Report: Poor Governance Aided Fall of OW Bunker, Likely to Happen Again

Excessive risk taking, a lack of transparency, and conflicts of interest

Failures of governance were key to last November's collapse of OW Bunker but companies are expected to continue to promote business structures that give rise to such failures, Singapore's The Business Times reports.

According to the report, excessive risk taking, a lack of transparency, and conflicts of business roles were among the underlying causes of the group's collapse.

The report was written by Mak Yuen Teen, associate professor of accounting at the National University of Singapore Business School, and Christopher Bennett, founder of BPA Australasia.

The report points to Kenneth Rosenmeyer, who had been OW Bunker's risk manager and resigned shortly before the group's initial public offering (IPO), and who has said he was tasked with making $1.5 million profit per month through speculation.

"In cases like OW Bunker, incentives (in the widest sense) and remuneration structures almost always play a part as they are a primary way in which organisational culture is created and sustained," wrote the joint authors.

While remuneration guidelines are not publicly available, key management were paid bonuses far larger than their fixed salary amounts during 2013.

In addition, conflicted roles existed within the group, such as those of the directors of the group's Singapore subsidiaries and that of the group's Chief Risk Office (CRO), Jane Dahl Christensen.

It is understood that OW Bunker's CRO was also the Executive Vice President (EVP) in charge of physical distribution, meaning she had been in charge not only of fulfilling "aggressive" growth strategies, but also of keeping risk to a minimum.

In addition, the report suggests that OW Bunker's remuneration policy would likely have given the CRO clearer financial incentives for fulfilling the risk-taking role in this case.

Excessive Risk-Taking

Furthermore, the directors in charge of OW Bunker's Singapore subsidiaries, Dynamic Oil Trading (DOT) and OW Bunker Far East (OBFE) acted as employees of the group, rather than directors of the subsidiaries, suggests the report.

At DOT, where a $125 million loss was said to have contributed to the collapse of the Group's collapse, the company's four directors were group CEO Jim Pedersen, group CFO Morten Skou, group EVP for Reselling, Gotz Lehsten, and Lars Moller.

Moller was the only resident in Singapore and was initially accused by the group of "fraud" following the discovery of large credits granted to Tankoil Marine Services.

The report also cites OW Bunker's listing prospectus as saying that the DOT board had no approval authority for credit lines and suggests the board had limited authority to govern the subsidiary company.

But the report said such situations are likely to continue to occur, particularly since the duties of subsidiary companies' directors are rarely enforced.

"If this state of affairs continues, we expect companies to continue to create separate subsidiaries and other legal entities and to push more risky and questionable decisions into these group entities."

"We can only see more trouble ahead in the governance of subsidiaries and group entities unless there is increased attention on the subject."

Last week investment banks Carnegie and Morgan Stanley were said to be potentially liable for key omissions in OW Bunker's prospectus relating to the group's more "risky" practices, including its speculative activities and DOT's "aggressive" growth strategy.