Minority Revolt

Small investors in Asia are finally fighting for the respect they deserve.
Abe De RamosJune 1, 2003

NatSteel’s offer looks generous in the extreme. At a time when SARS-stricken companies in Asia have put a lid on spending, the Singapore engineering group plans to double its announced dividend payout. The sum its majority owners want to distribute to public shareholders is US$240 million, equal to almost one quarter of last year’s sales.

But when David Gerald, the president of the Securities Investors Association of Singapore (SIAS), studied the offer, it didn’t take him long to see the fine print. NatSteel’s owners are only promising the extra money if, and only if, minority investors approve a rule that makes it easier to issue convertible bonds. In effect, majority holders would get a blank check to dilute minority shares with impunity — if the minorities say yes to big money now.

No wonder that the NatSteel dividend has become a cause celebre — or that Gerald has decided to fight. A former lawyer with an unflappable demeanor, Singapore’s premier investor advocate also has the aggressive cross-examining technique of a star prosecutor. He boasts a mounting portfolio of successful actions fought on behalf of beleaguered minorities. And, unfortunately for NatSteel’s owners, SIAS members own NatSteel shares. “We’ll grill them,” he says. “A dividend is distribution of profits,” he adds. “I’m entitled to it. But why should it be tied to a [resolution] that will lead to dilution of my shares?”

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NatSteel’s CFO Lim Say-Yan declined to comment.

Rebels with a Cause

CFOs of large government and family-owned companies beware. Gone are the days when closely held companies could ram through measures that squeezed minority investors’ rights without much fuss. Gerald is just one of a handful of increasingly powerful, homegrown leaders in the fight for investor rights in Asia. A short list would also include Jang Ha-Sung in Korea, who heads a grassroots organization that has challenged powerful chaebols, and activist David Webb in Hong Kong.

These and other gadflies are benefiting from a growing body of legal statutes to protect investors. South Korea’s parliament is expected to approve a law that would allow for shareholder class-action suits shortly. Taiwan has already approved a similar, albeit weaker, measure. Singapore, Thailand and Hong Kong have approved non-punitive governance codes that add clout to public complaints over outrages against shareholders.

CFOs of companies with only a handful of public float — a majority among listed firms — can expect increased questioning on company investments, compensation plans and accounting from assertive investors.

“Investor interest in corporate governance is intensifying,” says Mark Mobius, president of Templeton Emerging Markets, one of the largest investors in the region. Mobius is a long-standing critic of Asian companies’ pre-emption of minority shareholder rights. “There are so many cases to be angry about that it’s difficult to begin,” he says.

Mobius can count his blessings that more cases throughout the region have tilted in favor of minority investors. These include Henderson Investments in Hong Kong, Hyundai Mobis in Korea, and SembCorp in Singapore.

Target: CFO

The case of Gerald and NatSteel shows just why the CFO has become the target of the new rebels.

Based on documents filed with the stock exchange, NatSteel’s logic in tying the dividends with the convertible bonds goes like this: Since the mammoth dividend payout would reduce its cash balance by a third, NatSteel would need more flexibility to raise money quickly. Convertibles feature an option to retain the safe harbor of bonds or convert to riskier equity, so they can be attractive to investors even in uncertain markets.

For Lim, the CFO, being able to issue them quickly without cumbersome shareholder approvals would add to his arsenal of fast cash-raising vehicles.

But Gerald calls this pretzel logic. “There is no plausible explanation to the linking of the special dividend with future fundraising, because they can be voted on independently,” he says. If the company fears a cash crunch, why give out the enormous sum at all?

Issuing new debt or equity isn’t the only way to protect liquidity in lean times. CFOs have cash-saving alternatives as well, such as cutting costs, squeezing receivables, and as Cathay Pacific did last month, slashing dividends.

As CFO Asia went to press, NatSteel shareholders have yet to vote on NatSteel’s proposal. Gerald is urging small investors to trash it at the general meeting.

Investors are sticking to their guns with CFOs in markets with even less shareholder-friendly reputations than Singapore. Mediatek, a Taiwanese integrated chip company, caved in on April 4 to long-running shareholder complaints over a compensation scheme that would have diluted the stock, erased the company’s profits, and scotched any hope of dividends. The victory is likely to set a precedent in Taiwan, which rated below Indonesia and Pakistan in an annual tally of corporate governance by investment bank CLSA.

At issue was a lavish bonus plan that Mediatek’s owners granted to employees. The scheme included a payout of 18 million shares, or 4.1 percent of outstanding shares, with a par value of NT$10 (29 US cents) each. This represented a 98 percent discount to the prevailing market price of NT$447. Because Taiwan GAAP only requires expensing share bonuses at par value, the actual dilution impact of the move was masked. If expensed at fair value, the imputed amount of the bonus issue, NT$8.1 billion, would have wiped out the 2001 net profit of NT$6.7 billion.

Institutional shareholders protested the move, and some started a wave of campaigns against abusive share bonuses. “Almost all listed high-tech companies in Taiwan have been similarly diluting non-management shareholders over the past several years in varying degrees,” says Manish Singhai, fund manager at the Singapore branch of US-based Alliance Capital, in a paper prepared for an Organization for Economic Cooperation and Development (OECD) conference. “Mediatek took it to an extreme.”

Its share price plummeted 14 percent in the three weeks after the bonus share announcement.

Mediatek announced it was reducing its bonus issue to 3.1 percent of outstanding shares. And it’s not because times were hard; in fact, the company posted a record 82 percent increase in net income in 2002. In a first among non-US-listed Taiwanese corporations, the company also released a pro forma on the impact to the bottom line had the bonuses been expensed at fair value. “It’s a response to shareholders,” says CFO Yu Mingto. He adds: “Investors have a legitimate concern about how the employee bonus scheme dilutes their ownership.”

In a bid to “find a balance between shareholders’ and employees’ interests,” says Yu, Mediatek chairman Tsai Ming-Chieh met last month with US-based consultants about the possibility of replacing share bonuses with grants of restricted stocks, which, under US GAAP, are expensed over the vesting period. The problem: Taiwan has no accounting rules governing them. “Our chairman has proposed that maybe Taiwan can consider modifying our regulations here to allow restricted stocks,” says Yu. It’s a rare gesture, justifiably rewarded. Since April, Mediatek’s stock price has risen 10 percent to NT$288.

Into the Breach

Adding heft to shareholder actions, the Taiwanese Securities and Futures Institute is adopting a “quasi” approach to class action suits by allowing small investors to piggyback on the cases it brings against errant directors.

No such halfway measures for Korea, where legislators are expected to pass a bill this month for securities-related class action laws, specifically targeting stock price manipulation, false disclosure, and accounting fraud. The People’s Solidarity for Participatory Democracy (PSPD), a non-profit group, is sure to take advantage of the class action laws. The group has been the most litigious of activists in Asia since the crisis. Most recently, it called Korean prosecutors’ attention to irregularities at SK Corp, which led to the crackdown on the country’s third largest conglomerate and the imprisonment of its CEO Chey Tae-Won.

Class action laws will give PSPD teeth. In a class action suit, the burden of proof lies on the defendant, and the financial benefits from a victory, which go to shareholders, will cover the legal costs (a defeat means lawyers do not get paid). “In terms of the legal liability, class action lawsuits will definitely function as a deterrent against chaebol abuses, like in securities transactions,” says Jang Ha-Sung, who heads the PSPD. “Lawyers will also have an incentive to take [these cases].”

The class action laws will signal Korea’s determination to promote chaebol reforms, and this should help reduce the “Korea discount” that investors attach to local companies out of inherent distrust in their corporate governance. “The lack of class action is just part of the overall picture where you have a carrot and a stick,” says Vincent Duhamel, Asia Pacific CEO of US-based StateStreet Global Advisors. “The stick is you can hit with a lawsuit; the carrot is, if [investors] are active, they would be re-rating the market, getting rid of the discount. I hope [companies] get the message.”

As the SK debacle unraveled this February, Doosan Group, another chaebol, canceled bonds with warrants held by members of its founding family in what market observers believed was a move to sidestep a likely probe by Korean prosecutors. The probe was called for by the PSPD which suspects that such instruments were being used to keep the family in control of the conglomerate.

“[Two] of the most popular instruments among chaebol families in Korea [are] convertible bonds and bonds with warrants,” says Jang, referring to debt instruments with features that make them convertible into common stock. “A company issues bonds with warrants and we don’t know who buys them; a few weeks later, the warrants are in the hands of family members, and the exercise price is far below market value.”

In Doosan’s case, PSPD alleges that in July 1999, third-generation managers of the conglomerate transferred 1.59 million bonds with warrants (BWs) with favorable options and interest rates to 26 of their children through illicit internal transactions. “Doosan Group’s fourth-generation owner-managers have decided to cancel all of the 1.59 million BWs they hold in flagship Doosan Corp in a bid to help boost the company’s stock price,” the Group said in a press release quoted by Korean newspapers.

Where corporate governance laws don’t exist in Asia, shareholder rights activists are adopting a strategy of shaming owners into action. “We turn up at AGMs, we write letters, and we pressure from within,” says Hugh Young, managing director of Singapore-based Aberdeen Asset Management Asia. He adds: “If you want to address your complaint, you name and shame, using the media more often rather than the courts.”

In Singapore, which has no securities class action laws, the Securities Investors Association of Singapore (SIAS) has adopted the shame strategy. “We try to see the company and talk them into being reasonable,” says David Gerald, president of SIAS. “If they aren’t, then we will publish it by writing to newspapers. We use public embarrassment techniques.”

Recently, the SIAS stepped up its campaign against excessive pay and stock options. Last month, it cited Singapore Telecoms’ “brilliant” new pay-for-performance package, when the company dropped stock options and replaced them with stock grants, provided that the company shows good returns in three years. “This is what brings joy to shareholders,” says Gerald. “In deciding on extra remunerative packages, they must align the interest of the company with the shareholders.”

In the same breath, SIAS is challenging companies, starting with DBS Bank, Southeast Asia’s largest, to disclose detailed remuneration not just of directors, but of non-director senior executives as well (Singapore’s Corporate Governance Code only asks for directors’ salaries, in bands of S$250,000). “If the company performs well, we will not be grudging if you want to pay the CEO well, so long as we get our share value,” says Gerald.

SIAS has proved that public pressure works. Gerald has used the media as a means to get in the door and speak directly to CEOs and their finance chiefs. Last year, he engaged Chia Song Hwee, CEO of custom chip maker Chartered Semiconductor, in a 90-minute meeting, where the latter fended off speculation that insider trading was involved in its much-criticized rights issue. “SIAS is an effective and powerful voice,” he says, “and companies are recognizing that minority shareholders will not be short-changed.”

Gerald met with directors of Asia Food & Properties (AFP) in July 2001 after SIAS members complained that directors were set to approve “a remuneration package that far exceeded their performance,” a loss of S$218 million in fiscal 2000. Members also wanted an explanation of why AFP had transferred millions of dollars to a Cook Islands account.

The meeting resulted in AFP deciding to freeze half of the directors’ fees, and to appoint solicitors to trace the money. “It was confidential, but they gave us a reason and we were satisfied,” says Gerald. “In fact, half of the money had come back.”

SIAS has also met directors of other companies, among them: SembCorp Industries (valuation of shares in the privatization of Sembawang Marine); CSA (non-payment of dividends); Fraser & Neave (remuneration package for non-executive directors); and Golden-Agri Resources (directors’ fees and transfer of money).

All these, to some extent, have contributed to the build-up of momentum in other minority shareholder victories at general meetings, such as Keppel T&T last year (disapproval of its privatization owing to poor valuations), Datacraft Asia last February (disapproval of options grants and allotment of shares to directors and employees of parent company, Dimension Data), and Craft Print last March, when a shareholder filed a resolution to cap directors’ pay at S$480,000.

“It used to be that shareholders just came to general meetings for a good lunch, and they’d complain if the lunch wasn’t good,” Gerald says. “Now they are becoming more active, learning how to interpret annual reports and financial statements. They’re no longer asking about lunch, but the financial health of companies.”

Poll Vault

Such is not the case in Hong Kong, where shareholder activism is in the hands — almost the only hands — of David Webb, a former investment banker turned full-time investor. At a general meeting last month, just as Webb took the microphone to ask a question, an investor — who was quoted by a local newspaper — made her priorities abundantly clear. “Would you shut up?” she said. “You ask too many questions. You are delaying the meeting. It is lunchtime. I want lunch now.”

This lack of public support is responsible, in part, for killing Webb’s proposal for a Hong Kong Association of Minority Shareholders (HAMS) last year. More than a lobby group like SIAS, HAMS was intended to be a body capable of organizing active investors and, in cases of corporate abuse, filing “simulated” class action suits in Hong Kong, where no such laws exist. One weakness of Webb’s proposal was that he wanted HAMS to be funded by a levy on stock trades, which didn’t suit regulators who are themselves funded by such levies.

This April, however, Webb scored a victory when shareholders of the Hong Kong Exchange (HKEx), the listed main board, elected him as one of its directors. Webb hopes to make changes from within. “In the past, I was just an outsider making complaints, but at least while I’m on the board, I hope they will be responsive to my concerns,” he says. “The directorship in itself is not that dramatic, because I will be a minority, but in terms of authority, this allows me to bring matters to the attention of the management, to advocate reforms in the voting system, in the listing rules, and so on.”

That’s a tall order, given that many market participants have thrown up their hands in disgust over the Hong Kong government’s inaction on improving corporate governance. “In the six years I’ve spent here, one of the biggest surprises has been the lack of protection to minority shareholders, which I’ve seen through legal problems that my clients have experienced,” says Timothy O’Brien, partner at the Hong Kong office of US law firm Coudert Brothers. “I think class action laws in Hong Kong would be a salutary development.”

But even without the HKEx board seat, Webb has been trying to agitate general meetings in Hong Kong. His latest campaign is on the voting system where a show of hands, rather than a one-vote-per-share counting, still determines the fate of important resolutions. To change this, Webb bought stakes in the 33 Hang Seng Index companies, just enough to demand a poll on their general meetings. On his website,, Webb outlines both the resolutions and his voting recommendations.

Webb’s recommendations are mostly against conflicts of interest in directorships, and the issue of general mandate, a facility that allows CFOs to issue new shares without shareholders’ approval. Though this is common international practice, Hong Kong has a generous ceiling on the issuance of new shares (up to 20 percent of issued share capital) and the frequency the mandate can be “refreshed” in a year (unlimited).

While CFOs say the general mandate is a quick, practical way to raise capital, Webb says it has been abused to dilute minority shareholders, and to keep control within the conglomerate family, since the shares can be sold by private placement.

“If you give directors powers to choose who holds their shares by allotting new shares, and thereby who holds the voting balance in the company,” says Webb, “then you corrupt the governance mechanism because it should be shareholders governing the directors and not the other way around.”

Far Sighted

At least, Webb’s call is being heeded in his own backyard. Last month, eyewear maker and retailer Arts Optical, of which Webb owns a 5.25 percent stake, voluntarily adopted polling as well as UK standards on general mandate, which means capping it at 5 percent of issued share capital a year. “We’d like to send a message to shareholders that their interest in the company will not be diluted,” says Desmond Wee, CFO of the HK$602 million (US$77 million) a year company.

It wasn’t always that way. Last year, the company placed 28.5 million new shares (8 percent of issued share capital) to Templeton at a 12 percent discount. Wee says this was done to bring in a well-known name to the company, in a bid to boost its profile and consequently, liquidity. “On one hand, we’d like long-term funding,” says Wee, “but on the other, we’d also like to raise our profile so more investors will pay attention to us. If you compared the turnover of our shares before and after the placing, it grew ten times.”

But, asks Webb, did the end justify the means? “Although it created some excitement in the company — which didn’t need the money because it was flush with cash — it diluted earnings by about 5 percent,” says Webb, who accumulated his stake in Arts Optical through the market. “They were either badly advised or made a bad decision at the expense of minority shareholders who weren’t offered the same discounted shares.”

For Wee, the decision to cap the mandate was an effort to “strike a balance”. “As CFOs,” Wee says, “we need to strike a balance. If there is no limit [to the general mandate], it does make our job easier, but it’s also our job to give confidence to shareholders. I cannot sacrifice this.”

To make sure that other CFOs don’t either, Webb urges minority shareholders to vote against general mandates during annual meetings. Last month, he succeeded with Hong Kong carrier Cathay Pacific, where 62 percent of minority voters voted against the mandate.

This, of course, means nothing, since only about 30 percent of Cathay shares are held by the public and the controlling shareholders did not abstain from voting their shares. “I think it’s a matter of democracy and transparency,” says Webb. “There are a number of matters put to shareholders for a vote which, in my view, should be voted upon by independent shareholders exclusively, such as the election of independent directors and the general mandate.”

Since many large Hong Kong companies are up to 75 percent family-owned, in the end, isn’t Webb’s advocacy for voting a wasteful exercise? No activist would say yes. “The votes that can be cast are objection votes, they are worth casting,” Webb says. “The votes would have defeated the general mandate. So people should keep voting, but it will be establishing a track record of objection rather than actually winning votes.”

To firm up his point, Webb, too, will embark on a name-and-shame campaign, not on companies, but on institutional investors who do not exercise their votes. “If it’s clear that their votes have not been made,” he says, “then you’ve got to question whether they’re acting in the interest of beneficiaries. I think you’re going to get more activism because of that, the transparency process.”

Gerald of SIAS is not so convinced that the technique will work for institutional investors. “Exposure and embarrassment will discourage the party from participating with you forever, in fact they might become antagonistic,” says Gerald, who is already trying to recruit more institutional investors to join SIAS, and is calling on pension funds to also exercise their votes.

“Antagonism will not achieve anything,” he says. “Once you do, you lose them forever.”

Sterling advice for activists no doubt. But it applies equally to management and directors and their treatment of minority shareholders.