Corporate Governance Failure of CK Tang
Corporate Governance Failure of CK Tang
Corporate Governance Failure of CK Tang
EXECUTIVE SUMMARY
In our economy a good corporate governance has become a crying need now a days. Due to
deviant nature of human being, they are always interested to maximize their own benefit. In this
process of maximizing own benefit, board of directors of a company or the members of
management board of a company may involve in such an activity which may bring positive
result for them but might be harmful for shareholders who are the real owners of the company. In
other words, owners are concern about long term gain while agents are concerned about short
term gain. In this mismatch of objectives, the issues of agency conflict arises. Researcher claims
that, strict corporate governance policy is required to solve this problem. Again this corporate
governance policy vary from industry to industry, economy to economy and country to county.
So to know what types of corporate governance policies will be fit for an industry, study must
need in this field. This report was assigned to us to gather knowledge in this aspect. We have
selected The failure of C.K Tang as our key topic. We have tried to find out the cause and
different areas of issues where corporate governance failed throughout the report.
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Contents
Executive Summary..........................................................................................................................
Chapter- 01: Introduction to the Report...........................................................................................1
1.1 Introduction:..........................................................................................................................1
1.2 Objectives of the report:........................................................................................................1
1.3 Methodology of the report:....................................................................................................2
1.3.1 Data Collection Procedure..............................................................................................2
1.3.2 Data Processing and Analysis.........................................................................................2
1.4 Limitation of the report:.........................................................................................................2
Chapter- 02: Review of Literature...................................................................................................4
Chapter- 03: Company Overview....................................................................................................8
3.1 About C. K. TANGS:.............................................................................................................8
3.2 Evolution of The Brand:......................................................................................................10
3.3 Present Day:.........................................................................................................................10
Chapter- 04: Failure of C.K. TanG................................................................................................11
4.1 Role of the Board of Directors:............................................................................................11
4.2 First Privatization Attempt: Scheme of Arrangement..........................................................12
4.2.1 Reasons for failure of First attempt:.............................................................................12
4.3 Second Privatization Attempt: Unconditional Cash Offer...................................................12
4.3.1 Reasons for failure of second privatization attempt.....................................................13
4.4 Third Privatization Attempt: Voluntary Delisting................................................................13
4.5 C.K.Tang: The Fight towards Privatization.........................................................................14
4.6 Key Area of Controversy: Tangs Plaza................................................................................14
4.7 Unhappiness amongst Minority Shareholders.....................................................................15
4.8 The Capital Reduction Exercise..........................................................................................15
4.9 C. K. Tang: Corporate Governance Issues:..........................................................................15
Chapter- 05. Conclusion................................................................................................................19
References......................................................................................................................................20
To find out should independent directors be primarily concerned with the interests of the
minority shareholders?
To evaluate the independence of C.K. Tangs board during the third privatization attempt.
To find out whether the basis of valuation was fair.
To suggest improvements that would help protect minority shareholders in the future.
To explain three different privatization methods
To explain how these different methods work and the pros and cons of these different
methods from the viewpoints of the shareholder(s).
performance.
The
Ministry
of
Finance,
Singapore
(CORPORATE
GOVERNANCEC 2001) defines corporate governance as the processes and structure by which
the business and affairs of the company are directed and managed, in order to enhance long term
shareholder value through enhancing corporate performance and accountability, whilst taking
into account the interests of other stakeholders. Good corporate governance therefore embodies
both enterprise (performance) and accountability (conformance). A number of studies on the
state of corporate governance were undertaken. Studies have discovered number of reasons for
malpractices of corporate governance (CG) in companies listed with the Stock Exchange. One of
the principal reasons for poor corporate governance (CG) is that most of the listed companies are
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family oriented (Ahmed and Yusuf, 2005) and these companies prefer to keep ownership
holdings within the family connections (The Daily Star, May 17, 2006), i.e., these companies are
closely held. As a result, small group of shareholders own or control the majority of shares and
by using that majority, control the decision-making processes of the companies (Bangladesh
Enterprise Institute 2003).
In an overwhelming majority of the non-bank listed companies, sponsor shareholders, who
generally belong to a single family, heavily dominate the Board of Directors. The Board of
Directors is actively involved in management. Most independent directors represent current or
former government officials or bureaucrats. They are appointed directors to assist company in
getting licenses or as payback for previous favors (Ahmed and Yusuf, 2005).
In the context of Bangladesh, independent directors do not act as an advocate of majority
shareholders or as a source of innovative ideas (Bangladesh Enterprise Institute 2003). But
ironically, the companies Act 1994 provides for many stringent rules regarding any negligence,
default, breach of duty or trust on the part of director, manager or officer of a company. But these
rules are more honored in the breach than observance (Ahmed and Yusuf, 2005). In addition
to this, annual general meetings (AGM) of many listed companies are not held in time, which
also implies poor corporate governance (CG) practice.
Ahmed and Baree (2000) summarizes the principles and standards of corporate governance as
agreed and put forth by Organization for Economic Co-operation and Development (OECD)
,Cadbury committee (UK) and other international committees. The authors identified problems
of implementing international corporate governance norms in Bangladesh and finally make
certain recommendations for reform of corporate governance as well. The article recommends
three substantive actions be taken to improve corporate governance scenario in Bangladesh.
First, a high powered committee including members from government, regulatory agencies,
companies and ICAB should write a code for corporate governance in Bangladesh. Second,
amendments to existing laws should be adopted to enforce corporate governance norms. Third,
academic and professional institutions should include corporate governance principles in their
syllabus.
Sarkar and Ahmed (2007) depicted the scenario of corporate governance disclosure by listed
public limited companies in Bangladesh. They identified some information items which
companies tend to disclose much such as disclosure of remunerations committee. They
observed that there are some information items, which companies tend to disclose less or try
conceal purposively, such as stock code. They observed that 25 companies out of total
257companies as listed on DSE up to June 30, 2005 reported Corporate Governance Report in
the annual reports voluntarily. The mean disclosure of corporate governance items is 40.84
percent. Sarkar, Khan and Alam (2007) studied the response rate of different companies
(industry-wise) with a special reference to the SEC corporate governance guidelines and the
compliance rate for corporate governance guidelines by the companies who have reported the
compliance with such guidelines in 2005-06 and 2006.
A comprehensive diagnostic study was conducted by Bangladesh Enterprise Institute (2003) as a
project, which seeks to focus on the key areas that have been identified internationally as
important to good corporate governance. Weak regulatory system has also been identified as a
roadblock in the way of achieving sound CG. The existence of weak regulatory system prevents
the current laws and statutes from being implemented.
Incompleteness of Board committees hinders good CG in Bangladesh. Board committees which
are very important for sound CG are composed of Audit Committee, Remuneration Committee,
and Nomination Committee. The Audit Committee monitors the integrity of financial statements,
reviews internal financial controls, recommends appointment of external auditors and reviews
auditor independence and objectivity and audit effectiveness. The Remuneration Committee is
responsible for reviewing the remuneration of directors and senior management and advising the
Board whether the amounts are reasonable in comparison with industry and corporate yardsticks.
The Nomination Committee is responsible for proposing new nominees to the Board and
advising the Board on the core competence required of new directors (Michael Seamer, 2002).
Despite significant importance of the Board committees, new boards (except of banks) have been
found to have audit committees and almost none has been found to have nomination or
remuneration committees in Bangladesh (BEI, 2003).
situation of corporate governance in the three types of Enterprises: Public limited companiesFinancial and Non-Financial institutions and State Owned Enterprises (SOE).
1932
Nearly a decade after his arrival, CK Tang decided to shift from door-to-door selling to opening a
store, renting a shop unit on River Valley Road. This was a bold move, considering his customers
were used to his coming to them. The gamble paid off his loyal customers followed and
brought new customers with them. The retail business was good for him, after gradual expansion
CK Tang was able to buy a piece of land in 1939 on River Valley Road and build a three-storied
structure as both a business and a dwelling. With this additional space, he expanded his product
offerings to include other merchandise from China such as jeweler, baskets and assorted Chinese
curios.
1958
From his time as an uneducated 21-year-old, CK Tang showed great vision. But perhaps the most
famous of his visionary decisions was expanding his store on River Valley Road and buying the
land on Orchard Road. Then, Orchard Road was relatively quiet, and faced a Chinese cemetery.
People used to tell me this is not a nice place to start a business. Why buy such a deserted place,
and one in front of the graveyard? I would tell them, One day this place will boom. His
decision to buy the land stemmed from a vision he could clearly see and articulate a thriving
Orchard Road, with TANGS at its center. He was right; it was the perfect location as the
expatriate community had to pass his store when travelling from their homes to the financial
center. Over time, other stores sprouted around and outwards, making Orchard Road a thriving
shopping destination and one of the busiest, most well-known shopping streets in the world.
TANGS itself grew from strength to strength, becoming the store of choice for Western brands
entering Singapore and a purveyor of quality Chinese crafts, offering something for everyone
and earning CK Tang the moniker The Curio King.
1982
In 1982, the new 33-storey Tang Plaza, incorporating The Dynasty Hotel and a 5-storey shopping
complex, was opened. At the same time, the retail landscape was changing; international travel
had exposed shoppers to what the world had to offer, and independent brands were arriving in
Singapore.
TANGS repositioned itself as a hip destination for modern, international shopping, creating a
space filed with international brands. The superstore created so much attention in the retail scene
that international brands paid attention to Singapore, with the likes of Estee Lauder, Paloma
Picasso, Isabella Rossellini and Tyson Beckford headlining launches and events. At the same
time, TANGS began its legacy of supporting local talent, showcasing the works of multiple local
designers through the Society of Designing Arts Singapore (SODA). This retail revolution
brought TANGS to a new territory fashion and brought the store to new heights.
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Designed to offer the best of brands in the intimacy of a department store, the revamp also
provides a truly immersive customer experience, with services and flourishes available at every
corner, dining and rest spots on almost every floor, a comprehensive loyalty rewards programme,
24-hour shopping via www.tangs.com, and even an exclusive members-only rest in the form of
the Preferred Lounge at SEVIIN AT TANGS. The result an updated TANGS, rooted in its
heritage and commitment to its customers, with its sights set firmly in the future.
Yea
r
1st Attempt
2003
2nd Attempt
2006
3rd Attempt
2009
Means
Offered
Premi
Resul
price
um
35 %
Failed
16.1 %
Failed
Scheme of
S$0.42 per
arrangement
share
Unconditional cash
S$0.65 per
offer
share
Voluntary delisting
11
S$0.83 per
share
22 %
Succee
d
12
The reason was widely believed to be the undervaluation of the commercial property
Tangs Plaza.
closed at a price above the offer at that point in time. Nonetheless, the board retained its
recommendation, saying that market prices typically varied. This was despite earlier statements
by the Tangs saying that the privatization offer was to allow shareholders to monetize the value
of their investments at a premium over its historical trading prices. Shareholders also reproached
the directors for failing to clarify with the Tangs about their redevelopment plans for Tangs Plaza
after its privatization. They expressed disappointment with the independent directors, saying that
they had insufficiently analyzed the issue.
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consideration the redevelopment potential of Tangs Plaza. In response, the boards legal adviser,
Yeo Wee Kiong, said it was not legally required to put a redevelopment valuation on the report.
PwC stated that the property was valued at S$340 million on 25 May 2009. This was much lower
than other nearby sites. In contrast, minority shareholders contested that the site was easily worth
at least S$400 million, according to an independent valuer. This value did not take into account
the potential value arising from redeveloping the site, and did not consider the potential value
from sub-dividing the site into small retail units and leasing them to specialty tenants. The board,
however, stated that regulators had told the directors that any such redevelopment was not
applicable
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undervaluation of the Tangs Plaza property as the reason for rejecting the offer. C.K. Tang would
have to do more to convince these shareholders for the buyout to succeed.
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PwC valuation did not consider the potential value arising from the redeveloping the site. The
board, however, defended itself by stating that regulators had told the directors that any such
redevelopment was not applicable.
The Bias role of Independent directors and Chief Executive Officer (CEO):
The board of Director of C.K. Tang was consist of CEO and three other directors with experience
in accounting, business management and the retail industry. Among the four directors, three of
them were serving as non-executive independent directors. It is one of the core principles of
corporate governance is that the independent directors will be acting on behalf of the
shareholders especially for the interest of the minor shareholders but doubt was raised among the
shareholders that the independent directors and CEO overlooked the minor shareholders interest
and they were concerned to the interest of the Tangs family. Further claim had been made by the
shareholders that the directors failed to clarify with the Tangs about their redevelopment plans
for Tangs Plaza after its privatization. Shareholders expressed disappointment with the
independent directors, saying that they had insufficiently analyzed the issue.
Low offered rate:
The Tang family who is the major shareholders of C.K. Tang since its inception made three
attempts to privatize the Tang and tried to delist the company from Singapore Exchange (SGX).
The rate they offered to the minority shareholder through board meeting were lower than the
actual price of each share. The C.K. Tang management followed defective valuation method that
undervalued firms property and tried deceive the minority shareholders showing that, they were
given higher than the actual price. In 2009, though Tang family successfully delist the firm from
SGX, many of the shareholders were dissatisfied for the poor offered rate of the management.
Absence of proper disclosure:
A public company requires to follow the disclosure guidelines provided by the regulatory
authority. The adequate disclosure of financial and non-financial data helps an investor to take
decision whether s/he will invest into the company or not. Proper disclosure is not only important
for creating an efficient market with symmetric information, disclosure provides important info
to the regulators about the management and financial condition of the business entity. C.K. Tang
did not properly disclose the information of its own in annual reports especially information
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relating to the valuation of the assets during the privatization attempts. Though, Tangs 2007
annual report included the detail property valuation procedure, this practice was discontinued by
the management of Tang.
Lack of accountability to shareholders:
The management is responsible to board of directors and board of directors is responsible to
shareholders. The board of directors always need to act for the interest of the shareholders of the
firm. Things are not same in Tang, the board of directors always tried here to maximize their
benefit sacrificing the fair payable of the shareholders. They tried to show their asset
undervalued to pay less to the shareholders. They have set a minimum exit price for the
shareholders. A call for non-confidence to the members of the directors by one of the
shareholders had been diverted into irrelevant matters to protect their own interest.
Finally, it is the best example of having poor relationship between shareholders and board of
directors. The eternal conflict between manager and the owner of the company was the main
theme in the C.K. Tang.
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