”There are fat cats everywhere and ours are fatter than most…

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

… consisting of a small, exclusive group who scratch each other’s backs and benefit exclusively from the spoils of directorships in public companies”

“Growth can only be sustained by decentralisation and the Highlands project is an ideal opportunity for the creation of a new Capital City”
“Let’s act as one nation for the common good in creating wealth, which is an eminently moral thing to do”

A few months ago, Feroze Bundhun raised a number of pertinent questions at the Annual General Meeting of the New Mauritius Hotels about corporate governance in the Group. Last week he again asked the Board and Management of Sun Resorts & Spa Ltd to justify non-payment of dividends. His main objective in raising these issues, he says, was to express concern at the “lack of transparency in corporate governance because small shareholders have no idea who does what and who earns what.” He adds: Transparency is an important component of corporate governance practices for attracting both foreign and local institutional investors. This is particularly important when countries are small, isolated, without natural resources, their nearest export markets are at least twelve hours flying time away. ”

Until recently Feroze Bundhun was 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. He spoke to the Mauritius Times about corporate governance in Mauritius and issues related to efficient land utilization.

Mauritius Times: Many people appear to understand different things when they speak about ‘good governance’ or ‘corporate governance’ as virtues needing to be put into practice. Could you enlighten us by putting the idea behind it all in a nutshell and telling us what the final objective behind the concept is?

Feroze Bundhun: The foundations for Good Corporate Governance in Mauritius were laid down in 2003 by a Committee chaired by Tim Taylor on behalf of the Ministry of Economic Development. The Report highlighted that “in the final instance good governance is about trust and stewardship in and by corporate leaders”. Unfortunately the Report is all but forgotten because its chief recommendation about transparency appears to be ignored. Transparency is an important component of corporate governance practices for attracting both foreign and local institutional investors. Investors create markets, and it is investors in the end who determine which companies survive and which companies fail. This is particularly important when countries are small, isolated, without natural resources, their nearest export markets are at least twelve hours flying time away. Corporate governance is an expensive business and it is unlikely that the size of Mauritian companies would enable them to operate on the same level of corporate governance as larger international companies.

* Ever since the colonial days in Mauritius, doubts have frequently been cast about how bigger corporations which dominated economic life were using their positions to colour their accounts as it suited them, to employ discriminating standards depending on who they were dealing with, even to cheat on the weight of cane delivered by small planters to the sugar factories? Can we say with some degree of assurance that with the new mantra of corporate governance all this now belongs to the past?

Instead of remaining a prisoner of history and constantly harking back to the past, I believe we must move forward with zeal and entrepreneurship developing new skills and ideas and working together with all stakeholders (shareholders, employees, suppliers & customers, the public in general, local and national government, etc.) for the future of the country, without regard for our ethnic heritage, religion, social status and gender. Only then can we proclaim to be acting as one nation for the common good in creating wealth, which is an eminently moral thing to do. We must also create a level playing playing field as often new entrepreneurs are frustrated by the mere size of existing businesses they have to confront in terms of competition. Hence the State’s willingness to create nationalized businesses or hold large shareholdings in private businesses (SBM, Air Mauritius, etc.,) through the State Investment Corporation, the National Pension Plan or the Treasury.

* It would not seem however that the State’s track record in this sector has been particularly brilliant if we go by the massive losses incurred over the years due to wrong hedging decisions in one or two cases and for other reasons. Our SIC has not risen to the level of Singapore’s Temasek Holdings, the investment company owned by the Government of Singapore, and its casinos and restaurants have been in the red for a long time…

Temasek Holdings is one of the world’s largest sovereign wealth funds. It is managed professionally by a large team of experts in the various sectors of the economy: property, telecommunications, manufacturing, banking, aviation, etc. By no stretch of the imagination can SIC be compared to Temasek. Government-owned enterprises are not known for their ability to run profitable companies. The Rose Belle Sugar Estate is a good example of that. Political interference in management is a serious hindrance. Managers are often appointed to government-owned companies because of their political affinities and not because they are good managers. I cannot think of any country in the world other than Mauritius where government is involved in the running of casinos and restaurants.

* A few months ago, you had raised a number of pertinent questions at the Annual General Meeting (AGM) of the New Mauritius Hotels (Beachcomber) about corporate governance in the Group. I understand that this time round you have, in the same vein, asked the Board and Management of Sun Resorts & Spa Ltd to justify non-payment of dividends. Is it only a question of dividends or do you take issue with the way these corporate bodies are being governed?

Inspired not least by the recommendation of The Corporate Governance Report that encouraged “Shareholder Activism”, my main objective in raising these issues at the AGMs was to express concern at the lack of transparency in Corporate Governance because in both the companies you mention small shareholders, and there are many of them, have no idea who does what and who earns what. The issue is not about dividend payments alone but to obtain explanations for the declining values of shares. Executive directors of these companies do not necessarily need to earn a dividend on their shares as they are compensated handsomely enough already for their executive roles. Small shareholders need to understand why the value of their shares have declined by as much as 80% over the last few years. In both cases, the Board of Directors failed to explain the reasons for the decline in share values. Clearly poor management is to blame.

The stand I took at both AGMs may have surprised many but shocked no one; on the contrary I was approached by many supporters at the end of the meetings who either wished to congratulate me or offer thanks for showing courage in saying loudly what many pensaient tout bas. The era of deference of shareholders to companies is really over and the stand I took hopefully is the beginning of a trend.

My other concern was to express irritation at the length of time the same people appear to stay on the Board of Directors of public companies, some for decades and/or being replaced upon their retirement by other members of the same family. In a well-run company, there should be a rotation of directors periodically, say every seven years. Some serve when they are well into their eighties when clearly they are unable to understand things that are being said or are unable to interpret Resolutions being put forward. This demonstrates an inability to trust the younger generation. If things do not change, perhaps Government should envisage imposing a rotation of directors by Statutes, as is currently the case in the banking system where the term is limited to six years.

* Underperformance of hotel groups, or textile groups, may be due to the continuing depressed state of affairs ushered in by the recession in the source European market, and benchmarking managerial performance or underperformance with dividend payouts may not be justified, isn’t it?

In most developed economies executive pay depends entirely on the performance of share prices. In the Mauritian context compensation packages are based on grounds of seniority and family or personal connections in most cases; many Executives remain in their jobs for decades when even the Chinese Communist Party changes its entire leadership every ten years! In a properly run company a frequent turnover of Executives and External Auditors is a sign of good governance. Women should also be more involved as they can contribute positively not only towards good governance but to achieve better results, particularly in the hotel sector. There is evidence showing that when new Executives with adequate qualifications and experience are brought in there is an immediate upward movement in share prices: Names such as Lux Resorts, Rogers Group and Air Mauritius are good examples if their most recent quarterly reports are any guide.

Too often Chief Executives of hotel chains blame external factors to justify poor performance claiming economic challenges abroad, prices of air tickets, and local competition when all they need is some imagination in exploiting other means of boosting their cash flows: providing incentives and discounts to their shareholders for a start. If applied across the board, this would immediately increase demand for shares and therefore increase share prices as well as raising occupancy rates in their properties. UN statistics show that tourism figures globally are on the rise year on year not least by the opening of the Chinese market. Why should the Maldives, for instance, receive more Chinese visitors than we do given our exceptional tourism infrastructure. For the last 25 years Turkey, for example, a country that I know well has experienced an increase in visitor numbers of more than one million every year and the short distance to Europe is not the only explanation because both American and Asian tourists are on the increase as well.

* Some of the hotel groups, which were and still are losing money, have been asking for public support to help them tide over their financial difficulties. Have they made themselves sufficiently accountable to the public or even to their shareholders as to justify their asking for support by way of more promotion spending by the government, more flights to loss-making destinations by Air Mauritius or to devaluing the rupee to tide them over?

In my experience hotel chains are not making losses if their accounts are correctly reported. Any support that the public authorities can provide has already been provided by way of long leases on Pas Geometriques sites at cheap rents. It is true that their debt burdens are high and this is a reflection of management style rather than good economic sense indicating perhaps attempts to minimize tax liabilities. But it is often necessary to raise debts to improve existing facilities and to raise standards if you are to remain competitive in the market place. As I spend a lot of my time travelling abroad I am aware of the efforts made by Government to promote our country as a tourist destination. The National Airline is also a business and why should they lose money on unprofitable routes; the market should be the sole decider of exchange rates and currency values. If the currency is strong, perhaps the Government is doing something right in terms of economic thinking.

* 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. How can one explain that in the case of the MCB scandal of 2003, its board of directors did not have anything to reproach itself for when there was a blatant failure of internal controls in the bank and consequential loss incurred by shareholders?

What were the External Auditors doing at the time? Please remember that many bankers consider themselves to be Masters of the Universe. In Mauritius too often public corporations are still dominated by same family members or their relatives. There may be nothing wrong with this set-up but shareholders do not always make good managers. The 2003 Taylor Report highlighted the shortage of skills required for the appointment of non-executive directors: surely times have changed by now. All it takes is to look around beyond one’s own immediate circle and coterie to see the pool of talent available, particularly among the young and specially women. Too often directors overstay their welcome on the boards so that the tree begins to hide the wood.

* We hear these days about five domestic banks that would have made a bad bet on “assets” they would have acquired in India involving estimated collective loss in the region of 2 to 3 billion rupees. Since all this looks like a serial failure across those five banks, surely the risk decision of each one of them must have been fundamentally flawed and not fully based on rules of prudent lending and investing? What’s your take on that?

In the famous words of Matt Taibbi: “Bankers are like giant Vampire Squids wrapped around the face of humanity relentlessly jamming their blood funnels into anything that smells like money.” The Report on Corporate Governance recommended that “all members of the Board should be individuals of “integrity who can bring a blend of knowledge, skills, objectivity, experience and commitment to the Board”. Companies are also required to set up a “Risk Committee” to monitor risk issues, set risk strategy, advise the Board on risk issues and monitor the management process. Was the risk involved in this instance properly assessed? Clearly not.

* One or a couple of those banks might even have impaired their capital base in this venture. Who, in a corporate governance framework, would be held accountable for the bad judgment and its implementation leading to this scale of loss?

Remember that the taxpayer always bails out failed banks and the Central Bank is the lender of last resort. However, efforts are made in the banking sector throughout the world obliging banks to significantly increase capital adequacy base. Bank shareholders are also required to fund capital whenever necessary although in the case of Merryl Lynch five years ago and at the height of the sub-prime crisis the Bank was allowed to go under rather than being bailed out. Hopefully lessons have been learned by others.

* Would you say that companies which depend on funds raised from the public for carrying on their business should have an obligation towards full transparency and disclosure of their ins and outs to the public by, for example, listing themselves on the stock exchange and complying fully with listing rules?

To my knowledge the public does not have a say in a privately owned company. The public only invest in publicly Listed Companies precisely for the reason that the Stock Exchange has its own compliance Rules and Regulations that must be adhered to in accordance with the law. Listings on the SE require Companies to be transparent in their operations.

* How can one explain that in a country like Mauritius which vows by corporate governance and rule of law, the financial regulators have recently pinned down at one stroke no less than 50 companies dealing in dubious financial transactions, once the unauthorised deals of the White Dot and Sunkai Ponzi schemes came out in broad daylight?

This matter raises a number of important issues, but I would presume it is the Regulator’s job to police corporate activities after all.

* Air Mauritius has had a streak of poor performance over many years, with a peak coming on with the ‘hedging’ saga which sent the company into a tailspin. The company has explained that the aviation industry is generally in a bad shape. As an activist shareholder, what exactly would you attribute the sustained declining performance of the national airline to? Is the governance issue also in cause?

The performance of a company is a reflection of the quality of its management. The question is: who is running the company? What is the experience and ability of its Board of Directors; have they been appointed on the Board for their managerial competence or simply to satisfy the public’s interest in political and ethnic balance. In government-owned companies shareholder interference in management is a serious problem and one cannot see how matters could be improved unless these companies are left alone to get on with the job in hand based on commercial considerations alone. In an open liberal and democratic society governments should not be involved in running purely commercial concerns unless it is a matter of national strategic importance. The aviation industry sadly is often a matter of national pride.

* We have witnessed in recent years how the collapse of a few big companies in the West almost brought the very economies in some European countries to their knees, and how their governments had to inject huge amounts of public funds to recapitalize these companies. In Mauritius, though our companies form an essential part of the economic fabric, their total market capitalisation may not add up to that of even a single large firm, say in the cosmetic sector in France. That would suggest that our own “fat cats” might not therefore pose a threat to our economy. Do you agree?

There are fat cats everywhere and ours are fatter than most consisting of a small, exclusive group of people, a coterie if you like and a clique of well-connected individuals who scratch each other’s backs and benefit exclusively from the spoils of directorships in public companies. Only more shareholder activism can make them more socially responsible by forcing them to behave more responsibly and inclusively. This is a question of morality and ethics not simply of adherence to the Law. There are people who sit on the Boards of Banks that lend huge amounts of money to corporations where they are also directors. Can this be called ethical behavior? Corporate failure is a question of scale and in the event of a company going down the first victims are the employees not necessarily the “fat cats”.

* I understand that you had, some years back, advised the Government of Mauritius with a view to rationalizing the leasing of our Pas Geometriques. It would appear this has helped bring in more funds to the Exchequer. Do you have the impression that we have since been making sounder decisions as regards the utilisation of our State lands?

My company (the world’s largest provider of real estate services) was approached by the government some years back to review and update the status and terms of leases of the Pas Geometriques. As far as I know all our recommendations were approved by the government that wasted no time in implementing them quickly. I understand that the implementation of our recommendations significantly increased rental income and greatly improved allocation of State Lands. Whether this practice still continues I cannot say.

* We have been seeing a situation of soaring property prices in Mauritius for a number of years so that property is getting out of reach of people with a modest purse. Unless the boom were to burst, it looks like a price-rising trend set to continue in a land-scarce place like Mauritius. Could this situation of property prices shooting up constantly not have been attended to through a more rational allocation of property, including state property, across different uses?

Property prices reflect the levels of supply and demand. If you want to lower property prices all you have to do is increase supply. It’s as simple as that, and there are enough resources and sufficient landmass to achieve that particularly in the housing sector. If development land is scarce, then you have to think of alternative forms of residential development such as apartment blocks instead of always thinking in terms of providing individual housing units to each household.

* But, generally, do you think we are using our lands inefficiently? There have been attempts to establish national physical development strategies in the past. From the Mission d’aménagement du Territoire de l’Ile Maurice (MATIM) in 1977 to the last National Development Strategy in 2005, there have been a series of master plans that have been developed but which have never been really implemented…

You need to ask the decision-makers why all these plans have never been implemented. May be it is a question of scarce resources or the inability to put together a team that can properly handle such a task.

* It is said that developing countries can sustain their growth by expanding urbanisation. In Mauritius, we appear instead to be congesting places already congested places like Port Louis ever the more. Why do you think policy-makers are not going for urban diversification with a project like the one that was announced for Highlands several years ago?

Again it is a matter for decision-makers. Growth can only be sustained by decentralisation and the Highlands project is an ideal opportunity for the creation of a new Capital City as well as a new town involving all sorts of activities such as administrative, commercial, residential, retail, manufacturing, etc. I understand that the Highlands Project is still alive and will go ahead in time assuming resources are made available. Port Louis can hardly be called a congested city, particularly in the evenings and at night when it becomes a ghost town. You do not need to be a genius to understand that a city like Port Louis needs late night entertainment activities, shopping facilities, restaurants, etc. to bring its population out at night instead of confining them indoors in front of a TV set. We have a historic theatre in town that is left to rot being closed all year round. People around the world are moving towards town centres to live, play, work and enjoy themselves. Only in Mauritius it is exactly the opposite. I know of many situations particularly around the port where clusters of housing developments combined with entertainment facilities can bring life to the city again. We can always learn from other city’s experiences: Cape Town (Waterfront), Buenos Aires, Sydney (Darling Harbour), London (Canary Wharf), Havana, are good examples of rejuvenated cities.

* Published in print edition on 7 June 2013

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