Ten Lessons from the National Kidney Foundation Saga

By Joy Tan, Partner, Wong Partnership

The National Kidney Foundation (“NKF”) saga and its various spin-offs have dominated the domestic news since the previous board of the NKF filed its ill-fated High Court defamation action against the Singapore Press Holdings in 2005.

The troubling revelations in that suit regarding the conduct of affairs at the NKF brought to light serious corporate governance concerns at the NKF, and launched not only an action by the new board against certain former executive directors for breaches of their fiduciary duties, but also criminal prosecutions under the Singapore Companies’ Act.

In the civil action, the new board commenced action against TT Durai as former CEO, as well as three former board members: former chairman Richard Yong, former treasurer Loo Say San, and former board member Matilda Chua. The three were said to have permitted Mr Durai to subvert the proper checks and balances and to benefit at the expense of the company. They were also said to have sanctioned or participated in conflicts of interest via an undisclosed connection with two firms, Protonweb Solutions and Forte Systems, which held contracts with the NKF for call centre services and software development, in respect of which excessive payments were said to have been made. The defendants in turn commenced third party actions against other board members, who were said to have been informed of and participated in the conduct complained of and who would have been equally liable for any breaches of duty that occurred.

The NKF saga provides several valuable lessons for boards and directors, and highlights, from a practical standpoint, the importance of good governance and internal structures. The NKF independent auditors commented in their special report that the deficiencies in the NKF operations (if not their finances) stemmed from a lack of meaningful governance. Here are the top ten lessons which boards would do well to heed.

Ensure that there is a strong independent chairman who will act as an effective check on management

The NKF case provides a clear and practical illustration of the consequences of not having a strong and independent chairman of the board.

Mr Yong was said to have allowed the CEO to dictate to him, travelling when asked, and signing off as chairman on letters that Mr Durai had prepared for him (even though he did not understand some of the words).

Further, Mr Yong and his wife had engaged in an undeclared business relationship with Mr Durai and his wife via a Malaysian company. Conversely, it was said that the former NKF chairman had resigned because he and the CEO could not see eye to eye, and Mr Durai had wanted a compliant chairman, which he found in Mr Yong.

Ensure that there is an effective board that understands the organisation and meets often

Formal meetings of the NKF board were held only once a year. The Executive Committee (of which all directors were members) met more frequently. However, it was said that information such as minutes was not provided to them before meetings, and they were not allowed to take the minutes away with them after. The executive committee was said to have evolved into a forum at which the members were informed about decisions already made or executed by the CEO. Rather than being decision-making bodies, it was said that neither the board, nor its executive committee, exercised any meaningful oversight over operations or undertook any meaningful review of management performance.

Where there are matters that give rise to questions, the directors should ensure that they are fully investigated and that they are satisfied with the answers given 

Robust questioning and investigation by the directors is essential to the board’s oversight role and a good governance system. Those who knew about the relationship between the CEO, Forte Systems, and Global Net Relations never properly looked into the matter although there were clear warning signs as to the existence of a conflict of interest.

Directors should ensure that they act with reasonable diligence to inform themselves

In the criminal case, Yong and Loo were charged with failing to exercise reasonable diligence in that they had approved payment of sums in respect of the Forte software contract in excess of what was truly owed, without making proper inquiries with the head of IT as the person with the appropriate oversight in the matter. It was said that the directors had a limited understanding of both the Forte project and the NKF’s rights under the agreement.

Ensure that any conflicts of interest are properly disclosed, and any contracts and disputes should be handled at arm’s length and in the best interests of the company

As noted above, the NKF had contracts for call centre services and software development with Protonweb Solutions and Forte Systems, companies owned by a personal acquaintance and business partner of Mr Durai. Although Ms Chua disclosed her interest as a senior executive of Protonweb, it was not disclosed that both Mr Durai and Ms Chua were co-directors Global Net Relations, a company which was in partnership with both Protonweb and Forte to market and sell the very software services contracted to the NKF.

Furthermore, it was said that when the NKF entered into the contract with Protonweb, no competing bids were sought; and for Forte, while a tender process took place, its product was not considered suitable or the best by the NKF IT manager. Mr Durai was said to have been instrumental in ensuring the contract was awarded to Forte, and to have forced through interim payments to Forte even though it had failed to meet its deadlines and the product was below specification.

Payments to directors and officers should be proper and based on appropriate incentives

In the case of the NKF, a remuneration sub-committee was established, but there were no guidelines on remuneration structure, and the CEO was said to have retained full discretion to determine all key and staff remuneration. The CEO’s pay package was said to have been such a closely guarded secret that executive committee members had not been fully aware of it until the suit against SPH. In addition, Ms Chua was given a salary increase even though she was leaving the company, and this increase was backdated.

There should be a system of adequate internal controls

Many of the well-known corporate fraud cases have involved lapses in or failures to adhere to internal audit controls (e.g. in the cases of Asia Pacific Breweries and Gaelic Inns). In the instance of the NKF, it was said that they had a three-member internal audit team which reported to the CEO directly, and an audit committee that at one time did not meet for three years because the CEO would not support its recommendations. This system together with the work of the external auditors might have guarded against financial lapses, but it did not guard against the operational lapses which permitted the conflicts of interest and breaches of duty to continue.

The audit committee should be knowledgeable, independent, and empowered to act effectively

As noted above, the NKF’s audit committee failed to meet sufficiently often to be effective. Even more of an issue was that the chairman of the audit committee, Yeo Ek Khuan, was not a board member, which weakened the relevance and authority of the committee. It was said, for example, that the audit committee had raised the lack of a remuneration policy in 1999, and again in 2002, but its recommendation was ignored. Furthermore, the committee was said to not report to the board or executive committee, but to the CEO. The independence of the audit committee was also called into question by the fact that although Mr Yong had a business relationship with TT Durai and his wife, he still sat on the audit and remuneration committees.

A proper whistleblowing system should be in place to ensure that wrongdoing is caught early

A whistleblowing system is becoming an important part of good corporate governance. In the case of the NKF, the operational lapses might have been brought to light in a more timely fashion if those who had concerns had a confidential channel to voice them.

Never Allow Past Success to Blind One to Risks, Including the Risk of Having Too Much Power Concentrated in One Person

If the NKF saga can be summarized into one key lesson, it is the danger of becoming overly complacent. The KPMG report states, “The phenomenal success of the NKF in scaling new heights in fund raising over a long period was possibly a key factor in diluting the effectiveness of management controls, board oversight, and regulatory overview.” The NKF is likely victim of its own perceived success, with much reliance and trust placed in the CEO as the architect of that success. Unfortunately, without a system of good governance that is properly implemented and maintained, even the most outwardly successful of organisations can ultimately fall from grace.