Regulators can do more about governance lapses at Incredible Holdings and Watches.com

WHEN companies raise the salaries of senior management in the face of widening losses and questions about their business deals — from both external auditors and regulators — are shareholders helpless? And to what extent should regulators intervene?

Consider the recent cases of Catalist-listed Incredible Holdings : RDR 0% and Watches.com : WVJ 0%, both of which on Jun 27 were served notices of compliance (NOCs) by the Singapore Exchange Regulation (SGX RegCo) over a series of transactions involving joint investments and cross-shareholdings.

Both companies share a common executive director, Christian Kwok-Leun Yau Heilesen, and the following board members: Jacob Leung, Stanley Leung and Zhou Jia Lin. Both companies also have substantially similar members in their audit and nominating committees.

In October 2021, Incredible entered into an agreement with Heilesen to acquire 42 per cent of a company, Golden Ultra, for S$14.6 million. Prior to this, Watches.com had also entered into an agreement with Heilesen to acquire 55 per cent of Golden Ultra for S$14.4 million. The consideration was an issuance of promissory notes by both companies to Heilesen, who would hold the remaining 3 per cent interest in Golden Ultra.

The rationale for these transactions is unclear. SGX RegCo has queried both companies many times over the past year. It has also directed the audit committees of Incredible and Watches.com to appoint a suitable joint independent reviewer to review all corporate actions and fund-raising exercises announced by both listed companies in the past year.

The reviewer will assess whether these transactions and corporate actions were entered into on normal commercial terms and whether they are prejudicial to the interests of the companies and their minority shareholders.

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Incredible, whose business includes trading of luxury watches, said in its 2021 annual report that it had, in May that year, “entered the luxury goods trading business in the European market”.

The company had paid S$1.1 million for HB 2021 — a company with a shop in Denmark. The fair value of net identifiable assets of HB 2021 was only S$8,600, which meant that goodwill paid was almost the full S$1.1 million. The company wrote off the entire goodwill amount in the same financial year.

In the same annual report, the independent auditors issued a qualified opinion: “Based on the responses and explanations provided relating to the acquisition of HB 2021, we were unable to obtain sufficient appropriate audit evidence on the business rationale for the group’s acquisition of HB 2021.”

Incredible’s losses for the year almost doubled to S$6.32 million, while net assets decreased 24 per cent to S$9.13 million. Yet, executive director Heilesen was paid a bonus of S$1 million on top of his salary of S$300,000 and housing allowance of S$255,000.

The remuneration committee said this was fair, given his efforts and contributions to the commercial aspects of the company for the expansion as well as diversification of its business. But this goes against the well-established basic principle that remuneration must be commensurate with performance. There is basis for shareholders to ask if members of the committee and board have properly exercised their duties as directors in approving such remuneration.

There is more, but the above should be sufficient to raise several red flags in the corporate governance of both companies.

The Securities Investors Association (Singapore) sent a letter with questions to the company before its last annual general meeting to raise concerns in relation to the independent directors’ oversight of management, the safeguarding of shareholders' interests, and the role of the sponsor. Unfortunately, the company chose not to respond to these concerns.

Apart from issuing Notices of Compliance to both companies to appoint an independent reviewer, can SGX RegCo do more?

There is growing public opinion that SGX Regco should ratchet up, perhaps by suspending trading of both stocks until the independent reviews have been completed. Before allowing the shares to resume trading, it must be ascertained that a fair and orderly market really exists for both counters. The results of independent reviews will provide more clarity on the state of governance of the companies in question, and an indicative basis for whether there is a need for further investigations and enforcement actions.

A suspension would also send a strong message that while the regulatory regime is disclosure-based, regulators will not hesitate to intervene when the need arises.

The transition of the local stock market from a merit-based regulatory regime to one that is based on disclosure began in 2000, and the authorities here have since taken great pains to emphasise that their vision is for regulation to be largely market-driven. Official intervention would only be undertaken in a limited number of extreme instances.

This “regulatory-light” approach sounds good in theory – after all, who better to enforce discipline than the market itself? Good, well-run companies would then be rewarded by superior share price performance; while poorly-run, opaque ones would see their shares underperform. Market forces act as an incentive, but companies are not overly burdened with numerous onerous rules.

There are, however, limits to how well this works in practice. Incredible and Watches.com were last traded at S$0.002 and S$0.008 respectively. They have been penalised by the market, to the detriment of shareholders.

The writer is founder, president and chief executive of the Securities Investors Association (Singapore).