CDL’s AGM: Minority support for five IDs seeking re-election a litmus test of governance perceptions

[SINGAPORE] This week, minority shareholders of City Developments (CDL) will finally have the opportunity to endorse, or oppose, the controversial appointments of Jennifer Duong Young and Wong Su-Yen as independent directors (IDs).

The two IDs were appointed on Feb 7, and are seeking re-election at the annual general meeting (AGM) scheduled for Apr 23.

Also seeking re-election at the coming AGM are three other IDs – Colin Ong, Daniel Desbaillets and Wong Ai Ai – who were on opposite sides of the conflict surrounding the appointments of Duong Young and Wong Su-Yen.

All five of these IDs will probably be re-elected if they obtain the support of the Kwek family, which controls nearly half of CDL’s shares. Still, the level of minority shareholder support they garner could be a litmus test of market confidence in the state of governance at the group after the recent infighting.

This could, in turn, raise questions about whether an overhaul of CDL’s board is necessary in order for the group to better execute its plans and boost shareholder returns.

More generally, the level of minority shareholder support for the IDs seeking re-election might shape views in the market about the importance, or otherwise, of adhering to the letter of the Code of Corporate Governance (CG Code).

The main sticking points in this whole saga are that the nominations of Duong Young and Wong as IDs did not go through the nominating committee (NC), and that CDL’s expanded board subsequently merged its NC and remuneration committee (RC).

CDL executive chairman Kwek Leng Beng said these moves were a boardroom coup – orchestrated by his son, CDL chief executive Sherman Kwek. The elder Kwek pointed out that his position prevents him from sitting on the combined nominating and remuneration committee, and that he is now prevented from being involved in the nomination process of directors and key management personnel.

The Corporate Governance Report section of CDL’s latest annual report provides an extensive account of how the two new IDs were appointed. While it does not contradict any of the statements made by Kwek Leng Beng and Sherman Kwek when the conflict spilled into public view earlier this year, it lays everything out in a dispassionate manner and provides some additional details and context.

Among other things, the annual report sought to demonstrate that the appointment of the two new IDs followed a formal and deliberate process, consistent with the CG Code, despite not going through the NC.

Shareholders of CDL should read this segment of the annual report closely before deciding for themselves how to vote at the AGM later this week.

Lingering internal divisions?

This column said on Mar 3 that Kwek Leng Beng and Sherman Kwek had probably crossed the Rubicon. In light of the statements each of them had made about the other, it seemed only a matter of time before one of them stepped down.

Much to my surprise, Kwek Leng Beng said on Mar 12 that he had dropped legal action against the appointment of the two new IDs, and that the board had agreed to put aside their differences.

Yet, investors may not go back to viewing CDL as they once did.

For one thing, the market is now aware of the rift within the group caused by Catherine Wu’s long relationship with Kwek Leng Beng. While her “irrevocable resignation” as an “unpaid independent adviser” to CDL’s hotel arm was announced on Mar 4, market watchers may continue speculating about her continued influence.

Moreover, Kwek Leng Beng has plainly expressed misgivings about Sherman Kwek’s track record as CEO – criticising him for CDL’s disastrous investment in Sincere Property Group, poor investment decisions in the United Kingdom, and the persistent underperformance of CDL’s shares.

Kwek Leng Beng had also tried to have his son fired as CEO in February; and suggested that his nephew, CDL chief operating officer Kwek Eik Sheng, serve as the group’s interim CEO.

Then there is the division within CDL’s board over the appointment of the new IDs.

CDL noted in its annual report that the position it has taken about there having been a formal and deliberate process in the appointment of the new IDs was “based on the majority of votes of the board”.

Does it matter if these issues remain unresolved? Isn’t it more important that the warring parties within the group simply refocus their attention on maximising shareholder value?

Or, will the internal divisions raise investor concerns about the board’s ability to exercise oversight and enforce accountability?

Questions about performance

Last week, CDL addressed a number of “substantial and relevant” questions from its shareholders ahead of its AGM. The majority of them related to the group’s financial performance, its business strategy, and the steep undervaluation of its shares versus its revalued net asset value (RNAV) as at Dec 31 of S$19.86 per share (including gains on its investment properties and hotels).

Broadly, CDL said it is pursuing diversification across asset classes and geographies, recycling its capital, and building up its fund management business. It offered examples of properties that have been monetised, while pointing out that it now has big portfolios of purpose-built student accommodation assets in the UK, and private rented sector assets in Japan. The group has also been repurchasing its shares in the market.

So, why have CDL’s shares been languishing? Responding to questions from its shareholders, it said its various growth initiatives are taking time to bear fruit. In the meantime, its financial performance has been affected by adverse macroeconomic conditions, rising costs and repeated rounds of property cooling measures.

It didn’t help that CDL was dropped from the MSCI Singapore index last year.

Interestingly, CDL mentioned that it has divested about S$3 billion worth of global assets since 2021, but deployed S$7 billion over the same period into new investments. “Therefore, it is critical to accelerate divestment efforts to lower gearing and reduce interest expense,” it said.

These answers raise a number of questions, in my view. For instance, why is CDL aiming to accelerate the pace of its divestments against a tough macroeconomic backdrop instead of enforcing more discipline on its acquisitions?

Are CDL’s share buybacks actually improving the market value of its shares? Or, should CDL hold off on more share buybacks until initiatives such as the development of its fund management platform begin driving a sustained improvement in cash flow and return on equity? When exactly will the fund management business take off?

Given rising costs and repeated rounds of property cooling measures, shouldn’t CDL shrink or hive off its property development business? Wouldn’t that do more to boost the market valuations of its shares than share buybacks?

With the infighting at CDL over for now, minority investors should carefully consider if the current board is capable of keeping the group on the right track to deliver shareholder value.