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This article first appeared in The Edge Malaysia Weekly on July 23, 2018 - July 29, 2018

SAPURA Energy Bhd president and CEO Tan Sri Shahril Shamsuddin seemed his usual self last Thursday at the company’s office in Publika in Mont’ Kiara, Kuala Lumpur. However, the same could not be said of the other top brass after the company held its annual general meeting the day before.

Sharil, who took home RM55 million in bonus payments and RM16.56 million in salary and other emoluments in FY2018, has come under the scrutiny of shareholders, including the Employees Provident Fund (EPF).

Excluding an intellectual property rights payment of RM43.4 million, Shahril’s compensation amounted to RM71.92 million in FY2018, when Sapura Energy incurred a net loss of RM2.5 billion on revenue of RM5.89 billion. The loss was mainly attributed to a RM2.1 billion impairment provision for the company’s drilling segment.

At the AGM at the KL Convention Centre, the EPF representative apparently said the minority shareholders had seen the downside of the group’s financial performance and impairment but not the downside of Shahril’s remuneration package. He indicated that the retirement fund would vote against all directors due for reappointment at the AGM, including Shahril.

However, the bid to remove Shahril failed. He received 81.71% of the votes to remain as president and CEO. The other resolutions were likewise passed.

But any move to oust Shahril from the board would have dire consequences. Sapura Energy’s 14 bankers have a covenant on a RM16 billion refinancing package put together in 2014 that requires Shahril to maintain his shareholding above 10% and remain as CEO, failing which the loan will default.

The 14 principal bankers are ABN AMRO Bank, AmBank Bhd, CIMB Bank Bhd, Citibank, Export-Import Bank of Malaysia Bhd, First Abu Dhabi Bank, ING Bank, Malayan Banking Bhd, Mizuho Bank, RHB Bank Bhd, Standard Chartered Bank, Sumitomo Mitsui Banking Corp, MUFG Bank Ltd and United Overseas Bank, as stated in the company’s latest annual report.

Sapura Energy chairman Datuk Hamzah Bakar points out that the EPF is aware of the covenant and the consequences of removing Shahril.

“This is perplexing to me. They wanted to oust the board. Have they got a team to replace the existing one? Who is going to run the company?” independent director Gee Siew Yong asks in an interview with The Edge.

Asked whether it was aware of the covenant and its conditions, the provident fund, in an email reply, says, “The EPF had repeatedly raised concerns relating to the corporate governance practices of Sapura Energy, in an effort to align EPF’s interest as a shareholder in its investee companies’ management.

“The EPF is of the view that the remuneration of senior executives should be linked to the company’s performance. Boards of PLCs have a fiduciary duty to ensure that their shareholders’ interests are protected.

“As a signatory to the Malaysian Code for Institutional Investors, the EPF is committed to the agenda of promoting strong governance practices in Corporate Malaysia, and expects the same to be practised by all its investee companies. Adherence to good corporate governance by EPF’s investee companies would lead to sustainable long-term value creation for the EPF’s 14 million members by extension.”

Commenting on the EPF’s criticism at the AGM, Hamzah says, “The tone was surprising but the subject matter was not. They have raised it before and we have answered it before.”

The EPF, which held an 11.46% stake in Sapura Energy in January, ceased to be a substantial shareholder in May.

Its board representative, Tunku Alizakri Raja Muhamad Alias, resigned in end-January, but he is understood to have been privy to the information regarding the covenant that is tied to Shahril’s pay package and to have voted for it, according to Sapura Energy executives.


MSWG not happy as well

Apart from the EPF, the Minority Shareholders Watch Group (MSWG) also pelted the Sapura Energy board with questions, and clearly meant business.

Asked if it was aware of the covenant binding Shahril, MWSG, in an email reply, says, “During an engagement between the Institutional Investors Council, MSWG and the board and management of Sapura Energy on May 21, 2018, the chairman of Sapura Energy (Hamzah) mentioned that one of the reasons for Tan Sri’s (Shahril) high remuneration was due to the fact that there was a covenant on his shareholding by financial institutions.

“We were told that the covenant was one of the reasons for Tan Sri’s high remuneration. We were told that in the abovementioned meeting, and this was reiterated at the AGM.

“MSWG is of the view that remuneration should not be tied to such covenants. Remuneration should be in line with the performance of the company and benchmarked against other companies in the industry, both locally and internationally.

“More importantly, the board should ensure there is an alignment of interest between management and shareholders.”

Asked if MSWG was aware that if Shahril was removed as president and CEO, it would cause a default of the company’s RM16 billion debt, the watchdog says, “This was alluded to at the AGM. The way we understood it, if Tan Sri leaves the company, it would trigger a default. As we are not privy to the covenant documentation, we cannot comment further on the finer details of the conditions of default of the covenant.

“We did not vote against his re-election or call for his removal. It was the other directors, especially the independent directors on the board, who we hold accountable for Tan Sri’s remuneration.

“As such, we recommended to the shareholders to vote against the re-election of the two independent directors. This was to indicate our seriousness in wanting the board to show commitment to addressing the issue, which has been the concern of shareholders for the past few years. Even though all resolutions were passed, we believe a strong message has been sent to the board to seriously consider and review the remuneration package,” MSWG says.


Is Shahril being paid too much?

Some quarters are of the view that Shahril’s compensation should not be tied to such a covenant. Others think his compensation should not be lumped with his remuneration package.

The covenant, others have bluntly said, enables Shahril to hold the board and shareholders to ransom as he has to helm the company or risk a default.

Nevertheless, the board is solidly behind Shahril. From a cost perspective, Hamzah’s view is that paying a RM55 million bonus to Shahril is less than having to secure a bank guarantee. This is as important as his ability to grow the company.

“It depends on who you ask. Ask an entrepreneur and he will tell you it’s fair compensation … with the covenant and all. Ask a shareholder or a common man and he will tell you it’s immoral,” says a market watcher.

Some of Sapura Energy’s top brass say CEOs of international oil and gas companies are paid between US$10 million and US$27 million a year, which would justify Shahril’s package.

At its peak in December 2013, Sapura Energy had a market capitalisation of close to RM29 billion, which put it among the top three or four largest oil and gas service providers in the world. At last Friday’s close of 58.5 sen, its market capitalisation had shrunk to RM3.5 billion.

“I personally feel that maybe it (RM55 million bonus) is not enough, but given the circumstances ... the company is still struggling to recover, that may be just a token, a fair compensation,” says Hamzah.

Bankers who are familiar with Sapura Energy’s refinancing say the move to tie Shahril up via a covenant is common.

“It’s understandable ... We would like him (Shahril) to have his skin in the game as well,” says one of the bankers.

Another says when dealing with companies run by entrepreneurs, it is the norm for banks to ensure that the driving force behind them does not leave.

In March 2014, Sapura Energy signed a RM16.5 billion (US$5 billion) refinancing club deal with 13 local, regional and international banks.

A month before that, Tan Sri Mokhzani Mahathir, the son of Prime Minister Tun Dr Mahathir Mohamad, sold a block of 190.3 million shares at RM4.30 apiece, or almost RM820 million. He was seen to have made a timely exit as crude oil prices collapsed in October that year, sinking to US$50 a year later.

Sapura Energy was then known as SapuraKencana Petroleum Bhd following the merger between Shahril’s SapuraCrest Petroleum Bhd and Mokhzani’s Kencana Petroleum Bhd in July 2011.

In November last year, Mokhzani ceased to be a substantial shareholder of Sapura Energy after disposing of 605 million shares or a 10.1% stake, held under Khasera Baru Ltd, at between RM1.42 and RM1.49. The relationship between him and Shahril was said to be strained.

Mokhzani and his partner Datuk Yeow Kheng Chew relinquished their executive board positions in November 2013 and resigned in March 2015.


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