The Undoing of Corporate Governance at Hyflux
- Andrew Leo
- Sep 12
- 10 min read
Singapore-based corporate darling Hyflux made sure that it ticked all the right boxes when it came to governance and regulatory compliance. But its recent fall from grace is a cautionary tale on how management styles, charismatic CEOs, and directors’ personal interests can work against even the toughest corporate governance framework.
Grit and Persistence: The Rise of CEO Olivia Lum
In her 2015 speech to students at the National University of Singapore, Olivia Lum not only extolled the virtues of grit and hard work, but revealed some very personal details. The founder of much-lauded water treatment company, Hyflux, recounted how, in the early days, she would worry about paying next month’s rent.
It was a difficult, decades-long, journey that started in 1989, when Lum sold both her house and car to start Hyflux as a sales agent for large multinational companies. In 2003, Hyflux was listed on the Singapore Exchange (‘SGX’). In 2006, UK-based Global Water Intelligence recognised it as Water Company of the Year. Over the years, Lum’s personal fame also rose. From 2002 to 2005 she was a Nominated Member of Parliament. In 2011, she was named the EY World Entrepreneur of the Year.
Yet a decade later, in November 2022, Lum, along with a former CFO and four independent directors, were charged with violations of the Securities and Futures Act[1] for non-disclosure of information relating to Hyflux’s sale of Tuaspring, its integrated water and power plant.
The Appearance of Corporate Governance
Hyflux certainly appeared to be at the forefront of Singapore’s regulatory compliance regime.[2] Its annual reports made the required disclosures on the sixteen principles of the Code of Corporate Governance (the ‘Code’). With the exception of a departure from Principle 3 on the separation of the Chairman and CEO roles, there was nothing noteworthy about the disclosures. The company also had an internal Code of Conduct and Ethics. In 2006, it published its first sustainability report—in accordance with Global Reporting Initiatives—a year ahead of when such reporting was made mandatory.
As a prominent business personality, Lum gave many interviews over the years where she pointed to corporate governance as one of Hyflux’s core values.[3] No one in Singapore’s business community could have expected the circumstances of the Tuaspring sale.
The Tuasping Debacle
In 2016, Hyflux decided to sell Tuasping, but couldn’t complete the sale by December 2017. Nevertheless, Tuasping remained on the balance sheet, and on March 2018, a KMPG audit report showed a healthy liquidity position.
Just two months later, Hyflux announced that it had run out of cash to pay creditors. An impairment loss of SGD 916m was recorded in 2018—the true extent only confirmed when the Public Utilities Board valued it at a negative purchase price and took over the business at zero dollars. Retail investors suffered losses on perpetual capital securities that Hyflux had issued.[4] In November 2020, Hyflux was placed under judicial management and, two years later, Lum and other executives were charged with violations of the Securities and Futures Act. Lum was also charged under the Companies Act for Hyflux’s non-compliance with accounting standards. In May 2023, three KPMG auditors were issued with orders by the Public Accountants Oversight Committee.
But to really understand how and why Hyflux got to this point, it can be instructive to look over the preceding years—marked by an exodus of senior executives, an uneven balance of power on the board, utilitarian-style leadership, a lack of director independence, and a toxic internal culture.
A Dominant CEO
In 2018, Hyflux’s key management committee consisted of five persons (see Appendix 1). Between 2013 and early 2014, Hyflux’s CFO, COO, and Deputy CEO, all resigned. Analysts at the time noted that the stock market hardly reacted to the resignations—an indication that the market based its evaluation of management quality solely on Lum.
With dual roles as chairman and CEO, it’s undeniable that Lum had an overbearing influence on the management team. The arrangement was a departure from Principle 3 of the Code, but the board explained that vesting the two roles in Lum ‘provides the Group with strong and consistent leadership’.[5]
Using Finkelstein’s model[6] of power dynamics, it is possible to score key management personnel on the dimensions of structural power, ownership power, expert power, and prestige power. Applying this framework to Lum places her as a dominant figure in the management team—with the highest power score by a large margin (Appendix 2). On the one hand, this placed Lum as a visionary who could chart the company’s course. On the other hand, domineering CEOs often lead to conflict avoidance and cognitive blindness, which results in weak boards.[7]
Hyflux did appoint a Lead Independent Director to address the balance of power issue in accordance with the Code. However, the company failed to strengthen its structure for risk and controls where the Code was silent. For example, it didn’t have a chief risk officer, and its Risk Management Committee met only once in 2017.[8] Also, the Head of Internal Audit was not part of its broader management committee.[9]
Lack of Board Independence
The board of directors is responsible for supervising management. In Singapore, a combination of statute[10] and general law imposes duties on directors. The Singapore courts have stated that ‘[t]he ‘interests of the company’ is not just profit maximisation. Neither is it profit maximisation by any means’.[11] In a survey, close to 91 percent of Singapore directors agreed that directors are ‘permitted to take into account the interests of stakeholders other than shareholders when performing his functions’.[12] Generally, research indicates that boards function more effectively when they are independent of management.[13]
The Hyflux board comprised Lum and seven independent directors, including lawyers and finance professionals (See Appendix 3). The proportion of independent directors far exceeded the requirements of the Code. However, there were questions about whether the board was truly independent.[14]
Over the years, some of these independent directors had other relationships with the company that made them non-independent. Until 2005, Gay Chee Cheong was deemed a substantial shareholder.[15] Between 2013 and 2015, Gary Kee was an executive director. Until 2010, Christopher Muragasu was employed as senior vice-president of corporate services. Between 1996 and 2006, Muragasu’s sister held a number of positions, including COO, Deputy CEO, and as a senior advisor. Teo Kiang Kok’s brother was vice-president of business development between 2005 and 2008.
Between 2005 and 2010, Kok’s law firm, Shook Lin & Bok, provided legal services to Hyflux and earned fees totalling SGD 364,000. Lee Joo Hai, a partner at professional services firm BDO LLP, had similar potential conflicts of interest. Between 2005 and 2008, BDO Raffles provided internal audit services to Hyflux, earning fees amounting to SGD 186,000. While this was below the SGD 200,000 annual threshold that determines a director’s independence, the perception of a potential conflict of interest remains. Kok and Hai also served together on two other boards. The Code is silent on such interlocking directorships, but research has identified them as a threat to directors’ independence.[16]
The Impact of Utilitarian Morality
The academic literature indicates that corporate governance regulations tend to be informed by the utilitarian foundation of morality—which aims to produce the best consequence for the greatest number of persons—while ignoring deontology and virtue ethics.[17] Deontology concerns fundamental duties that should be followed regardless of consequences. Virtue ethics emphasises traits such as honesty and diligence.
However, for directors, a utilitarian application is far from straightforward. The interests of multiple stakeholders need to be considered when making decisions in the ‘best interest’ of the company—and ‘best interest’ is not limited to shareholders’ interest in maximising profits. For example, the risk-reward profiles of shareholders and perpetual note holders might be different when the company enters a new market. Also, for a company with a strong CEO who also has substantial shareholdings and a board that is arguably less independent than it looks, what is in the ‘best interest’ of the company will depend on the CEO’s vision and management style.
When a CEO applies corporate governance rules based mainly on utilitarianism, the rules are simply treated as conditions to be fulfilled in order to pursue bigger corporate goals—without a deeper regard for the reasons behind the rules. In this scenario, director’s duties are not linked to categorical imperatives, but are a means to an end. There are concerns that utilitarianism alone might not promote behaviours in line with ethical and societal norms.[18]
Lum’s management style was clearly aligned with utilitarianism: results alone were important, regardless of how they were achieved. When, for example, Hyflux was preparing a bid to run Singapore’s first water treatment plant, Lum told staff—who spent months working nights in preparation—that, ‘This is the only chance we can make it big’. And when speaking about Hyflux’s values, such as its ‘can-do’ spirit, she said that they are critical because they ‘helped us win contracts and deliver projects’.[19]
A Toxic Company Culture
Employee reviews can provide an insight into company culture—which can in turn contribute to poor ethical decisions by management. Glassdoor reviews of Hyflux reveal employee concerns about a ‘toxic’ culture—‘top-down’, not receptive to feedback, involving ‘micro-management’, and ‘fast-paced’.[20]
A top-down approach can deprive employees and directors of their voice, and consequently personal responsibility for their actions. Modern supporters of utilitarianism accept that ethical decisions need to be agent-centric—that the actor must be themselves rather than a neutral third-party observer thinking in the abstract.
Also, a fast-paced environment that does not value individual opinion is not conducive to deliberate thinking that is less vulnerable to biases—what Kahneman calls System II thinking.[21] Research indicates that people make more rational decisions when slow, deep thinking is activated.[22]
Finally, when individuals are given space to be themselves, they have more capacity to process their emotions and reach a more balanced view of ethical issues. Research shows that emotions are related to a deontological way of thinking.[23] In the classic Fat Man trolley problem, while pure, rational calculation may lead us to push a man onto the tracks to save more lives, it is emotions that hold us back from hurting him with our own hands. Emotions can be a counterforce to utilitarianism, which is inadequate by itself.[24]
Conclusion
The Hyflux case clearly shows that corporate governance can be complied with on paper, and publicly, but its actual application can be difficult to evaluate. Management and media might paint a picture of a company guided by purpose and values, but this can differ from employees’ reality.
It’s critical to understand how management are making ethical decisions, both in the normative and the behavioural view, their personal and outside interests, and how corporate culture can be shaped to nudge them into making better decisions.
Andrew Leo
Andrew Leo studied accounting at the National University of Singapore and University of Cambridge. Based in Singapore, he currently works as an accountant in a global asset management company and serves as vice chairperson of the audit and risk committee of a large charity. He is interested in internal controls, corporate governance, and leadership.
Appendix 1: Key Management Personnel (2018)
Appendix 2
Note: Scores are on a simplified basis based on publicly available information.
Appendix 3: Board of Directors (2018)
[1] Securities and Futures Act 2001.
[2] Singapore’s corporate governance framework comprises rules found in the Companies Act 1967, the Securities and Futures Act 2001 and, for companies listed on the SGX, the Listing Manual and guidelines set out in the Code of Corporate Governance. The Code is based on the ‘comply or explain’ principle that is set out in the Financial Aspects of Corporate Governance report (the Cadbury Report), and adopted in the Combined Code (now known as the UK Corporate Governance Code) in 1998.
[3] ‘The boldness to dream’ Leaders Magazine, Inc. (January 2012) <https://www.leadersmag.com/issues/2012.1_Jan/ROB/LEADERS-Olivia-Lum-Hyflux-Ltd.html> accessed 12 August 2022
[4] Amir Yusof, ‘“We have not lost faith”: Hundreds of Hyflux investors gather to express concerns at Hong Lim Park’ (Channel News Asia, 30 March 2019) <https://web.archive.org/web/20211205091648/https://www.channelnewsasia.com/singapore/we-have-not-lost-faith-hundreds-hyflux-investors-gather-express-concerns-hong-lim-park-896896> accessed 5 December 2023.
[5] Hyflux Limited, ‘Hyflux Ltd Annual Report for FY2017’ (2018) <https://links.sgx.com/FileOpen/Hyflux%20Ltd%20Annual%20Report%20for%20FY2017.ashx?App=Announcement&FileID=498672> accessed 12 August 2022.
[6] S Finkelstein, ‘Power in top management teams: dimensions, measurement, and validation’ (1992) 35(3) Academy of Management Journal 505-538.
[7] E Heemskerk, K Heemskerk, and M Wats, ‘Conflict in the boardroom: a participant observation study of supervisory board dynamics’ (2017) 21 Journal of Management & Governance 233-263.
[8] Hyflux (n 5).
[9] ibid.
[10] The Companies Act requires directors to be honest and diligent in carrying out their duties. Singapore courts have indicated that these statutory duties are based on general law expectations for directors to act bona fide in the interests of the company (Ho Kang Peng v Scintronix Corp Ltd) and exercise due care and diligence (Falmac Limited v Cheng Ji Lai Charlie).
[11] Ho Kang Peng v Scintronix Corp Ltd [2014] SGCA 22.
[12] P Koh and HH Tan, ‘Directors’ duties in Singapore: law and perceptions’ (2019) 14(1) Asian Journal of Comparative Law 37-63.
[13] James D Westphal, ‘Collaboration in the Boardroom: Behavioural and Performance Consequences of CEO-board Social Ties’ (1999) 42(1) The Academy of Management Journal 7-24.
[14] Kenneth Cheng, ‘Hyflux’s fall from grace: What went wrong’ (TODAY, 23 May 2018) <https://www.todayonline.com/singapore/hyfluxs-fall-grace-what-went-wrong> accessed 12 August 2022; Mak Yuen Teen, ‘Hyflux’s board ticked boxes but let down stakeholders’ The Business Times (24 May 2019) <https://www.businesstimes.com.sg/opinion-features/columns/hyfluxs-board-ticked-boxes-let-down-stakeholders> accessed 12 August 2022.
[15] Mak (n 14).
[16] ibid.
[17] Abhijeet K Vadera and Gerard George, ‘The morality of doing business purposefully’ SID Directors Bulletin (2018) <https://www.sid.org.sg/images/PDFS/Publications/DirectorsBulletin/DirectorsBulletin_4Q2018.pdf> accessed 12 August 2022.
[18] ibid.
[19] Hyflux (n 5).
[20] Hyflux employee reviews about senior management (Glassdoor, 2023) <https://www.glassdoor.sg/Reviews/Hyflux-senior-management-Reviews-EI_IE39115.0,6_KH7,24.htm> accessed 12 August 2022.
[21] Daniel Kahneman, Thinking, Fast and Slow (Penguin 2011).
[22] ‘Gained in translation’ The Economist (17 May 2014) https://www.economist.com/science-and-technology/2014/05/17/gained-in-translation accessed 12 August 2022.
[23] Norbert Paulo, ‘Law, Reason, and Emotion? The Challenge from Empirical Ethics’ (2017) 103(2) Archives for Philosophy of Law and Social Philosophy 239-259.
[24] Arthur Dobrln, ‘Three approaches to ethics: principles, outcomes and integrity’ Psychology Today (18 May 2012) <https://www.psychologytoday.com/us/blog/am-i-right/201205/3-approaches-to-ethics-principles-outcomes-and-integrity> accessed 12 August 2022.
