Post Merger Risk Relating To Hr - 31 Jul 06

29th August 2006 Chairman and Members Management Merger Steering Committee Mayban Fortis Holdings Berhad

POST MERGER RISK ASSESSMENT RELATING TO HUMAN RESOURCES ISSUES AS AT JULY 31, 2006 1

OBJECTIVES To report Management Merger Steering Committee (“MMSC”) on the status of the Post Merger Risk Management in relation to Human Resources issues

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KEY SUMMARY RESULTS

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2.1

Based on the Post Merger Risk review assessment, the people/human resources issues has been highlighted in all the initiatives and is rated as high risk (red) by the respective VC owner’s. This was due to disruption to ongoing business operations and inability to maintain operational and business momentum that mainly contributed by the lack of staff or resources issues resulted from the high number of resignation cases reported during the merger integration exercise.

2.2

For the first eleven months of the merger period, 124 resignation cases or 5.9% of the total number of staff were reported and based on the existing trend and analysis, there is high possibility that the number will be further increased in the next few months due the more and prolonged delay in resolving the uncertainty issues, annual and/or pro-rate bonus payment in October 2006 and full-blown operations of all the new takaful operators.

2.3

The highest number of staff resignation was from Commercial business unit with a total of 53 cases. The resignation cases from this critical unit is expected to results in negative impact to the business production i.e. switching of agency force and clients.

2.4

In addition, the outflow resulted to adverse perception from industry and reducing the interest of outsider to join MFHB and this could be translated from inability to secure and hire many high potential candidates; thereafter jeopardize our position to get good people.

2.5

In view of the above, the Risk Management team had conducted this exercise to identify and highlight the staff resignation issue to MMSC that is crucial and had threatened the achievement of the overall merger objectives.

BACKGROUND/INTRODUCTION 3.1

With reference to the Post Merger risk scorecard relating to Human Resources issues especially on staff resignation, the Risk Management team has taken the opportunity to further review the resignation trend and impact to the enlarged Mayban Fortis Group of Companies.

3.2

The review exercise was conducted based on the discussion and data provided by Mayban Fortis Human Capital Department (HC). In addition, a series of interviews and collaborative inquiries with the respective immediate supervisor (random basis) of the resigned staff were also performed to further confirm and support the findings.

3.3 • • • •

3.4

In addition, this data are also segmented into 3 staff levels as follows: • Management covers the managers and above staff grade • Executive level covers all the executive staff grade • Clerical covers non-executive staff grade

3.5

The scope of review covers the following areas in respect of staff resignation and could be summarized as below: • • • • •

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The period of review on staff resignation for all the entities covers from September 2005 to July 2006 and were divided into four (4) main business unit category as follows: Corporate resignation from CEO’s office of all operating entities Commercial resignation from sales and marketing units Operation resignation from operation/back office business unit Support resignation from support unit i.e. finance, legal, IT compliance etc

Overall analysis on the staff resignation – key findings Causes of resignation Implications and general impact Risk scenario and Potential resignation Conclusion and recommendation

KEY FINDINGS Based on the staff resignation details, the following analytic data were observed: 4.1

Prior than the merger announcement, the combined total number of employee as at August 2005 for every operating entities of the enlarged MFHB was recorded at 2086 as compared with 1991 (including 48 new recruitment) employees recorded in end of July 2006. The decreased in the total number of employees were mainly contributed by staff resignation and retirement cases that recorded at 124 and 13 respectively. In addition, we noted that there were 4 termination and 2 death cases reported during the eleven months of the merger period.

4.2

From 124 resignation cases or 5.9% of the total number of employees at the enlarged MFHB Group with MNI, TN and MF reported at 2.5%, 1.9% and 1.5% respectively as illustrated below; Percentage of staff resignation

Overall Resignation By Entities Entities

MF (MFHB,MGAB, MLAB & MTB) MNI TN TOTAL

As at 31 July 2006 resigned staff no. % 32 26%

Total workforce @ Aug 05 724

% resigned staff against total workforce 1.5%

% of Staff Resignation by Entities

26%

31%

MF

MNI

53 39 124

43% 31% 100%

780 582 2,086

2.5% 1.9% 5.9%

TN 43%

Staff Level Management Level Executive Level Clerical Level TOTAL

Number and % of staff resignation for Mayban Fortis Group of Companies from Sept 05 – July 06 Corporate Commercial Operation Support TOTAL no. % no. % no. % no. % no. % 2 1.6% 12 9.7% 4 3.2% 9 7.3% 27 21.8% 1 1 4

0.8% 0.8% 3.2%

31 10 53

12 3 19

25% 8.1% 42.8

9.7% 2.4% 15.3%

34 5 48

27.4% 4.0% 38.7%

78 19 124

62.9% 15.3% 100.00%

4.3

The highest resigned staff were contributed by the commercial staff of 42.7% and followed by 38.7% of support, 15.3% of operation and 3.2% of corporate staff. The high percentage recorded from the commercial and/or front-line staff could potentially impacting the top line revenue, as there are high possibility of them bringing together their business portfolio and intermediaries.

4.4

From the resignation listing, we noted that staff from executive level had contributed the highest percentage of 62.9%, followed by management and clerical level at 21.8% and 15.3% respectively.

Overall Staff Resignation from Jan 05-July06 20 18

18 17

Number of Staff

16 14

14 13

12

12 11

10

11

11

11 10

9 8

8 7

7

6

6 5

5

4

5

3

2 Jul-06

Jun-06

May-06

Apr-06

Mar-06

Feb-06

Jan-06

Dec-05

Nov-05

Oct-05

Sep-05

Aug-05

Jul-05

Jun-05

May-05

Apr-05

Mar-05

Feb-05

Jan-05

0

Month

4.5

Based on the monthly staff resignation trend, the observation could be summarized as follows; •

The total number of staff resignation for the period of January to August 2005 (8 months period) was 59 with an average of 7.4 cases per month; as compared with the total of 124 resignation cases during the eleven months merger integration period (September 2005 to July 2006) that could be translated as an average of 11.3 resignation cases per month.

•

On the resignation cases by operating entities, prior than the merger announcement, TN recorded 25 resignation cases or 3.15 cases per month, MNI at 22 or 2.75 cases and MF recorded as 12 cases or 1.5 staffs resignation per month.

However, during the first eleven month of the merger period, MNI recorded the highest number of staff resignation with 53 cases, an average of 4.9 cases per month, followed by TN and MF that recorded 39 and 32 resignation cases with a monthly average of 3.5 and 2.9 cases respectively. •

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The highest number of resignation cases was recorded in April 2006 with 18 cases and followed by May and June 2006 with 17 and 14 resignation cases respectively and – could be possibly associated with bonus payment for MNI and TN staff in April 2006. Based on this results and trend, without immediate and effective corrective actions, we anticipated that the next wave of the resignation cases will be happened in October and November 2006 – immediately after the payment of bonus to MFHB staff.

MAJOR FACTOR THAT CONTRIBUTED TO STAFF RESIGNATION Statistical findings and interview with selected superior of the resigned staffs revealed that there were various factors that contributed to these issues and could be divided as follows; ‰

The “Pull” factor

Better position and significant increase in remuneration package that been offered by other organization had been cited as one of the key factor identified and should be sub-divided as below; 5.1

Career opportunity at the four new Takaful operators The uncertainty generated by a merger creates the perfect environment for competitors especially the 4 new takaful operators to pinch our personnel. It was also mentioned that there are high possibilities that many of our best people had already been hunted and/or get calls for job interviews.

5.2

Expansion of Employee market Vacancy and various positions with career advancement and better remuneration package offered at other organization due to operational expansion had also been cited as one of the pull factor for staff resignation. ‰

Combination of “Pull and Push” factor

This combination factor had contributed to the majority of the resignation cases. Unresolved contentious and sensitive issues had been pointed out to be main reason for staff leaving MFHB. Our exercise revealed that the uncertainty issues had been identified as the major reason and the details causes/reason arising from this issue could be briefly described as follows: 5.3

Pending announcement of new organization structure The delay in the announcement of the merger plan especially on the new company structure was mentioned by the superior of the resigned staff as one of the main reason for them leaving the company. Most concerned areas are on the availability of their position/department in the new structure, chances of getting the same or at least the equivalent position in the new structure.

5.4

Unresolved Syariah and Takaful branding issues The Syariah issue has also mentioned as contributing to the resignation of TN staff. The separation between Takaful and conventional business is crucial to them in upholding their principle and believe.

5.5

Delay in finalization of staff remuneration and benefits package The uncertainty of the remuneration and benefit package to be offered under the new structure has also revealed as a reason to the staff resignation. Better or at least the equivalent benefits packages, higher salaries that been offered by the competitors are the added points to the uncertain benefit package issues. In addition, issues relating to personal limitation and preferences had also been cited amongst the pull/factor factor such as;

5.6

Head Office relocation and Branch rationalization exercise The announcement of the merger integration plans and strategy, which includes the centralization of Mayban Fortis operations at Dataran Maybank; and possible relocation of branch staffs to Head Office or other towns due to branch rationalization had also stated as contributing to the resignation issue due to resistance to changes ie relocated or transferred. Based on the data provided by Human Capital Department, since September 2005 the total number of branch staffs that had resigned at MNI & TN are recorded at 12 & 15 respectively.

5.7

Drastic and unanticipated changes High expectation in terms of business growth and timeline has also pointed out to staff leaving the company especially from commercial and/or front-line unit. It was also cited that higher expectation in terms of production target and allocated without proper and unclear direction relating to overall business plan, strategy, implementation and coordination had worsen the issues. ‰

The “Push” factor

Under this category, issues relating to winner & loser perception and adaptability aspects had been mentioned as the real push factor that contributed to their decision. Amongst the issues are as follows; 5.8

Culture clash and sense of loss relating to work culture, values, management styles, norms and standards

5.9

Staff demoralized due to allocation of merger appreciation bonus for selected management and executive only

5.10 Delay in integration and unresolved system issues that very critical to majority of the staff 5.11 Anticipated changes in organization structure and job titles which is very sensitive issues and staff may interpret changes as loss of status

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IMPLICATIONS & GENERAL IMPACT Based on the review exercise, the major implications and impact on staff resignation could be highlighted as below; 6.1 ƒ ƒ ƒ ƒ

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Disruption to ongoing operations due to; Delay in staff replacement Lack of succession planning Operating in silo and lack of multi-tasking resources Restriction on staff inter-department transfer - Memorandum by HR

6.2

Inability to maintain existing operational and business momentum that may give direct impact to service standard and potential medium term impact to business revenue

6.3

Domino effect that may jeopardize the achievement of overall merger objectives

RISK SCENARIO ON POTENTIAL RESIGNATION CASES The following scenarios had been identified as the potential contributor and to be the next wave on the staff resignation issues:

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7.1

The more and prolonged delay in resolving the uncertainty issues that will increase the possibility for staff resignation, i.e. uncertainty about separation between takaful and conventional business

7.2

Annual and pro-rate bonus payment to all staff in October 2006

7.3

Full-blown operations of all the new takaful operators

CONCLUSION AND RECOMMENDATION The staff resignation issues have such a great impact on operations, take up so much of the business budget and momentum, and present so many pitfalls that cannot be ignored or deferred by management. In order to eliminate staff anxiety and ensure such negative scenario could be improved, we would like the management to consider the below recommendations; 7.1

To expedite the process of finalization and formalization of the organization structure, branding and remuneration package to staff. The more delay to resolve this issues, in the worst case could lead to drastic increase of staff resignation and possible sabotage by employees.

7.2

To formalize the HR process that includes guarantee to rehire/absorb at the same or equal salary level of all staff of the merging entities. In addition, no staff would be terminated until the completion of the merger exercise and this will further guaranteed job security for all staff and must be clearly communicated to all staff.

7.3

To develop a constant and effective communication between management and staff is vital to improve transparency and making clear on any controversial issues and perceptions during the merger integration period. Managing staff perception is crucial.

7.4

To remain flexible and responsive when encountering any unexpected and/or complex obstacles that potentially affected the initial expectation and timeline, management need to also acknowledge delays, push employees to meet targets but watch employee morale and to revise or reschedule targets whenever necessary.

7.5

To establish a special committee to ensure that this critical issue is to be reviewed and resolved in a timely manner. Amongst others, management should also consider having an avenue and/or forum for potential leaver to raise their concern as well as ensuring that all exit interviews are conducted by the Human Capital Department for all resignation cases.

7.6

To expedite in finalizing and tabling the result of the Employee Culture Survey conducted by Human Capital to MMSC and incorporate the Risk Management findings as a cross-reference to formulate and implement the mitigation plan and objectives.

7.7

Nevertheless, retaining key employees and easing the transition by harmonizing the remuneration and benefits is more economic than expending the time and effort to hire replacements – Retaining is cheaper than rehiring and/or retraining.

7.8

In view of the above and as basis to move forward, the Risk Management team in collaboration with PMO had proposed that subsequent to this report that highlighted the existing staff resignation issues, the formulation and implementation of post merger risk management exercise in relation to People and Human Capital issues should be driven by Human Capital Department to ensure that ALL risks that threatened the achievement of the merger objectives is managed and mitigated accordingly.

Prepared by,

Recommended by,

ABD RAZAK SULAIMAN Head, Operational Risk Management Mayban Fortis Group

RAZIN MURAT Head, Risk Management Mayban Fortis Group