Major global crises, from the Asian financial crisis (AFC) in 1998 to the current Covid-19 pandemic, have caused significant disruption to businesses and employment and Malaysia has not been spared.
During the AFC, unemployment levels in Malaysia were at four per cent. During the 2007-2008 global financial crisis, we saw unemployment of 3.5 per cent, and now in 2020, we are witnessing a new high of more than 5.3 per cent.
It should come as no surprise that the pandemic has forced companies to reconsider their strategies and sustainability, as only the strongest will survive.
Some companies have taken very disciplined restructuring approaches. However, some have refused to change and are, in fact, resorting to threatening to cut jobs if they are not given more bailout money while refusing to cut the personal excesses of the senior executives.
The usual playbook employed by companies that require "help" or a "bailout" is to:
• Set up a special purpose vehicle (SPV);
• Give out favourable stock options or employee share option schemes based on generously-crafted key performance indices (KPIs) to the same owners/founders/executive management team;
• Secure a government grant or soft loan; and,
• Engage with pension fund(s) to ensure that these large funds buy the rights issues or company stock, which will guarantee share price stability due to the controlled liquidity or free float.
Power imbalance
While the company gets a lifeline, the minority shareholders get a raw deal as the irresponsible owners/senior executives continue with the same modus operandi that includes allowing eroding margins due to poor cost controls, poor hedging strategies, overbuilding/excess capacity, or expensive land costs/acquisitions.
This is not to say that restructuring is a bad strategy. In fact, under the current difficult operating circumstances, many of these companies should be allowed to undergo a full restructuring.
However, the important questions are: What form of restructuring should take place? Should it only involve financial restructuring or should it also involve changing the senior management of these organisations, regardless of whether they are the significant shareholders?
Recently, it was revealed that a particular company's restructuring plan would involve restructuring the company's large debt position with a debt-to-equity swap.
Under this proposal, an SPV was to be set up, with the owners given stakes and the option to increase them if the KPIs are met.
On the surface, this sounds very fair: If you perform, you get more shares in the company.
However, looking at the proposed restructuring plan, it is clear that the scheme does not give the existing minority shareholders a good deal.
The owners use pro forma target performance numbers in their books to meet their performance objectives for the year. Thus, they are entitled to more shares in the SPV, as well as higher payouts in terms of salaries and other beneficial payments.
Although the company is in financial distress (with more debt on their balance sheet than they can service), the new merged entity can now go to potential investors to receive more funding.
Where priorities lie
The fresh capital that is sought will be based on this proposed new reorganisation of their debt, which may or may not improve the profitability of the company.
Investors always focus on earnings and growth, but these owners/senior executives are not really interested in that.
First and foremost, these types of owners are interested in ensuring that they maintain their equity in the company.
Secondly, these owners are interested in the cash injection into the company in which they own shares. With this potential cash injection, they will have access to this capital.
Will this capital be used to enrich themselves at the expense of other shareholders, or will the senior management of the company finally change?
When assessing restructuring plans, existing shareholders must ensure that they are given enough details about the potential restructuring and/or whether the conditions of the due diligence are sufficiently transparent.
We have seen how similar companies like to reassure the market that they have strategic contracts in hand, in an attempt to boost investor confidence and convince these investors to put in new money or buy shares in the new SPV.
Strategies like these usually work within a short window of time to provide some false optimism, but slowly and surely, the optimism will wear off and reality will set in.
The key point to remember is that the same structural issues that have plagued a company for years will remain in the future if no systemic changes are made.
The only way that these types of companies will learn is if investors reject their restructuring plans until a new management team is brought in and the previous owners or senior executives are no longer able to dip their sticky fingers into the company till.
Perhaps it is time for the owners take a backseat by stepping away from the board and relinquishing any executive role.
This is the only way forward if we are to rebuild corporate Malaysia.
The writer is a regional fund manager with more than 30 years of experience. She was named one of the 25 most influential women in the Asia-Pacific region for asset management as well as one of Forbes Asia's 50 Power Businesswomen 2014
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times