Good management ranks above corporate governance

Good management ranks above corporate governance
PHOTO: Good management ranks above corporate governance
Ron Sim,founder, chairman and CEO of OSIM International.

CORPORATE governance frameworks, while invaluable in guiding corporate behaviour, cannot be substitutes for good management, said OSIM International founder, chairman and chief executive Ron Sim.

Speaking to BT recently about the company's experience as a listed entity, Mr Sim also cautioned against a dogmatic approach to corporate governance and highlighted what he felt are common misconceptions among investors.

"Corporate governance is about transparency and accountability and it is very important for all companies," he said. "But corporate governance by itself does not run a business. The board of directors also does not run the company."

Good management is still the most critical factor, and shareholders are often best served by a management whose interest is deeply intertwined with that of the company, he said. And in this respect, the concept of vested interest - usually seen as something negative in corporate governance - is misunderstood.

"It is a myth that you cannot be vested. The truth is that everyone has a vested interest. Even independent directors have reputations to protect, and that is a vested interest, leaving aside any monetary incentives," said Mr Sim.

He cited himself as an example. He is both chairman and CEO, even though corporate governance guidelines call for the separation of the chairman and CEO roles. He is also the controlling shareholder with over 60 per cent of the company. He is deeply vested in the company, and it is this that aligns him with other shareholders and drives him to protect the company's interests, he argued.

"If you're not vested, you may not care. People like us, we will go up or down with the company. We will not be running away."

In contrast to business owners, professional managers with short-term contracts may not align their long-term interests with that of the company. Increasingly lucrative executive compensation packages also mean that just a few years on the job will be enough for many - and they will not be around to see the consequences of their actions. This could encourage a "mercenary" mentality that will not serve shareholders well, Mr Sim said. "The vested management may actually serve the company better."

The danger of having a very short-term view is also why he has maintained his long-standing opposition to mandatory quarterly reporting for mid to large-sized companies in Singapore.

Singapore requires quarterly reporting for firms exceeding $75 million in market capitalisation, a requirement that still attracts debate. Companies, executives - and even some investors - argue that quarterly reporting encouraged short-termism and increased share-price volatility, while adding to companies' compliance costs and boosting the workload of management and the board.

Corporate governance advocates argue on the other hand that more infrequent reporting could lead to even greater uncertainty in the marketplace, and that price-sensitive information should be released in a timely fashion to all shareholders.

Said Mr Sim: "Quarterly reporting does not encourage transparency and accountability. It makes companies and CEOs think short term when they should be thinking long term. Even when companies finish with one quarter, they have to start preparing to report for the next. It can take the focus away from growing the real business." And that can't be good for investors even though quarterly results can act as price catalysts for trading, he pointed out.

Mr Sim believes that quarterly reporting should be voluntary, and investors would then decide how important quarterly reporting is to their investment decisions. "I believe yearly and half yearly reporting will be enough."

His views on quarterly reporting have been hardened by OSIM's experience. In 2005, the group, best known for its massage chairs and healthy lifestyle products, led a consortium that included a unit of Temasek Holdings to acquire Brookstone Inc in the US, borrowing $100 million to acquire for itself a 55 per cent stake.

Despite the US specialty retailer's propensity for making losses during the first three quarters of a year, OSIM was confident of turning the business around to whole-year profitability. Instead, OSIM's own profitability gyrated in tandem with Brookstone's quarterly volatility, with the cost of the acquisition weighing on the Singapore company's earnings and spoiling a once-proud profit track record. In the end, OSIM made a $77.31 million write-off on its troubled investment in Brookstone. Another issue Mr Sim highlighted was the commonly held notion that independent directors exist to protect the interests of minority shareholders.

"That is wrong. Independent directors safeguard the interests of all shareholders, both the majority and minority shareholders."

He does not agree with the suggestion by some that minority shareholders should be able to elect directors to represent their interests on the board. "Why do you want to introduce impasse on the board? If minorities are uncomfortable with the majority shareholder or the management, they need not stay invested in the company."

Mr Sim added that regulators should be aware of the need to strike the right balance between imposing more demands and the burden this puts on businesses, especially smaller ones. He noted the number of companies that have decided to delist, citing in part the regulatory and compliance burden they face. For now, OSIM, which went public in 2000, intends to stay a listed company, he said.

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