How far do a CEO's powers reach?

Singapore

THE recent kerfuffle involving the leadership at Catalist company ecoWise Holdings has not been lacking in high drama.

In the past few weeks, founder, executive chairman and CEO Lee Thiam Seng has changed the locks to its offices, hired an IT firm without the board or sponsor's approval to help him change the passwords on the company's servers, and suspended certain members of senior management - all in a bid to safeguard the company's assets.

His actions have thrown the spotlight on an issue not widely understood by the market: just how far do the powers and authority of a listed company CEO stretch?

Let's first look back at the events that led to Mr Lee's actions.

Recap/timeline:

June 14: The ecoWise affair ostensibly began a month ago, when the company was due to release its H1 2021 financial statements. Mr Lee reportedly wanted to delay their release until after trading hours on June 14, as he still had not received answers from the management team on questions he had about certain transactions.

He said he had been having difficulties getting information on the company's affairs from the management team, including the company's deputy CEO Cao Shixuan, in the past year.

The results ended up being released in the early hours of June 14, as Mr Cao and lead independent director (ID) Er Kwong Wah were said to be concerned about the deadline, even though that would still have been met after trading hours.

June 22: ecoWise said, in a stock exchange filing, that Mr Lee had engaged IT firm Stone Forest without the board's approval, and had on June 15 - with Stone Forest's help - changed the locks to the company's server rooms and changed the passwords to the servers.

Mr Lee said he did so as there was an "urgent need to preserve the assets, evidence, books and records of the company in order for him to investigate various corporate governance and internal control issues of the group".

Mr Cao, who confronted Mr Lee and was told to leave the premises, made a police report about the incident, and disputed Mr Lee's version of events.

Mr Lee appointed a chief operating officer and placed certain executives and senior staff, including Mr Cao, on "paid suspension of duties", as he had concerns about the continued management of the company.

June 25: Singapore Exchange Regulation (SGX RegCo) served a notice of compliance on ecoWise to appoint two new independent directors (IDs), commission an internal audit and an audit of its first-half 2021 results, and form a new audit committee.

SGX RegCo said it was concerned about the "lack of a strong and independent element on the board", the accuracy of the company's H1 2021 results, the adequacy and effectiveness of internal controls in relation to ecoWise's financial reporting, release of announcements, escalation and information flow to the board, and the safeguarding of the group's assets.

Mr Lee then issued an open letter, in which he raised more concerns about the group's management under Mr Cao's supervision and said that these concerns were shared by two former IDs who had departed in May.

June 29: ecoWise announced it had reinstated the duties of all suspended staff including Mr Cao, as it deemed this "necessary to ensure continued operations of the group's business"; it added that it would comply with SGX RegCo's compliance notice.

July 7: investor watchdog, the Securities Investors Association (Singapore), or Sias, said in a media statement that it is "seriously concerned" about the developments at ecoWise, but that shareholders should give the company time to comply with SGX RegCo's directives.

Mr Lee's actions - from changing the locks at the offices, to hiring an external party to help with the protection of data, to suspending certain employees - all undertaken on the basis of safeguarding the interests of the company, have called attention to the issue of the powers that can be exercised by the CEO of a listed company.

Some market observers have asked if a CEO has the right to undertake these actions if he believes the company to be in danger, and which rules or legislative provisions confer such rights on him?

Associate professor of law at the National University of Singapore (NUS), Lan Luh Luh, who specialises in company law, corporate finance law and corporate governance, explained: "Under company law, the board has delegated the authority to manage the day-to-day operations of the company to the CEO and his management team. Therefore, preserving the data and protecting the assets - including the hiring of the IT security company, etc - of the company fall within the express authority of the CEO or at least the implied authority incidental to his role as CEO.

"There is no need to get consent from the board before he carries out all these actions. The deputy CEO cannot complain that he has not been given access, as he reports to the CEO."

Prof Lan added, however, that a CEO is still an agent with powers delegated by the board - meaning, the board can always revoke or restrict the CEO's power via a board resolution.

"In the event that the board finds that the action of the CEO has caused damage to the company, for example loss of assets, etc, it can take legal action on behalf of the company against the CEO. The board can even apply for an injunction from the court if there are grounds to suspect that the CEO might cause damage to the corporate assets, such as through the dissipation or destruction of data," Prof Lan said.

Joy Tan, joint head for corporate governance and compliance at law firm WongPartnership, said: "Subject to the provisions of relevant policies of the company or specific authority delegated by the board, a CEO would generally have broad express or implied authority to undertake urgent executive actions on behalf of a company and this would include such actions as may be necessary to preserve the assets, evidence, books and records of the company in order to investigate corporate governance and internal control issues of the group, especially if these are raised by the regulators.

"That said, under the Code of Corporate Governance, the board is responsible for the governance of risk and ensuring that management maintains a sound system of risk management and internal controls, to safeguard the interests of the company and its shareholders. The authority to appoint special auditors would ordinarily vest in the board as such.

"Specifically for Catalist companies, it would be appropriate to consult the sponsor too. The regulator also has the power to mandate the appointment of special auditors under certain circumstances pursuant to its administrative and enforcement powers. In such instances, the listed company would often consult the regulator as well before making the appointment."

Corporate governance advocate Mak Yuen Teen, an associate professor of accounting at the NUS Business School, said: "After more than 20 years of covering corporate governance issues, I thought I'd seen everything. But this is the first time I've seen an executive chairman/CEO doing something like this."

He said there were matters that could have been handled better. For one, the two IDs "should not have resigned before replacements were identified", and that they had "let the company and its shareholders down" by doing so.

Prof Mak also believes that Mr Lee should not have unilaterally undertaken the actions he did without the agreement of the board. "If he thinks a crime is being committed, then he should have made a police report.

"Perhaps, being the executive chairman, he thought it's his board; and that, being the founder, it's his company; neither is the case."