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Saturday June 14, 2008

The Sime shuffle

Heads rolled over the week when Sime Darby ousted its group CFO and another key staff while three others resigned.

Razidan

TRUTH is, the lid has been rattling raucously for awhile now, threatening to fall off at the slightest nudge. Beneath it, a seething cocktail of sentiments – suspicion, disenchantment and vested interests. The top came off over the week. And the nudge came from Sime Darby Bhd.

Sime Darby which owns the bragging rights as the world’s largest listed planter since it made its debut on Bursa Malaysia end November last year (it was created from a mammoth merger of three entities – Sime Darby, Golden Hope Plantations Bhd (GHope) and Kumpulan Guthrie Bhd) and controlled by Permodalan Nasional Bhd, surprised the market over the week by its move to axe its group chief financial officer Razidan Ghazalli (ex-finance director of now defunct GHope) and group vice-president (1) of Downstream and Biofuel Muhammad Mohan Kittu Abdullah (ex-GM of GHope’s Golden Jomalina Food Industries).

In a statement, it said the move follows an in-depth inquiry into RM120mil trading losses at GHope’s wholly owned refinery Golden Jomalina. The board, it said, has decided “that the persons concerned had failed to discharge their functions to the standard of care that were reasonably expected of them.”

It is widely believed that three others have also stepped down on three months notice. They are Datuk Sabri Ahmad, Plantation Integration Advisor (former group chief executive of GHope), Dr Anhar Suki, senior vice-president of oil and fats/biofuel downstream (ex-head of GHope’s biodiesel business) and Azmir Yahya, vice-president of commodities trading and marketing (formerly, GHope general manager of Commodities Trading).

The news set off a flurry of speculation (and a load of accusations) that it was deemed too harsh to sack those involved, that it was “selective prosecution” and that it was motivated to “get the (old) Sime executives back in the game (top tier)” by “gradually thinning out the executives from the other two groups (GHope and Guthrie).”

In stark contrast, the analyst fraternity barely bat an eyelid. In fact, most opined that the losses involved were relatively small and viewed the move as laudable as the board of Sime Darby had set the tone that no transgressions, no matter how big or small, will be condoned. “The main rationale or motivation for the latest move notwithstanding, the loss was not of epic proportion and in the context of Sime Darby today, it would have been only too easy to sweep this under the carpet and make everything seem hunky dory. But the amount of losses is immaterial. The company has sent a signal that such actions are inexcusable.”

Sabri

The Sime stock, the largest on Bursa Malaysia with a market value of over RM55bil, reflected the suspicions with general nonchalance and in fact, rose week-on-week by 15 sen. Since its debut on Bursa end-November 2007, as a new fresh enlarged group, the counter has skyrocketed to a high of RM13.40 in mid January, a low of RM8.60 mid-March to settle around its present level of RM9.20.

What next?

Sources say Razidan and Muhammad may seek legal recourse for their terminations. Attempts to contact both men as well as Sabri drew no response.

The latest development was greeted by distrust and scepticism among certain quarters and much of it directed at Sime Darby president/group chief executive Datuk Seri Ahmad Zubir Murshid. “It is unfortunate for Zubir that he is being perceived as someone pushing the old Sime Darby agenda. And it helps little that the enlarged group or merged entity has adopted the exact title and logo (with a change in hue),” says an industry observer.

And considering the not-so smooth mega merger process (understandably so considering it involved eight companies), indeed a fertile ground for disenchantment within certain quarters, that ought to be least surprising.

From the word “go” (in November 2006 when the merger plan was first proposed), the plan was riddled with a tug of war of vested interests, egos and the greater good (which in itself is a subjective issue). For that reason, picking out a top tier management squad as well as new board, new company name and logo for the enlarged group had posed major headaches as it drew much resistance and intense outmanoeuvring. But as publicly cordial as possible, the creases were ironed out and decisions were made.

Over the week, those sentiments resurfaced. With that, all eyes will be on who is appointed to succeed Razidan as group CFO. No doubt, Sekhar Krishnan (then, CFO of old Sime and now, executive vice-president, group corporate services) will be high on the short list of potential candidates.

How it happened

Not be known to many, the losses in the futures trading was in fact stated in Synergy Drive’s (the name of the special purpose vehicle set up to effect the entire merger) prospectus and more specifically on the attached GHope’s accounts (see chart).

Accountability, to me,has to flow right up.-Zubir

There is a reference to a trading loss from forward commodities contracts in GHope’s audited accounts for financial year ended June 2007, but unless you are very familiar with financial statements, you need to pore over dozens of pages of notes to the accounts to spot the item, which explains why it was overlooked by many in the first place.

CPO futures are derivative financial instruments and therefore, they are not recognised in the financial statements.

However, Note 37, which covers financial instruments, sets out the fair values of financial assets and liabilities that are not carried at fair value on the balance sheet. Here is where you can find a RM77.5mil item described as a financial liability. This represents unrealised losses from forward commodities contracts as at June 30 last year. Had the contracts been settled that day, GHope would have sustained a hit of RM77.5mil.

It is common for plantation companies to trade in CPO futures as a means of hedging against swings in the commodity’s prices. Speculating in futures, however, is unusual among these companies.

Overzealous rogue trader

It is believed that the futures trades that had incurred losses were conducted by a single rogue trader, overzealous to rake in lottery-like loot in a long running CPO bull market. The trades were done between October 2006 and August 2007. Sources say he had blatantly breached the company’s internally set trading limits, many times over. “This trader went overboard in buying and selling CPO futures. He exceeded his daily trade limits and when he tried to cover his position by buying more, the situation snowballed. This exposed the company to some big positions,” says a source. The trader had resigned from the company sometime middle of last year.

Sources say the limit of open position trading for Golden Jomalina was 6,000 mt with maximum allowable variance of RM300,000 at any point in time. Also trading of futures cannot exceed T+3 months forward. The trader, says a source, had exceeded the limit by entering into futures contracts of up to 15 months forward.

“What had started out as an initial paper loss of RM40mil in trading CPO futures kept rising as CPO prices kept escalating,” the source adds.

KPMG Forensics was hired by GHope to conduct an investigative review of Golden Jomalina’s futures trading operations, essentially to explain how such losses could have taken place and to quantify the exact losses involved. The final draft was submitted in late January this year. The issue was deliberated by the board of directors at their meeting on May 28.

How could such lapses have happened? Were internal controls in place at GHope?

Ironically, according to Ghope’s annual report 2006, the pilot project for the group’s Enterprise Risk Management, assisted by PricewaterhouseCoopers Advisory (PWC), was done on Golden Jomalina. “The ERM Project is important for the development of a risk management framework to ensure that principal risks to the business are systematically identified, evaluated and addressed, for an optimal level of business efficiency,” it said. It also included a trading policy and procedures manual.

“This brings to mind the argument that one can have the best systems in place but ultimately, it boils down to implementation,” says a peeved observer.

Meanwhile, in the context of the trading losses discovered in GHope and to prevent a repeat of such occurrences, it is believed that PWC was recently appointed to review Sime Darby group’s entire trading processes.

A tad harsh, maybe?

Many question if Razidan and Muhammad Mohan have received a fair shake. Wasn’t the move by Sime Darby to whistle for foul and terminate the services of these two men “unnecessarily harsh”? they ask.

“It (the futures trades) took place in the trading floor and was carried out by a single trader who had an immediate supervisor. Theoretically, there were controls in place. Could the group CFO have been too far removed from such deeds to have been aware if he was not furnished with adequate information?” asks an observer.

Another observer holds this view: “GHope is not a conglomerate. It deals in one product and that has to do with CPO. How it hedges the CPO prices is the single most important thing a CEO of a plantation company ought to be concerned about.”

So, who ought to be accountable - every single person in the chain of command? May be, may be not.

Quite clearly, it is a highly debatable argument.

So, where should the buck stop?

 
SIME :  [Stock Watch]  [News]

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