28 Jun 2019

CORPORATE GOVERNANCE IN SIME DARBY

           


CORPORATE GOVERNANCE IN
SIME DARBY


TABLE OF CONTENT


1.0       INTRODUCTION                                                                                         3
                                   
2.0       SIME DARBY                                                                                               3

3.0       CORPORATE GOVERNANCE                                                                   6
3.1       Corporate Governance in the United Kingdom
(UK)                                                                                                    6
            3.2       OECD Principles of Corporate Governance              10
            3.3       Sarbanes-Oxley Act of 2002                                                11

4.0       THE IMPORTANCE OF CORPORATE GOVERNANCE TO
SIME DARBY                                                                                               12

5.0       CONCLUSIONS                                                                                           19

            REFERENCES                                                                                              20
1.0       INTRODUCTION
Corporate governance systems are developed to manage business affairs with the aim of enhancing shareholder wealth and corporate accountability. However, despite the many efforts made, corporate governance flaws (i.e. corporate scandals) keep emerging, making this phenomenon a major governance issue. Various opinions have been articulated in response to this and ethics have been strongly recommended as a factor to solve the corporate governance issue. Motivated by the above, this paper examines the possibility of integrating ethics into corporate governance practices.


2.0       SIME DARBY
Logo simedarby.png
The Sime Darby Group is Malaysia's leading multinational and one of Southeast Asia's largest conglomerates. Founded in 1910, the Group has grown from a single company offering a single product and service in one country into a strong and dynamic international Group with a comprehensive range of business activities carried out by more than 28,000 employees in over 300 companies in more than 20 countries. Known for its financial and management capabilities, Sime Darby is listed on the Main Board of Bursa Malaysia Securities Berhad with a market capitalization in excess of US$5.68 billion as at 30th June 2015.

The company has diverse interests in plantations, property, motor vehicles, industrial equipment, and energy and utilities. Besides, Sime Darby had also diversified into healthcare, which is considered a growth sector in the group. Today the company is a merger of three large plantation entities, with the merger having taken place on November 2007; the entities are Kumpulan Guthrie Berhad, Golden Hope Plantations Berhad and Sime Darby Berhad.

Following the merger, Sime Darby Plantation, which is one of Sime Darby’s business divisions, was established as one of the world’s largest palm oil producer, producing about 2.4 million tons or 6% of the world’s crude palm oil (CPO) annually. The division mainly focuses on the plantation of palm oil and rubber, as well as manufacturing and distribution of food based and non-food based products. To date, Sime Darby Plantation owns approximately 314,154 hectares of palm oil plantations and 8,419 hectares of rubber estates in Malaysia, while another 208,049 hectares of oil palm plantations are located in Indonesia.

Today, in addition to its original plantations core business activity, Sime Darby is also a major player in the motor vehicle, heavy equipment, property, and energy & utilizes industries. While the core businesses are located in Malaysia, the Group has extensive trading and manufacturing interests in the People' Republic of China (including Hong Kong SAR and Macau SAR), Singapore and Australia. The Group also operates in Negara Brunei Darussalam, Indonesia, Thailand, Vietnam, the Philippines, United Kingdom, New Zealand, the Solomon Islands, Papua New Guinea and New Caledonia.

Sime Darby's Group Head Office, a 21-storey glass-fronted building, is located at the junction of two of the busiest roads in Kuala Lumpur - Jalan Raja Laut and Jalan Sultan Ismail.

Figure 1: Sime Darby's Group Head Office



Sime Darby Group Business Activities

Figure 2: Sime Darby Group Business Activities
3.0       CORPORATE GOVERNANCE

The institutions of governance provide a framework within which the social and economic life of countries is conducted. Corporate governance concerns the exercise of power in corporate entities.

Corporate Governance is the key foundation for firms to be more productive and have a long existing product life cycle. The levels of institutional collapse and firm’s failure worldwide from unforeseen circumstances, there have been new concepts or theories on how an organization should effectively run.

In this topic we will discuss corporate governance in the UK, OECD Principles and Sarbanes-Oxley Act 2002.

            3.1       Corporate Governance in the United Kingdom (UK)
                       
                        3.1.2    Financial Reporting Council
United Kingdom (UK) Corporate governance code has developed since in the early 1990s. The corporate failures of the BCCI bank and the Robert Maxwell pension fund turned the attention of many towards corporate governance issue. Since in the 1990’s, many initiatives, including the introduction of the code of corporate governance, have been taken to ensure proper governance of companies.

To manage and monitor the development of the corporate governance code in the UK, the Financial Reporting Council (FRC) was established. Responsible for promoting high standards of corporate governance, FRC has specific objectives as shown in Figure 3.

Figure 3: Objectives of Financial Reporting Council
           

                        3.1.3    Chronical Development of the Corporate Governance Code
The corporate governance code is a dynamic document which is undergone revisions and improvements to cate to current situations. A committee was established to review and revise the code before the updated or current code of corporate governance was published. Table 1 outlines the history of corporate governance codes in the UK.



YEAR
REPORT OR CODE
1992
Cadbury Report
1995
Greenbury Report
1998
Hampel Report
1999
Turnbull Report
2003
Higgs Report (non-executive directors)
2003
Smith Report (audit committee)
2003
Combined Code
2006
Combined Code (June)
2010
UK Corporate Governance Code
Table 1: Chronological Development of Corporate Governance Codes in the UK


                        3.1.3    The UK Corporate Governance Code (2010)
After several amendments, the current code of corporate governance for the UK was created, which is, the UK Corporate Governance Code (2010). This code applies to accounting periods beginning on or after 29th June 2010

This code applies the “comply or explain” approach. This approach requires companies to comply with the rules and recommendations; otherwise, they need to explain their non-compliance. It consists of principles (main and supporting) and provisions. Figure 4 lists five main principles of the code and supporting principles for each main principle:


Figure 4: Main Principles of the UK Corporate Governance Code (2010)
Source: Financial Reporting Council (2010)

3.2       OECD Principles of Corporate Governance

The Organization for Economic Co-operation and Development (OECD) was initiated to promote policies that will improve the economic and social wellbeing of people around the world.

OECD celebrated its 50th anniversary in 2011, with a current membership of 34 countries worldwide.

One of the policies is the OECD Principles of Corporate Governance, which was published in 2004. The code outlines six major principles as shown in Figure 5:


Figure 5: OECD principles of corporate governance
Source: OECD (2004)
                       
            3.3       Sarbanes-Oxley Act of 2002
The Sarbanes–Oxley Act of 2002 (enacted July 30, 2002), also known as the "Public Company Accounting Reform and Investor Protection Act" (in the Senate) and "Corporate and Auditing Accountability and Responsibility Act" (in the House) and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or expanded requirements for all U.S. public company boards, management and public accounting firms. There are also a number of provisions of the Act that also apply to privately held companies, for example the willful destruction of evidence to impede a Federal investigation.

The bill, which contains eleven sections, was enacted as a reaction to a number of major corporate and accounting scandals, including Enron and Worldcom. The sections of the bill cover responsibilities of a public corporation’s board of directors, adds criminal penalties for certain misconduct, and required the Securities and Exchange Commission to create regulations to define how public corporations are to comply with the law.

The eleven sections also known as the eleven Major Elements in the Sarbanes-Oxley Act of 2002. Figure 6 is showing the elements that was introduce in the act in 2002:

Figure 6: Major Elements in the Sarbanes-Oxley Act of 2002
Source: Wikipedia



4.0       THE IMPORTANCE OF CORPORATE GOVERNANCE TO SIME DARBY

Sime Darby is a diversified Malaysian multinational involved in key growth sectors such as plantations, property, motors, industrial equipment, and energy and utilities. It operates in over 20 countries, employing more than 110,000 people, and has a large, diverse shareholder base.

Over its 100-year history, the Sime Darby Group has evolved, and not just as a thriving business concern. With the development of increasingly stringent governance and responsibility standards over the last few decades, Sime Darby has made the decision to entrench those values at its core.

This is a continuing effort and there is constant evaluation within the group of its operating, governance and ethical standards to ensure its commitment to corporate responsibility is met. The main challenge the group had to face when adopting more stringent governance standards, which included greater oversight and transparency, was ensuring the various businesses were still able to show sustainable growth and remain nimble.

Other than that, good corporate governance can improve Sime Darby in terms of:

            a)         Strength and flexibility
A strong governance framework is an essential part of Sime Darby’s strategy to maximize shareholders’ wealth. The size and diversity of the group’s operations require a dynamic self-governing model that balances the operating autonomy of the divisions with appropriate checks, balances and performance benchmarks. This does present certain challenges, given the group operates disparate businesses in regions as remote as Liberia, where it has a 220,000-hectare plantation concession, and the Pacific Islands, where it has Caterpillar dealerships.

The current model is sufficiently flexible for the divisions to be responsive to market dynamics at the local level, yet robust enough to ensure local practices are consistent with group policies on ethics and governance. The hallmark of Sime Darby’s governance framework is the two-tier board structure, headed by the Main Board and supported by Flagship Subsidiary Boards (FSBs). Each FSB is charged with operational oversight of its division but remains subject to the direction and counsel of the Main Board, particularly on matters of strategy and policy.

The structure is modular and FSBs can be added or removed as businesses are acquired or disposed of.  Clear terms of reference ensure the FSBs remain focused on all aspects of divisional operations. This allows the Main Board to take a broader perspective, looking at enterprise issues such as strategy, risk management and governance.

Sime-Darby-2
Figure 7: Two-tier board structure


Each FSB is structured to ensure a balanced composition, with members drawn from the Main Board and senior management, as well as including independent industry experts. Sub-committees also support the Main Board. All nominations to the Main Board and FSBs are reviewed by the Nomination and Remuneration Committee (NRC), of which independent directors are a majority.

The roles of the Chairman, and the President and Group Chief Executive are distinct and separate. A dedicated Group Compliance Office (GCO) was established in February 2011 to assist with the implementation of a compliance management framework.


b)         Developing Standards
The management reporting system complements the two-tier board structure; each division has a management committee that is subordinate to the Group Management Committee. Reporting lines between the Group Head Office (GHO) functions and their divisional counterparts are clearly defined to ensure accountability and alignment of purpose. Finance and legal, in particular, are considered ‘gatekeeper’ functions that are capable of red-flagging potential issues and risks. Therefore, a direct reporting line has been created to the GHO.

In a similar vein, the audit and compliance functions report directly to the Governance and Audit Committee (GAC), while risk management reports directly to the Risk Management Committee. This ensures the independence of the audit and risk functions, which is crucial to the integrity of the governance framework. To further complement its self-governing framework, procurement and shared services are used as control tools, and centralized where possible to reduce the duplication of systems and increase effectiveness by reducing the risk of human error.

In 2007, the group adopted a new brand promise: “Developing Sustainable Futures”. With this move, the group announced its intention to seek a balance between financial growth, environmental stewardship and social sustainability across all its business activities. This commitment is constantly reviewed and assessed by various champions within the group, whether it is in governance and safety standards at one end of the responsibility spectrum or philanthropic assistance on the other.

For example, the group’s corporate responsibility programmes conducted through the plantation division focus on elevating socio-economic standards in various ways, including offering educational assistance, and improved public infrastructure and healthcare for the benefit of local communities.

As a signatory to the United Nations Global Compact (UNGC), the group strives to embed the 10 principles of the UNGC with respect to human rights, labor, environment and anti-corruption in its strategy, culture and day-to-day operations. The group shares this commitment to corporate responsibility with its employees and other stakeholders, including business partners.

Sime Darby was the first government-linked company to sign the Corporate Integrity Pledge introduced by the Malaysian Anti-Corruption Commission (MACC). This Pledge is in accordance with the second initiative of the Government Transformation Programme to fight corruption in Malaysia.

c)         Lowering Risk
Another important aspect of corporate governance to Sime Darby is mitigating or reducing the amount of risk that is involved. Through corporate governance, scandals, fraud, and criminal liability of the company can be prevented or avoided altogether.

Since the people involved in the organization know what they are accountable for, the actions of one person doesn’t mean the downfall of the entire corporation. Properly identifying what the roles in the corporation are allows decisions to be made that won’t have a negative effect on the overall corporation, and it means that the offender can be much more quickly identified and punished instead.

Corporate governance is also great because it is a form of self-policing. Before outside forces are able to do anything to a corporation, it’s possible for the corporation to handle matters itself. With corporate governance, everyone is held to a specific standard and communication is made easier due to their being an established hierarchy and role that everyone involved in the corporation plays. This level of handling business on its own instead of being forced into making decisions outside of the company helps keep the corporation sustaining itself.

c)         Governance and Transparency
As part of its on-going efforts to strengthen its self-governing structure, Sime Darby has launched several initiatives to inculcate a strong culture of ethics. The group rolled out the Code of Business Conduct (COBC) in nine different languages (and Braille) to directors and employees across its divisions and territories.

The COBC emphasises a zero-tolerance policy on corruption and is reinforced through various channels, including e-learning, classroom training, the intranet and the group’s website. Approved vendors are also required to sign a ‘Vendor Letter of Declaration’ to ensure adherence to the COBC. Appropriate channels for whistleblowing are available for complaints to be escalated to management. The Senior Independent Director (SID) directly oversees the whistleblowing function and ensures all reported violations are properly investigated.

Sime Darby also issued a Directors’ Manual and Directors’ Handbook, which provides a reference point for directors, while the Group Policies and Authorities (GPA) articulates its governance framework and limits of authority to all its employees. The GPA is available to all employees via the portal.

All corporate disclosures are made in a timely and accurate manner to the stock exchange. Corporate and business information is disseminated to all stakeholders in a uniform, fair and timely manner. Messaging is developed and coordinated centrally at Head Office, and departments engaged with different stakeholders are entrusted to communicate effectively and meaningfully.

The group maintains an investor-friendly website with up-to-date information, data, announcements and downloadable presentation materials. Sime Darby also maintains active dialogues with key governance stakeholders such as the MACC, Malaysian Anti-Corruption Academy and Transparency International-Malaysia, which are centred on the group’s anti-corruption initiatives. The GCO submitted its second report on the group’s anti–corruption activities to the MACC in July 2013.

Sime Darby is majority owned by a Malaysian government investment fund, but believes in upholding the rights of all its shareholders. The group has put in place the following shareholder protection mechanisms:

·         Independent directors form a majority on the GAC and the NRC;
·         Appointing a SID to whom shareholders and other stakeholders may raise their concerns;
·         Whistleblowing policy that provides employees, shareholders and other stakeholders with an avenue to report, in good faith, any suspected wrongdoing;
·         Disclosure of related party transactions involving directors, major shareholders and persons connected to them; and
·         Open letter responses to queries raised by a Malaysian organization representing minority shareholders, which are openly shared at annual general meetings.





5.0       CONCLUSIONS

Corporate governance is an aspect of business that’s become incredibly important in recent years, but it isn’t the only part of business a person has to understand.

Markets work best when information is available to all. Companies like Sime Darby have a responsibility in this area, but other intermediaries, such as brokers, analysts and rating agencies, also play an important role. Here, too, the revised OECD Principles call for measures to ensure independence and transparency and to counter possible conflicts of interest.

The revised Principles emphasize the need for effective regulatory systems that ensure that the potential for damaging conflicts of interest remains limited and that there is a level playing field among the major participants in corporate governance, for example, through protection of minority shareholders. Effective implementation and enforcement require that laws and regulations are designed in a way that makes them possible to implement and enforce in an efficient and credible fashion. Supervisory, regulatory and enforcement authorities should have the power, integrity and resources to act professionally and objectively.  The division of authority between agencies and supervisory bodies should be well defined and they should pursue their function in an unbiased and even-handed manner without serious conflicts of interest.

By agreeing on these Principles, OECD governments have set the broad foundations for high standards of corporate governance. The legislation needed to enforce these standards is the responsibility of individual governments, and in enacting it, governments and policy makers need to find a balance between rules and regulations on one hand and flexibility on the other. Looking ahead, the governments of OECD countries are committed to maintaining an open dialogue with all the parties involved so that everyone can learn and benefit from the shared experiences of putting these Principles of Corporate Governance into practice.  This is vital to ensuring that the Principles remain relevant and effective, evolving as new issues arise.
ATTACHMENT

REFERENCES
Allen, W.T. (2001). The Mysterious Art of Corporate Governance, Corporate Board. 22 (130): 1-5.

Corporate governance - OECD. (2011, November 17). Retrieved October 27, 2015, from http://www.oecd.org/corporate/

Gunasekaran.P. (2011). Breaking up Sime Darby. Retrieved October 27, 2015, from http://biz.thestar.com.my/

OECD. (1999). OECD Principles of Corporate Governance, Organization for Economic Co-operation and Development, Paris

Pass, C. (2004), Corporate Governance 4 (2): 52-63, Emerald Publishing Limited.

Sime Darby: Developing Sustainable Futures. (2014, December 5). Retrieved October 27, 2015, from http://www.simedarby.com/Corporate_Profiles.aspx

Stiles, P. and Taylor, B. (2001). Boards at Work: How Directors View Their Roles and Responsibilities. Oxford University Press, Oxford and New York, NY.




Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut laoreet dolore magna Veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea commodo consequat.

Biar Kami Bantu Anda

Hubungi Kami
Sarah
+60182765083
KUALA LUMPUR