Last week, the Securities Investors Association of Singapore celebrated its 20th anniversary and the occasion was a reminder to investors about the importance of putting emphasis on companies to uphold high standards of corporate governance. 

Good corporate governance is one of the key fundamentals to a company’s success and long-term sustainability. At heart, it helps to reflect on a company’s values, supports its vision and shapes the culture. The goal is to help managers of a company mitigate risks, safeguard stakeholders’ interest and ultimately enhance value.  

On the other hand, ineffective mechanisms or poor corporate governance could erode the very foundations that a company was built upon and lead to disastrous consequences. 

For instance, when it came to light in 2017 that Keppel Corporation’s Offshore & Marine division (Keppel O&M) made corrupt payments to win contracts with Brazilian oil companies Petrobas and Sete Brasil between 2001 to 2014, it was ordered to pay US$422 million as part of a global resolution with authorities in the US, Brazil and Singapore. It also set a record for a Singapore-listed company.

Apart from potential monetary losses, reputation also goes down the drain when good corporate governance fails to be upheld. Rebuilding confidence in stakeholders, suppliers and customers would then become a costly affair. 

In the past weeks, we have been raising the questions on why the board of United Engineers (UE) chose to sell its entire stake of treasury shares at a price of $2.58 per share to undisclosed parties, when it seemed that there were more enthusiastic buyers. The whole process of the share sale raises many doubts and we simply cannot get our heads around. 

For one, shareholders had a rude awakening when they found out that 3.14 percent of the company had been offloaded to mystery buyers at $2.58 per share, when they had already voted against the offer of $2.60 made by YPI (Yanlord-Perennial Consortium) in 2017. In addition, why was  UE’s second largest shareholder, Oxley Holdings, not offered to take up the block sale despite having repeatedly indicated that it would be willing to buy the shares at a higher price? 

In our last article, we also questioned why UE chose to place out shares at a low price when earnings and business prospects were deteriorating. After all, the share sale occurred at a time when UE shares were trading near 52-week low and when the company still has significant debt headroom given that it is one of the lowest geared property counters listed on the Singapore Exchange. 

We also highlighted our observation of UE’s quickly declining dividends over the past few years. In 2016 when OCBC was still the major shareholder, investors were rewarded first and final dividend of 5 cents per share and a special dividend of 7 cents per share. However, when YPI took over in 2017, dividend was slashed to 4 cents and 3 cents in 2018. Disregarding the special dividend in 2016, minority shareholders that bought UE as dividend stock would have seen their dividend income slip by 40 percent in merely 2 years. 

Granted, the US-China trade war and a myriad of other factors may have impacted the local property sector and UE’s performance lately. But viewing how the corporate developments unfolded, one might not be able to confidently say that UE’s board was acting in full interest for its stakeholders. 

In a letter sent to us and directed at UE’s board, a minority shareholder expressed similar sentiments about the recent developments. 

Giving the benefit of the doubt, the fact remains that the existing board has not been entirely transparent in its conduct. Since YPI’s takeover, UE’s governance and transparency index ranking has already slipped from 76 in 2016 to rank 100 in 2018.

In our opinion, a homogenous board has an inherent risk of insularity. In a highly dynamic world, a diverse board is also more robust and better able to navigate through challenges.

Going forward, it might not be a bad idea for UE to include Oxley’s executives in its board. The current board of UE lacks someone with vast residential property development experience in Singapore hence this is where Oxley can value add. Mr. Zhong Sheng Jian of Yanlord is a niche PRC property developer while executives from Perennial Real Estate Holdings, for all its merits, has no residential property development track record in Singapore. The Dairy Farm residential development project is the “maiden” developer project under the current board.

In addition, Oxley’s representation in the board would reaffirm the faith that other smaller minority shareholders have for the company. This could be the first step to bring UE to greater heights. 

Related Article:

United Engineers 2Q Profit Falls 33%, Expect Declining Dividend; Minority May Raise More Questions


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