Nov 13, 2019 in Business

The Sime Darby Financial Fiasco

Sime Darby is a Malaysian multinational corporation that operates different diversified businesses. The majority shareholder is the Permodalan Nasional Berhad, with an ownership of about 51% of the company. Other organizations and groups own the rest of the shares. Its recent financial fiasco has led to speculations on who made the ultimate blunder and how effective its corporate governance structure is. This research paper will explore the reasons the company failed, provide suggestions and answer the case study questions.

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Reasons for Failure

The most obvious reason for the company’s failure is the management’s mistakes in strategic decision-making. Despite the company’s inexperience in handling large contracts, the managers decided to take up the two massive projects commissioned by Qatar Petroleum AS and Maersk Oil Qatar AS. The combination of two projects made their management difficult hence the overruns.  A wide scope can limit the management’s effectiveness because of the many activities involved. Secondly, the Board of Directors failed in its oversight duty to curb the over-ambitious strategies of the company’s management. 

Suggestions as a Member of the Board of Directors

The first step should entail the dismissal of the current board of directors and an institution of a new one because it failed to identify and rectify the mistakes made the CEO and his management team. Secondly, the corporate governance guidelines should be revised to give the board more power and accountability, which would increase their culpability when failure arises.

Case Study Questions

Question One

Although the Board of Directors had experienced individuals, it failed to safeguard the interests of the shareholders. Several factors can explain the failure. First, even with an experienced board, it is challenging to predict changes in the external market accurately.  Unexpected increases in raw material prices could have caused the overruns. The board understood that it was a common practice for contractors to reimburse corporations in case of overruns. Since the CEO explained that the client had agreed to take care of the overruns, the board did not take further action. The board may have assumed that if the client agreed to reimburse, the reason for the overruns must be justifiable. Their laxity in the matter and trust on the CEO was a judgment error that made them reluctant to inquire the causes of the overrun in the first place. The second explanation for the board’s failure is that there could have been pressure to increase shareholder value. The pressure could have weighed in on their decision to allow the CEO to take more risks than he should in the hope of creating wealth for the shareholders.

Question Two

The critical attributes of an effective board include a strong relationship with the CEO, an understanding of its value to the organization, and focus on strategic issues. A cordial relationship with the CEO allows him to talk about his strategic fears and aspirations openly, which can help the board create risk mitigation strategies. When a board understands its value to the firm, it creates chances for its members to interact with staff and get an understanding of what is happening at every level of the corporation. The focus on strategic issues ensures that the CEO reports against the plans and goals regularly, which can allow the board to take appropriate measures in case of problems.

Sime Darby’s board does not have any of these attributes. If it had a good relationship with the CEO, he would have been forthcoming to it about the overruns before it received the auditor’s report. The board seems not to have had an understanding of its value to the company. It did not interact with the different divisions and thus could not identify failures and correct them before they blew out of proportion. If the board’s focus was on strategic issues, it would have demanded frequent reports from the CEO, which would have identified the potential overruns before they occurred.  

Question Three

All the board members should be held accountable and not just the CEO. The board’s duty is to play the oversight role to ensure that the CEO does not pursue strategies that are likely to diminish value for the shareholders. Since they did not intervene when the CEO took over-ambitious projects that were beyond the company’s abilities, they should be held accountable. They failed to identify the potential failure in the two projects and allowed the CEO to pursue them. They additionally failed to track the progress frequently to identify risks and mitigate against them.

Question Four

As a Director in 2005, I would have lobbied the rest of the board not to approve the two projects. I would have preferred one of the projects and not the two because the company did not have the experience and the resources required. The CEO would have to explain to the board how the project would be carried out in the absence of experience, the estimated costs and measures to deal with unforeseen cost changes. The board would have only approved the project after being satisfied that there was an allowance for extra costs. Additionally, I would have tried to influence the board members to establish reporting timelines for the CEO on the progress of the project. The internal auditor would have to report frequently to verify the progress of the project.

Conclusion

The reasons for the company’s failure include strategic decision-making and board laxity in its oversight role. The solutions to the problems include the disbandment of the board, constitution of a new one and the revision of corporate governance guidelines to give the board more authority and accountability. The board could have failed because of unpredictable conditions in the market and laxity in supervising management. Critical board attributes include a good relationship with the CEO, knowledge of the board’s value to the company and focus on strategic issues. Sime Darby’s board has none of the characteristics. The board is accountable because it is the overall oversight authority. As a director, I would have approved one project after provisions for projected cost increases and a planned project progress reporting by the CEO and internal auditor.

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