The Performance of the Sime Darby Berhad Example for Free

The company which will be discussed here is The Sime Darby Berhad, the world largest listed plantation company based in Malaysia.Sime Darby is a government link company whereby its majority shareholder are the Permodalan Nasional Berhad,the state investment arm. It businesses consists of plantation,property,industrial,motors,energy utilities and healthcare. The world leading conglomerate has just celebrated its 100th anniversary when it has become center of controversy due to losses of RM 2.1 billion in may last year. The market was in shock when this news where announced since Sime Darby is a giant mutinational conglomerate involved in five core sectors with a total turnover of RM 33 billion.

The company has removed Ahmad Zubir Murshid as the CEO after cost over runs in four projects including the Bakun hydroelctric dam project, the Qatar Petroluem project(QP project),the Maersk Oil Qatar(MOQ) project and the Marine Project. Sime Darby is a government linked company whereby its majority shareholder are the Permodalan Nasional Berhad which is the state investment arm group. Sime Darby may need to book RM 964 million in losses due to this projects. Sime Darby was two years behind schedule for this projects and will have to reverse its revenue of RM 200 million booked in its 2009 financial year. A losses of RM 526 million is expected to due to the cost over runs at Maersk Qatar Oil project. An another Qatar project may also results in RM 155 Million losses which construct some vessels. The first project that incurred losses are the Bakun hydroelectric project.

Bakun hydroelectric dam project is located on Balui River,Sarawak,Malaysia was delayed since the approval of the project in 1992. Once built, the bakun dam would be the largest dam in asia outside China. The dam is expected to generate 2400 megawatt electricity to Peninsular Malaysia.

The electricity will be supplied via submarine cables across the South China sea to Peninsular Malaysia. The Bakun hydroelectric dam project is being built by Malaysia China Hydro Sv consortium led by Sime Engineering Berhad,a subsidary of Sime Darby. It is reported that the Bakun Dam project has incurred about RM 1.7 billion in cost over run of which the government of Malaysia has agreed to reimburse around RM 700 million, leaving Sime Darby with with 964 million losses for the second half of the financial year. Sime Darby has incurred the cost over runs from carrying out civil works for the project. In an research report by an investment bank, it remained negative on this project since Sime Darby did not disclose the cost over runs in the past financial report. It has been indicated that the cost to Sime Darby could arise from RM 1.8 billion to RM 3.2 billion due to future claims by the mechanical and engineering contractors. It has added that Sarawak Hydro, the owner of the project could claim up to 20 percent of the original cost from Sime Darby due to late delivery. The maximum amount for late delivery will be around RM 360 million for Sime Darby. In total it is been estimated that the losses from the project could arise an additional RM 1 billion but the losses could be reduced if the additional RM700 million claims from the government for the losses is approved and all other claim were dropped.

The handover could be delayed until june next year. The Quantum of losses for Sime Darby largely depends on government wilingness to reimburse the additional cost uncovered by the group and waivement of all the late delivery charges. There is an indication that Sime Darby is only wiling to absorb 15 percent of the total overuns which is around RM 300 million. But since the new cost over runs are due to poor management of the project, the government will unlikely to absorb all the cost over runs. Sentiment in stocks and shareholder could diminish as investor are remained corcerned over the issue.

The next big project that has caused losses are the Sime Darby oil and gas project in Qatar. The Qatar Project was awarded in August 2008. Loss exceedes RM 500 Million because of the project delays and cost over runs. The sector was a very unknown venture, where by the group core business are plantation and real estate. There is a very high risk of failure from beginning of the project. To make things worse, the Sime Darby has failed to explain the situation to the board and shareholders. In the suit against the former directors it was stated that despite no prior experience to undertake a project at such scale, the Sime Engineering unit has extended its operation to Qatar witthout any knowledge with marine transport and instalation,subsea pipe laying work, labour rates and yard facilities in Qatar. At the time, Sime Enginering top executive post were helmed by former managing director Datuk Mohamed Shukri Baharom, Head of oil and gas Abdul Khadir Alias,Chief financial officer Abdul Rahim and General Manager Zaki Othman are all directly reports to the Ceo,Ahmad Zubir.

Sime has decided to bid for the engineering,instalation,construction and commisioning contract to be commisioned by Qatar Petroleum for its Bulhanie project which is also known as MOQ project which among other includes modification to 34 existing platform,17subsea lines between existing and new plarforms. This was Sime Darby first major engineering contract as a main contractor outside malaysia. Sime went ahead despite no marine capabilities to carry out transporting,instalation and pipe laying work and appointed Iran Offshore Engineering.Despite Qatar rejection,Sime Darby carried away the project with targeted completion on August 2008.There were many delays due to Sime Darby inability and incompetence to finish the project.Sime Darby has also failed to record Qatar Petroleum alleged promise to compensate Sime Darby in event of delay.Delays were not informed to the board directors by and instead they falsified and reduced actual cost over runs such that damage recorded in the book were recognised later than it should be. Costing Rm 102 Million, the unit has appointed seven consultant to put the project back on track and add value. But these consultant instead has offered service renderd illegal in Malaysia,acts which could damaged Sime Darby reputation.Sime Darby has taken the marine project to transform itself into major marine vessel player in the oil and gas industry but it went wrong since the wrong shipbuilder were picked.The marine project is the extension of MOQ project concerning construction of two tugboats and a barge in the MOQ project.Losses of about Rm 155 Million being reported since the barge has not been delivered.The strategy was to build a derick lay barge,a pipe laying ship and an anchor handling towing supply,a tug boat that could supply to offshore oil rigs. Failing to carry out due deligence,the former CEO and ex wise president Datuk Mohd Shukri has been sued by Sime Darby.They have also ignored findings of accountancy firm KPMG on the deals with MLC shipping group and Puteri offshore limited.Sime Darby in a statement said that Datuk Mohd Shukri proposed for ship building contract with MLC for the consruction and sale of four units of anchor handling towing supply at cost of $ 92 Million.He have also proposed another deal with MLC to the board for construction of derick for cost of USD 95 million.

Sime Darby in the same statement have said that eventhough Datuk Mohamed Shukri has attended the risk management committee meeting and presented the paper and proposal to the board of directors, He did not disclose the deals with MLC and puteri offshore to the board. All these conflicts has tarnished the Sime Darby group reputation. To overcome this situation Sime Darby has taken some action including filing a civil suit against former CEO,Managing Director, Head of Oil and Gas,Chief Financial Officer and the General Manager for wrongful payment to consultants in Qatar Petroleum priject,wrongfully waiving Performance Bond in MOQ proec,wrongfull payment of consultancy fees in MOQ project,failure to deliver 3 vessels in Marine Project,wrongfull payment to Sinohydro and wrongfull payment to Northwest Investigation Design & Research Institute.

The total suit filed is around RM 500 million. Sime Daby has established a Board Work Group in October 2009 to review its four projects in Qatar including Qatar Petroleum Project, MOQ project, Marine Project and Bakun Project. To improve efficency of management and internal controls, Board Work Group has pursued some aggressive actions including sacking of the group CEO. In order to make sure the conflict do not arise, Sime Darby should implement corporate governance in its conglomerate since from the conflict it shows that Sime Darby has poor corporate governance in its organisastion. Performance and accountability to shareholer and stakeholder is good governance main emphasis. This includes performance of the board in acquiring different talents among directors and communication with senior management to ensure decisions are made in best interest of company and its shareholder.

Necessary skills and competence are important for Sime Darby directors to understand their role comprehensively. Ineffective board, weak internal controls and poor risk management, lack of adequate disclosures, poor audits and unreliable financial reporting are poor corporate governance. This poor corporate governance is heavily effecting the minority shareholder since Sime Darby is a listed companies with concerntrated shareholder who will exercise greater influence over corporate affairs such as nominating the board and making an agreement with third party. Sime Darby should provide accurate and timely information to enable shareholder to review the performance of the company and directors.To address issues of risk and setting direction,Sime Darby should provide information about future looking and indepth aspects of business,governance and system.This will enable shareholders to respond accurately on basis of the information.To improve timelines,Sime Darby should publish its annual report and account in its websire within a specified period.Managerial compensation should be in line with the performance of the management to overcome problems due to lack of mutual interest between shareholders and management.Exessive payment that are being paid to directors should be regulated and should be wholly determined by firm performance. The Malaysian code on corporate governance had adapted the principles that directors remuneration packages should be suitable enough to attract and retain people whom have the capacity needed to succesfully manage the company and package should be tied to corporate and individual performance.

Linking directors packages to corporate performance is vital to the shareholders since it is based on their individual and corporate performance.A company board of directors functions as the highest internal corporate governance.In order for the board of directors to be effective,independence is an important value to be implemented.Financial fraud are less likehood with board independence to solve agency problems inherent in managing any organisation,board of directors play vital role of internal governance.The board will asses and monitor vital decisions and has the power to fire,hire and compensate the top level decision managers.This is why they are an important mechanism for evaluate the performance of management and protecting shareholders interest. To establish best practice,the entire board of Sime Darby directors should have taken lead role in good corporate governance.Larger number of Non Executive Directors is argued by agency theory with regard to independence of board of directors.This is due to that non executive director could establish role in monitoring and control actions of executive directors.This means non executive director is considered as check and balance in enhancing Sime Darby board effectiveness.The expertise and knowledge of non executive director could make the company more transparent.With such hugh responsibilities,they should avoid becoming ‘rubber stamp’ to the management.Studies shows that voluntary disclosure is greater when associated with board independence. The audit comitee is comitee of the board.In order to function smoothly,independent of audit comitee is vital as it allows both the internal and external auditors to remain free of undue influences and inteference from the management.This is important in order to perform its financial reporting oversight more effectively.Audit comitee needs competant and experienced directors particularly in financial aspect to monitor financial reporting in an organisation.Better earning is associated with audit comitee in an empirical evidence.Incidents of accounting errors,irregulaties and illegal acts are fewer with audit comitee independence.Overstatement of profit by Sime Darby could be hindered with an independent audit comitee. In conclusion, good corporate governance is essential for a large listed companies such as Sime Darby to continue performing in near future.

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