Abstract
For an inquisitive student of corporate governance, the BUMI Plc case offers an extraordinary insight into the nuances of contrasting corporate governance cultures and their associated problems. The marriage of the East–West governance models and its subsequent failure has brought to the fore the vulnerability of the Anglo-Saxonic corporate governance model in the face of entrenched relationships characterizing Eastern governance structures.
Western investor Nat Rothschild joins hands with the Bakries of Indonesia to build a mining behemoth. Despite the Bakries’ supposed lack of governance integrity, Nat allies with them with the confidence that the demands of Anglo-Saxonic corporate governance model would play a great leveller in ironing out any mis-governance-related issues. Whether he was too confident of the Western model of governance, or on his own competence as a successful investor, or whether he failed to grasp and appreciate other models of governance is a matter of debate. Suffice it to say that Nat sensed a huge business potential in Indonesia, and despite a contrasting governance model followed by Indonesian businessmen, he partnered with them in the hope that at the end the Anglo-Saxonic governance model would prevail and maximize shareholder value. Was he proven right or whether he misjudged his partner’s governance model forms the basis of this case. The case does not argue for or against any governance model. Instead it draws the student’s attention to the existence of different governance models and their interplay in a unified setting.
Introduction
The transition from a barter economy to a production–consumption economy has sown the seeds of business, and corporations (in some form or the other) have come into existence ever since. Today, corporations are ubiquitous and touch every facet of our life.
Till the dawn of the twenty-first century, corporations were not studied as an end in themselves but on what and how they contributed to the larger economy. However, from the 1930s, scholars have begun focusing on how and why corporations behaved the way they did so. Much like human behaviour, corporate behaviour too cannot be explained away without drawing from multiple disciplines. Corporations are complex institutions and complexity brings with it many shades of perspectives. The study of corporate governance is unique in that it draws from multiple disciplines, namely, economics, business management, politics, sociology, law and finance.
In the recent times, corporate governance is largely being probed from a ‘value creation’ perspective. Who creates value for the firm and how? Are all the significant actors of the firm, that is, promoters, shareholders, board of directors and management team, aligned by their interests to maximize firm value? If yes, what motivates them and if no, what other interests dominate that of value creation/ maximization? Questions like these are being increasingly asked and addressed to understand the intricate nuances that corporate governance as a discipline has to offer.
Corporations are governed differently in different countries. The way corporations are governed say, for example, in the US or the UK could be different from the way they are governed in France, Japan, Germany or Korea. Each country has its own economic fabric and corporations are governed in sync with their national laws and regulations.
However, with increasing internationalization and the concomitant changes in equity holding structures, multicultural and multinational workforce and access to global product and capital markets there is a demand for homogeneity in governance practices. Despite the call for homogeneity, the world has for long witnessed contrasting governance styles each with its own merits and demerits (Bhasa, 2004).
Corporate governance literature documents the existence of multiple governance models. For the purpose of this case, we briefly touch upon two diverging models to flesh out the contrasts that exist between them. For comparison, we pick ‘Anglo-Saxonic’ and the ‘entrenched’ governance models, primarily because the former is widely accepted and acknowledged as having provisions for robust governance mechanisms and the latter because the subject matter of our case concerns Indonesia—a country supposedly characterized by a strong politico-business relationship (see Table 1).
The BUMI Plc debacle is a classic case that alludes at the dichotomy that riddles the modern day corporate governance debate. It is commonly understood that the strength of the Anglo-Saxonic model of governance lies in its demand for accountability and in the existence of strong governance mechanisms of oversight. How successfully the model works when it is pitted against a competing governance model of entrenched relationships has often been the point of debate in governance scholarship. However, students of corporate governance would be intrigued to learn whether and how both the models can co-habit if married through a common desire to maximize shareholder value. Do the East–West models compete to outplay each other within the firm’s internal dynamics? Do the promoters share the same value denominator or are they driven by individual ambitions that can be detrimental to shareholder value maximization? In a marriage of contrasting governance styles, can any one party succeed in gaining control dominance? If the alliance succeeds, who or to what element of governance does one ascribe the success to? And if it fails, can we simply dismiss it off citing ‘clash of cultures’ as the reason?
There can be as many interpretations as can be reasoned in the BUMI case. A curious student of corporate governance would find many hues to explain the failure (more precisely, ‘alliance debacle’) of BUMI Plc. While it is always worthwhile to look at multiple perspectives to understand the case, it is also prudent to funnel all arguments to one major underlying theme—clash of governance cultures. In the recent times, where different variations of corporate governance scandals/scams are increasingly occupying our mind space, BUMI Plc stands out as a classic case of ‘clash of governance cultures’ with the Western investor pressing for improvement in corporate governance standards as he knows it best and the Eastern counterpart governing BUMI the way he is inured to.
Comparison of the Dominant Corporate Governance Models
Within a year of forging an alliance to create BUMI Plc, the Bakrie Group of Indonesia and Nathaniel Rothschild from Europe compete to control it amidst a slew of allegations and counter allegations. To argue whether the Anglo-Saxonic model of corporate governance has prevailed over the Indonesian model or vice versa would be premature, given the freshness of the case. The coming years would help us contextualize the current day governance nuances of this case with more clarity. But for now, let us first attempt at understanding the players in the case, their game and the outcome.
The Players
A. Bakrie Group
Founded in 1942 by Achmad Bakrie, the Bakrie Group is amongst the largest business groups in Indonesia. With business interests spanning across sectors, such as, agriculture, education, shipping, oil and gas, realty, infrastructure, media, mining, coal, edible oil, steel and sports, the family conglomerate wields immense business and political clout in Indonesia.
While Achmad founded Bakrie & Brothers as a trading company, his eldest son Aburizal Bakrie who joined the company in 1972 changed its fortunes by aligning with the then political forces of Indonesia.
Fall and Quick Revival
During the crisis of 1997–1998, the company accumulated more than US$1 billion in debts. In 2001, the government-run Indonesian Bank Restructuring Agency intervened to restructure Bakrie’s debts (Institute of Directors, 2013). Post debt-restructuring, the family was left with just 2.92 per cent shareholding, while 95 per cent shares were transferred to the debtors under a ‘debt-for-equity’ (sic) swap arrangement and the remaining 2.08 per cent was with the retail investors.
However, in a quick reversal of fortunes, the assets of two of the world’s largest thermal coal mines PT Kaltim Prima Coal and Arutmin landed into the group’s kitty. During the period 2002–2005, in an excessively aggressive political atmosphere and a new-found love for nationalistic laws, the government of the day had coerced its erstwhile mining concessionaires BHP, New Hope Mining, Samtan, BP and Rio Tinto to exit the mining sector of the country. Domestic investors found it an opportune moment to either acquire majority shares or wrest managerial control of these companies.
While the top six mining companies accounted for over 75 per cent of the country’s coal production between 2002 and 2009, BUMI Resources 1 (PT Kaltim Prima Coal + Arutmin) owned by the Bakrie Group on its own accounted for over 25 per cent of Indonesia’s thermal coal production and exports.
Aburizal Bakrie: The Man Behind
Aburizal Bakrie, the former Chairman of Bakrie Group is reckoned to be amongst Indonesia’s most powerful men. Popular journalistic reports indicate that his political alignment helped him skyrocket the growth of the Bakrie Empire. Also, his position as President of Indonesia Chamber of Commerce (KADIN) for over a decade between 1994 and 2004 has helped him keep the Bakrie Group afloat despite its financial troubles.
When Aburizal Bakrie was the minister for economy, he championed the cause of a gas pipeline project connecting Java with Kalimantan. Eventually, his proposal was approved and Bakrie Pipe Industries (a firm controlled by the Bakrie family) won the US$1.26 billion pipeline contract. 2
Over 55 per cent of Bakries’ revenues around the mid-2000s came from infrastructure projects that were largely dependent on the government contracts. This goes on to indicate the immense political clout enjoyed by the Bakries.
During 2012–2013, over a quarter of all transactions on the Jakarta Stock Exchange (JSE) were seemed to be driven by 10 companies owned by the family and listed on the JSE indicating that the Bakries made quick recovery during the period Aburizal Bakrie held three important positions, namely, Chairman of the Bakrie Group, Minister in the Indonesian government and President of Indonesia Chamber of Commerce (KADIN).
In addition, Aburizal was also the Chairman of the Golkar party and was nominated as the party’s presidential candidate for the elections of 2014.
B. Vallar
Vallar was born in July 2010 amidst a classic run-in between Lord Jacob Rothschild and Nathaniel Rothschild, the father son duo. RIT Capital Partners owned and controlled by Lord Rothschild had a capital of US$2 billion that Nat wanted to invest in assets in mining markets. Lord Rothschild did not oblige and Nat had to find his own way to fund his ambitions. While he pumped in £100 m of his own money, his investment banker friends and some institutional investors, such as, Abu Dhabi Investment Council, Schroders Bank and BlackRock joined in to fund Vallar. Together they listed Vallar on London Stock Exchange (LSE) and a cash shell worth £707 million thus got formed. Other than the reputation of those involved, what motivated the smaller investors to invest in Vallar is very intriguing. 3 Nat assured his shareholders of doubling or tripling their value in the shortest possible time.
With a huge chest of funds at his disposal, Nat went asset hunting in the iron ore, coal and gold mines of Brazil, Russia, Canada and Colombia. He was fuelled with the ambition to create a huge company that could make it to Financial Times Stock Exchange (FTSE) 100 and return its shareholders better value than anticipated.
Even while Nat’s asset hunt was on, he got a call from a JP Morgan banker, asking if he would be interested in looking at coal mines in Indonesia. Nat found this to be a good opportunity to enter into emerging markets.
A total of 35 per cent stake of Mr Rosan Roselani’s holdings in Berau—the fifth largest coal producer in Indonesia—was up for sale and Nat had an option to buy it. While Nat considered buying a stake in Berau, he started looking elsewhere too. Driven by his ambition to create much higher value for his shareholders, Nat also opted to look at the other available choice—that of BUMI Resources owned and controlled by the Bakrie Group. The Bakries were debt laden and were looking for ways to prime up their finances. Given a general negative opinion of Indonesian businessmen, they seemed untouchable in most advanced capital markets. So for them, Nat’s interest could not have been timed better. They could get access to London capital market without having to go through the rigorous rigmarole of listing on LSE.
Making and Unmaking of BUMI Plc
The Bakries’ not-so-good reputation notwithstanding, Nat felt that introduction of the UK-based governance style with reputed independent directors to keep a tight watch on the company’s governance would to a large extent eliminate the possibility of the controlling shareholders exerting any kind of influence in the running of the new entity. 4
So in July 2010, Nat inked a deal with Indra Bakrie (Aburizal’s brother and Chairman of the Bakrie Group) and Bumi Resources rolled into Vallar Plc at a deal value of a little over US$3 billion. 5 Vallar Plc was renamed BUMI Plc and Indra and Nat assumed positions as co-chairmen of the newly named entity.
Under the deal, BUMI Plc picked a 29.2 per cent stake in BUMI Resources from the Bakrie Group and 85 per cent stake in Berau Coal Energy from PT Bukit Mutiara (both Indonesian coal mining giants). In return, the Bakrie Group got 23.8 per cent and PT Bukit Mutiara a 10 per cent stake in BUMI Plc (see Figures 1 and 2).
Though the Bakries together with Samin Tan held over 47 per cent stake in BUMI Plc, their voting rights were capped at 29.9 per cent while Nat controlled 30 per cent voting rights. However, under a special relationship agreement, the Bakries were given the right to hire and fire board members. Was it a costly mistake in retrospect?
Bone of Contention: Bad Governance versus Intention
As soon as BUMI Plc was formed, its share prices plunged owing to a free and significant fall in global coal prices and its associated impact on the performance of the company.
By late 2011, Nat sensed that BUMI was mired in financial irregularities and no amount of financial prudence could explain away the logic behind ‘non-business expenses’ reflecting in its financial statements. He expressed his concern by writing a letter to Ari Hudaya, chief operating officer (CEO) of Bumi Plc seeking clarification on the company’s financial irregularities and also allowed Financial Times to gain access to his letter. 6
With a view to impressing his seriousness upon the other shareholders, Nat quit the board of BUMI Plc in October 2012 and pressed for the replacement of the existing board.
While there are multiple governance nuances to the case, the most primitive one as thrashed out in the media is that of Nat’s dissatisfaction with regard to financial misappropriation by the management of BUMI. 7 Suffice it to say that Nat disliked the way the Indonesian management of BUMI tunnelled 8 away money from the company against expenses that were suspicious in nature. Under Nat’s pressure, BUMI Plc had to launch investigations on the alleged financial irregularities.
The Bakries though prided themselves on practising good corporate governance principles (see Exhibit 1). Given that BUMI Resources had won multiple corporate governance awards before the Vallar–BUMI deal their hubris took a beating on Nat’s allegations and they did not take kindly to it. 9 They pressed for a separation from BUMI Plc and with this backdrop of mistrust amongst the partners, the fight for control of BUMI Plc began (Bloomberg, 2013).
In addition, with Nat’s continued activism in the backdrop, the stock price of BUMI Plc plummeted by 40 per cent in the summer of 2011 thereby triggering repayment claims by creditors on a US$1.3 billion loan. Unable to service their debts part due to the falling coal prices and part due to their own mis-governance, the Bakries sold off half of their BUMI shares to Mr Samin Tan for US$1 billion in a backhanded bail out deal thereby relegating Nat Rotschild to the position of the fourth largest shareholder of the company behind three Indonesian businessmen. This to a large extent reduced Nat’s clout over BUMI Plc (Businessweek, 2013). Also, the reporting structure adopted BUMI Plc during the same period was way beyond sane standards of corporate governance. Samin Tan was reporting to himself twice over. As President Director of BRM, he was reporting to Samin Tan, President Commissioner of BUMI Resources in turn reporting to Samin Tan, Chairman of BUMI Plc (see Figure 3).
Snapshot of CG Awards Won by BUMI Resources in 2010
Struggle for Control and the Outcome
In a series of proposals and counter proposals to retain control over BUMI Plc both the agitated parties tried to be one up against each other.
Nat’s Moves
Wanted the Bakries to be replaced by Hashim Djojohadikusumo who he felt had the right credentials to run BUMI Plc. 10
Proposed to buy Bumi Resources’ stake in BUMI Plc.
Proposed the other Indonesian shareholders, namely, PT Borneo Lumbung Energi and Metal (23.8 per cent) and PT Bukit Mutiara (9.8 per cent), to sell their stakes and exit out of BUMI Plc.
Proposed to issue 20 per cent new shares on the back of its enlarged capital and acquire PT Bukit Mutiara’s 4 per cent stake in Berau. 11
Proposed to replace 12 of 14 board members.
Proposed to replace CEO Nick von Schirnding and Deputy Chairman Sir Julian Horn-Smith.
Bakries’ Moves
Proposed to takeover BUMI Plc’s 85 per cent stake in Berau Coal and Energy for US$946 million.
Proposed to split BUMI Resources from BUMI Plc through a buyback arrangement.
Proposed to sell off their stake in BUMI Plc and exit.
Proposed to sell their BUMI Plc stake to Samin Tan of PT Borneo Lumbung Energi and Metal and use the proceeds of the sale to buy back BUMI Resources from BUMI Plc. 12
In all, Nat moved 22 resolutions of which 19 were defeated. The fact that Nat had 30 per cent voting rights and his resolutions got defeated by 61 per cent shareholder vote (especially in an extraordinary general meeting (EGM) conducted in London of an LSE-listed company) demonstrates the fickleness of shareholder behaviour. How?
Nat’s concern of mis-governance in BUMI Plc by the Bakries and the concomitant erosion of shareholder value found no takers amongst the shareholders (Financial Times 2013, The Guardian 2013, Bloomberg, 2014). The Bakries seemed to be in complete control of BUMI Plc as:
News of BUMI Resources’ control reverting to the Bakrie Group was accepted positively by the stock markets and share prices saw an immediate jump. On the same day that BUMI Resources’ share prices went up by 5 per cent, BUMI Plc’s share prices dropped by 2.4 per cent. Shareholders rejected 19 of 22 proposals made by Nat Rothschild.
Towards the end of the struggle for control, the Bakries succeeded in buying back BUMI Resources from BUMI Plc for US$501 million. Also, they offloaded their stake in BUMI Plc to Ravenwood Acquisition Company Ltd, owned by their ally, Mr Samin Tan. BUMI Plc has since been rechristened Asia Resource Minerals Plc (ARMS) and effective June 2014 a new Chairman and CEO were appointed. Samin Tan though continues to remain on the board of ARMS as a non-executive director.
Questions
If you were Nat Rothschild would you enter into an alliance with the Bakries? Please indicate reasons for your response.
Do you think that despite their exit the Bakries are still able to control BUMI Plc?
Nat Rothschild or Bakries—whose governance style do you support and why?
Why did the shareholders side with the Bakries and not with Nat despite Nat’s supposedly better standards of governance?
Footnotes
Acknowledgements
The author prepared this case based on secondary research and delivered a case seminar to the master’s students of corporate governance on 5 September 2014. The author gratefully acknowledges the support provided by Professor Thomas Berglund of Hanken School of Economics and the students of the master’s programme for their interesting insights and discussion.