Analysis of Corporate Governance and Fraud at TFS Corporation

This report provides a comprehensive analysis of the corporate governance and fraudulent activities of TFS Corporation (later Quintis Limited). It examines the company's strengths and weaknesses, focusing on its poor corporate governance, unethical practices, and misleading financial disclosures. The report highlights the failure to conduct adequate research, the release of false information, and the violation of ASX good governance principles. It also discusses the impact of BlackRock's investment in the company and its implications. The report further analyzes the excessive compensation of the CEO and the company's overall strategic errors. The findings underscore the importance of transparency, ethical conduct, and robust risk management in corporate governance. The analysis relies on the provided assignment brief, financial reports, and news articles to illustrate the case of TFS Corporation's governance failures.

Running head: GOVERNANCE AND FRAUD
Governance and Fraud
Student’s name
University
Author’s note:

1GOVERNANCE AND FRAUD
1.(i) Corporate Governance is the system by which companies are governs and controls their
conduct. A good corporate governance consists of a transparent set of rules and strict controls
which ensures that shareholders, directors and executives have the same benefits and
incentives. Most companies strive to obtain a high standard of governance, for poor
corporate governance could raise apprehension on a company’s reliability, integrity or its
obligation to shareholders. These negative impacts could seriously affect the company’s
status. TFS has clearly adopted some bad decisions that led to a poor corporate governance
resulting in their bankruptcy. Hence, it is important to reflect and analyse the strength and
weakness in their corporate governance, so we could avoid repeating the same mistakes that
TFS made.
Strengths
The most important aspect of Quintis’s performance was that the company identified the risks
and managed them carefully. With adequate information, the managerial authority was able
to develop better investment decisions. Nonetheless, TFS performed quiet well in its semi-
fiscal year. This indicates that the management had a strong framework within the couple of
quarters. The said structure definitely helped to evaluate the risks and the investment
opportunities available for profitable operations (Fernando, 2013). The company had a strong
structure comprised of a proficient board of management. The board had the required
expertise and was able to implement its resolutions properly. This expertise and commitment
of the management that resulted in decent performance during the semi-fiscal year. The net
profit of the company after tax and the revenues were higher than their previous performance,
which reflected a strong financial position for the company (Fernando, 2013).

2GOVERNANCE AND FRAUD
The management had been investing their effort to rebrand the company. It organization
changed its name from Quintis to TFS Corporation. In order to endorse the company’s image,
it invited celebrities in their social functions and welfare activities. They also utilized the
media to communicate their probable future developments to the public. Through such
actions the company made effective interactions with investors as well (Fernando, 2013). It is
the responsibility of the management to ensure that the financial reports are prepared and
communicated to the stakeholders on time. The TFS did communicate their financial
performance to its shareholders at its half year financial year (Fernando, 2013). They even
made timely disclosure of information.
Weaknesses
The management of a company is responsible for setting the objectives and goals that are
achievable for the organization. Also, they are responsible for disclosing financial
information to all the stakeholders of the company that is accurate and timely. However, the
TFS management did not conduct enough research on their investment and therefore it could
not make sound decisions before investing in sandalwood (Labelle, 2013).
The company activities were quiet unethical and it seemed to be irresponsible towards its
stakeholders. It is the obligation of every company to carry out its operations with utmost
integrity and honesty. On the contrary, the company released false information to its
stakeholders as well as to the public. Moreover, the management did not consider the
consequence of releasing wrong information to the public either. It also denied it shareholders
their right of obtaining the right information. Every organization is entitled to provide the
stakeholders with the appropriate information so that they are able to make sound decisions
on investments. TFS investors were denied that right, which was unacceptable and

3GOVERNANCE AND FRAUD
outrageous. When investors are given misleading information they are discouraged from
investing in the same company (Labelle, 2013)
1.(ii) According to the ASX good governance principles and regulations, an organization
ideally has to maintain certain stipulations. ASX prescribes 8 principles in this regard. They
are as following:
Lay solid foundations for management and oversight
It indicates that a listed organization should clearly define the respective responsibilities and
roles of its management and directors. Also, their performance should be regularly monitored
and reviewed.
Structure the board to be effective and add value
The directorial board of an organization should be of an appropriate size. It should
collectively possess the required skills, commitments and knowledge of the functions and
responsibilities of the entity and the industry that it performs in.
Instil a culture of acting lawfully. Ethically and responsibly
The guidelines suggest that a listed company should promote and continuously reinforce a
culture of ethical practices and responsible actions among its employees. Abidance to law and
adherence to moral behaviour hold primary importance in the governance of an organization
Safeguard the integrity of corporate reports
According to this regulation, a listed organization should have an appropriate and fair process
to authenticate the integrity and validity of its reports
Make timely and balanced disclosure

4GOVERNANCE AND FRAUD
A listed organization should make balanced disclosure of its assets and all other matters on
appropriate time, for a shareholder or any other stakeholder may expect to have a material
outcome on the price or the value of the share’s security.
Respect the rights of security holders
A listed company should provide its security holders with appropriate and transparent
information. This will consequently allow the security holders exercise their rights
effectively.
Recognize and manage risk
A listed organization should constitute a sound and effective risk management framework
and review its effectiveness from time to time.
Remunerate fairly and responsibly
The guidelines emphasizes that in an organization, every employee and employer alike,
should benefit from their compensations and remunerations justifiably. There should not be
any undue advantages in terms of salary structure. Besides, a listed organization should
design its remuneration structure to attract and retain skilled, high quality directors and
executives.
In the case of Quintis, however, almost every principle of these governance
guidelines, if not all, were violated or disregarded. The company clearly represented an
instance of bad governance, involving unethical practices and irresponsible actions.
First of all, Quintis violated the fair disclosure principle. The organization never
publicly admitted that its biggest client, namely Shanghai Richer Link had stopped business
with them until further pressurized by the media and investigatory agencies. Quintis had
claimed that they have “forward sold” 750 tonnes of Indian sandalwood to Shanghai Richer

5GOVERNANCE AND FRAUD
Link, which was supposedly the biggest buyer of the company that accounts a notable 59% of
the company’s sales. However, the latter never progressed with any order since 2017. Quintis
had further approached customers with the evidence of this illusory order for their
promotions, which is clearly unethical. This scandalous move from Quintis had affected its
numerous shareholders and investors by affecting their valuable investment in the company.
However, this was not the first instance of misdirecting information provided by Quintis. In
August 2014, the Australian media reportedly alleged the organization of false statements
disclosure. They claimed that Quintis, then known as TFS announced a deal with Galderma
worth approximately $500 million. Consquently, in the following weeks TFS’s shares
increased by 20%. However, the contract turned out to be a mere $6.9 million in revenues in
the following two years (Appiah and Chizema 2016). Thus, Quintis had violated the trust
and reliance of its shareholders and security holders many a times.
In addition to the false and misleading business claim, Quintis had further disregarded
security and transparency regulation. On March 2017, a certain Chinese broadcaster claimed
that Shanghai Richer Link is a smuggling racket operating illegally. It was busted by the
Chinese customs officers for tax evasion and smuggling illegal sandalwood from Australia.
Although TFS claimed that it did not have the information of tax evasion and illegal
operation conducted by Shanghai Richer Link and had prompted an investigation right after,
it still ensued suspicion in TFS’s role as it did not disclose the investigation procedure to
public either.
Apart from making dubious marketing claims and misdirecting its stakeholders,
Quintis also engaged itself with several other unethical practices. It utilized a Ponzi-like
marketing scheme that promised quick market returns but failed to deliver. The company was
entangled in fraudulent auctioning and artificial inflation of shares as well. Quintis also made

6GOVERNANCE AND FRAUD
some serious strategic errors such as misreading of market, unrealistic forecast of market
price, miscalculations of valuation etc. The instances of unjustified remunerations provided to
the company’s CEO and the non-executive directors also indicate their unethical behaviour.
Hence, it can be said that Quintis made an exemplary case of poor governance. The
breach of security and utter disregard to transparency resulted in distrust among its
stakeholders. High turnover among the directors and executives is another indicator of their
vulnerability. Since late 2011, 8 managers and directors have resigned from Quintis. This
clearly implies the lack of transparency and trustworthiness of the company (Bebchuk and
Fried 2013).
Moreover, their fraudulent activity and non-disclosure of financial reports directly hampered
their market price. The price of company shares were decreased significantly. Besides, the
company was burdened with an estimated $55 million liability, thus rendering it unable to
pay back the investors and shareholders. It also affected the employee compensations
provided by the company.
(1)(iii) Blackrock Inc. is supposedly the world’s biggest investment management company
with approximately $6.28 trillion under asset management and a market capital of $86
billion. The asset under this management firm is mostly comprised of Governments,
sovereign wealth funds, pension schemes and endowments. Blackrock Inc. earns its revenue
by two major components, i.e. equities and fixed-income securities. It is also a major
investment management firm functioning globally (Ir.blackrock.com, 2019).
BlackRock had a huge impact on Quintis’s revival and change of strategies. Quintis,
formerly known as TFS, is a company that sells Indian sandalwood and related products.
During the late October 2018, Quintis was challenged by a US-based research group named
Glaucus. The research alleged Quintis of short-selling and making fraudulent claims over its

7GOVERNANCE AND FRAUD
market price and future sales. As a result, Quintic faced a major setback in terms stock prices
and stakeholders’ involvement. In this hour of need, BlacRock had decided to provide an
amount of $145 million led by the bondholders (Fitzgerald 2019). This recapitalisation had
helped Quintis to resurface. However, this investment has some significant implications.
By investing the amount, Blackrock has become the majority owner of the company
Quintis has turned into a private limited corporation following the takeover
As maintain the terms and conditions of the recapitalization, Quintis has stopped selling MIS
to shareholders, instead it focuses on its plantation management for end use and product
selling for the revenues
Owing to this investment, the creditors are reassured to obtain some return of their
investments. Most importantly, an estimated amount of 200 employees were assured to keep
their jobs as Quintis escaped bankruptcy
Hence, it can be asserted that BlackRock’s credit to Quintis was the lifeline to keep the
company afloat. However, owing to this credit, the bondholders own the majority of the
Quintis shares, rendering the organization lacking authority over its assets and strategies.
(2)i) According to the ASX good governance policies, all the employees including board
members, managers and executive should be entitled to a fair and justified pay-scale and
benefits according to their performance and workload. Any listed entity, aiming at ethical
practices and environment in their work culture should follow this principle nonetheless.
However, the pay package that the CEO of Quintis Mr Wilson enjoyed has been questioned
by the researchers and market experts.

8GOVERNANCE AND FRAUD
According to Quintis’s annual reports ranging from 2013 to 2016, Mr Wilson had a
significant amount of shares in his name. At the same time, he was remunerated with a
handsome salary for his executive position in the company. However, as a board member, he
was also under the scanner for the company’s demise following the short-sell attack. The
shareholders of the entity lost their part of benefit due to the dropped share rates and their
credits could not be paid back, although Quintis promised them over-market price for their
investments in the company. Besides, due to the crisis, the entity was in anticipation of
bankruptcy and as a consequence, around 200 employees along with the plantation
stakeholders were about to lose their jobs. In such situation, the lump sum amount of the
CEO’s pay packet raised questions among its workers and analysts. This is a clear indication
of governance policy violation.
This can be compared to the same incident involving Harvey Norman’s CEO Katie
Paige’s remuneration controversy. According to the reports, Harvey Norman Holdings
Limited has a market capitalization of $3.9 billion as of fiscal year 2017 (Harvey Norman
Holdings 2019) and it pays its CEO Ms Paige an amount of $3.3 million. Compared to other
listed entities with a market cap ranging from $2.8 billion to $8.9 billion, CEOs are offered
an average of $2.1 million. However, there are some people with a similar pay scale. For
example, Meridian’s CEO received a salary of $3.8 million. Therefore, Ms Paige is
supposedly receiving an average amount of salary.
However, the Harvey Norman management argued that the salary amount is directly
related to the company’s market performance. The company has increased its earnings per
share (EPS) by an average of 12% in a year for the last three years. The reports indicates a
noticeable 8.8% growth in revenue as well (Harvey Norman Holdings 2019). Clearly, the
company is growing. And this is a positive impact on all the shareholders’ investments.

9GOVERNANCE AND FRAUD
Hence, the CEO enjoying a benefit of the market growth does not imply any unethical
practices in the organization.
Quintis, on the other hand, Cannot claim any success in terms of market performance
as such. On the contrary, it faced major setbacks owing to its short selling and misleading
disclosures. Shareholders lost significant amount of investments and denied to pay back their
credits. In such a situation, the CEO or any other member of the executive board enjoying a
benefit of a high pay package is not acceptable.
Further, the question was not only limits itself to the CEO’s salary alone. The entity
was also involved in unethical practices with regard to the disclosure and handling of Mr
Wilson’s put option. This privilege that was been given to Mr Wilson indicates that he, as the
biggest shareholder of the company, had a collective of shares that was worth more than $51
million. This was a major source of interest since the company’s mystery investor evaded the
transaction of an estimated $33.9% million. (Poljack, 2019) However, this amount of share
that belonged to Mr Wilson was not disclosed by the company in their annual reports of 2015
and 2016. Thus, it can be concluded that, given the performance and economic condition of
the company, the benefits and remunerations that CEO Mr Wilson had received was not at all
ethical, and at the same time it violated governance policies.
(2)ii) With reference to the previous discussion, the remuneration and compensations
provided to the 4 non-executive board members can also be reviewed in the light of good
governance and ethical practices in the company.
The board members are responsible for determining company strategies and
executional procedure. It is also their responsibility to examine the market trends and analyse
the company’s market performances.

10GOVERNANCE AND FRAUD
Quintis is supposedly one of the largest organizations that sells Indian sandalwood
and related products. The company also grew their funds and revenues by selling MIS shares
and bonds. It allegedly used a Ponzi-like scheme that promised its creditors over-market
prices in a quick refund. However, the company failed to fulfil its promises due to the impact
of short-selling allegations. The management also failed to forecast market prices and
investments. Moreover, they used illusory and misleading marketing materials and
promotions. Thus their lack of fair disclosure led the organization on the verge of collapse.
In this situation, the non-executive directors receiving high scale remunerations and
benefits is completely unethical, as this collapse was a direct consequence of their failure in
market analysis and strategies. They were supposed to take the responsibility of the
bondholders’ loss. Instead, their compensation indicates unethical practices in the
organization.

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References
Appiah, K. and Chizema, A. (2016). The impact of board quality and nomination committee
Bebchuk, L. and Fried, J. (2013). Executive Compensation as an Agency Problem. SSRN
Electronic Journal.
Fitzgerald, D. (2019). Quintis recapitalises with $145 million from global investor
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2019].
Harvey Norman Holdings (2019). Financial Info — Harvey Norman Holdings. [online]
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information [Accessed 6 Aug. 2019].
Ir.blackrock.com. (2019). Investor Relations | BlackRock. [online] Available at:
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disclosure and corporate governance perspective. Available at SSRN 317519.
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Poljack, V. (2019). Ex-Quintis CEO Frank Wilson retains $15m put option. [online]
Australian Financial Review. Available at: https://www.afr.com/business/exquintis-ceo-
frank-wilson-retains-15m-put-option-20170505-gvyzcd [Accessed 6 Aug. 2019].