The Sime Darby Financial Fiasco
Case Overview
In May 2010, Sime Darby Berhad announced that its earnings may be cut by up to RM964
million due to losses in its Energy & Utilities Division, from cost overruns in four projects.
Following the announcement, its share price plunged to RM7.47 on 27 May 2010, a 10-month
low. In this case, we look at some of the events leading to the loss as well as the actions taken
by the board of directors in response. The objective of this case is to allow a discussion of issues
such as board composition, the board's role in oversight, and responsibilities of the board versus
management.
Where It All Began
In September 2002, the Malaysia-China Hydro JV consortium, led by Sime Engineering, was
awarded a contract to construct the Bakun Hydroelectric dam'. During the course of the project,
plans for the construction of an undersea high voltage direct current (HVDC) cable was also
initiated for the dam to relay power to Peninsular Malaysia. Although the project was scheduled
for completion in the third quarter of 2007, delays in impoundment, as well as changes to the
plans and disagreements over the cost of the dam, caused a significant setback to the date of
completion?
This is the abridged version of a case prepared by Goh Ming Jing, MuhammedAmeers/o Mohd Noor, Muhammad li
Idaham, and Kesmond Goh Zhi Peng under the supervision of Professor Mak Yuen Teen and Vincent Chen Yu Shen.
The case was developed from published sources solely for class discussion and is not intended to serve illustrations of
effective or ineffectivo management. Consequently, the interpretations and perspectives in this case are not
necessarily those of the organisations named in the oase, or any of their directors or employees. This abridged
version was propared by Cheryl Nio Yi Hui under the supervision ot Professor Mak Yuen Teen Copyright 2012 Mak
Yuen Teen and CPA Australia 142
Towards the end of 2005, the management of Sime Engineering decided to bid for an
engineering, procurement, construction, installation and commissioning (EPCIC) contract,
commissioned by Qatar Petroleum AS (QP) for its Bulhanine Project. It was the first time that
Sime Engineering had attempted to undertake a project of such scale and magnitude. The
project required substantial Transportation and Installation NT&l) work which Sime Engineering
neither had the expertise nor the resources to handle. Hence, the company invited tenders from
T&l subcontractors
However, several issues plagued the company during the tender. Only oneT&l subcontractor
offered to carry out the full scope of work for the T&I project and the contractor was rejected by
QP due to political implications. QP gave Sime Engineering time to source for new
subcontractors and issued the letter of acceptance to Sime Engineering for the project in April
2006. The amounts to be received would be paid upon completion and the project was
scheduled for completion in August 2008
A month later, Sime Engineering submitted a bid for another EPCIC project, commissioned by
Maersk Oil Qatar AS (MOQ) and QP. Similar to the EPCIC works that they had just signed with
QP, Sime Engineering had very little know-how or the resources to deal with the colossal MOQ
project. Nonetheless, MOQ awarded the project to Sime Engineering in February 2007, with
completion scheduled for October 2009
With these two projects in the works, Sime Darby's Energy & Utilities (E&U) division, which
included Sime Engineering after the merger, undertook a strategic decision to become a full
service provider for EPCIC projects in the future. The first keystone in the plan was for Sime
Marine subsidiary of Sime Energy & Utilities, to construct or acquire several vessels to allow for
T&l capabilities within the division. Management proposed building the vessels as that would
entail 27.5 per cent lower cost compared to buying the vessels at market price. On the flip side
the time taken to build the vessels would span a number of years while immediate purchase of
the vessels would enable Sime Marine to provide Sime Engineering with the T&l capabilities
required for the MOQ Project
The Sime Darby Board
The board of directors had 13 members in 2009. Of the group, 12 including the chairman were
non-executive. The lone executive director was the Group's CEO. Six of those directors were
independent directors. The percentage of independent directors was higher than the one-third
required under Bursa Malaysia's Main Board Listing Requirements.
The non-executive directors included many big names. The independent Chairman, Tun Musa
Hitam, had held several ministerial positions, including deputy prime minister of Malaysia,
before his appointment. He was also chairman of several other listed companies. The Deputy
Chairman, Tun Ahmad Sarji Abdul Hamid, was considered a non- independent non-executive
director because he was a nominee of Permodalan Nasional Berhad, the Malaysian
government's investment arm. He was also a chairman and director of several other listed
companies. Another high-profile director was Datuk Seri Panglima Sheng Len Tao, who was an
independent non-executive director. Also known as Andrew Sheng, he is a chartered accountant
by training, and had served as Chairman of the Securities and Futures Commission of Hong
Kong, Deputy Chief Executive at the Hong Kong Monetary Authority and held various other
positions at the World Bank and Bank Negara Malaysia.
Trouble Looms for the Company
In April 2008, potential cost overruns exceeding RM150 million on Sime Engineering's MOQ
project was reported in The Edge Sime Darby Berhad responded by issuing a statement denying
the allegations In August 2008, Sime Darby's internal auditor issued a report on losses in the Oil
and Gas Segment (O&G) of the E&U division, which was then brought to the attention of the
Audit Committee at the board level8 The group chief financial officer then, Tong Poh Keow,
together with the external auditors, PricewaterhouseCoopers, had wanted a higher provision for
losses than was reflected in the accounts, but did not pursue the issue as management said the
losses could be recovered.
In addition, the external auditors had supposedly delayed signing off the audited accounts of
the division for FY20089
In May 2010, Sime Darby announced that its second half earnings might take a big hit
amounting to RM964 million10 due to losses in its E&U division. The losses were mainly due to
cost overruns on projects. Of the RM964 million, RM200 million was due to a reversal of
revenue recognised in the 2009 financial statements QP project which had already incurred
losses exceeding RM500 million, RM159 million was due to the MOQ project which had already
recorded a loss of RM367 million in the first half of the fiscal year, RM450 million was due to the
Bakun hydroelectric dam project, and RM155 million was due to losses from the construction of
some vessels in a third Qatar project". Sime Darby's shares hit a 10-month low at RM7.47 per
share ahead of its earnings report on 27 May 201012
The Board's Response
No one would criticise or point out mistakes, which proved to be Ahmad Zubir's downfall. For
some top people, their loyalty was to the CEO of the day, not the company
Sime Darby Official
Faced with the report from the internal auditor, the board queried the E& U division on the
issue. The management team, led by Datuk Seri Ahmad Zubir Murshid, explained that the
company need not make full provisions as the client had agreed to reimburse some of the cost
overruns in due time 14. Since it was normal industry practice in Malaysia to have cost overruns,
especially in large contracts, and this method of reimbursement had worked well for other
contracts within Malaysia, the board accepted the explanation and did not pursue the matter.
In August 2009, after the internal auditor issued a second report that 15 voiced grave concerns
about the E&U division a work group was set up to review the operations of the division Nine
months later, a special board meeting was called to review the findings of the work group. 145
After the 13-hour meeting, the board asked Datuk Seri Ahmad Zubir Murshid to take a leave of
absence. Sime Darby Berhad then called a news conference, two weeks before the scheduled
announcement of its second quarter results, to announce the losses and Datuk Seri Ahmad Zubir
Murshid's leave of absence16
In the Wake of the Aftermath
After the announcement, many ministers and concerned investors petitioned Sime Darby to
take more action.
Faced with mounting pressure, Sime Darby called in KPMG and Deloitte to conduct forensic
audits in June 201017. The audit investigations were concluded in November 2010. Following
the investigations, Sime Darby released a statement on its website stating that the forensic
audits revealed breaches of duties and misconduct within the E&U 18 However, on the advice of
the Group's legal counsel, Sime Darby declined to disclose more information on the matter.
In December 2010, the group filed a civil suit against its former CEO and four executives in
relation to the cost overruns, seeking damages and relief totalling at least RM340 million over
three loss-making projects19 The damages sought included US$30.81 million for consultancy
fees wrongly paid in the MOQ Project, RM80.51million for consultancy fees wrongly paid in the
QP Project and US$48 million for losses arising from the failure to deliver the three marine
vessels20. The four executives in the civil suit were Datuk Mohamad Shukri Baharom (former
executive vice-president of the group's E&U division), Abdul Rahim Ismail (former chief financial
officer of the group's E&U division), Abdul Kadir Alias (former head of the oil & gas business unit
of the E&U division), and Mohd Zaki bin Othman (former senior general manager of Sime Darby
Engineering)21.
A Twisted Tale
"The decision-making process went through many levels of detailed discussion and approval
which culminated in the approval by the main board of Sime Group,"22 Datuk Seri Ahmad Zubir
Murshid
In response to the civil suit filed by Sime Darby, Datuk Seri Ahmad Zubir Murshid served third
party notices to 22 other directors on the grounds that they had breached their duty as directors
to exercise due skill, care and diligence and that the other directors should be held responsible
as they were the highest and ultimate decision making authority
into a New Beginning "
All announcements made by the group are being implemented, particularly in the way Sime
Darby is reorganised. Each one of the divisions will have an independent board but not listed." 4
Datuk Mohd Bakke Salleh
Following the termination of Datuk Seri Ahmad Zubir Murshid, Datuk Mohd Bakke Salleh was
appointed as the President and Group Chief Executive of Sime Darby. He was quick to
implement changes. Under his leadership, Sime Darby emerged with a reorganised new look.
The divisions of Sime Darby were separated and a chairman was appointed for each of the
respective divisions. An amicable settlement with Maersk Oil Qatar AS regarding a dispute over
claims and payment issues related to a 2007 contract was also reached. In addition, a pending
lawsuit with Maersk Oil Qatar was settled with a payment of RM100 million
The board of directors at Sime Darby also underwent many changes, with only four out of the
previous 13 members keeping their positions, namely the Chairman Tun Musa Hitam, Tan Sri
Samsudin Osman, Tan Sri Dato Dr Wan Mohd Zahid Mohd Noordin, and Dato Henry Sackville
Barlow. New names on the Sime Darby Board included Tan Sri Dato' Sri 147
Hamad Kama Piah bin Che Othman, currently the President and Chief Executive of Permodalan
Nasional Berhad, as well as Tan Sri Datuk Dr. Yusof Basiran, currently CEO of the Malaysian Palm
Oil Council (MPOC).
Discussion Questions
1. The board of Sime Darby includes very experienced and high profile directors. How can such a
board fail so spectacularly to safeguard the interests of the company?
2. What are the critical attributes of an effective board? To what extent does the Sime Darby
board possess such attributes?
3. Should the board members also be held accountable and not just Datuk Seri Ahmad Zubir
Murshid?
4. On hindsight, if you were one of the directors on the main board of Sime Darby, what would
you have done back in 2005?