Fining directors a good move, but more protection needed

  • Business
  • Saturday, 25 Jun 2011

QUIETLY (and thankfully), it stopped. At one time, Bursa Malaysia's range of enforcement actions included slapping fines on companies that breached the exchange's listing requirements. Eventually, it dawned on the authorities that when the listed companies were asked to pay fines because the management had done wrong, the minority shareholders ended up being penalised twice, especially when the companies were in financial difficulties.

It was bad enough that these shareholders had put money in businesses that were not run well, but what was worse was that the companies' funds were further depleted to pay the regulator for the sins of the management.

In 2008, Bursa Malaysia refined its enforcement policy. Judging from the exchange's media releases, the last listed company to be fined by the exchange was Gold Bridge Engineering & Construction Bhd. That was in February for late submission of its 2007 annual audited accounts and first quarterly report for financial year 2008.

From then on, the companies are publicly reprimanded but not fined. The reprimands mainly function as red flags that alert investors to the fact that these companies have failed to comply with certain listing requirements.

The fines, on the other hand, are for deterrent effect. So, these days, who gets hit where it's supposed to hurt the most? The directors, of course.

The exchange had already been imposing fines on directors before 2008, but not with the frequency and severity we see today. In 2007, 22 directors from seven companies were fined about RM1.5mil in total. So far this year, Bursa Malaysia has fined 16 directors of four companies to the tune of a whopping RM4.4mil. Ouch!

(Bear in mind though that of the RM4.4mil, RM2.5mil relates to the bizarre developments at Kenmark Industrial Co (M) Bhd. The directors who were fined were its three Taiwanese directors, James Hwang, Chang Chin-Chuan and Chen Wen-Ling, and all of them have not been seen in Malaysia for well over a year, making it unlikely that Bursa Malaysia can get them to cough up the money.)

Is this strategy of intently going after the directors sufficiently solid? If we go by the aphorism that a chain is only as strong as its weakest link, we should look at the case of Golden Plus Holdings Bhd (GPlus).

On June 22, Bursa Malaysia publicly reprimanded the property developer for breaches of the listing requirements. The exchange also publicly reprimanded GPlus' seven directors and fined them RM200,000 each. Essentially, the company and the directors were hauled up for not complying with the exchange's “numerous directives” to appoint a special auditor and to allow the accounting firm to proceed with a special audit ordered by the exchange.

This is not the first time that the company has faced enforcement actions. In October 2009, GPlus was publicly reprimanded for delays in submitting its audited accounts, annual report and quarterly report. Its six directors were also publicly reprimanded and fined RM120, 400. Six months later, the company was publicly reprimanded again for similar breaches of the listing requirements. This time, the directors were not penalised.

Here we have a company that has persistently drawn the wrong kind of attention. In less than two years, GPlus has been publicly reprimanded thrice and its board of directors have been fined twice, with the fines totalling RM1.52mil. Is there such a thing as the final straw in matters like this?

It's not just the frontline regulator's patience that's being tested. The GPlus case invites scrutiny of the fine balance between being fair to the minority shareholders and protecting other investors.

Stock exchanges don't usually delist companies just because the companies flout the listing rules. The rationale is that such a move would be unfair to those who own shares in the companies and yet have no say in how the companies are run. Ordinarily, the financially distressed companies are the ones booted out when they're no longer fit to be listed.

What about companies that appear to be healthy but do not always follow the rules? Yes, it's reasonable for exchanges to say it's up to the investors to check the companies' track record before buying their securities, but what then? Are we relying on good old caveat emptor?

The decision to fine directors instead of the listed companies is good for minority shareholders. Next, we ought to consider how better to protect the other investors, going beyond the mantra that in a disclosure-based regime, all that they need to know has already been announced. The problem is, here's one thing we don't know yet: If a listed company repeatedly breaches the listing requirements, why does it still deserve to be listed?

Executive editor Errol Oh is not a baseball fan, but he does believe that after three strikes, you're out.

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