The cat should have been let out of the bag a long time ago, but it is better late than never. Last Thursday, Sime Darby Bhd came clean by disclosing the extent of the losses incurred by its energy and utilities (E&U) division.

What started out sometime in 2008 as rumblings in the Internet community and news media, and subsequent denials, have come to this: the unprecedented removal of the head of a government-linked corporation. Sime Darby’s group chief executive Datuk Seri Ahmad Zubir Murshid was asked to take a leave of absence six months before the expiry of his contract in November this year.

Sime Darby revealed a further negative impact of RM964 million on its results for 2HFY2010 ending June 30. This comprises RM200 million from its Qatar Petroleum (QP) project, RM159 million from its Maersk Oil Qatar (MOQ) project, RM155 million from MOQ’s marine project and RM450 million from the Bakun Hydroelectric Project.

These, together with the previous losses from the E&U division, bring total losses from the four projects to RM1.96 billion.
The additional losses were discovered by a board work group set up in October last year to investigate the E&U division, following its results in FY2009.

Sime Darby’s chairman Tun Musa Hitam told the press last Thursday that in the last six or seven months, questionable issues had emerged and that there was “cause for curiosity” in the division which resulted in the establishment of the work group, comprising Datuk Seri Panglima Andrew Sheng, Tan Sri Wan Mohd Zahid Mohd Noordin and Datin Paduka Zaitoon Datuk Othman.

The work group employed the services of cost consultants and legal and financial advisers to arrive at its findings which resulted, most visibly at this point, in the removal of Zubir, following a marathon 13-hour board meeting the day before. Musa explained that the decision was made in recognition of good corporate governance and accountability after considering the role of top management involved in managing the E&U division and the resultant damages caused by “going-ons in the past”.

Sheng also said the work group had identified areas of weakness within the division and instructions had been given to tighten controls and review these areas of weakness.

“Yes, there are major lessons we have to draw from risk management. Risk management is not a perfect game. We have to understand that there are various complex issues such as weather, various delays, disputes on different parts of the contract. We can certainly draw very good lessons from this and we have to move on,” he said during the press conference.

The genesis of this work group may be traced back to 2008 when Sime Darby’s internal auditor raised the alarm on losses from the QP project, which was brought to the attention of the audit committee at group level. External auditor PricewaterhouseCoopers concurred with the internal auditor and did not qualify the accounts of the E&U division. As a result, the audited accounts of Sime Engineering were delayed for a year.

This issue was superseded by the Synergy Drive merger which rendered the losses immaterial within the consolidated accounts of the merged group although group CFO Tong Poh Keow, who had taken over from Razidan Ghazalli, had wanted to provide for the losses. However, this was not done.

Apparently, Razidan, who got the boot for trading losses of RM120 million at Golden Jomalina Food Industries, had also been concerned about the QP project cost overruns.

The problem started appearing in the news in April 2008, with The Edge reporting that cost overruns exceeded RM150 million in Sime’s MOQ project. The losses attracted a lot of media attention and were highlighted in various blogs, including the now-defunct Sime Darby Watch blog.

Musa made a trip to Qatar in mid-2009 to see for himself the problems there and also to meet the clients. Then sometime in August or September, a top official from Sime Darby’s external auditor personally spoke to Musa on the matter, recommending the formation of a working group to investigate the extent of losses at the E&U division.

This group, headed by Sheng, was set up in October last year. Musa told the press that while the review was for the QP project at first, it was then extended to other projects in the E&U division.

There are two schools of thought as to why Zubir had to take the fall. One view is that he had pushed Sime Darby to the limit following the Synergy Drive merger exercise in order to show growth. In the case of Sime Engineering, it went all out to get projects even with thin margins, leading up to the merger.

Another view is that Zubir was protecting Datuk Mohamad Shukri Baharom, the previous head of the E&U division, and he had taken his eyes off the E&U division.

“Old Sime would have hidden the damage and allowed the CEO to retire gracefully. But the board decided otherwise because standards set were high. Remember the GHope guys who had to leave,” a person familiar with Sime Darby observes.

Recall that shortly after the merger, Razidan and Muhammad Mohan Kittu Abdullah, group vice-president for downstream and biofuel, were asked to leave over some RM120 million in trading losses made at Golden Jomalina Food Industries — a subsidiary of Golden Hope Plantations Bhd — setting a high standard for corporate governance and accountability.

Speaking of “old Sime”, when the group’s financial arm Sime Bank Bhd incurred losses amounting to RM1.8 billion during the 1997/98 Asian financial crisis, the banking head, Datuk Ismail Zakaria, resigned while the group president and chief executive Tan Sri Nik Mohamed Nik Yaacob retired only in 2004. Zubir took over the position of chief executive after that.

Market observers say that moving forward, aside from addressing the weaknesses and lack of control in the E&U division, the group needs to also tackle the lack of young members among its board of directors who can do more than just keep an eye on things, such as going down to the ground to keep tabs of what is going on.

According to its 2009 annual report, Zubir, 52, is the youngest member on the board of directors. The oldest are Musa and Dr Arifin Mohamad Siregar, both 75. The average age of the 13-member board is 67 years.

The group may also be in need of an infusion of new blood in the management team, given that it has always been seen as an “insider operation” protective of its own kind. Some say this led to an unwillingness to crack the whip when necessary.
Zubir is not expected to be the only casualty of this episode. People want more heads to roll and there is talk that a number of resignations can be expected.

The negative impact of RM964 million in losses may lead to Sime Darby’s first quarterly loss since its 2007 merger. Analysts have slashed their profit forecast for the group for FY2010 by at least 35%, with HwangDBS Vickers Research cutting its forecast by 43%. Sime Darby will certainly not be able to meet its own net profit target of RM2.5 billion.

The disclosure of the latest numbers gives further justification for calls to break up the group’s diverse businesses. Given the massive losses from the E&U division, should the group remain in this business? When asked, Musa said: “Thank you for the suggestion and we will take note of it and see whether that suits us.”

With the massive losses out in the open, the impact on investor confidence has been obvious. The counter was suspended on Thursday. When the suspension was lifted on Friday, Sime Darby’s share price fell to an intraday low of RM8.08. It closed at RM8.25 per share, erasing RM2.4 billion from its market capitalisation.

At the time of writing, it is understood that Musa will be meeting a group of bloggers on Friday night, most likely to talk about the RM964 million loss, among other things. Musa is known to engage bloggers in “sembang” sessions in a move to embrace digital democracy, something he has done since early 2009.

But what about engaging the investors? Investors have sold down the stock and the analysts briefing to be held on May 27 in conjunction with the announcement of Sime Darby’s quarterly results is expected to be well attended and will give the investing community an opportunity to grill management. It should also shed light on the actual and exact impact of the RM964 million loss.

This article appeared in Corporate page, The Edge Malaysia, Issue 806, May 17-23, 2010.