Corporate Governance at TFS (Quintus): Strengths, Weaknesses, and Demise

This document discusses the strengths and weaknesses of corporate governance at TFS (Quintus), a sandalwood company. It explores how these factors contributed to the company's demise. Additionally, it evaluates the role of BlackRock in the downfall of the company and critically assesses the appropriateness of CEO's salary and performance benefits, as well as the remuneration paid to non-executive directors.

Running head: CORPORATE GOVERNANCE
Corporate Governance
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I) With reference to the TFS (Quintus) corporate statements from 2013-2017,
discuss the strengths and weakness in corporate governance at TFS (Quintus).
Corporate governance refers to the set of rules and principles that are used to run
an organisation. It is an umbrella term which is used to describe all the executive
ways in which the business is directed and controlled. It doesn't belong to a
specific operation or an office. It is a wide term for all the governing operations
that are used to run a business. Corporate governance is a balancing act that
focuses on safeguarding the interest of all the stakeholders. It focuses on
everything from controlling internal functions to executing the direct action plans.
It also helps in achieving company objectives. Corporate governance is
responsible for maintaining the positive image of the company in the public eye.
The company’s moral and financial growth is the deciding factors of the stock
value. The scared reputation can also negatively affect the share price. (Faria, P.,
Martins, F.V. and Brandão, E., (2014)) Corporate goverence is also responsible
for maintaining the credibility of the company in the public eye so that its market
value can be high. The financial status and growth potential also affect the
company equity value. The board of directors usually play a major role in the
cooperate governance.
Bad corporate governance can not only malign the company’s reputation it can
also negatively influence the financial stability of the company. Some bad
decisions can lead to the company's downfall. Sometimes the bad governance is
also an indication of the fact that some personal ambitions are been satisfied at the
cost of the company. Good cooperate governance can take a company to great
heights. The sign of a good cooperate governance is the sense of transparency it
brings in the regular operations. Most successful companies have fixed policies
regarding everything from executive to financial matters. Stringent quality checks
and regular audit are promoted by good corporate governance. Good cooperate
governance is based on the clear set of rules which aim at maintaining the balance
between safeguarding the stakeholder’s interests and achieving the financial goals.
It adopts cost-effective, realistic and rational ways to achieve its targets.

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The good governance can provide edifice on which a thriving company can stand
firmly whereas bad governance can shake the very foundations of the company.
The good governance can take the company to the great heights within a short
duration. It was the good governance only that understood the need to find the
other ways to generate revenue as sandalwood trees take 15 years to mature and
yield profit. The sale of young plantations of Indian sandalwood trees brought real
money to the TFS (Quintus). First investors paid for the plantations then a
nominal management fee was charged for the upkeep of the trees till their
maturity. (Goh, L. and Gupta, A., 2016)) This business model worked for TFS
(Quintus) as almost $87million was collected as ‘establishment fees’ for the new
plantations. TFS (Quintus) stakeholders were getting richer until 2014. Then the
TFS (Quintus) started its journey downhill. Soon it fell flat on its face.
Weaknesses
A powerful report compared TFS (Quintus) to the Ponzi scheme. It exposed
various loopholes in the company created by bad corporate governance. The series
of bad omen continued as TFS (Quintus) lost a major sandalwood supply deal
worth $150 million. This left investors worried about their investment. The
departure of Mr Frank Wilson gave another shock to the ailing company. The
company lost its reputation and credibility. The sales of the company fell from
$85 million to $20 million. The weakness of the corporate governance at TFS
(Quintus) was its inability to foresee the consequence of its decisions. The
unrealistic estimate of present financial status was another grave mistake
committed by the sandalwood company. (Gomariz, M.F.C. and Ballesta, J.P.S.,
2014))The policies that were initially used to promote the growth of TFS and
protect its assets were later used for the personal benefits. Some reports claim that
TFS founder, Frank Wilson exploited the TFS's policies to generate cash for
personal gains.
II) Discuss how corporate governance at TFS (Quintus) contributed to the demise of
the company.

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Downfall of TFS (Quintus) was the fatal end to the plantation company which
was started by the man, Frank Wilson, who decided to try his hand at growing
Indian sandalwood. The company grew by leaps and bounds as the sandalwood
offered the huge margins. The federal laws also favoured the growth of the
company as it meant more and more trees in Australia. The company also got
various tax benefits. TFS cooperation became the largest plantation of the Indian
sandalwood in the world. The company was funded by the Managed Investment
Scheme (MIS). Within four years of entering the share market, its share price
jumped to $1.37. By replanting each year, this Indian sandalwood company
created the world’s first and only sustainable supply chain of the sandalwood. It
covered a huge area of 12,564 hectares. (Gottesman, A.A. and Morey, M.R.,
2015)) This Indian sandalwood company also owns an oil extracting facility.
However, some bad corporate governance decisions along with fatal blow from
the fate pushed TFS (Quintus) to the downhill journey. The report published by
the Glaucus research group on March 22, 2016, exposed the bad corporate
governance that was ruining the glorious company. Various bad decisions and
manipulated figures destroyed this sandalwood company completely.
The Glaucus report exposed various bogus sales channels used by the company.
Their credibility was always questionable. According to the report, their Chinese
buyer was basically a sandalwood smuggling ring. Some other bogus sales
channels were also exposed which raised questions on the credibility of the
company.
Bad governance was also the reason behind revenue policies which offered a
loophole. The revenue recognition policies in TFS allowed it to show cash
revenue before actual revenue has been generated from its mysterious buyers. The
revenue that was only generated on the paper was used to generate finances
through the bond arrangements. The policies that were initially used to promote
the growth of TFS and protect its assets were later used for the personal benefits.
Some reports claim that TFS founder, Frank Wilson exploited the TFS's policies
to generate cash for personal gains.( Iwasaki, I., 2014))
The Glaucus report highlighted various factors that were manipulated to show
great quality of goods and their demands in the market. It even exposed some

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researches and experts opinions used by TFS to establish the superiority of its
products and their high demand in the market.
Corporate governance is responsible for keeping the company on the moral and
financial growth track. Company’s reputation and its net worth are the deciding
factors of the stock value but scared reputation can negatively affect the share
price. The Glaucus report had a very negative effect on the market value of the
company. The lack of public trust forced administrators to look deeply into the
TFS as many claims made by Glaucus report in 2017 were verified like the
Chinese bogus buyer. Finally, the company went bankrupt in 2018. Presently the
company has dissolved the MIS scheme.( Klettner, A., Clarke, T. and Boersma,
M., 2014)) The present management has vowed to make cost-effective decisions
which will help the company to regain its former glory and public trust.
III) Immediately prior to the Glaucus report in 2017, the investment giant BlackRock
purchased a large number of shares in TFS Corporation (Quintus). Shares that
were now worthless. Give your opinion on the role of BlackRock in the demise of
the Indian sandalwood company.
Blackrock, the global investment giant infused $145 million cash to give a fresh
lease of life to the bankrupt Indian sandalwood company, TFS (Quintus). This
cash flow will help this company to protect the interest of 200 employees. The
recapitalisation will mean that TFS (Quintus) will be in the position to fulfil its
commitment towards the MIS(managed investment scheme) investors. The capital
input made TFS (Quintus) a private company now.
The shares might be worthless now but these will be valuable in the future. Some
investors felt that BlackRock will reap great benefits from this deal which will be
lucrative in the future as the sandalwood trees will mature. The shares that were
useless will soon become valuable as the company has growth potential.( Klettner,
A., Clarke, T. and Boersma, M., 2014)) Sandalwood demand is very in various
countries. Some experts also believed that the BlackRock, which is known for
making profitable deals with dying companies, has done the same with the Indian
sandalwood company.
Analysis

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Corporate goverence oversees all the operations that take place in the company.
Running a sandalwood company has its own challenges and difficulties. The main
challenge is to channelize the resources for 15 years as the sandalwood trees take
15 years to mature. The corporate goverence overcame this difficulty by selling
young plantations to the growers. The regular maintenance paid to the company
by the buyers meant continuous income for the company. Moreover, the MIS
scheme adopted by the TFS (Quintus) has its own pros and cons. Many people
purchased equity in TFS (Quintus) for the tax benefits. The Australian
government offered many tax exemptions as this company was environment
friendly. TFS (Quintus) stakeholders were getting richer until 2014. By replanting
each year, this Indian sandalwood company created the world’s first and only
sustainable supply chain of the sandalwood. It covered a huge area of 12,564
hectares. Soon the things started falling apart for this Indian sandalwood
company. The Glaucus report exposed various flaws in the cooperate goverence.
It showed that the company showed more cash on papers to squeeze more funds
from the markets. Some bogus buyers were also exposed. The company
condemned this report but soon it went bankrupt in 2018. Blackrock, the global
investment giant infused $145 million cash to give a fresh lease of life to the
bankrupt Indian sandalwood company, TFS (Quintus). (Lu, J.W., Liang, X.,
Shan, M. and Liang, X., (2015)) Some stakeholders believed that this investment
giant has gained a lot from the dying company as the sandalwood trees will soon
mature to give good yield.
With reference to Harvey Norman annual reports over the past 3 years(2016-2018)
IV) Critically evaluate if the short term and long term salary and performance benefits
for the CEO are appropriate.
CEO is the chief executive who is responsible for the smooth functioning of the
company. The CEO is responsible for making various key decisions which can be
fruitful for the company. Hence most companies try to recruit a CEO that can

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understand the vision of the company and take it to greater heights. CEO is
responsible for all the operations from making key appointments to important
financial decisions. Usually, most key decisions in the company require the nod of the
CEO. However the list of duties and rights of the CEO vary from company to
company. In small scale companies, CEO and company owners are the same person
but in the big MNCs, the CEO is specially appointed by the board of directors or
through a rigorous recruitment process. The ability to lead is not possessed by all.
Many people have the ability to manage but a few can lead. A CEO should posses a
plethora of skills from intuitive thinking to team building. (Luo, X., Kanuri, V.K. and
Andrews, M., (2014)) The list is endless. Many companies have a CEO and a CFO.
CFO mainly focuses on the financial matters. However, in most companies CEO
looks after everything from executive matters to financial matters.
In 2018, CEO Kay Lesley Page was paid salary and fees of 205,339 under the short
term benefits. The performance cash incentive of 173,027 was provided under the
short term incentives. Under the long term incentives, the performance cash incentive
(205,339) and performance rights( 173,027) was given to the CEO of the company.
The total remuneration of 3,128,446 was paid. The short and long term benefits were
appropriate for the CEO. Harvey Norman gives a good remuneration to bring in the
great talent in the market for channelising the growth of the company.
V) Critically evaluate if the remuneration paid to the 4 non-executive directors is
appropriate.
The non-executive directors are the people who are hired to lend their expertise
and knowledge. The non-executive directors are not usually employees of the
company. They are usually paid fees for their services. They are usually hired to
bring objectivity and a fresh outlook. As these directors work from the outside
they keep a check on various matters. They are also known as external directors.
They can monitor the performance of a company objectively. These people are
usually experts in their respective fields. They work outside the regular executive
machinery of the company. In matters of remuneration, they are paid far less than
the directors who directly control the executive functions. A nominal fee,
according to the market standards, is usually paid to non-executive directors. It is

7CORPORATE GOVERNANCE
also not compulsory that all the non-executive directors are paid equal fees. These
non-executive directors are embodiments of the key values of the company.
Unfazed by the day-to-day hassles of running a company, the non-executive
directors can focus on various key issues such as finances, accounts, strategy,
public image, commitment to environment etc. They are like a fresh breeze of air
and new thoughts. (Mason, C. and Simmons, J., (2014))
Harvey Norman has four non-executive directors. There are no retirements
benefits offered to the non-executive directors. There is a great disparity between
the short term and long term benefits availed by the directors and non-executive
directors. There are no performance cash incentives for non-executive directors.
Some amount of incentive can enhance the performance of all the individuals so
the non-executive members should also be compensated for their contribution and
good performance.
The CEO and other directors get various non-monetary benefits as well but there
aren't any non-monetary benefits for the non-executive directors. With each
progressing year, there is a slight increase in the financial benefits for the
executive directors but there is no increase in the remuneration paid to the non-
executive directors. The comparison between the benefits offered to the executive
and non-executive directors has revealed a great disparity. There is no doubt that
directors put more time and energy in the company but the non-executive directors
are also necessary for the growth of the company. Hence some performance and
non-monetary benefits should be provided to the non-executive directors. Non-
monetary benefits can uplift the spirit of the non-executive directors. The
contribution of non-executive directors should be valued more and compensated
accordingly. (Ntim, C.G., Lindop, S., Osei, K.A. and Thomas, D.A., (2015)) This
will also serve as a motivation to the non-executive directors. Kenneth William
Gunderson-Briggs is the only non-executive director who was paid little less in
2018 as compared to 2017. The remuneration for the other non-executive directors
was basically the same. Michael John Harvey was paid 54, 795 in 2017 and 2018.
Christopher Herbert Brown was paid 132,420 in 2017 and 2018. Graham Charles
Paton was paid 132,420 in 2017 and 2018.
Analysis

8CORPORATE GOVERNANCE
The purpose of the good remuneration is to keep the employees motivated.
Individuals need to sustain themselves and their families. The good payout helps
companies to attract good talent as everyone wants their capabilities and talents to
be valued properly. The performance benefits are usually added to act as a
motivation agent for enhanced performance. All companies give some sorts of
performance benefits to encourage its employees. CEO is usually the highest paid
executive in the company. Most companies offer good pay scale along with other
attractive benefits to recruit best talent for the CEO. The CEO is directly
responsible for the operations. The total remuneration of 3,128,446 was paid in
2018 to the CEO. The short and long term benefits were appropriate for the CEO.
(Urbancová, H. and Šnýdrová, M., (2017)) But the non executive directors were
not paid any performance benefits. Some performance benefits would be good for
non executive directors.
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