Publication: The Business Times, p 23 Date: 25 November 2010 Headline: Reforming corporate governanceRefomzing corporate governaweInvestors need to understand interaction between underlying business model dynamics and those running the enterprisesBy KfE KOON UOON ed-party acquisitions. flnancod by the PO and secondary equity olTerlngs, toSnatch. The action undertaken by cancel the artiticial receivables thatHarpies. the spirits ojsudden, sharp were created in collusion w i the re- ~gusts o wind fn Creek mg(tho1ogy f lated parties, and booldng the set-offwho would snatch away (harpazd) as goodwill and intangible assetsthings from the earth. They had which stood at 228 miltion yuan.plagued the old blind King Phinsup In a Raju-d6ji vu fashion. propertysuch that whenever a plate o food f was involved. According to news arti-w y placed before him the winged cles reporting about the firms siuur-Harpies would swoop down and tion. its chairman Sun Jianurong re-snatch it away, befoufcng any scraps portedly tried to siphon away a-100left behind pet cent stake in Chongqing Daqing Property, which owned properties in ORPORATE govern- China worth 10 billion yuan, to his C ance. as elucidated by Hong Kong private flrm called Top leading finance re- Ono Property Group, and later to a searchers Andrei SEh- Chinese firm owned by his brother. leifer and Robert Vtsh- Thus, rather than hearing again ny. deals with the that inevitable lament why boards - ways in wbich suppli- often skin-deep installations - work era of Bnance to corpo- so poorly so often, regulators sholJdrations assure themselves of getting a thrust the corporate governancerehun on their investment. How do stake right into the heart of perversethey make sure that managers do not behavioural incentives where it mat-steal the capital they supply or invest ters most: by having mandatory dts-in bad projects?" closure ofthe ultimate unseen owner- shiu and ~rivate business interests of A formerly popular group with re- thecontrollinn owners at these Asiantail and institutional investors of funs to hop&ully curb the growingaround 150 Singapore-listed Chinese upaqueness in the Wedge betweencompanies. the worth of the S-chips ownership rights and cash-flowhas dwindled significantly from rights disguised under the increasedaround SS40 billion in market value usage of nominee shareholdings andby more than half due to the wntinu- non-diiclwure.ous gust of cold wind in mis-govern- While controlling owners mayance and accounting scandals blow- view thc tunnelling of that $1 out ofing a m s these Gnus. the firm to be enhancing or protecting Attantion and discussion on corpo- their own interests - albeit at the det-rate governance reforms in minimis- riment of the minority shareholders -inn manamrial amncv costs and to particularly in bad times when theyalLgn maiagerial-inte-bas with the fear losing the value of what theyshareholders had centred, perhaps have built, they need tu apprecia,tenarrowly, on the agents" or the that they are putting to risk the goingchess pieces", some ofwhich include concern of their companies to onjoythe independence and quallty of the that elusive valuation ~remium a ofindependent directors in their moni- multibagger that usualiy mmes fromtoring efforts. We need to step back and look in- - putting that $1 -and more back into a single. focused business vehicle.stead at the chess board", the rules and riding through the ups and espe-of the game in Asia that influences cially downs of the business cyclesownership behaviour and the account- with their reputations intacXing mechanism, in order to avoid the Investors should take heed of theplight of Phineus with managers or rules of the game, and pay due re-controlling owners leaving defiled r e spect in seekingto understand the in-turns for the minority shareholders teraction between the underlyingand an awlul mess for the authorities business model dynamics and the peo-to clean up. ple running the enterprises. It woqId REUIERS be premature to speak of fundamen- Wedge. The word to understandthe Game.That sharp divergence be- Awrtmng d1cut.r: We need to look at the rides o the game in Asia that influence ownership behauiour and the accounting mechanism, in order to m i d f tal analysis using possibly rigged ortween cash-flow or ewity rights and a situation where managers or controlling owners leaw &filed returns for minority shareholders and an awrfulmess for the authoritfes to clean up incomplete accounting numbers dbecontrol rights in the tv~icai Asian to propping and tunnelling to fashionfirms. ~oitrolling owne;; are tempt- When the credit crunch started to abandoned Satyam one by one. and damental analysis" ofthe firms. Artili- In other words, there is left-side in elaborate. but garbage-ingarbage-ed to tunnel assets out of 5rms where melt away the prospects faced by his share prices fl, which triggered the el cia1 amrued sales aro booked under via propping, and right-side out via out, valuatton models. or tdmfdl*they have low cash-now rights but private finns. especially as Hydera- margin call in Rajus personal othor receivables". while the bogus tunnelling. analysis of possibly manipulated prlc-high controlling rights to 5rms where bads property market cooled with pledged shares. Bankers force-sold cafh-based sales stay hidden in the Take the case of the hlgh-prome es and volume.they have both high cash-now and prices and rents falling more than 30 his shares, resulting in the price to cash & cash equivalents". and highly profitable" S-chip S i o - When value investing I applied scontrolling rights. oftentimes !bar per cent. he could not bring the dwin- plunge further. ARer "propping". tunnelling" or Environment. Footnote 12 of their properly and rigorously in Asia t oclosely held private firms in which dling money back to Satyam from hls Uke Raju. many of the S-chip con- expropriation of these assets out of 2008 Annual Report revealed that the identify the right entrepreneurs andthey are the dominant shareholders. 300-odd private business vehicles for trolling owners haw mu*ple private the listed Tim follows, engineered average interest rate earned from manaprs who are serious in building Lets take the case of Satyam to un- accounts-keeping and maintenance business interests. property develop- through related-lending and transfer their 728 million yuan (SS143 mil- their business model into a legacy.derstand the Wedge. of a competitive dividend yield. ment in particular. outside of their List- activities which are rarely paid back lion) cash in the balance sheet is mere- and to protect, to guard. lo preserve Ramalinga Raju tunnelled out Raju decided to raise cash from i- n ed vehicles. by the controlling shareholders. ly 0.56 per cent In Footnote 13, the the asset. of the investors, the re-USSl billion in cash and assets from vestors to make up for the bogus How did the distorted incentivesin These cash transfers a done artful- m amount due and dividend receivable wards c n only be bountiful. especial- ahis listed vehicle Satyam, where he USSl billion in cash and assets by in- the Wedge work its way to be mani- ly. often in short-term transactions in h m its subsidiaries in the company ly in a tempest-tossed environment.and his family held around 8 per cent jecting some of his private assew into fested in the m u n t s ? order to be qualified as cash equiva- accounts is 282 &on yuan. In their The writer is a lecturer ofequity rights. to hIs 100 per cent the tisted Satyam. The price tag of the First the controlling shareholders lents". That explalns why most of the group accounts. the amount of accounting at Singaporeowned private property Iirm Maytas. acquisition to de-risk the business? will engage in propping activities to artificialcash balances in these finns non-trade receivables is 240 million Managemen1 University. and ato psrtidpate in Hyderabads proper- USS1.6 billion. artificially inflate the sales and assets typically earn low average interest yuan out of the 276.5 million yuan in director o Aegis Croup o f fty market. With Maytas. they can get Minority shareholders rejected his of the listed firms through related-par- rates. at below one per cent, when total receivables. Companies, a Singapore-based 100 per cent of the cash flow as com- plan, decrying a woeful misuse of ty transactions (RPTs) to entice the the typical bank rate in China varies From Footnote 12. Sino-Environ- inuestment managementpared to 8 per cent in Satyam. cash. Past enamoured investors funds of investors who did their fun- between 5 and 10 per cent. ment possibiy made dubious relat- organisationSource: The Business Times O Singapore Press Holdings Limited. Permission required for reproduction.