Will The Boardroom Tussle Effect

The Company Performance Finance

Essay
Corporate tussle and board fight are not new to the corporate world. This
board tussle happened due to many factor such as merger and acquisition
(M&As), power struggle between management and director, or because of
disagreement between shareholder on the corporate strategy. Corporate
tussle also happened when a new shareholder try to get control of the
company.There are lots of interesting stories on the board tussle in Malaysia.
Some of the big cases of board tussle is takeover of KFC Holding, Tan Chong
Motor, Ho Hup and recently Petra Perdana.
Company
Feuding parties
Resoluation
1
Tan Chong Motor Holding
Datuk Tan Kim Hor and his family against descendeat family of his younger
brother, the late Tan Sri Tan Yuet Foh
A settlement has been agreed. Believe to give Kim Hor's fraction its share and
the late Yuet Foh's family remain control in the group.
2
KFC Holding
A team led by Tan Sri Nik Ibrahim Nik Kamil against Kulim.
Kulim emerged as the controlling shareholder and installed its own
management team
3
Petra Perdana & Petra Energy
Founder & CEO Tengku Datuk Ibrahim & other directors
Tg Datuk Ibrahim was ousted as CEO in the EGM.
4
GBH
Founder family & MD Tony Goh Tai Seng & single largest shareholder, Tan
Sri Robert Tan Hua Choon.
Tan Sri Robert Tan secured 82.5% stake & Mr Tony resigned as MD.
5
Ho Hup
Management & major shareholder on the sale of land for debt restructuring.
Sale of land approved in the EGM but now under court battle.
Some example of board tussle in Malaysia
Some of the above board tussle already completed so that the company can
focus to grow and moving forward. Anyway there are also some cases of
board tussle which now continue in court. In this tussle, the party who would
like to win the tussle must have at least simple majority of 51% votes of the
shareholder during the AGM. This is stated under Section 132 of the
Company Act.
In this concept paper, there is one elements that I would like to present
Will the board tussle effect the company
performance?
2:0 Definitions
Definitions of Corporate Governance
Shleifer & Vishny (1997) define Corporate Governance as the way suppliers
of finance to corporation assure themselves of getting return of their
investment. Or it also means the process or structure used to direct and
manage the business affair of the company towards enhancing business
prosperity and corporate accountability with the ultimate objective of realizing
long term shareholder value, whilst taking account the interest of other
stakeholder.
This corporate governance is the main pillar of business philosophy which not
only applied to the shareholder but also to the stakeholder as well.
Definitions of Board of Director
The board of director is the highest authority in the management of the
company and they are playing a critical role in the company governance. The
members are elected by the stockholder who jointly oversee the activities of
company organization.
Member of board of director is called director. Director is individual which can
be owners, managers or other individual that appointed by the shareholder.
There are a few type of director. Executive director is referred as director who
also is involved in day to day operation of the company. Director who is not an
owner and not involve in management is called independent director or non-
executive director.



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The board of director will be headed by Chairman. Chairman is also elected
from the board of director members.
Chief executive officer (CEO) is the highest ranking of corporate officer
incharge of total management of the company. CEO of a company reports
directly to the board of director.
Definitions of Extraordinary General Meeting
(EGM)
EGM is a special meeting called by a board of director or a group of
shareholder to discuss important things that needed board of director and
shareholders attention and approval urgently. Shareholder and director only
can call the EGM if he/she held at least 10% share or 10% of the voting right.
This EGM only can be attended by the shareholder of the company. Director
need 14 or 21 days notice to inform the shareholder about the EGM.
3.0 Why board tussle happened?
There are many reason of why board tussle happened. In this paper we will
look into 3 different perspective of why the board fight happened. And from
this example, we also will check on how the company performance after the
tussle ended.
3.1 Mergers and acquisitions (M&A)
Mergers and acquisitions (M&A) is one way for the company to increase their
shareholder value. This was done by buying other companys share to
become a major shareholder. The target of M&A normally a company which is
profitable, can add more value to the existing business or acquired a company
for their know how or technology. For example Proton acquired Lotus to get
an automotive technology more faster.
There are also some cases where the M&A is due to takeover of the direct
business competitor. This is to ensure the company can monopolize or reduce
the competition in their business segment.
Normally the M&A was done through negotiation between the buyer and the
seller on the price and other obligation and both party agreed for the M&A.
Anyway there are also some cases where the M&A was done without the
consent of some stakeholder or board of director. This issue normally lead to
the boardroom fight or corporate tussle. One example of the M&A is the fight
to control KFC Holding between Kulim and other shareholder lead by Tan Sri
Nik Ibrahim.
KFC Holding is the biggest fast-food operator in Malaysia. KFC operates 475
outlet restaurants such as KFC, Pizza Hut and Ayamas with turnover about
RM 2.3 billion in 2009. With the strong business based and cash flow, it has
created an appeal to other company to control KFC. A company who is
looking for any new investment will see KFC as a good company to invest and
control.
That is one of the reason why KFC was involved in takeover and boardroom
tussle in the 1990s until 2005. The tussle ended when Kulim (Malaysia) Bhd,
which is Johor state government group bought 43% of the share from QSR
Brand Bhd in 2005. Anyway it takes Kulim about 1 year to successfully regain
control of KFC after the tussle was brought to court.
In the case of KFC, the share price was not really performing when they are
plague with boardroom tussle from 1990s until 2006. This is due to
uncertainties in the company future prospect to grow. However KFC share
price is almost double once the board tussle ended in 2006.



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3.2 Family feud
In Malaysia, about 43% of Bursa Malaysia main board was controlled by
family members. This is significant to the study by Claessens et al. (2000) that
corporation in East Asia is control by family members. This fact also
supported by Abdul Rahman (2006) who indicates that many listed firm in
Malaysia are owned and controlled by family member which they inherited
from their own descendants.
That is why, Malaysian corporate scene also saw many board tussle due to
family feud to control the company that once built by their older generation.
This happened when some of the family member who also a shareholder feel
marginal from the promotion or left out from the management of the company.
This issue normally happened when second or third generation starting to
involve in the companys management.
When one side of the family feels that they are poorly protected, one way of
securing better protection is by becoming a control shareholder.
Some of the famous stories of board tussle involving family members are
between uncle and nephew to control Tan Chong Motor Holding. This issue
was plaguing Tan Chong Motor for about 10 years already. Tan Cong Motor
was established by Kim Hor and Yuet Foh about 45 years ago. They inherited
a small business from their father before that and both of them continue to
drive the company to be one of the biggest company in Malaysia which
oversees interests in 10 countries in Asia with annual revenues exceeding
more than RM 3 billion.
The tussle began after Yuet Foh died in 1985 and then replaced by his son
Heng Chew who was accused by Kim Hor of making major business
decisions on his own. In 2002, Kim Hor, the co-founder of Tan Chong Motor
was ousted from the board of director during their annual general meeting. He
was 78 years old and need at least 75% of the votes cast to re-elected as the
board of director. This is due to Malaysian law stated that directors aged over
70 years old must be re-elected each year with 75% support. The battle was
not only in the boardroom but also continued to the court. After a long battle,
the agreement was reached where the companys management still remained
under controlled by the late Yuet Fohs family.
Even though the tussle continued for almost 10 years, the company remains
strong. The net profit keep increasing from 2006 until 2008. This performance
is mainly contributed by a strong sale of Nissan cars in Malaysia.
3.3 Dispute involving director
As we elaborate before, the board of director is consisted of executive director
who involved directly with the management of the company and non-executive
director who is not involve in the management. There also some cases where
the director is also a Chief Executive Officer (CEO) of the company. The study
shows that dispute is more likely to happen when the CEO is more powerful
than board of director. Hermalin and Weisbachs (1998) model suggested that
the power structure between management and directors evolves over the
CEOs tenure, with the CEO generally gaining more power over time. The
CEO also more powerful if he is the founder of the company of he is a family
member of the founder of the company.



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There are also cases where CEO also taking the position of Chairman.
Malaysia Institute of Corporate Governance (MISG) recommended that the
CEO and the Chairman should be held by a different person. Mcknight and
Mira (2003) found out that the duality role will have negative impact on the
company performance compared to those firms where the CEO and Chairman
is a different person.
In the case of Petra Perdana and Petra Energy, the CEO, executive chairman
and also co-founder Tengku Datuk Ibrahim was ousted during the EGM in Feb
2010. The tussle between Tg Ibrahim and Koh brothers happened due to
disagreements on how the company and their assets should be managed.
Koh brothers are director and also co-founder of Petra Perdana.
The issue started when Tg Ibrahim used his executive power to sell 5.3%
Petra Energy stake at a loss of RM500,000 and also disposed 25.03% stake
in Petra Energy for about RM93 million without the consent of other board of
director. These exercises were done to meet short term financial obligation
and cash flow problem. Anyway some of the board of director, Mr Koh
brothers and executive director, Mr Shamsul is against the sale of these
share.
These boardroom dispute create uncertainties to the investor and resulted the
share stock price reacted negatively. Until today the share price is hovering
around RM1.30 compared to the highest of about RM3.10 in June 2009. Even
though the tussle was solved by the EGM with the removal of Tg. Ibrahim,
investors still lack of confident due to the fact that Tg Ibrahim has about 20
years of experience in Petra and new CEO will take a longer time to grasp the
whole situation.
Conclusion
It is understood that board room tussle is part and parcel of the corporate
world. It happened due to many factors and we cant say that it is bad for the
company performance. Normally in the short term, the share price will be
depressed due to the lack of uncertainty.
Some of the examples showed that it can bring company performance in the
long run because the non-performing director was ousted and replaced with
more credible director.


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