a-place-in-the-family-corporate-governance-practices-in-family-firms-case.pdf

A Place in the Family: Corporate Governance Practices in Family Firms

Case

Author: Marleen Dieleman

Online Pub Date: January 04, 2017 | Original Pub. Date: 2017

Subject: Family Business, Asian Pacific Business, Corporate Governance

Level: | Type: Experience case | Length: 1746

Organization: fictional/disguised | Organization size: Large

Region: South-Eastern Asia | State:

Industry: Agriculture, forestry and fishing

Originally Published in:

Publisher: SAGE Publications: SAGE Business Cases Originals

DOI: https://dx.doi.org/10.4135/9781526411242 | Online ISBN: 9781526411242

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Abstract

Adeline Ong is the new Independent Director of Lim Palm Co., a family business listed at the Singapore Exchange. During her second meeting the board approves an important strategic decision on an acquisition. Adeline realizes that input from independent directors does not seem welcome and that the board does not adequately fulfil its role. Rather, the company’s governance systems are shaped by family dynamics and hierarchies. Unable to contribute constructively in the existing situation, Adeline wonders whether she can add value to the Lim Group as an independent director, and if so, how.

Case

Learning Outcomes

The case is meant to stimulate discussion on corporate governance practices in family firms, in particular the actual and intended role of independent directors (IDs) of family firms. By the end of this case study, students should be able to identify gaps in actual and desired corporate governance practices in family firms, and identify strategies to close such gaps. Furthermore, students should be able to recognize common features of large family-owned business groups and how these features affect governance practices.

Corporate Governance Practices in Listed Family Firms in Asia

Adeline Ong frowned as she stepped out of her second board meeting of Lim Palm Co., a family-owned company listed on the Singapore Exchange (SGX), and part of a larger Indonesian business group. To her surprise, an important acquisition was approved without much discussion during the board meeting. She felt the board was not providing the necessary checks and balances and was not functioning as it should. She wondered how she could make a positive impact on the family-owned company as an independent director. Adeline also wondered if she could add value or if she should she consider stepping down from her position.

Lim Palm Co.

The Lim Group was established by Mr. Hengky Lim in Indonesia in 1963, originally as a trading firm. Mr. Lim subsequently ventured into food manufacturing and started sugar and palm oil plantations in Sumatra, an Indonesian island. In addition, he set up a property and construction business and a mining business, and even bought a small Indonesian bank with 17 branches. Over time, all businesses grew as Indonesia witnessed several decades of strong economic growth under President Suharto (1967–1998).

Following the opening and development of the stock market in the late 1980s in Indonesia, Mr. Lim listed his food business (Lim Food Co.) on the Indonesian stock exchange in 1991, and later the mining business (Lim Exploration Co.) in 2005. The bank, which had grown into Indonesia’s tenth largest bank, remained in private hands.

Within Indonesia, Mr. Lim was known as an entrepreneur with a keen eye for business opportunities, but also as a patriarch who was rather traditional and who consciously maintained a low profile. This was not uncommon in the country, as many of the business people were of Chinese descent and at times had faced discrimination or outright violence. As with most family firms in the country, many of the trusted professional managers had been with the group for a long time as Asian families like the Lim family typically valued loyalty and trust. In the mid-1990s Mr. Lim’s two sons entered the family business, which had grown into a widely diversified conglomerate. They slowly worked their way up to director positions.

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In 2009, Mr. Lim listed the palm oil company (Lim Palm Co.) on the SGX. Jakarta-listed Lim Food Co. owned about 60% of the shares (Figure 1). Lim Palm Co. performed well and enjoyed steady growth and healthy profits. Its products, mostly crude palm oil, were partly sold to Lim Food Co. to process into various food products sold in Indonesia, and partly marketed globally. The assured internal market meant that Lim Palm Co. was less exposed to volatile commodity prices. Lim Palm Co.’s market capitalization was around S$300 million, and Lim Palm Co. was one of the medium-sized players in the palm oil plantations sector.

Figure 1: Ownership structure.

The Board

In Singapore there is a one-tier board system with a combination of executive and non-executive directors. The Singapore Code of Corporate Governance recommends a strong independent element on listed company boards, with IDs making up at least a third of the board and half if the Chairman is not independent. Companies are required to comply or else explain in their annual reports why they chose not to comply.

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Page 4 of 7A Place in the Family: Corporate Governance Practices in Family Firms

Foreign companies listing in Singapore are required to have at least two IDs that resided in Singapore.

With the majority of listed firms in Singapore having strong ultimate owners (either a family or the government), the corporate governance code sought to empower IDs to ensure major shareholders did not act to the detriment of smaller shareholders.

Lim Palm Co.’s board consisted of seven directors (Table 1). Mr. Hengky Lim, who was 79, was the non-executive Chairman. Daniel Darma (61), who had been with the Lim Group in various roles for 20 years, was chief executive officer (CEO). Mr. Lim’s eldest son Albert (53) was a non-executive director and Stanley (49), a younger brother, looked after marketing from Singapore, and was an executive director. Mr. Lim and Albert focused most of their attention on other group firms in Indonesia, but Stanley lived in Singapore and focused on Lim Palm Co. All the operations were located in Indonesia, except the trading and marketing team.

Table 1: Lim Palm Co. Board Composition

Mr. Henky Lim (79)

Non-executive chairman

Mr. Daniel Darma (61)

Chief executive officer, executive director

Mr. Albert Lim (53)

Non-executive director, member of the nominating committee

Mr. Stanley Lim (49)

Executive director

Mr. Robert Tan (75)

Lead independent director, member of the audit committee, member of the nominating committee, member of the remuneration committee

Mr. Calvin Chew (68)

Independent director, member of the audit committee, member of the remuneration committee

Ms. Adeline Ong (47)

Independent director, member of the audit committee, member of the nominating committee, member of the remuneration committee

Three IDs complemented the board, Adeline being one. The other two IDs had served the company since the listing in 2009. One, Robert Tan, was a retired accountant (75) who had been a partner of one of the Big Four accounting firms and who had known the family for many years. He was an experienced director, sitting on five other listed company boards in Singapore, mostly family firms. He was designated as the lead ID. Another, Calvin Chew, was a former banker (68), who sat on one other listed company board. All IDs were Singaporeans and residing in Singapore.

Adeline was in her late 40s and enjoyed a successful career as a corporate lawyer at one of the leading Singaporean law firms. She had known Stanley for three years and got along well with him as a business professional. They occasionally met over lunch and one day Stanley suggested she join the Lim Palm Co. board. He told Adeline he would have no problem convincing the nominating committee of her qualifications. When she agreed to join the board, Stanley asked her to send her CV over, and shortly thereafter her appointment was announced and she was introduced to the rest of the board.

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The Board Meeting

Adeline was set to attend her second board meeting a few months after joining as an independent director. Late the night before the meeting, the board had received a lengthy proposal to acquire another Indonesian palm oil company. At the meeting the next day, the CEO chaired and started with a short discussion on the quarterly results announcement, after which the proposed acquisition was tabled.

The CEO briefly explained why the proposed acquisition was in the interest of Lim Palm Co. The three family directors and the CEO all looked expectantly at the IDs. Robert Tan asked whether this deal involved any related parties and reminded the CEO of the relevant listing rules to follow.

Adeline asked about the risks of the acquisition, as well as the legal aspects. She also wanted to know who the sellers were and whether there was a post-merger integration plan. Mr. Hengky Lim started fiddling with his phone when Adeline asked more questions and Stanley looked uncomfortable. The CEO gave brief responses. None of the other directors spoke or were asked to provide their input, and the acquisition was subsequently approved.

The rest of the meeting was dedicated to a number of formalities, such as ratifying and signing resolutions and releasing announcements to shareholders, formally confirming that all relevant listing requirements were met, planning the next board meeting, and so forth.

Adeline’s Challenge

Adeline realized that she faced a difficult problem. Stanley had told her before she joined that Lim Palm Co. was a typical traditional family firm. He said that he hoped to increase the level of corporate governance and that her legal experience would be very helpful to Lim Palm Co. He expected that Adeline would play a constructive role, hinting that it was very difficult for him to create any change.

Adeline had thought of this board position as an opportunity to contribute her knowledge and expertise, to gain experience as a board member and to further her corporate career in Singapore. Many of her senior colleagues sat on listed company boards. But now she started wondering whether she should have accepted the position in the first place.

Changing the existing dynamics in a board as a new addition was not easy – not to mention the fact that the majority owner was a traditional Chinese–Indonesian family patriarch, she was female, the youngest, and had never worked closely with anyone in the Lim company except Stanley. As a lawyer she was acutely aware that the position carried substantial reputational risk.

What would it take to bring the family firm to the next level of corporate governance? Could Adeline fulfil her duty as an independent director to act in the interest of the company – or should she step down? If she could add value to the company, how could she position herself and affect positive change?

Discussion Questions

Analyze the role of the board at Lim Palm Co. In what way does it deviate from best practices in corporate governance? What would be the benefits to the company if it moved towards higher levels of corporate governance, as Stanley suggested? What contribution do you think Adeline can make to the company? Should she have done something differently? Should she do different things going forward? What qualifications do you think IDs in family firms need in order to add value for shareholders and stakeholders? Should regulators give IDs in family firms more power?

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