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Lessons from Lian Beng for Remuneration Committees

As an independent director (ID) and member of the remuneration committee (RC), what

would you do if you had "differences in opinion from the management over certain

company affairs" relating to how management should be compensated?

For two IDs at Lian Beng Group Ltd, a building construction and civil engineering company

listed on the SGX, their course of action was to resign in mid-2015. Both had been members

of the board since the company's IPO in 1999, so the decision could not have been made


In a nutshell, the differences in opinion centred on how the performance bonuses of the

chairman and managing director, and the two other executive directors (EDs) – who are also

the chairman's siblings – should be computed.

Lian Beng's position was that the pre-existing service agreements for the chairman and the

EDs expressly based their performance bonuses on "net profits of the group before tax and

before extraordinary items". Over the years, this had, in practice, been interpreted as "net

profit before tax and before minority interest", even though the agreement was silent on

the treatment of minority interest.

The company's perspective was understandable, since (a) minority interest falls below the

net profit before tax line in statements of accounts, (b) the service agreements were not

explicit one way or the other on the point of minority interest, and (c) its approach to

determining performance bonuses has historically and consistently been "before minority


The two IDs, however, took the view that, for the financial year ended 31 May 2014

(FY2014), the performance bonuses for the chairman and EDs should have been based on

group net profit before tax and after minority interest.

In response to a query from the SGX, Lian Beng disclosed that the performance bonus for

the three EDs in FY2014 would have been approximately S$2 million lower had it been

computed "after minority interest".

The IDs' position that the performance bonus measure should have accounted for minority

interests is not unusual. Generally speaking, if minority interests are significant, an "after

minority interest" measure is seen to be better aligned with shareholders' interest.

Profit test

For many companies, the amounts involved are small and using a "before minority interest"

measure has no significant impact on profit before tax calculations. This was the case for

Lian Beng for many years. The difference for Lian Beng in FY2014 was that the minority

interest component grew to nearly S$40 million, or around 28 per cent of net profit before

tax. This was probably not foreseen at the time the bonus measures were first crafted in the

service agreements of the three EDs.

The incident highlights the need for RCs to carefully consider a number of factors when

defining "profit" as a basis for determining management bonuses. The relevant profit test

can be based on one or more of the following:

  • Before or after tax

  • Before or after minority interest

  • Before or after accrual of bonus expense

  • Before or after revaluation of gains or losses

  • Before or after foreign exchange gains or losses

For each of these factors, the RC needs to consider management's ability to influence results

and ensure that remuneration is properly aligned with the company's performance and

shareholders' interest. As an example, foreign exchange volatility is dependent on

macroeconomic factors that are beyond management control and thus such gains or losses

would tend to be excluded. However, if management is expected to manage currency

exposure, including deploying appropriate hedging strategies, then this item should be

taken into consideration in determining bonuses.

A more significant factor is the revaluation of gains or losses which can be sizeable, and

include a high level of subjective input from management. As such, there are considerable

risks in including such items in bonus determination. Regardless of the measures used, the

RC should test potential outcomes and calibrate rewards accordingly.

It is common for service agreements to be in place at the time of an IPO. However,

businesses and strategies do change over time. An RC needs to regularly evaluate and

confirm that performance rewards continue to be appropriate for evolving businesses. Thus,

it is important for service agreements to be time bound, and subject to subsequent review

by the RC.

Lian Beng's own annual reports indicate that its service agreements are valid for three years

and subject to automatic renewal every three years. Best practices would suggest that RCs review incentive plans regularly and update them to ensure alignment with market

conditions and business objectives.

Room for discretion

Furthermore, where RCs lack technical expertise in compensation matters, it is advisable to

engage subject matter experts who can provide independent advice.

Finally, while service agreements should be clear on performance measures and incentive

structures, they should not be so formulaic as to leave no room for the RC to exercise



A version of this article was originally published in The Business Times on Jan 18, 2016.


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