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By Professor Mak Yuen Teen

FELDA: Settlers’ Bedrock

FELDA was formed in 1956 to resettle the rural poor into newly developed areas and organise smallholder farms growing cash crops in Malaysia. It eventually developed 317 schemes that benefitted 1.6 million people, increasing the average family income to RM3,047 per month in 2010. Not only did FELDA’s resettlement schemes alleviate poverty amongst settlers, the efforts also contributed significantly to Malaysia’s palm oil industry. Since the 1990s, FELDA has diversified into other economic activities and launched several private corporate entities.

FGV was incorporated as a private limited company on 19 December 2007 as the commercial arm of FELDA for overseas investments. FGV’s main business operations are in plantations, logistics, and sugar, with a global presence in more than 10 countries across three continents.

Fresh Blood: Off to a Steady Start

Datuk Zakaria Arshad was appointed as CEO and Group President of FGV on 1 April 2016, after ex-CEO Mohd Emir Mavani Abdullah stepped down following a failed controversial deal which involved the purchase of loss-making Indonesian planter, PT Eagle High Plantations TBK.

As the son of a first-generation FELDA settler, Zakaria was popular amongst settlers. After graduating from university in 1984, he kickstarted his career by managing a FELDA subsidiary, and worked his way up the corporate ladder over the next 32 years. More recently, he assumed the role of CEO of FELDA subsidiaries Delima Oil Products Sdn. Bhd. (Delima Oil) and FELDA Vegetable Oil Products Sdn Bhd. He also held the position of Executive Vice President of palm downstream cluster.

In January 2017, Tan Sri Shahrir Abdul Samad was appointed as the new Chairman of FELDA. He emphasised that FELDA would not be micromanaging FGV, despite being its majority shareholder. Although the continued success of FGV was important to FELDA, FGV had its own set of rules to follow as a listed company. Shahrir expressed trust that Zakaria would execute his plans of reform and reassured the public that FELDA would keep a watchful eye on the happenings in FGV.

The Floodgates Open

On 5 June 2017, FGV made news headlines when Zakaria was abruptly asked to resign, following claims that he had breached his fiduciary duties.

It was revealed that the Afghan company, Safitex Trading LLC (Safitex), had delayed payments amounting to almost US$11.7 million owed to FGV’s subsidiary, Delima Oil, for a shipment of palm oil in 2016. Zakaria had reportedly allowed Safitex a longer credit term of 60 days, as opposed to FGV’s usual 30-day policy, without any evidence of evaluation of the debtor’s ability to repay the debt. He was also accused of allowing sales to Safitex to continue despite unsettled payments in 2014, causing debt levels to soar to US$8.3 million by late 2015.

On 11 April 2016, Zakaria allegedly approved a proposal to further raise the credit limit to US$9.52 million. Thereafter, the external auditors repeatedly highlighted the matter in quarterly review reports, but the management expressed confidence regarding the debt’s recoverability. On 20 April 2017, the board instructed FGV’s internal audit team to conduct further investigations into the matter. This resulted in the detection of “possible contraventions of Group policies”.

Boardroom Showdown

On 31 May 2017, a board meeting was held without Zakaria to discuss matters pertaining to Safitex’s debts. Subsequently, FGV’s Chairman, Isa Samad, reportedly summoned Zakaria into his office and requested him to resign, citing the alleged breach of corporate governance codes. Riled up by Isa’s requests, Zakaria defended himself by stating that, “it’s a bit ridiculous he asked me to… resign, based on just the internal audit report”.

Thereafter, Zakaria publicly declared his innocence. Firstly, he clarified that the credit facility had been offered to Safitex by the previous management, pointing out that he was not the only one involved in dealings with Safitex. He also expressed the view that it was unreasonable to expect him to micromanage all of FGV’s subsidiaries. In addition, Zakaria highlighted that Safitex’s debt amounted to less than 0.2% of FGV’s total earnings, and that the owner of Safitex had been overseas and was hence unable to settle the payment on time. Zakaria further added that Safitex was a large company, which gave FGV’s management the confidence that the firm would fully repay the debt.

In response, Isa denied ever requesting Zakaria to resign. Isa clarified that the board’s intention was to protect FGV’s reputation and had merely suggested Zakaria’s resignation to prevent the matter from blowing up, adding that this move by the board was not an attempt to “cover up” the Safitex scandal.

Despite attempts to clear his name, on 6 June 2017, Zakaria, as well as three other management personnel, received letters mandating an indefinite leave of absence. This was reported as a collective decision by the board, to allow FGV’s internal audit team to further investigate purported irregularities involving Safitex.

Zakaria publicly expressed that he believed FGV had blown the issue out of proportion to place pressure on him to resign − given that he had disagreed with the board on several matters in the past.

Raking Up the Past: Suspicious Transactions

Taking matters into his own hands, Zakaria proceeded to reveal a series of suspicious transactions that the board had made despite his opposition.

On 12 November 2013, Cambridge Nanosystems revealed a contract signed with FGV in a bid to harness an alternative form of clean energy. While this seemed to support sustainability efforts, the subsidiary involved had been making losses of up to RM117 million in the previous few years. Further, the agreement required FGV to invest another £100 million into the subsidiary. Zakaria said that the basis for the joint venture was weak, especially given that FGV was operating in the plantations industry. Zakaria had initially managed to convince the board of his views and prevented the transaction. However, a few weeks later, the board changed its stand and gave its go-ahead for the investment

On another occasion, Zakaria was presented with an investment proposal to acquire a 30% stake in a creamer factory for RM300 million. Again, Zakaria did not agree with investing RM300 million in a non-core business. He discussed his concerns with the board. Although the executives expressed their disapproval towards the investment during the meeting, he was later notified that the investment had been approved. Zakaria hinted that the repeated over-ruling of contracts and investments were the works of “invisible hands” behind the scenes.

The Prime Minister’s Office then invited Datuk Seri Idris Jala, an independent third party, to conduct an investigation and provide recommendations for FGV. Due to his past successes, all major parties involved widely supported this move.

On 14 June 2017, Idris Jala presented the findings from his investigations to Malaysian Prime Minister Najib Razak, stating that there were “reasonable grounds” to proceed with disciplinary actions against Zakaria and the other officers who were on leave of absence. In response, the Prime Minister highlighted broadly that the ultimate decision would be made based on “company laws, good governance and fair process”.

Resigned to Fate

Just days after Zakaria was given an indefinite leave of absence, Isa found himself faced with repeated calls to step down. Many claimed that it was only fair for Isa to leave FGV while the MACC continued its investigations. In an initial response, Isa proclaimed his innocence and stated that he had no reason to resign.

A group of second-generation FELDA settlers, Suara Generasi ke-2 Felda (SGK2F), urged Isa to step down given his “bad track record”. The leader of the group, Hamaruddin Abdul Aziz voiced concerns that the share price of FGV would continue to spiral downwards, given that it had already fallen by more than 60% since its listing in mid-2012.

In addition, the group’s advisor, Datuk Zulkefli Nordin, lamented the lack of accountability during Isa’s tenure, citing that proper debt statements were not presented to settlers, making it difficult for them to monitor debt levels.

The group also defended Zakaria and questioned the need for his temporary suspension. Speaking on behalf of the group, Hamaruddin recalled Zakaria’s display of grit in carrying out his duties, despite having taken over as CEO during a time when FGV faced losses and failed business ventures. During his tenure, Zakaria had turned losses of over RM81 million into a profit of over RM2 million for FGV. The group also called for the reappointment of FELDA’s Chairman Shahrir as FGV Chairman. This was to allow FELDA, FGV’s biggest shareholder, to be better represented on the board. This would ensure that decisions made in FGV were aligned with the interest of settlers, who were its minority shareholders.

Eventually, on 19 June 2017, following recommendations by a special counsel, Isa voluntarily resigned as Chairman of FGV, as well as from his other positions in the Group. An acting Chairman, Tan Sri Sulaiman Mahbob, was appointed in his place.

Bumpy Road: A Brief History of Isa

In 1978, Isa first stepped foot into the political scene after winning the Linggi state seat in Negri Sembilan, where he served as a member of the state executive council until 1983. For the next 22 years, Isa went on to assume the title of Menteri Besar, otherwise known as the First Minister. Often described as a charismatic “old-school politician”, Isa enjoyed a good start in his career. Nevertheless, old school politics later proved to be insufficient in preparing him for challenges brought about by new century politics and corporate management.

In 2005, Isa had contested for the post of the United Malays National Organisation (UMNO) Vice President to further his political career. However, things took an unexpected turn when he was charged for being involved in “money politics”. He was found guilty of five out of nine corruption charges involving vote-buying and the organisation of prohibited campaign meetings. The UMNO Disciplinary Board punished Isa with a six-year suspension of his membership, which was later reduced to three years after an appeal. Despite his involvement in graft, Isa was appointed as Chairman and non-executive independent director of FGV on 1 January 2011.

A Soft Landing for Isa

After Isa’s resignation as FGV Chairman on 19 June 2017, Prime Minister Najib reappointed him as acting Chairman of the Land Public Transport Commission (SPAD), to express his gratitude for Isa’s past contributions.

This decision raised many concerns. Former SPAD Chairman, Hamid Albar, said that the government ought to “exercise wisdom” in the selection of a successor and should provide answers to the public surrounding Isa’s involvement in the recent scandals. Lawmaker Liew Chin Tong also suggested that Isa should not be accorded with such a prestigious position amidst the allegations of corruption in FGV, as this could “further erode public confidence towards the government”.

Isa was also implicated in two other scandals. These had occurred within FELDA Investment Corporation Sdn Bhd (FIC) during Isa’s term as the Chairman of FIC in 2014. FIC serves as the investment arm of FELDA and was incorporated on 2 July 2013. It is primarily engaged in property development, hospitality, and other strategic investments.

In August 2017, MACC arrested Isa due to his alleged connections with FIC’s controversial purchases of overpriced hotels. FIC was reported to have purchased a four-star hotel in Kensington, London, at an inflated price of RM330 million in December 2014. This was three times the market price of RM110 million. Additionally, FIC purchased a hotel in Kuching for RM160 million, which exceeded its actual market value by RM50 million.

Questionable Land Transfer

Public confidence in FELDA faced another blow in December 2017 due to the revelation of the fraudulent transfers of four plots of land in Kuala Lumpur, Malaysia. The total value of the plots of land was estimated to be RM1 billion but they were transferred for a mere RM 270 million to private developer Synergy Promenade Sdn Bhd (SPSB).

It was later revealed that FELDA’s board of directors were kept in the dark about the land transfer – they only found out about it through mass media platforms. According to a report, however, the FELDA board was informed about the proposal to develop the land but was not updated about the choice of developer and the ultimate decision to transfer the land.

FELDA regained ownership of the land in January 2018, a month after the transfer was discovered. SPSB had agreed to sign a memorandum of understanding and returned all land ownership documents back to FELDA at no cost. FELDA Chairman Shahrir reassured the public that it had no intention of withdrawing from the ongoing police investigation regarding the land transfer in order to “identify any possible mismanagement”.

No Light at the End of the Tunnel

In October 2017, Zakaria was reinstated as Group President and CEO. A major board overhaul took place during his four-month absence, leaving FGV in the hands of new Chairman Datuk Wira Azhar Abdul Hamid and fresh-faced directors.

However, some remained sceptical about the new board. President of TI-M, Akhbar Satar, felt that drastic actions to strengthen the board composition must be accompanied with genuine intention to make “sincerity and integrity an integral part of the corporate culture”, emphasising the importance of setting the tone at the top.

On 20 March 2018, FELDA Chairman Shahrir declared that FELDA had recovered from its troubles, having managed to regain confidence from the public and the marketplace. Ten days later, FGV’s board announced that its subsidiary, Delima Oil, had commenced legal proceedings against Safitex, seeking a claim of more than US$10 million. Meanwhile, findings from MACC’s investigations into the series of scandals have yet to be disclosed.

Were these scandals the result of isolated acts orchestrated by a few black sheep? Are there more severe underlying issues that require immediate attention? Perhaps Chairman Shahrir was right – it was time to focus on the fundamentals and strip things back down to the basics.

 


 

Discussion questions

  1. Discuss the factors that led to the accumulation of debt from Safitex. What could the various stakeholders have done to prevent this?
  2. Discuss the different roles of the board and management in a company. Was there a clear division of responsibilities between FGV’s board and management?
  3. After the scandal surfaced, Zakaria said that he did not agree with several investment decisions made by the board in the past. Discuss whether Zakaria and the board had effectively discharged their respective responsibilities.
  4. Comment on the adequacy and effectiveness of existing risk management and internal control practices within FGV. Suggest ways to improve risk governance in the company.
  5. What are the pros and cons of having representation from the parent company on the board of its subsidiary, and having the Chairman of the parent company chairing the board of the subsidiary?
  6. Based on this case, discuss how public governance is related to corporate governance?
  7. Evaluate the effectiveness of the Malaysian Anti-Corruption Commission in investigating the scandals and protecting the interests of minority shareholders. Would greater public oversight be effective in increasing board accountability?

 


 

The content was originally published on CPA Australia.
Photo by Andrew Neel on Unsplash.


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