We are at the cusp of a potentially novel trend in corporate governance. For a long time – perhaps too long – it has been the role of shareholders to demand more disclosure, more transparency, better governance from the company’s management. For them the board is used as the potent instrument which can enforce stronger accountability and management responsibility.

But now enter onto the scene Muddy Waters Research, a short-seller cum whistle-blower that rains down on companies to expose allegedly dubious business practices and lapses in corporate governance.

It even has the audacity to proclaim its short position in the targeted company and its intent to bring down the stock price in order to make itself a tidy profit. Its initial array of targets included listed Chinese companies while recent attacks focused on familiar global entities such as commodities traders Olam International and Noble Group.

Whistling duo

Muddy Waters’ success rate has been mixed, but in most cases the initial downwards reaction in share prices were more than enough for it to cash in huge gains. In the process, the targets were also often queried by the respective stock market regulators, particularly to account for the unusual price movements.

As if the waters are not muddy enough, another whistle-blower Iceberg Research joined the foray and attacked Noble Group. In this case, it stated that it was not a short-seller.

The game-changer here is that Iceberg Research is anonymous; it is hidden in the cyber world where it operates and disseminates far-reaching information.

Most notably, shareholders appear to take heed of Iceberg’s reports – an interesting example of information from nowhere that seems to be getting somewhere.


Naturally companies in the firing sights are fighting back.

whistleWith these whistle-blowers, the companies concerned suddenly find that they have to answer to the charges made. Many have, in fact, expended considerable effort, labour and resources to refute the charges against them.

Interestingly, in the recent incident of Noble Group, shareholders at the annual general meeting voted overwhelmingly to adopt the group’s financial statements despite the claims proffered by Muddy Waters and Iceberg.

Nonetheless, this series of offensives may mark a turning point in the global corporate governance landscape.

The traditional chain of accountability by companies to shareholders and regulators stands moderated by third-party analysts who often have vested interests.

These are different from the usual range of brokerage-related or portfolio-based analysts who issue buy, sell or hold recommendations.

The Muddy Waters and Iceberg type of players – the like of which we can expect more – may well be a new addition in the corporate governance ecosystem.

Who cares?

In the digital, data-driven era, as long as your company is listed and traded, it is easy for anyone to pick up the red flags

For business leaders the obvious question is should you care about this? You might run a company that is not especially high profile, nor in a sensitive or volatile industry – you don’t trade commodities nor run supply chains for example.

But it is not always and only the big companies that can be attacked. Any company can be vulnerable.

In the digital, data-driven era, as long as your company is listed and traded, it is easy for anyone to pick up the red flags.

The key point to note is that the invaders need not be high-profile players like Muddy Waters or Iceberg.

We are likely to see advocates and activists, often operating as individuals, who are now emboldened and likely to go beyond the isolated queries to be even more comprehensive, holistic and systematic in taking on companies. And for these, it may even be the smaller companies that are implicated.

So what?

What then should you do if you find your company in the firing line?

ThinkAloud4Of course, if all the claims are baseless, you can simply ignore them. But the problem is that investors may sometimes be persuaded by these claims, especially if they are backed up by “facts and figures”.

One key choice you have to make is whether to remain on the defensive or even to mount an offensive.

From a defensive viewpoint, companies may simply try to explain their way out. In Noble Group’s case, point-to-point rebuttals were given to the charges by Iceberg.

Shareholders are normally reasonable people but if their pockets are hit, they may join the upheaval. Thus it is necessary that the company takes the due diligence to be as forthcoming as possible.

Often however, it may serve the companies better to take the offensive. Legal action may be taken against the whistle-blower for false claims. Even in the anonymous case of Iceberg, Noble Group purportedly knows who the perpetuator is and has been taking the legal route.

If your company has some major shareholders who can stand firm on your side, it is even better. In the Olam case, Temasek Holdings – Singapore’s sovereign wealth fund – took the step of increasing its stake and thus boosted confidence in the company.

For many companies, however, this is probably an exception rather than the norm.

Another critical step is to engage the media, especially if the attack has received significant attention. Noble Group’s CEO has actively employed the media to tell the company’s side of the story.

Who’s next?

Another question is how can companies make themselves less vulnerable? For corporate leaders, how do tell if you are next in line for an attack?

The answer: look in your BAG – in other words your:

  • Business
  • Accounting
  • Governance

For business practices, the main issue is your revenue model. How is money made? Is there a complex web of cash flows that investors and analysts find it hard to understand and may form a basis for doubt? Has your company grown inordinately by acquisitions that seem improperly valuated? Are there alliances that do not make sense to people outside the company?

For accounting, the general conventions should prevail. Are there controversial ways of accounting treatment that might be grounds for suspicion? Are there are dealings that may be recorded and seem not to have occurred? Have assets been written off in extraordinary ways that are unconvincing? Are there assets carried that seem to come from expenses?

And for governance practices, it is best for listed companies to observe the principles and guidelines in the relevant codes. For Singapore, there is the Code of Corporate Governance which is based on the comply-or-explain approach. It will indeed be quick and easy for assailants to determine where the non-compliances are and how these are explained (sometimes there may be instances where there are no explanations).

One major area of concern is usually board appointments which are often subject to intense scrutiny. Has the company, for example, met the requirement for director independence if the chairman is not independent? Are there long-serving directors that may attract attention? Are executives excessively remunerated?

Other areas may pertain to auditing which is often a hot button for shareholders. There may also be specific issues in disclosure such as related-party transactions which may be controversial.

Measuring up

Many countries do have assessment schemes that report the corporate governance performance of their listed companies.

In Singapore, the Governance and Transparency Index (GTI) publishes the rankings and scores for corporate governance in all listed companies.

The Singapore portion of the ASEAN Corporate Governance Scorecard reports the corporate governance results for the 100 largest companies by market capitalization.

Recently, a new Governance Evaluation for Mid and Small Caps (GEMS) provides governance ratings for listed SMEs.

A starting point for potential attackers may be to look at those companies which have low scores or have dropped sharply in the relevant ratings. This may be an initial filter to detect major lapses.

Naturally such a method is not fool-proof as many global mega-lapses in corporate governance such as Enron, Satyam and Olympus did not display red flags for several years prior to exposure.

Indeed companies should do self-assessment in corporate governance using the available instruments as developed by the respective rating organisations.

Stay ready

Amongst the three categories of practices – business, accounting and governance – perhaps governance is the most critical as it relates to leadership and sets the structures and processes to direct the conduct of the other two practices.

The best defence to potential attack is thus good corporate governance. It pays to plug the holes and make the company water tight.

To ward off attention from Muddy Waters and their like, companies should form task forces to review the corporate governance situation.

As a well-known Chinese proverb goes:  “It is easy to dodge the spear in the open, but hard to avoid a stab in the dark”.

This is not just the job of the company secretary or investor relations function. The board should take the lead to steer the company to be less vulnerable.

It will be proper to work through scenarios and exercises to simulate potential attacks. What contingency plans does the company have in place? Is there a crisis response protocol? What are the communication plans?

Yes, it is always good to be alert. The Scout Motto sums it well – “Be Prepared”.