“Company directorships are a status symbol and carry prestige and benefits and rarely any responsibility”

Interview: Feroze Bundhun, ex-Managing Director of CBRE, Turkey —

* ‘The calamity befallen on the BAI Group was a deliberate act of vengeance and jealousy heaped on a successful company for purely political reasons… BAI was never a Ponzi Scheme, far from it…”

* ‘Companies are successful when they adopt policies consistent with gender parity and reflect the population diversity of the country. This can hardly be said of most Mauritian companies’

Feroze Bundhun raised a number of pertinent questions at the recent Annual General Meeting of the New Mauritius Hotels about corporate governance in the Group, and asked for justifications from the Board and Management about non-payment of dividends. His main concern regarding big corporations is about lack of transparency in corporate governance because “small shareholders usually have no idea who does what and who earns what”. Feroze Bundhun has been the Managing Director of CBRE in Turkey. He has actively provided all types of real estate services including valuation, investment, consultancy, advisory and leasing work in Turkey and throughout the Middle East. He qualified as a Surveyor in 1965; he also holds a Post Graduate Diploma in Town Planning, University of Paris, and studied Property Law at University of Westminster, London.


Mauritius Times: The issues we raised the last time we spoke – in June 2013 – with regard to good governance, lack of transparency, alleged collusion amongst company directors, etc., appear to be still valid and relevant to the circumstances prevailing within some big corporations operating in the private sector as well as in state-owned enterprises (SOEs). What will it take for things to change for the better in Mauritius?

Feroze Bundhun: What needs to change is the Directors’ mindset first. Many companies listed on the SEM were previously privately owned family concerns and they are still being managed as such. A listed company is governed by the Company’s Act 2001, by the Financial Reporting Act 2004 (as amended) and by The Good Corporate Governance Code. Company directors are answerable in law to the shareholders only and not to their family members or personal friends. They have a fiduciary duty towards all shareholders.

Open debate about Company matters is an essential part of good governance. Often debates are not encouraged particularly at AGMs and shareholders who appear to be too outspoken are sneered at or viciously silenced. In many cases more than half of Company shares are held by small shareholders who appear not to be interested in the performance of their Companies even when the share price has been on a downward trend for a long time.

Management remains in the hands of a minority of shareholders and little arrangements between friends continue to prevail, such as the appointment of external auditors who remain in office for decades when the law requires Listed Companies to change them every seven years.

* Rules have been strengthened, a code of good governance has been established and business operations in the private as well as in SOEs fall under the watch of diverse public agencies and regulators. Is there any deficiency on that front? Understaffing, resource inadequacy? What else? Round pegs… coming in through political connections?

Regulators who are supposed to police the activities of Listed Companies are themselves either unqualified, unwilling or reluctant to raise serious management issues. Fund Managers whose duty it is to ask questions at AGMs are always absent from public debate for fear of commercial reprisals. Their absence inevitably leads to abuses in corporate governance. Major institutional shareholders such as Pensions Funds, SIC, other institutions are not even represented at Board levels. These bodies are often led by political appointees and are therefore answerable to their political masters.

* The jury is still out as regards whether the closure of the Bramer Bank and the manner in which the BAI Group had been brought down were the fair thing to do – former Good Good Governance minister is now calling for a commission of enquiry to set the record straight –, but that episode demonstrated that the relevant public agencies and regulators can and indeed do (what they would qualify as) the spring-cleaning whenever it’s required by law and the support of the government is acquired. So the question of lack of resources and skills should not arise, isn’t it?

The calamity befallen on the BAI Group was a deliberate act of vengeance and jealousy heaped on a successful company for purely political reasons because it involved different personalities on the political divide; it was nothing to do business ethics as such; no investor was ever cheated or lost money. The BAI Group was the lifelong work of one man, a great innovator and visionary with unsurpassed entrepreneurial skills to whom the country should owe a great debt of gratitude for having single handedly created close to 5,000 secure jobs against all odds. BAI was never a Ponzi Scheme, far from it.

* You had raised in 2013 a number of pertinent questions at the Annual General Meeting of the New Mauritius Hotels (Beachcomber) about corporate governance in the Group. We understand that this time round you have, in the same vein, asked the Board of NMH to justify non-payment of dividends in past years. Is it only a question of dividends or do you take issue with the way these corporate bodies are being managed?

Company matters are not only about payment of dividends but rather about the creation of wealth through increase of the share price; that is why pension funds, insurance companies, trade unions and other institutions invest in them for the long term.

In the case of NMH the share price twenty years ago was in the region of MUR 400 a share and has been on a downward spiral ever since, standing at some MUR 21 today (MUR 63 a share before the script issue of last year). It seems to me that Management remains indifferent to this trend, most directors remaining in office for decades and are unwilling to change policies, particularly in terms of controlling running costs.

A recent study by an American university showed that companies are successful when they adopt policies consistent with gender parity and reflect the population diversity of the country in which they operate. This can hardly be said of most Mauritian companies.

The Company is undervalued today because of its debt level and high running costs; its share price should be double today’s level if the Company was properly managed specially with a regular turnover of new Directors. The law should force the removal of Directors after say ten years of service. Many of its current Directors have been around for far too long which means that they cannot tell the difference between the wood and the trees.

* Underperformance of hotel groups was for some time due to the depressed state of affairs ushered in by the recession affecting the European market. Things have gradually improved on that front, but some of the hotel groups are still losing money. The NMH’s indebtedness, for example, stands at Rs 15 billion as against its total share value of some Rs 9.6 billion. Would it be right to say that we are technically talking here of a bankrupt company? What are the implications thereof?

The recession in Europe barely affected tourist arrivals in Mauritius or negatively impacted on room rates. Most hotels have remained profitable but their heavy indebtedness means that profitability is seriously curtailed because of financial costs and expenditures running out of control.

The tourist industry continues to grow with yet more arrivals from a wider geographic base than before and in spite of increasing competition the better hotel properties continue to thrive on the back of higher occupancy and room rates.

Too often management costs are too high compared to international standards because managers in Mauritius are compensated upfront rather than based on performance and profitability. There is allegedly one long-standing Director of NMH who continues to draw a salary higher than the CEO or the Finance Director. It that is indeed the case, that would suggest that Management gives the impression that they can adopt a casual approach to issues such as financial fraud.

* Given the level of indebtedness of NMH, the layman would wonder as to why you would go for buying more shares of a company that is technically bankrupt? What’s the rationale? Is it confidence in the company’s ability to pull itself out of the red and eventually regain profitability?

The debt/equity ratio is a matter for the company’s bankers; a company is not necessarily bankrupt if the debt is high and its capital value is lower than its debt level. There are different ways of valuing a company. The share price is indicative of value at a given point in time and the valuation can change depending on future cash-flow projections.

NMH has bitten more than it can chew by investing in a massive residential and hotel project in Marrakesh, which is losing a great deal of money because it is struggling to reach a decent cruising speed and the villas remain unsold. Although debt levels are coming down, it will be years before the NMH can return to profitability, thus triggering a hike in the share price. Properties that are not performing well should be disposed of immediately.

* The recent controversy concerning ENL/Rogers’ bid to acquire, through a perceived colourable device involving the purchase of NMH shares at a lower price than what they are really worth, has again brought to the fore the issue of cross-company directorships which may not be conducive to good governance. This issue has been placed on the table since quite long – D. Avramovich and J. Manrakhan referred to that impediment in the commission of inquiry report on the sugar industry – but this has not been resolved to date. What’s your take on that?

There is the perception that some of the bigger shareholders (Rogers & ENL) who also happen to be directors of NMH chose to drive the Company’s share price to the ground in order to pounce on the Company prompting a takeover bid; the vast majority of the other shareholders are perfectly aware that the Company is currently undervalued and will remain on board until a higher offer is forthcoming.

* One correspondent, Murli Dhar, wring in this paper about concentration of shareholding in key companies suggested that the FSC could consider diluting rules which increase market concentration in the hands of big companies. The more diverse the shareholding of the biggest companies, the more it may help increasing the bigger private companies’ public accountability in terms of selective employment and allocation of contracts. What do you think?

The FSC should certainly look into restricting directorships of any individual in listed companies to a maximum of, say, three in order to increase accountability and to reduce too much cosiness amongst directors.

It is rather difficult in a small economy such as ours to really spread the shareholder base considering that the total number of small shareholders in the country does not probably exceed some 10,000 all told! Obviously this encourages a concentration of the large shareholdings in a small number of companies which helps explain the concentration of large corporate shareholdings in a limited number of companies listed in the SEM.

Besides the SEM itself is rather small compared to other countries and it is therefore easy to manipulate the market assuming you have available capital. This is what was recently happening in NMH Group.

* Would you say, at the end of the day, that as a shareholder of some of the existing corporations you are satisfied that their boards of directors have made themselves sufficiently accountable to their shareholders according to the rules of good governance and they are walking the talk as regards wealth creation for shareholders?

Mauritius is a very peculiar place in the sense that however skilled, qualified, experienced or devoted one is, equality of opportunity does not really exist: it all depends on the hand y have been dealt at birth meaning that you can go so far and no further however deserving you happen to be.

That is probably why existing directors tend to hang on to their position well beyond their sell-by date. If more often challenged at election time at the AGM, the Board will surely take notice and take appropriate action. For a number of years now I have been arguing for more female directors on the boards of hospitality industry where women tend to excel themselves: first the presence of women creates a more civilised atmosphere at board meetings by altering the nature of debates, and it has been shown that women directors increase the performance of companies by more than a third! We should therefore applaud the appointment of a female finance Director at NMH last August, for the first time in the Company’s history. I can assure you that the results of the Company this year would show an improved bottom line.

* According to the rules of corporate governance, the board of a company is solely responsible for putting down strict internal controls and putting management in charge to implement those so that its cadres do not overstep their responsibilities. But then we have had the MCB scandal of 2003 as well as those companies dealing in dubious financial transactions and Ponzi-like schemes, but also the serial failures of some state-controlled commercial banks, hedging failures in SOEs. All this shows that the track record of some of the “fat cats” in the public sector has not been really commendable, so we should not be pointing the finger at the private sector only, isn’t it?

There is an adequate number of laws, regulations and codes in Mauritius with regard to good governance; the problem appears to be that there are insufficient instruments for adequately policing corporate activities.

Board Members in both SOEs and private companies have a legal fiduciary obligation towards all shareholders. It involves great care and trust in the handling of financial transactions within the company. You will recall that in France the Director General of the IMF was recently tried for “criminal negligence” when, with the express authority of the President, she had transferred a huge amount of money to Mr Bernard Tapie. She was indeed found guilty but the Court decided not to sanction her because the money was subsequently returned. In France if found guilty of criminal negligence company directors can face up to six years in prison!

In Mauritian terms such behaviour would be lightly approached because company directorships are a status symbol and carry prestige and benefits and rarely any responsibility. It would be interesting to find out how many company directors are familiar with the Company Act, the rules governing corporate behaviour or the codes of good governance; more, how many have indeed even read the Articles of Association of their own Company. The financial conduct authority should open its eyes to monitor corporate goings on.

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