is an independent non-executive director of these three listed companies and a partner of Kadir, Andri & Partners. Sreesanthan is widely regarded as the go-to guy in Malaysia when it comes to working out the legal aspects of major corporate deals.

The SC charges shocked many people. Most of them would have swapped gossip, theories and anecdotes relating to the case. Arguably, the other board members of Sime Darby, GAB and Scomi are obligated to go beyond that. They need to consider how the criminal prosecution against Sreesanthan may impact the companies and the functioning of the boards. (In fact, the Sime Darby board did meet to address the charges, but more on that later.)

It's not about playing judge, jury and executioner; it's for the court to decide whether Sreesanthan is guilty or not. As long as the case is ongoing Sreesanthan claimed trial it's premature and unfair to argue that it affects the boards' credibility and integrity.

Besides, Bursa Malaysia's listing requirements disqualify a person from becoming a director of a listed company based on a conviction of certain offences (including those under the securities laws) and not based on him merely being charged.

The pertinent question here really ought to be this: Can he continue to fulfil his role as a director while dealing with such charges?

There is no manual that supplies answers for this. But the SC's Corporate Governance Blueprint 2011 does shed some light.

In the chapter on the board's role in governance, the Blueprint points out that the overall objective is for boards “to move away from their role as mere advisers to become active and responsible fiduciaries”.

To achieve this, directors must recognise their roles and responsibilities, the importance of board independence and composition, and the need for commitment of board members.

The fact that Sreesanthan is facing insider trading charges doesn't alter the independence and composition of the three listed companies' boards. However, it may affect his ability to properly focus on his boardroom duties at Sime Darby, GAB and Scomi.

Says the Blueprint: “As a result of the increased responsibility of the director, serving on a board has become a significant and onerous commitment, both in terms of time and attention required.

“Not only must directors participate in board meetings and be willing to serve on committees, they are also expected to dedicate time to reviewing relevant materials and preparing a thoughtful contribution to the discussion and deliberation process.”

In particular, the Blueprint is referring to people who over-extend themselves by accepting appointments to several boards. It also asserts that the onus is on directors to pursue continuing education and lifelong learning.

Neither point applies in Sreesanthan's situation, but the principal argument stays valid to be an effective director, he has to devote time and energy.

Can he do that while he's up against the SC on seven counts of insider trading? On top of that, he has his full-time work at Kadir, Andri & Partners.

According to the latest annual reports, he is on Sime Darby's Litigation and Governance & Audit Committees, and GAB's Audit, Remuneration and Nomination Committees.

During the financial year ended June 30, 2011, Sime Darby had 15 board meetings, while the Governance & Audit Committee met 10 times. The Litigation Committee was set up in March last year and had one meeting before the close of the conglomerate's financial year.

It appears that Sreesanthan has a lot on his plate. That became more evident on Tuesday, when the Sime Darby board met to discuss the SC's charges brought against him. The company announced through Bursa Malaysia that he had taken leave of absence from all board and committee positions in the Sime Darby group.

Sime Darby also said he had indicated his intention to retire by rotation at the next AGM. Effectively, he has stopped serving as a Sime Darby director.

GAB and Scomi may have indeed had similar board meetings, but at the time of writing, neither company has disclosed of such a thing taking place. Nor have they said anything about Sreesanthan's status as a director.

There's probably no one-size-fits-all solution when a director of a listed company is accused of insider trading, but there's at least one wrong response refusing to assess the likely implications and keeping mum.

> Executive editor Errol Oh thinks it's amazing that Sreesanthan is only the second person to be charged with insider trading by the SC. The first was Chua Seng Huat, managing director of Kim Hin Industry Bhd, who was charged in 1996.

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Saturday July 28, 2012

Dealing with a rare situation

Optimistically Cautious by ERROL OH