Frankly Speaking: Is the Board of Directors of South Malaysia Industries in a Tight Spot?

Recent actions by the Board of Directors of South Malaysia Industries Berhad (SMI, 4375) have raised serious concerns among investors and minority shareholders. At the 52nd Annual General Meeting (AGM), several key resolutions, including the re-election of a director and the approval of the director's remuneration package, were rejected by shareholders. However, the Board appeared to disregard these outcomes, sparking widespread criticism.

Notably, the rejected director not only retained influence but was subsequently appointed as the Chief Executive Officer of SMI. This decision has raised eyebrows as it grants the individual significant control over the company, despite a clear lack of shareholder support. The situation has further fuelled discontent among minority shareholders, who see this as a glaring disregard for shareholder sentiment.

Adding to the frustration is SMI’s ongoing loss-making position. Despite the company’s financial struggles, the Board of Directors and management continue to draw substantial remuneration packages, raising questions about fairness and accountability to the minority shareholders.

A History of Accountability in Similar Cases

There are numerous precedents highlighting the accountability of directors who fail to uphold their fiduciary duties. In April 2023, MMAG Holdings Berhad faced legal action for breaches of fiduciary duties, with claims amounting to RM23.17 million filed against its former directors. Similarly, Cahaya Mata Sarawak Berhad was embroiled in legal proceedings initiated by a new shareholder against an executive director and five others. The case, involving allegations of mismanagement in the construction of an integrated phosphate additives plant in Sarawak, sought special damages of RM52.69 million. These instances underscore the financial and reputational risks faced by directors who fail to act in the best interests of their companies.

A recent High Court judgment against Datuk Lee Son Hong and his wife Too Sooi Keng, directors of WRP Asia Pacific Sdn Bhd, further illustrates the consequences of breaching fiduciary duties. The court found that the pair funnelled RM13.1 million from contractor payments into a company they controlled, Equatorion Sdn Bhd, without providing the contracted auxiliary equipment. The judgment ordered them to repay RM15.6 million, including finance charges, with interest at 5% per annum until full settlement. This serves as a clear warning that directors who misuse their authority for personal gain are liable for significant legal and financial penalties.

Between 2017 and now, Bursa Malaysia has intensified its scrutiny of directors’ responsibilities, taking 54 enforcement actions against 25 independent directors across 10 listed companies. Common breaches include inaccurate financial reporting and failure to meet corporate disclosure requirements. Penalties have ranged from reprimands to fines of up to RM1 million, with one director receiving the heaviest penalty to date: a public reprimand and fines totalling RM300,000 for financial reporting violations. These enforcement actions demonstrate a clear commitment to holding directors accountable for neglecting their fiduciary responsibilities.

Collectively, these cases underscore a critical message: directors who disregard their duties or fail to act in the best interest of shareholders are not immune to legal consequences. The growing number of enforcement actions and legal rulings reflects a heightened focus on ensuring corporate accountability and governance standards.

The Implications for SMI

The emergence of a new major shareholder group, now controlling over 50.1% of SMI, adds another layer of complexity. This group has initiated a general offer to the minority shareholders, which could lead to significant changes in the company’s leadership and direction. The current Board and the recently appointed CEO may face intense scrutiny for their decisions and actions, particularly if they are seen as neglecting their fiduciary duties or disregarding shareholder concerns.

The situation at SMI serves as a reminder of the importance of corporate governance and accountability. As the company faces the possibility of leadership changes, it remains to be seen whether justice will be served for minority shareholders and whether the Board will be held accountable for its actions. For now, all eyes are on the new majority shareholders and their next moves, as they could determine the future of SMI and its governance practices.