Case Study - SembCorp Marine

Comms 340 – Managing Corporate Reputation & External RelationsGroup Case Study on Sembcorp Marine

SembCorp Marine

A Case Study

April 2008

Prepared By :

Pauline Ng Wan Ching, Monika Miskluska, Joanna Wanczuk, Angel Esteban Alcalde

Riveroll, Andres Eugenio Rodolfo Nieblas

This case was researched and prepared by Pauline Ng Wan Ching, Monika Miskluska, Joanna Wanczuk, Angel Esteban Alcalde Riveroll and Andres Eugenio Rodolfo Nieblas, under the guidance of Practice Assistant Professor Michael Netzley. This case was written for the purpose of class discussion and is not intended to illustrate either effective or ineffective handling of an administrative situation. Academic institutions may copy this case for free so long as this copyright notice is included on all reproductions. Copyright ©


1


2008.

The Wave to Ride: Sembcorp Marine

The past week has been unsettling for all managerial members in Sembcorp Marine

(SCM), the world’s second-largest maker of oil rigs, since the financial scandal

unfolded on 22nd October 2007. Mr Goh Geok Ling, Chairman of Sembcorp Marine,

taps his pen on his office table top as he tries to learn more about the Foreign

Exchange (Forex) losses encountered by Mr Wee, SCM’s ex financial director. At the

same time, media outlets, financial analysts, and most importantly, their parent

company, Sembcorp Industries were pressing SCM for an explanation. Will Mr Goh’s

vast experience from his management portfolio provide the necessary knowledge he

needs to deal with this crisis? – He worries about the meeting he has in 1 hour’s time

with the Board.

Sembcorp Marine (SCM) Company Profile

SCM is under the umbrella of Sembcorp Industries as illustrated in the figure.

SCM is a leading global marine engineering group, specializing in a full spectrum of

integrated solutions in ship repair, shipbuilding, ship conversion, rig building,

offshore engineering and construction. Refer to Exhibit 1 “SCM Core Capabilities”

for more information on their global milestone track records.


2


SCM has over the years established a proven track record and is globally renowned

for its rig building and offshore conversion expertise. They are also recognized as an

industry leader in ship repair and a niche playing in the design and building of a wide

variety of vessels. With operations in Singapore, China, Brazil and USA, SCM offers

one of the largest marine engineering facilities in the region.

Jurong Shipyard Ptd Ltd (JSPL), is the fully owned subsidiary of SCM and is

renowned for offering a "one-stop total service" in ship repair, newbuilding, ship

conversion and offshore engineering. It is the key entity involved in this crisis. Refer

to Exhibit 2 “SCM Corporate Structure”.

Temasek Holdings is the ultimate holding company of Sembcorp Industries Limited,

the controlling shareholder of the company that makes SCM a Government Linked

Company (GLC).

Government Linked Company (GLC)

Government Linked Companies (GLC) are companies in which some of the shares are

owned by the government and these companies are mostly formed in the 1960s and

1970s, primarily to accelerate Singapore’s economic development in certain sectors.

In the 1980s and 1990s, GLCs are formed from the privatization of former

government departments. At that time, the government moved into areas such as steel

making, ship-repair and petrochemicals etc, industries where the private sector did not

want to enter and assume all the risks. Temasek Holdings was formed in 1974 to hold

and manage all such government investments.

And in another definition found on a government website, “a company would be

considered a GLC if it is a subsidiary or associate, by virtue of share ownership, of

Temasek Holdings (the government holding company), or a statutory board”1

In addition, Temasek stated that GLCs do not receive special privileges and are in

fact, expected to raise funds on commercial terms rather than the usual perception that

1 www.singstat.gov.sg/pubn/papers/economy/op-e22.pdf


3


GLCs have better credit risks when it comes to raising loans. Temasek Holdings

ensure the GLCs remain competitive by becoming more innovative and

entrepreneurial, and at the same time, ensure that they do not compete unfairly with

smaller local firms by encouraging them to seek new business opportunities overseas. 2

Unrolling of Events

On 22 October 2007 this blue-chip company announced that it sacked its finance

director that Monday, saying that he allegedly entered into unauthorized foreign

exchange transactions that could lead to an estimated $248 million loss! It was

unbelievable. (4)

In the first statement on the SGX website company claimed that Director of Group

Finance Wee Sing Guan made the transactions through JSPL. That was virtually all

the company said to its stakeholders for the next few days. (Press release 4)

Mr. Wee joined the company 33 years ago as an accountant and worked hard for

achieving first the position of the financial controller and recently his present position

of director of group finance. Some ex-colleagues of Mr Wee described him as 'mild-

mannered' and someone who was not known to take risks. 'He sticks to the rules,' an

ex-colleague told Business Times Singapore. (11)

According to SembMarine “no other person - other than Mr. Wee - was believed to be

involved.” The company didn’t comment on the revelation that at least one of the

transactions had the two signatures required for authorization.

Accusation that followed this breaking news indicated that Singapore was facing one

of its largest financial scandals since derivatives losses brought China Aviation Oil to

the brink of collapse in 2004 and rogue trader Nick Leeson caused Barings Bank to

fold in 1995. (4)

2 www.temasekholdings.com.sg/news_room/press_speeches/04_05_2000.htm


4


The first and, as it occurred, missed estimations of unrealized losses linked to the

transactions amounted to approximately $165 million and were based on market-to-

market information from 11 banks that dealt with Jurong Shipyard. This information

resulted in Kim Eng Securities downgrading its rating on Singapore's SembCorp

Marine Ltd to "hold" from "buy". (8, 9, 36)

During the next weeks SembCorp Marine focused on investigating whether money

already paid can have been recovered and which of the transactions may have been

actually unauthorized. Moreover, SCM and Jurong Shipyard had appointed Drew &

Napier LLC and Ernst & Young to investigate the unauthorized transactions, their

nature and all the circumstances that they came under. Drew & Napier and E&Y also

worked with a special committee of the SCM board. It is a special committee shall

comprise independent directors - Tan Tew Han, chairman of the audit committee;

Ajaib Haridass, chairman of the risk committee; and Ron Foo, member of the audit

and risk committees - as well as Tang Kin Fei, member of the risk committee. (2)

The decision of appointing its own external auditors to investigate these unauthorised

currency bets was raising eyebrows. The best practice in such situation seems to be

the appointment of a completely independent accounting firm in order to avoid a

potential conflict of interest. In response, SCM said, that they had appointed E&Y

because of the urgency of the matter and that they were in the process of appointing

an independent auditor. (13)

During conference on 2nd September, indeed they announced that investigations would

be carried out by lawyers, Drew & Napier, and accountants,

PriceWaterhouseCoopers. 'They have been given unrestricted access to all relevant

material and personnel, and will report their findings to the boards of SembMarine

and Jurong Shipyard', said Mr. Haridass (15).

Another issue that raised the suspicions of journalists and public opinion, was the fact

of putting members of its risk committee in charge if investigation, when these

members were supposed to be responsible for preventing such a scandal! According

to SembMarine's annual report: ” The committee's primary role and function is to

review the adequacy and effectiveness of the company's risk management plans,


5


systems, processes, policies, guidelines, controls and procedures, as well as its risk

portfolio and risk levels. (11)

As the company claimed at that time, there was nothing to indicate that shareholding

was at risk because of the matter of mentioned transactions. The core operations were

indeed on track, but investor’s confidence had been already shaken. (2)

First of all, estimated loss occurred to be more than the company's 2006 earnings of

S$238.4 million ((US$162.7 million)! Furthermore, the transactions had not been

closed right away what could result in the loss being even greater, depending on the

movements in foreign exchange rates and the outcome of the investigation.

Luckily, company published a report that revealed a company’s surprising

performance in 3Q of the year. During the conference, which was organized just after

the scandal occurred, they announced its net profit rose 82 percent to 81.4 million

Singapore dollars in the third quarter 2007, comparing to a previous year. It was

boosted by increasing demand for oil exploration rigs.

Even if the 50 or so analysts and reporters were more concerned about the impact of

“unauthorised transactions”, the company did not comment the scandal, claiming that

nor the company itself neither its subsidiary Jurong Shipyard are liable for the loss.

(Press release 1; 15) Generally, almost every question on the issue drew the response

'that the matter was under investigation and could be the subject of litigation in

future'

All the transactions were closed on the 1st November with the total loss amounting to

US$220 million (excluding about US$83 million which Jurong Shipyard had paid

before the trades were discovered) That was US$55 million more than it was believed

at the beginning. (Press release 1, financial statements)

In the meantime in press release from 25 November, SCM had announced the

appointment of Mrs. Maureen Leong as a Financial Director Finance. She would

assist SCM in finance, treasury and tax matters in the interim for a minimum of six

months until a suitable candidate would be found. (Press Release 6)


6


Finally, as a result of unauthorised transactions, the company reported a sharp 99 per

cent drop in fourth quarter earnings. Net profit for the three months ended December

2007, sat at S$800,000, down from S$95.3 million a previous year. (52)

Strong orders for oil rigs were helping to mitigate SembMarine's losses from forex

trading. SembCorp managed to book a full-year net profit of S$241 million, up from

S$238.4 million in 2006. Excluding forex losses, full-year net profit actually comes in

at S$549.2 million due to strong rig demand. (52)

Role of Investment Banks in the Saga

11 banks were involved in the “unauthorised” foreign transactions entered into by Mr.

Wee and all of these banks had become an important part of the conflict.

The question of who should be called to account for Mr. Wee's actions came into

sharp focus and resulted in litigation. The US$83 million that had already been paid

out was reported as a ‘recoverable’ item in the fourth quarter (business times

Singapore 2.11). SembCorp promised to make every effort to get the money back.

SCM and JSPL were determined to fight against the lingering claims announced by

the other banks.

The game between banks and SCM went on for three months until a final settlement

with the banks had been reached. The forex losses expensed in the fourth quarter

financial statement had been reduced to $258.7 million.

SCM questioned the validity of the forex transactions due to the lack of the second

signature on the transactions’ order and their exotism.

Each of the parties involved engaged experts who would support their standpoint. US

banking consultant Heinz Riehl, who had been engaged as an expert witness by JSPL,

felt 'a reasonable and prudent banker in the bank's position clearly would or ought to

have known that the transactions were unauthorised'. (Business time 28.12).


7


On the other hand, BNPP insisted that a November 2004 JSPL board resolution states:

'The company has full authority and capacity to enter into such transactions from

time to time for the purpose of hedging or speculating’. BNPP adds that there was no

restriction to the type of forex transactions that he could enter into – whether they

were for hedging or for speculative purposes.

In further accusations SCM alleged that banks would aid Mr. Wee to conceal his

losses instead of conveying the situation to the senior management. BNPP was

dismissing the claims saying it was not its responsibility to regulate Mr. Wee’s

transactions.

After the litigation had come to an end, SCM limited its statement to saying that it had

taken unspecified steps to ensure such an event does not reoccur. The company said

that it could not reveal more details about the disputed currency trades as the matter is

under judicial review.3

Business & Investment Environment in Singapore

In Singapore, according to the Hoftede’s study, the Power Distance Index (PDI),

which measures the extent to which members of the society accepts unequal

distribution within the society, is rather high, at 74.4 Next, there is a bulk of the

Singaporean stock investors who are made up of “aunties”. And they are usually

characterized by being less educated and their stock trading decisions are largely

influenced by their trust in a company, as well as what they hearsay from the media.

This puts SCM in a unique position when it is confronted with this crisis.

An assessment conducted by US-based consultancy and advisory firm, the Kurtzman

Group revealed an Opacity index where Singapore emerged 12 th in the world,

outperforming countries such as Japan and France. It’s opacity rating is 24, where 100

3 http://www.reuters.com/article/marketsNews/idINSIN22747720080222?rpc=611

4 http://www.clearlycultural.com/geert-hofstede-cultural-dimensions/power-distance-index/


8


is equivalent to complete non-transparency. The index examines aspects of business

practices that potentially raise the costs of business and capital, and inhibit economic

growth. The 48 countries in the index this year were assessed on five key

components: corruption (COR), efficiency of the legal system (LEG), deleterious

economic policy (ENF), inadequate accounting and governance practices (ACC), and

detrimental regulatory structures (REG).5

Sembcorp Marine Financials

SCM has 42 years outstanding track records of growth and expansion. It is a blue chip

company traded in the Singapore Stock Exchange (SGX) and is a highly trusted

company by the locals. From 2005 to 2007, it has won the top 3 positions of the

“SIAS Investors’ Choice Awards – Most Transparent Company (Non Electronics

Manufacturing)”. 6

On the 1st November 2007, SCM reported a strong Q3 growth, with a 68% growth in

profit at $240.2 million. (November 1, 2007) “A Strong Q3 2007 Growth”, Sembcorp

Marine Press Release. The figure below is a representation of the sectors that

contributed to the profits, with rig building accounting for 55% of the profits.

SCM has a good foundation in business and growth potential. Collaborations with

many countries such as the latest venture with Brazil etc makes the company one of

the most highly trusted by Singaporean investors and is a highly recommended stock

with analysts recommendation of “Buy” from all investment companies.

5http://www.sedb.com/edb/sg/en_uk/index/news_room/publications/singapore_investment04/singapore_investment10/spore_open_business.html

6 http://www.sembcorpmarine.com.sg/index.php?page=awards-accolades


9


QuickTime™ and a decompressor

are needed to see this picture.

Sembcorp Marine Thereafter

What’s next for Sembcorp Marine after the announcement of the 100% drop in Q4

2007 earnings? As the litigation between the banks and SCM carries on, investors

await the results and holds on hope that SCM will continue to ride through this crisis

they way they have trodden through 42 years of their history.


10


Questions to Ponder

1) Using Argenti’s expanded corporate communications framework strategy,

identify the constituencies involved in this case and determine what the best

Singaporean way of communication would be for SCM.

2) Does the Singapore business and investment environment, along with them

being a GMC affect SCM’s communication strategies?

3) Consider how different communication would be between SCM and their

parent companies and on the press conference.


11

Documents

Case Study - SembCorp Marine