The other day, I heard someone say this: “My company has not been making money. It is just breaking even every year.”
Fair enough statement.
However, the person went on to say that whenever there is a profit, all of it will be paid to him as director fees. Thus, the company will never show a profit.
There is actually a good reason for doing this. The corporate tax rate is much higher than the personal tax rate. So, unless you are already at the highest tax bracket for your personal income tax, it makes sense to “channel” the profits from the company into your own pocket.
In a company which is 100% owned by a single person (who is also the director), no one will really lose out other than the taxman. Of course, whatever fees that are paid must still be of a reasonable amount, otherwise the taxman will probably come knocking on your door.
What about the case where a company is owned by many shareholders? The issue then becomes a bit more contentious. Whatever excess fees that are paid to a single director (who could be the majority shareholder) would be detrimental to the remaining shareholders as the profits could have been paid out as dividends.
For a publicly listed company, there are usually some safeguards to prevent this sort of thing from happening.
This includes the requirement to publicly disclose the remuneration of key employees and the board of directors. There is also a need to disclose whether close relatives of key management staff are working in the company and their remuneration.
However, corporate governance requirements and actual reality are two different stories altogether.
Whenever a company deviates from the requirements, SGX might ask the company to rectify the shortcomings and the company will attempt to address the issues raised by SGX.
Sometimes, the replies do not answer the question completely but SGX might decide to close one eye.
Take the case of a particular S-chip, X, which has been making losses almost every year after it got listed.
SGX posed them this question after the release of their annual report:
Guideline 9.2 of the Code of Corporate Governance states that the Company should name and disclose the remuneration of directors and at least the top five key management personnel (who are not directors or the CEO) in bands of S$250,000. There will be no upper limit. We note that on page xx of the Annual Report, the Company disclosed that the remuneration of a director is S$500,000 and above and did not disclose the remuneration of the top five key management personnel. Please explain the reason(s) for the deviation from the code as required under Rule 1207(12) of the Listing Manual.
The reply by company X goes like this:
There are no other key management personnel other than the two key executives of the Company as disclosed in the Annual Report.
The reply did not disclose the top band of the CEO and also failed to disclose the top five key management.
There was also another question:
Guideline 9.3 of the Code of Corporate Governance states that the Company should disclose the details of the remuneration of employees who are immediate family members of a director or CEO, and whose remuneration exceed S$150,000 during the year. We note that the Company has not disclosed this information. Please explain the reason(s) for the deviation from the code as required under Rule 1207(12) of the Listing Manual.
Response by company:
The Company has an employee who is an immediate family member of Mr Y, a Director and CEO of the Company, and whose remuneration during the year (FY2012) exceeds S$150,000 but not S$250,000 and which comprises basic salary and bonus of xx% and yy% of the total remuneration amount respectively.
While the response revealed that there was an immediate family member of the CEO who worked in the company, it did not really answer the question of why the information was not provided in the first place.
Nevertheless, there was no further followup on this by SGX.
To me, the replies given by company X seems to imply a “What can you do to me?” kind of attitude.
Ever wonder why some companies keep on making losses year after year? Your guess is as good as mine.
To add insult to injury, if a company persistently makes losses, it might be suspended or even potentially delisted.