Flapping wildly amidst the wreck

For the last few weeks, Singapore-based Keppel Offshore and Marine Ltd (“KOM”) has been in the news for all the wrong reasons. KOM and its wholly owned US subsidiary, Keppel Offshore & Marine USA Inc. have agreed to pay a combined total penalty of more than US$422 million (S$565 million) for making corrupt payoffs to officials in Brazil. Brazilian authorities will receive 50% of the penalty, while the US and Singapore authorities will receive 25% each.

This will hurt. KOM’s profit after tax for financial year ending 31 December 2016 was only S$326 million. Its business was already troubled as can be seen from the fact that its 2015 profit after tax was a much higher S$528 million.

It will also substantially drag down its parent company Keppel Corporation since KOM contributes a major part of Keppel Corp’s own bottom line. KOM is a 100% subsidiary of Keppel Corp.  The parent company’s own 2016 profit after tax was S$822 million, almost 50% down from 2015’s S$1,593 million.

There is no better summary of the case than at Mothership.sg. Its article Keppel O&M corruption scandal, explained is thorough yet concise, so I really don’t need to recount the background. There are just two aspects that I would like to highlight.

The first is the “amusing” way — Mothership’s choice of word — that Keppel Corp responded as the tawdry saga unravelled. I want to point out how the amusement continues.

The second is the even more amusing way in which some anti-People’s Action Party folks on social media have been trying to make hay (or perhaps, seaweed) out of this.

Keppel Corp’s response

This is what Mothership wrote about the headquarters’ response in the beginning:

The funny thing is, they initially tried to deny it outright.

When revelations first hit Keppel in February 2015, they released quite an amusing statement (which you can download here) that said, essentially:

• We have a code of conduct that bars corruption
• We reviewed the agency Skornicki works for and the agreement we have with them explicitly says no corruption allowed. (No really, go read it, it’s really quite entertaining because that’s actually what they said)
• Also, we make plenty of positive contributions in Brazil — social welfare programmes, community activities, and political donations

Skornicki was arrested in February 2016, and on the day news of that came out, Keppel said it “had since put the agency relationship with Skornicki on hold” until the authorities came to a conclusion about whether he was corrupt or not.

And then, in August 2016, in the wake of Skornicki’s explosive revelations in court (Brazilian media started amusingly referring to him as “the human bomb”), Keppel Corp immediately released a statement decrying his claims as false…

At this point, Mothership then included a screenshot of a press release by Keppel Corp which contains the sentence: “We refute the allegations made by Mr Skornicki regarding Keppel’s involvement in the illegal payments made by Mr Skornicki.” This gentleman was KOM’s third-party fixer in Brazil, making the needed connections and setting up the deals. In court, he named five persons high up in KOM’s hierarchy as being the ones who gave him the green light to do what he did.

In a filing with the stock exchange (around August 2016), Keppel Corp fumed, “None of the individuals named in the article, including the current CEO of Keppel Offshore and Marine Mr Chow Yew Yuen, have ever authorised Mr Skornicki to make any payments as bribes.”

Note the name Chow Yew Yuen, which the above statement insisted was as innocent as a newborn babe. You’ll see the name again below.

Fast forward to 5 January 2018. The Straits Times has an article titled “Keppel: Current boards not aware of illegal payments“.

The current boards of directors of Keppel Corporation and its unit Keppel Offshore & Marine (KOM) were not aware of the illegal payments made to secure projects in Brazil, the group said.

Keppel was responding to queries from The Business Times on board accountability…

“The illegal payments were deliberately concealed by those complicit in the bribery and structured as agency fees. The agency fees were not approved by the boards of Keppel Corporation or KOM as they were built into the contract values of the respective projects, and bidding for projects is in the ordinary course of KOM’s business,” a Keppel spokesman told [Business Times] yesterday.

Oh, Keppel, Keppel, Keppel. That is just an invitation to research the composition of the boards. And that’s exactly what I did, looking into the published annual reports on the websites of Keppel Corp and KOM.

According to a statement by the US Department of Justice, there were 13 shady contracts between 2001 and 2014, with bribes amounting to US$55 million built into them. A quick glance at the table above will show you that the majority of the board members of Keppel Corp began serving before 2014.

In fact, if you look at the annual report of 2010, you will see that two of them — Alvin Yeo Khirn Hai and Danny Teoh — were that year members of the audit committee.

As for KOM,

 

There was a small change in the board between the publication of the 2016 Annual Report (released in the first half of 2017) and the listing of directors on its website on 6 Jan 2018. Chow Yew Yuen, then-CEO, joined the board in 2016, but is no longer on it as at 6 Jan 2018. Instead there’s a Chris Ong, the new CEO.

Once again, you’ll notice that the majority of today’s board began serving years ago, certainly within the 2001 – 2014 period when the bribery went on.

So, if (going by Keppel’s latest statement) these fellas had no clue what went on behind the scenes to win 13 tenders through those years, what were they doing on the board? You mean to say that they didn’t know what were the factors for success in one of their largest markets? They really thought they won the tenders on price?

Making seaweed

Ever since the news of the penalty agreement broke, the anti-People’s Action Party folks who populate my Facebook wall have been trying hard to use this case to throw shade on the PAP. Specifically, the posts hoped to sow doubts about the PAP’s claim to incorruptibility. Of course, I am not about to say that PAP is incorruptible — no one is ever totally immune to temptation, it’s only a matter of how hard one resists it — but I think this is a poor choice of a battleground.

An important thing to note is this: the corruption involved in this case is not of the kind where the directors or executives enriched themselves. If at all they benefitted, it was only incidentally through bonuses.

Choose your battles. This one is not going to get you much traction.

But it does raise the question: what does one do with bonuses previously paid out? The Mothership article seems to say — this bit is not altogether clear though — that the 13 contracts yielded profits amounting to S$467.6 million, which presumably would have factored into executive compensation. That said, I have no information about the specifics of bonuses paid at Keppel Corp or KOM, so I can only speak in very general terms. But this is an issue that is very much alive in the business world, particularly in finance. Executives who pursue short-term gains can earn huge bonuses, but the strategy could leave time-bombs within their firms, time-bombs which may not explode till years later when the executives have long gone. How does one claw back the bonuses?  What would be a fair method of computation?

The bigger picture

I think most people will understand that it’s not always easy to draw the line between black and white here, however hard the anti-PAP folks try. And for directors to claim they were completely unaware and did not even provide nods and winks is not easily believed; as leaders they should have more courage of conviction in stating their case. Engaging in payoffs is in the very nature of doing business in many countries. It’s the price for getting into those markets. Sometimes, you can get away with it for decades and make heaps of money. Other times, the regulatory environment changes suddenly and you’re caught out.

It’s a form of political risk. You invest in an “emerging” market, pour in lots of money, be chummy with the ruling clique and for a while you’re doing fine. Then one day, there’s a revolution, your assets are seized and you’re in the doghouse for having been friends with the ancien regime.

What’s the choice here? Don’t even enter the market until everything is safe and assured — with a guarantee by God that there won’t be any future revolution? That’s not doing business. That’s just an excuse to stay in bed.

This is the kind of discussion Singapore should have. It should be part of our maturing as a global hub to understand realistically issues of risk and reward, and the different shades of gray. Crying “corruption” as if we can still expect to engage with the rest of the world while staying immaculate virgins is to infantilise all of us.