KepCorp’s Credibility Gets A Knock

KepCorp should be leading the way in financial disclosure, not being rapped for undue reticence, says Shobha Tsering Bhalla, LycosAsia’s managing editor

How language makes fools – or innocents – of us all! Just seven months ago, butter wouldn’t have melted in Kenneth Lay’s mouth as he hyped his company, Enron, in an interview with Business Week: “The company is probably in the strongest and best shape that it has ever been,” he was quoted as saying.

Two months later, on October 16, in a press release the ex-chairman of the beleaguered company declared: “Our 26 per cent increase in profits shows the very strong results of our core wholesale and retail energy businesses and our natural gas pipelines.” Coming from the head of a Wall Street darling that styled itself as “the world’s leading company”, the statement was taken as par for the course by the media and the stock markets.

Three weeks later, Enron was forced to admit that it had overstated earnings by US$586 million for the last four years. So much for the company’s corporate double-speak and financial puffery. Destined to self-destruct as a company, Enron’s myriads of lies and layers of subterfuge will ensure that it’s built to last as a scandal.

Closer home, Keppel Corp last week admitted that it had committed an “error of judgement” when it failed to inform investors that it had granted an interest-free loan to a shareholder of subsidiary Keppel Telecommunication & Transportation.

The shareholders, Americans Philip and Victor Friedman, who hold a 13.9 per cent stake or 75 million shares in KT&T, were given an interest free loan of about S$147.2 million in October 2000. This was payment to the Friedmans for a 20 per cent stake in their US-based IT services company Computer Generated Solutions.

The deal valued the Americans’ KT&T shares at around US$1.067 or S$1.80 each at the time. KepCorp said in retrospect, the loan deal ‘was a poor business judgment in view of the subsequent collapse of technology stocks’.

KepCorp had given the Friedmans a guarantee that if they sold the KT&T shares for less than US$80 million, the parent company would bear “the amount of the shortfall.”

To any shareholder worth his scrip, this would be tantamount to KepCorp undertaking to buy out the Friedmans at S$1.96 per share as opposed to the $1.10 he, the small shareholder, would get for his. As it happened, KepCorp’s decision cost it $53 million in write-off from the shortfall in the recovery of the loan for the year ended Dec 31.

Sounds like a pretty lop-sided deal. No wonder shareholders are angry.

More tellingly, until a few weeks ago, minority shareholders had been completely in the dark about the US$80 million (S$147.2 million) loan. They only got to know about it when KepCorp mentioned it for the first time early this month in a circular that it sent out on its proposed privatisation scheme.

Adding salt to minority shareholders’ wounds, KepCorp went on to refute allegations by minority shareholders that it had created a “false market” in KT&T shares. In its latest statement yesterday (March 25), it said Keppel T&T investors were at all times aware that the transaction involving the Freidmans would result in an issue of 75 million new shares – regardless of the fact that shareholders knew nothing of the loan.

Without a hint of irony, the local conglomerate described its action – or the lack of it – as “an isolated non-compliance of Keppel’s corporate governance policy.”

“An error of judgement”; “isolated non-compliance of Keppel’s corporate governance policy” – pretty and innocuous phrases which camouflage uncomfortable or nasty facts.

So is this, as KepCorp would have it, just “an error”, a mere accounting blip? I put the question to a well-known and respected market expert who runs his own investor relations company. His reply was blunt. “No one makes an accounting “slip” of this magnitude and then remains mum about it.”

So, going by the book, I persisted, wouldn’t it be mandatory for any loan given by a publicly listed company to be declared at the time it is given? And would failure to do this be construed a criminal breach or merely absent-mindedness?

“One does not write off S$53 million without telling why. Only now that someone has dug this out, they went clean. It strongly suggests that they knew that this might be seen as unfair treatment of the rest of the shareholders,”

My point exactly. How does a company, least of all a large comglomerate like Keppel Corp, with a bevy of accountants and consultants to advise it, forget to disclose such a large loan on its books?

It seems inexplicable that such a respected and well-established company operating in one of the cleanest and most regulated markets in the world, should have displayed such a lapse of memory (read conscience) in its corporate behaviour.

Indeed, in view of the financial holocaust that we know as Enron and the quagmire that its auditor Arthur Andersen is in today, you would think that companies – especially one with the stature of KepCorp – would take extra care not to attract attention to their accounting and reporting practices.

This is not only because we all know what a can of worms that might open but also because once credibility is lost, it is well nigh impossible to build it up again. The best thing a company can do under the circumstances is to avoid trying to talk its way around the problem or worse, still, paint a halo around its head with obfuscating language.

KepCorp should not try to shrug off its non-disclosure as an “isolated non-compliance of Keppel’s corporate governance policy” because the public will read the sub-text of this as: “What’s the big fuss all about? We didn’t really do any thing wrong.”

The point is not about wrong doing alone. It is about consequences. They are becoming far more serious than they used to be and with decision making becoming more decentralised, proper disclosure is not just an ethical but also a business imperative.

With support for reforms gaining ground – witness the recent MAS ruling on rotation of auditors – and the US stock market on a search and destroy mission against companies whose books seem unnecessarily complex, no company can take its reputation – and its stock price – for granted.

Indeed, leading Singapore conglomerates like KepCorp should to be in the vanguard for inculcating a local reverence for the principles of fiduciary responsibility and disclosure. And it can only do this by example – by understanding that its values are those that it is willing to enforce.

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