Recently shareholders of AirAsia Group Bhd (KLSE: AIRASIA) and Atta Global were shocked to learn that key executives in their respect companies were caught up in claims of severe misconduct.
Last week, AirAsia’s name came up in a UK court judgement for a corruption trial involving aircraft manufacturer Airbus SE (EPA: AIR), in which Airbus allegedly bribed two unnamed executives – dubbed as “key decision makers” at AirAsia, by providing some US$50 million in the form of a sponsorship for a sports team owned by the two executives, in exchange for purchasing Airbus aircraft. Shares of AirAsia Group and its sister company AirAsia X slumped after the news broke. Co-founders Tan Sir Tony Fernandes and Datuk Kamarudin Meranum have since relinquished their executive roles while authorities probe the bribery claims.
Atta Global has suspended executive chairman Ooi Chieng Sim, after he was among
eight men charged with drug trafficking at the Magistrate’s Court in Bukit
Mertajam. These eight men were accused of trafficking 4,980 grams of
methamphetamine at a warehouse by the side of Atta Global’s premises in Perai
Industrial Estate. Police seized several of Atta Global’s properties in Penang
and luxury cars in connection with its investigations. Share of Atta Global and
Heng Huat Resource (where Ooi is also executive chairman) were suspended since
aside, the two incidents highlight the importance of having a good
understanding of the people running the business, before you buy shares of any
company. This is especially crucial in Asia where the majority of listed
companies are owner-operated. Managers that are dishonest and incompetent can
cause a business to lose value over time, and as investors, you would have
suffered massive losses and opportunity costs if you had invested in such
companies. How can we then avoid such mistakes? Well, below are five examples
of management actions that could potentially undermine a company, and in turn,
- Excessive compensation package
Be wary of
managers who write themselves a big pay cheque when the company is producing
mediocre or poor results. In doing so, they are focusing on their own interests
(i.e. maximizing their compensation package) at the expense of shareholders.
At the company’s 2018 annual general meeting (AGM), Sapura Energy Bhd’s (KLSE: SAPNRG) chief executive officer (CEO) Tan Sri Shahril Shamsuddin survived a bid by institutional investors to oust him as director and CEO amid unhappiness over this total pay package of RM71.92 million for the financial year ended 31 January 2018. Shahril’s remuneration of RM71.92 consisted of RM7.24 million in fixed monthly salaries (and other emoluments), RM55 million in performance bonuses, RM9.34 million under the defined contribution plan and RM348,000 for benefits-in-kind. To put things in perspective, the company recorded losses of RM2.51 billion for the same year.
- Overpaying for acquisitions
of growth, managers often turn to business acquisition. In some cases, managers
justify paying a high price for synergies that do not materialize. Instead of
growth, the company faces problems of integrating the acquisition with its
existing business operations. Further, if the acquisition is financed by debt,
the company is saddled with unnecessary borrowings.
Shares in Top Glove Corporation Berhad (KLSE: TOPGLOV) plunged in July 2018 after the company announced its acquisition price of surgical glovemaker, Aspion, from Adventa Capital could have been overstated by as much as RM714.90 million. Top Glove claimed that Aspion directors, Low Chin Guan and Wong Chin Toh had conspired to defraud and deceive it unto acquiring Aspion for RM1.37 billion. It took legal action against Adventa Capital, Low and Wong after discovering financial irregularities in Aspion’s balance sheet following the completion of the acquisition three months earlier in April 2018. Moreover since the integration, Aspion has yet to produce a significant profit for the group, at least not up to Top Glove’s expectations.
acquisitions must be considered cautiously. No matter how good a business, if
you overpay for it, it could turn out to be a poor investment. It would be too
late to have buyer’s remorse once an acquisition is completed.
- Dubious related party transactions
In August 2019, Genting Malaysia Bhd (KLSE: GENM) announced that it had signed a term sheet to buy the stake in Nasdaq-listed Empire Resorts from Kien Huat Realty, a company controlled by Genting’s founding Lim family. Minority shareholders raised concerns of earnings erosion since Empire Resorts has been posting net losses since 2015, and the acquisition price of US$129 million implied a premium to book value.
Malaysia defended its decision to invest in Empire Resorts, saying the deal
would place the company “in a position to more deeply access the New York
market and provide both Genting Malaysia and Empire Resorts the opportunity to
compete more effectively in the northeastern US region’s current competitive
gaming landscape.” Time will tell if the acquisition was wise and indeed
core, WeWork is a real estate company that leases long term office space in
order to rent it to others in the short term. However, the company presented
itself as a “tech company”, and persuaded prospective investors to buy in to
its vision of becoming the “largest physical social network in the world” and a
company that “elevates the world’s consciousness”. Its chief financial officer,
Artie Minson even urged investors to view losses
as “investments”, when the company reported a loss of US$264 million in the
first quarter of 2019.
be an inevitable part of starting and growing a business – a fact that is
widely understood in the investing community. That said, it is important for a
company’s management to be honest and forthright about these losses, and to
demonstrate a path to profitability. Don’t let management charm you with
unrealistic ideas and take you for a spin.
Wells Fargo & Co (NYSE: WFC) was regarded for years as one of America’s best banks. Then, in 2016, its pattern of wrongdoing became public. The bank admitted that employees had opened as many as 3.5 million phantom accounts in customers’ names to meet stratospheric sales goals. It also admitted forcing customers to buy unneeded auto insurance and charging improper mortgage fees.
has been costly for Wells Fargo. Its CEO was pushed out. The bank has paid more
than US$1.5 billion in penalties to federal and state authorities and US$620
million to resolve lawsuits from customers and shareholders.
factors contributed to Wells Fargo’s toxic sales culture: unrealistic and
unreasonable expectations, minimal accountability and an atmosphere of fear. In
short, Well Fargo’s executives created an environment where the results of
hitting sales targets greatly outweighed corporate values of “ethics” and
“doing what is right for customers”. Avoid companies with toxic business
several ways you can do your research on management. You can read about your
managers in news articles or study their track record from annual reports. You
can also listen in on interviews and company earnings calls or even ask
management questions face to face in an AGM. And if you spot one or more of
these management red flags, reconsider your investment.
To end, we
leave you with the wise words of Warren Buffet. He said that “in looking for
someone to hire, you look for three qualities: integrity, intelligence and
energy. But the most important is integrity, because if they don’t have that,
the other two qualities, intelligence and energy, are going to kill you.”