Why CDL's dissident directors were right to quit

THE exodus of directors from the board of City Developments (CDL), over concerns about the company's investment in Chinese real estate developer Sincere Property Group (SPG), may have some investors on tenterhooks.

Yet, combined with remedial steps CDL is already taking, the turnover of its board could well be a crucial and necessary step in regaining the confidence of the market.

The fact is that CDL may need to make some hard decisions about its ill-timed investment in SPG. A refreshed board would arguably be better positioned to do this without being second guessed by the market.

Directors should not quit simply because they do not agree with their fellow board members. Varied perspectives and viewpoints are a strength, not a weakness.

Yet, after bitter internal divisions about SPG spilled into public view, CDL's departing directors may have felt they had no choice but to consider their positions.

In October last year, CDL shocked the market when it announced that Kwek Leng Peck had resigned from the board over, among other things, disagreements in relation to the group's investment in SPG.

Mr Kwek had been on the board since 1987. He is a cousin of CDL's executive chairman Kwek Leng Beng, and an uncle of the company's chief executive Sherman Kwek.

This focused the market's attention on SPG's troubles, and sparked a sell-off in CDL's shares.

It may also have pressured other non-executive directors of CDL who had expressed misgivings about the Chinese property group to make an exit lest they be accused of treating their board positions as sinecures.

Last week, CDL said that Koh Thiam Hock, a former senior banker, had resigned as an independent non-executive director. The company noted that Mr Koh thought it "most appropriate" to step down after sharing his "observations, concerns and suggestions" about SPG.

Earlier this week, CDL said that Tan Yee Peng, who has nearly two decades of accounting and auditing experience, had resigned as an independent non-executive director. The company said Ms Tan disagreed with the board and management about the handling of SPG after it was acquired.

As competent and experienced directors, Mr Koh and Ms Tan are likely to easily find alternative board appointments if they so choose. Meanwhile, CDL has been recruiting new directors of equal distinction.

Since November, CDL has appointed four new independent, non-executive directors. They are former KPMG partner Philip Lee, CGS-CIMB Securities CEO Carol Fong, hospitality industry veteran Daniel Marie Ghislain Desbaillets and former fund manager Chong Yoon Chou.

Remedial action

Unburdened by past internal rancour, CDL's new directors are likely to be more effective in engaging the group's management as they set about putting things right.

Efforts on this front are already underway. Notably, CDL's external financial adviser Deloitte & Touche has completed a review of the group's investment in SPG.

Among other things, Deloitte & Touche has determined which of SPG's 71 projects are profitable and generating cash flow, which can be divested to improve liquidity, and which need to be more actively managed.

CDL has also set up a special working group to improve the liquidity and profitability of SPG, led by CDL's former chief financial officer Goh Ann Nee. Ms Goh is currently designated chief transformation officer in the executive chairman's office.

Next challenges

CDL has already indicated that it will recognise losses from its 51 per cent stake in SPG in FY2020.

CDL's refreshed board should ensure that the group's management has a clear and credible plan to stem these losses and staunch SPG's need for further liquidity support, while preserving the China-based company's usefulness as a platform for future growth.

CDL should also address concerns investors may have that the group is not fully in control of SPG, and that its exposure to the liquidity-strapped China-based company may necessitate a capital call.

Steering CDL and SPG through their current challenges will require a cool evenhandedness as well as sober awareness of the current risks in China, tempered by worldly optimism of what the future could hold.

CDL's recently departed directors displayed true independence of thought and action, and served the company's shareholders well.

With the market now aware of the problems in China, and the group's management already taking measures to get SPG back on track, it is right that they have made way for a new crop of board members.