CPA Ethics & Governance - week 1 Case Study - Hong Fok Corporation Introduction

The long-standing frustration of minority shareholders of Hong Fok finally burst out during the AGM held on 26 April 2012. The battle between minority shareholders and the Cheong family, which is the controlling shareholder of Hong Fok and also dominated the company's board and management, triggered significant media coverage and queries from the Singapore Exchange (SGX).

The Cheong family established their footing in the real estate industry as early as the 1950s, during which it owned properties in several South East Asian countries. On 15 December 1967, the Cheong family founded another business, International Hotel Private Limited, to become the developer and owner of the Singapore Hyatt Hotel. As the business of the company shifted towards property development and investment, it was renamed as Hong Fok Corporation Limited (Hong Fok) on 15 August 1980. On 8 July 1981, Hong Fok filed for an initial public offering and was officially listed on the Singapore Exchange Securities Trading (SGX) and Stock Exchange of Hong Kong (SEHK).

Background

The Cheong family maintained control over the company by holding more than 50% of Hong Fok's shares directly or indirectly. The family members are also actively involved in running the company. Cheong Kim Pong has been the CEO of Hong Fok since 13 January 1968. Up till 31 January 2014, he also held the positions of Chairman of the Board and Managing Director2. Cheong Puay Kheng, Ms Cheong Loo Kheng and Cheong Aik Yen, who are all siblings of Cheong Kim Pong, held positions as the Hong Fok Vice President of Administration and Personnel, Vice President of Property Maintenance and Personal Assistant to Directors respectively.

As of 31 December 2011, the board comprised of four executive directors and three non- executive directors. Besides Cheong Kim Pong, the other three executive directors were also from Cheong family, namely Cheong Pin Chuan, Cheong Hooi Kheng and Cheong Sim Eng, who are brothers and sister of the chairman. The three non-executive directors, Jackson Lee, Tan Tock Han, Lai Meng Seng, were designated as independent directors. Among them, Tan Tock Han is the brother-in-law of the four executive directors, and Jackson Lee had served the board since his first appointment in 1976.

Until 2011, the board only had an audit committee.

The Controversial AGM

On 26 April 2012, Hong Fok held its Annual General Meeting (AGM) for Financial Year ended 31 December 2011 (i.e. FY2011). During the meeting, minority shareholders

questioned the absence of dividend payments since 2007 despite increasing revenue, the high remuneration paid to four executive directors in excess of S$10 million in the past few years, and profit recognition for its flagship project, the Concourse Skyline5.

The debate between minority shareholders and board further intensified when the chairman Cheong Kim Pong requested for a change of voting methods mid-way. Minority shareholder Mr Mano Sabnani later complained to Business Times, "... shareholders rejected the directors' report and the audited results by show of hands... so chairman proposed that all the resolutions be put through the poll (vote according to number of shares held).

Such change angered minority shareholders and some left before voting for other resolutions. However, the AGM continued with the remaining shareholders and all resolutions were passed by poll almost unanimously.

Discussion Questions

1. What are the benefit(s) and drawback(s) of voting by a show of hands compared to voting by poll? In your opinion, was the change of voting methods during Hong Fok's AGM legitimate and fair to minority shareholders?

2. Evaluate the board composition and structure of Hong Fok.

3. In the case of Hong Fok, were the levels of directors' remuneration appropriate? Currently, what are the available safeguards against excessive directors' and management's remuneration?

4. In many Asian countries, family-controlled companies are very common. What are the key challenges in fostering good corporate governance in such companies?

Note: Book : Psaros, J., Australian Corporate Governance: A review and analysis of key issues, 2009 or onwards. Pearson Education Australia.

(ISBN/ISSN:

9781442500259)

Subject:

ACCT5029 CPA Ethics and Governance