Reading 2 A CORPORATE GOVERNANCE BREACH AT SINGPOST by Simon Israel, Chairman Appointee, SingPost1 PDF

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SMUThis case was written by Professor Gennaro Bernile, Havovi Joshi and Vinika D. Rao at the Singapore Management University.The case was prepared solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situati...

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SMU Classification: Restricted

SMU173

A CORPORATE GOVERNANCE BREACH AT SINGPOST My immediate priorities are to lead the board through the completion of the corporate governance review, review board composition and appoint a new Group chief executive. - Simon Israel, Chairman Appointee, SingPost1

On 5 May 2016, Singapore Post Limited (“SingPost”) announced the appointment of Simon Israel, the chairman of Singapore’s telecommunications giant, Singtel, as the non-independent chairman of SingPost. With this appointment, SingPost hoped that it had taken a step forward in reassuring its stakeholders, who had been stunned at the corporate governance lapses revealed by the company over the past six months. With a heritage dating back to 1819, SingPost was Singapore's designated Public Postal Licensee, providing domestic and international postal services. In May 2003, the company was listed on the mainboard of the Singapore Exchange2, and continued to perform well, remaining profitable over the years. Shareholders were generally pleased with the company: the firm’s market capitalisation had increased from S$1.14 billion (US$0.83 billion3) at the time of its IPO in 2003 to S$3.53 billion (US$2.56 billion) as at 31 March 2016, with total shareholder returns amounting to 323.2% over the period.4 However, in December 2015, a corporate governance saga began to unfold in the company. Earlier in the month, on 10 December, SingPost’s group chief executive officer, Wolfgang Baier, resigned quite suddenly, to “pursue new endeavours”.5 A couple of weeks later, on 22 December, SingPost announced that due to an ‘administrative oversight’, it had, in an SGX announcement on 18 July 2014, not disclosed lead independent director Keith Tay’s interest in a 2013 acquisition. Tay was non-executive Chairman and held a 34.5 percent stake in corporate finance adviser Stirling Coleman, which had acted for the sellers in the acquisition.6 The announcement added that Tay had, however, abstained from all voting by the board in relation to the buyout. In the face of a public outcry, SingPost decided to have a special audit conducted to examine the conflict of interest issues surrounding the acquisition. As the shareholders questioned the independence of PwC, which had been SingPost's external auditor since it listed in 2003, the company also appointed law firm Drew and Napier as a joint special auditor. In addition, it appointed 1 “SingPost Announces New Chairman”, SingPost Press Release, May 5, 2016, http://www.singpost.com/download/FinancialNews/Announcements/2016/ann20160505.pdf, accessed May 2016. 2 SingPost, “Corporate Information”, http://www.singpost.com/corporate-information/history.html, accessed May 2016. 3 US$1= SG$1.38 as at May 24, 2016, www.xe.com. Unless stated otherwise, this conversion rate has been used through the case. 4 “Singpost Chairman to Step Down at the AGM in July 2016”, SingPost News release, April 1, 2016, http://www.singpost.com/mediacentre/news-releases/...2016.html, accessed May 2016. 5 “Singpost Group Ceo, Dr Wolfgang Baier resigns”, SingPost News release, December 10, 2015, http://www.singpost.com/mediacentre/news-releases/632-singpost-group-ceo-dr-wolfgang-baier-resigns.html, accessed May 2016. 6 “Director at Centre of SingPost Saga Steps Down”, The Straits Times, April 10, 2016, http://www.straitstimes.com/business/companies-markets/director-at-centre-of-singpost-saga-steps-down, accessed May 2016.

This case was written by Professor Gennaro Bernile, Havovi Joshi and Vinika D. Rao at the Singapore Management University. The case was prepared solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Copyright © 2017, Singapore Management University

Version: 2017-02-10

This document is authorized for use only in Helen Kang's FINS3626 International Corporate Governance - T2 2021 at University of New South Wales from May 2021 to Sep 2021.

SMU Classification: Restricted

SMU-16-0028

A Corporate Governance Breach at SingPost

leadership firm Heidrick & Struggles as an independent consultant to undertake a larger companywide corporate governance review.7 Before the special audit report could be released, there was further upheaval at the company. On 1 April 2016, SingPost’s chairman, Lim Ho Kee, announced his intention to step down. Lim had been SingPost’s chairman since its IPO in 2003, and commented that the “issue of board renewal has been on my mind for the last few years”.8 Accepting his decision, the board unanimously agreed to appoint board member Professor Low Teck Seng as Chairman. However, just six days later, on April 7, Low issued a statement declining the role, stating that he wanted to focus on his “principal commitment” as the chief executive of Singapore’s National Research Foundation. And the very next day, Tay announced his decision to also step down from the Board, after two decades as a board member. On 3 May 2016, SingPost released the executive summary of the special audit report to the public . It was stated therein that Tay was “arguably in breach of section 156(1) of the Companies Act for not declaring his interest in a 2013 acquisition of Famous Holdings as soon as practicable. In addition, he had breached some fiduciary duties relating to the Famous deal and SingPost's acquisition of Famous Pacific Shipping (NZ) in 2015, which came under the Companies Act.” 9 The report mentioned that the omission appeared to not have been deliberate. It also stated that “SingPost had no standard processes for evaluating acquisitions or for directors to disclose conflicts of interest”.10 Regulators and shareholders alike expressed grave concern at the contents of the special audit report. Mak Yuen Teen, corporate governance specialist, associate professor at the National University of Singapore and a shareholder in SingPost, observed in a letter to the Business Times, I am astounded by the poor corporate governance in SingPost in the areas of evaluation and approval of mergers and acquisitions, disclosure of interest and announcements. The responsibility for this rests with the entire board. Perhaps the board of SingPost became so focused on doing business that it forgot that this must be underpinned by good corporate governance.11

With Israel’s appointment, SingPost would be hoping to take another step in winning back its stakeholders’ confidence. But was this enough? What else did the postal giant have to do to ensure that its corporate governance standards and mechanisms were considered truly effective? Was this a case of overzealous shareholders hauling a revered corporate institution over the coals for what was just an administrative breach? And what would be the larger ramifications of SingPost’s lapses on the corporate governance environment in Singapore, a country that prided itself on both the efficacy of its regulatory environment and ease of doing business?

SingPost Corporate Profile 7

Ibid. Singpost Chairman to Step Down at the AGM in July 2016, SingPost News release, April 1, 2016, http://www.singpost.com/mediacentre/news-releases/641-singpost-chairman-to-step-down-at-the-agm-in-july-2016.html, accessed May 2016. 9 Melissa Tan, “SingPost Special Audit Findings May Lead to Regulatory Action”, The Business Times, May 10, 2016, http://www.businesstimes.com.sg/companies-markets/singpost...action, accessed May 2016. 10 Ibid. 11 Mak Yuen Teen, “SingPost Special Audit Report Should Reveal Full Methodology”, Governance for Stakeholders, May 8, 2016, http://governanceforstakeholders.com/2016/05/08/singpost... methodology/, accessed May 2016.

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SMU Classification: Restricted

SMU-16-0028

A Corporate Governance Breach at SingPost

Following Singapore’s independence in 1965, SingPost, which had started as a small mail office in 1819, was admitted to the Universal Postal Union (UPU) in January 1966. The Singapore Postal Services Department became a fully autonomous body on 1 January 1967. In 1982, the Postal Services Department merged with the then Telecommunication Authority of Singapore (Telecoms). Ten years later, in 1992, Telecoms was split into three entities: the reconstituted Telecommunication Authority of Singapore (TAS), Singtel and SingPost.12 On 13 May 2003, SingPost did an IPO and was listed on the mainboard of the Singapore Exchange (SGX). It subsequently became a constituent stock of various main benchmark indices - FTSE AllWorld Index Series, FTSE All-World Minimum Variance Index, FTSE All-World High Dividend Yield Index, FTSE RAFI Index Series, FTSE Global Infrastructure Index Series and FTSE ST Index Series.13 Business SingPost had been given exclusive rights to receive, collect and deliver letters and postcards until March 2007.14 With new entrants into the once exclusive postal markets, competition increased. Global trends too had the potential to severely impact SingPost’s performance. With the rise in Internet-based services such as email, postal mail was on the decline. In fact, stamped mail, mostly from private individual customers, reduced from 180 million units in 2002 to 130 million units in 2011.15 SingPost recognised that adapting to these new economic conditions was critical to the survival of a modern postal service, and had appointed Baier as its group CEO in October 2011 to manage this transformation. One month later, Baier had initiated the RTF Programme, a 30-month strategy to increase service volume by expanding into a regional network through acquisition and investment in more efficient infrastructure, IT, and talent. The strategy was based on investing and acquiring along five different ‘pillars’ - mail, digital services, logistics, e-commerce and retail, and financial services - to increase revenue and fill the void left by declining mail. An important element of this programme was inorganic growth through acquisitions into new services and markets.16 The strategy appeared to have worked well, and for the financial year ending 31 March 2016, SingPost’s annual revenue had increased to S$1.15 billion (US$0.8 billion) from S$920 million (US$666 million) in the previous year. This was attributed largely to e-commerce related growth and acquisitions. The company also achieved a record full year net profit of S$248.9 million (US$180 million), although underlying net profit dropped by 4% over the previous year to S$153.6 million (US$111 million), on account of loss of income from a mall redevelopment, and divestment of stake and deconsolidation of subsidiary companies, DataPost & Novation Solutions (refer to Exhibit 1 for

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SingPost, “Corporate Information”, http://www.singpost.com/corporate-information/history.html, accessed May 2016. Ibid. “Singpost Chairman to Step Down at the AGM in July 2016”, SingPost News release, April 1, 2016, http://www.singpost.com/mediacentre/news-releases/641... 2016.html, accessed May 2016. 15 This section has been excerpted from: Reddi, K. and Joshi, H. “Singapore Post: Transforming Mail Services in the Internet Age”, June 2013, http://casewriting.smu.edu.sg/case/singapore-post-transforming-mail-services-internet-age, accessed May 2016. 16 Ibid.

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SMU Classification: Restricted

SMU-16-0028

A Corporate Governance Breach at SingPost

details on the past five year financial performance).17 The firm’s market capitalisation as at 31 March 2016 was S$3.53 billion (US$2.56 billion), with total shareholder returns until then amounting to 323.2% from the IPO in 2003.18

Corporate Profile The two large institutional shareholders of SingPost were Singtel and Alibaba Investment Limited, with approximately 23% and 10% stakes respectively in the company. Institutional shareholders made up another 33% of the company’s investor groups, while retail investors were at 30%, and others at 4%.19 As at May 2016, the company had a credit rating of ’A-/Stable’ by Standard & Poor’s. Board of Directors At the end of financial year 2015, SingPost’s board comprised 12 directors (refer to Exhibit 2 for additional details on each director). This was a relatively large board compared to other companies in a similar business segment across the globe.20 Of the 12 directors, eight were independent, and other than Baier, all were non-executive directors. Three of these directors, namely Lim Ho Kee (the chairman), Tan Yam Pin and Keith Tay Ah Kee, had spent over nine years on the board. Lim and Tay had first been appointed directors in April 1998, while Tan came on the board in February 2005. The tenure of these directors had in fact prompted Mak Yuen Teen to raise a question via email to SingPost’s Investor Relations in June 2015 (prior to the company’s Annual General Meeting) that, The board has added new independent directors in recent years who appear to be well qualified, given the nature of SingPost ’s business. However, there are a number of long-serving independent directors, some of whom have served on the board for almost 20 years. They are also more than 70 years of age. Given the change in the business of SingPost, do these directors have the necessary skills and competencies for the new strategies that SingPost is pursuing?21

SingPost though had a credible response in that it had appointed board advisory services provider Egon Zehnder for two years running to ensure that these directors were indeed independent. And during their confidential interviews with Egon Zehnder, all directors had confirmed that they believed the three directors were truly independent in their thinking and behaviour.22 In terms of frequency of board meetings, the board met at least quarterly to review and approve the 17 SingPost, “Q4 & FY2015/16 Financial Results”, 10 May 2016, http://www.singpost.com/download/AboutSingPost/SGXAnnouncement/2015Q4/PresentationSlides.pdf, accessed May 2016. 18 “Singpost Chairman to Step Down at the AGM in July 2016”, SingPost News release, April 1, 2016, http://www.singpost.com/mediacentre/news-releases/641...2016.html, accessed May 2016. 19 SingPost, 2015 Annual Report, http://www.singpost.com/download/ar201415.pdf, accessed May 2016. 20 Mak Yuen Teen, “Corporate Governance Concerns at SingPost”, The Business Times, December 15, 2015, http://www.businesstimes.com.sg/companies... singpost, accessed May 2016. 21 Ibid. 22 SingPost, 2015 Annual Report, http://www.singpost.com/download/ar201415.pdf, accessed May 2016.

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SMU Classification: Restricted

SMU-16-0028

A Corporate Governance Breach at SingPost

release of the Group’s quarterly results, as well as discuss and resolve all matters requiring its approval. Additionally, towards the end of each financial year, the board participated in a strategy workshop with management to plan the Group’s longer-term strategy.23 Board Committees SingPost’s board had also established Committees, each of which had written terms of reference that set out its respective authority and duties (refer to Exhibit 3 for further details on the Board Committees). For the financial year ending 31 March 2015, the Board had met seven times—however, the Nominations Committee had met thrice, the Compensation Committee once, and the Audit Committee and the Board Risk and Technology Committee had met four times each. The Executive Committee, though, had met 14 times during the year – which had prompted Mak to enquire in June 2015, SingPost has an executive committee which met 14 times during the year, and with due respect, a relatively young CEO. Why is it necessary to have an executive committee which meets so often and is the executive committee managing the company together with the CEO? If so, should the independent directors on the executive committee still be considered independent?24

Corporate Governance Challenges: How the Story Unfolded In November 2015, SingPost had been named as one of the top 50 ASEAN publicly-listed companies based on the ASEAN Corporate Governance Scorecard. It had also won one of the two outstanding achievement awards per country, given to companies that were outside the top three in that country.25 But just a month after these accolades, disturbing facts began to surface. The genesis of the problem went back to January 2013, when SingPost purchased a 62.5% equity stake in Famous Holdings Pte Ltd (FH) for S$60 million (US$49.2 million26), which then became a subsidiary of SingPost. Thereafter, in July 2014, SingPost, through FHPL, purchased a 100% equity stake in F.S. Mackenzie Limited (FSM); and in January 2015 (again through FHPL), it purchased a 90% equity stake in Famous Pacific Shipping (New Zealand) Limited (FPSNZ). All these three companies - FHPL, FSM and FPSNZ - had appointed Stirling Coleman Capital Limited (SCCL) as a financial advisor in regard to these acquisitions. Tay, the lead independent board director at SingPost, was the non-executive Chairman and a 34.5% shareholder of SCCL - a fact that SingPost did not mention in its public announcement about the FSM acquisition posted on the Singapore Exchange (SGX) website in July 2014, stating instead that none of its directors had an interest in the acquisition. In the finger-pointing drama that ensued once this omission became public, SingPost appointed 23

Ibid. Mak Yuen Teen, “Corporate Governance Concerns at SingPost”, The Business Times, December 15, 2015, http://www.businesstimes.com.sg/companies-markets/corporate...singpost, accessed May 2016. 25 Ibid. 26 US$1=S$1.22 as at January 2013, www.xe.com. 24

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SMU Classification: Restricted

SMU-16-0028

A Corporate Governance Breach at SingPost

special auditors Drew & Napier and PwC on 23 December 2015 to review what had transpired. The firms released their findings in a Special Audit Report on 3 May 2016, which highlighted some key aspects:27  Tay was not involved in the daily operations of SCCL and did not represent SingPost or FHPL in any negotiations with SCCL or the vendors in any of the Famous acquisitions.  SingPost had no set policy or procedures for the evaluation and approval of M&A transactions but relied on “broad internal guidelines as well as the work experience of its members” – these guidelines were not flouted in the Famous Acquisitions.  Tay had expressly indicated his involvement in SCCL to the Board and abstained from voting on the acquisition accordingly.  SingPost was not obliged to disclose Tay’s interest in the Famous acquisitions under the SGX Listing Manual-Mainboard Rules. However, stating that none of its directors had an interest in Famous was clearly an error. The error was attributed to “carelessness” rather than an intent to deliberately conceal Tay’s interest in the FSM acquisition.

Media reports highlighted that SingPost allegedly decided not to act to correct the omission on the advice of their external lawyers, Rodyk & Davidson, who later stated that their advice would have been different if they had “read the incorrect announcement”.28 The Special Auditor’s report summary also stated that the erroneous announcement notwithstanding, “there is no suggestion that Mr Tay...