Wake-up call for Corporate Malaysia

SIME Darby Bhd's RM120 million crude palm oil (CPO) futures trading loss and its aftermath last week have given Malaysia's corporate world a significant wake-up call.

For plantation companies in particular, it has exposed the need to tighten trading room operations or start implementing rules that have always been there, but perhaps were never implemented in the first place.

According to plantation company officials, it is common practice that traders are not allowed to sell more than two months forward due to the fluctuating nature of CPO prices.

So it came as a shock to everyone that a single trader at a subsidiary of the-then Golden Hope Plantations Bhd, prior to its merger with Sime Darby, had managed to exceed these limits and accumulate losses through futures trading between October 2006 and August 2007.



"How did this happen? Surely someone had to notice the loss if there were daily reports to sign. And why in the world did he bet against the market when other industry experts are saying otherwise?" said a trader.

We are made to understand that traders employed at plantation companies buy and sell actual CPO in the open market, hoping to make a better profit margin from the difference.

Apparently this is a normal practice by almost all plantation companies in Malaysia to protect themselves from the vagaries of CPO's fluctuating price.

If that is the case, and the trader in question indeed exceeded his limits and made huge losses from betting the opposite of market expectation, then these are actual losses and not paper losses as some people contend.

And in the case of a government linked company like Sime Darby, the losses represent a failure in responsibility towards its ultimate shareholders, that is, the millions of Malaysian unit trust holders under Permodalan Nasional Bhd (which has 51 per cent stake in Sime Darby) and contributors of the Employees Provident Fund (an 11 per cent shareholder).

Last Tuesday, Sime Darby announced that following an in-depth inquiry into the losses, the board decided to terminate the services of two of its senior personnel for having "failed to discharge their functions to the standard of care that were reasonably expected of them".

The two were Razidan Ghazalli, the group's chief financial officer (CFO), and Muhammad Mohan Kittu Abdullah, the group's vice-president (1) of downstream and biofuel.

The termination of high ranking officials sets a precedent of sorts for Malaysia's corporate sector, especially coming from the country's largest listed company.

"Already there are murmurs among top executives of other companies, realising that they can be held more accountable than before for dereliction of their duties," said an industry source.

Yet this is not uncommon in more developed markets like Japan, South Korea and Europe, where company chairmen and top executives have resigned or were sacked following corporate scandals, financial losses, or product failures.

Perhaps the silver lining behind this episode is that it will jolt top executives in Malaysian corporations to be more responsible, ensuring that proper checks and balances are in place, and be mindful that they are answerable when something goes wrong.

For a conglomerate like Sime Darby, some might argue, the demand or standard of transparency and corporate responsibility is higher because of the many stakeholders involved.

But accountability is a necessary cornerstone of good corporate governance for all companies, no matter how big or small.