Egalitaria - Governing GLCs in Malaysia

25 Nov 2015 / 20:15 H.

    LAST week, I was invited to speak at an OECD (Organisation for Economic Co-operation and Development) conference on the corporate governance of state-owned enterprises (SOEs), or in Malaysian terms, government-linked companies (GLCs). In this article I use the terms interchangeably.
    This meeting was held in conjunction with the OECD's newly released 2015 guidelines on corporate governance of SOEs, which provide for very high standards on how public enterprises should be managed and governed, to ultimately provide best value to citizens whose funds they run on.
    GLCs in Malaysia are owned by the federal government through seven government-linked investment companies (GLICs), namely Khazanah Nasional, Permodalan Nasional Berhad, Kumpulan Wang Simpanan Pekerja, Kumpulan Wang Persaraan, Ministry of Finance Incorporated, Lembaga Tabung Angkatan Tentera and Lembaga Tabung Haji.
    Although a comprehensive list is difficult to obtain, it is estimated that these seven GLICs own more than 200 GLCs in Malaysia, contributing to 5% of the national workforce and accounting for 36% and 54% respectively of the market capitalisation in Bursa Malaysia and the Kuala Lumpur Composite Index.
    GLCs have certainly contributed positively to fulfilling national development objectives, such as spearheading the government's bumiputra agenda, providing employment and promoting inclusivity, apart from contributing to the national economy more generally.
    In fact, during the recent graduation of the GLC Transformation Programme, it was reported that the top 20 GLCs targeted for reform in 2004 have now recorded increased profits and total shareholder return – all positive news. They also represent half of the top 10 companies on the FTSE4Good Bursa Index, which recognises Malaysian companies with good corporate responsibility practices.
    But apart from these top 20 (in fact, now 17, after government divested shares in three of them) GLCs, not enough attention on governance practices is given to the other hundred or so entities. This is where the OECD guidelines come in, which should be a valuable reference for Malaysia.
    Some of the key elements include a requirement for SOEs to ensure a level playing field and fair competition in the marketplace when SOEs undertake economic activities. This might come as a surprise to Malaysians, since we expect our GLCs to receive favourable financing, as they are "government-backed", when in fact the best practice is to ensure SOEs are not in fact conferred any unfair advantage over private competitors. On the same note, SOEs should not give or be given preferential treatment when engaging in public procurement.
    Second, the OECD recommends a clear separation between regulatory and ownership functions, to ensure that the same government entity does not both regulate and own the GLC in question. For the many GLCs owned by MOF Incorporated – like 1MDB and Pembinaan PFI Sdn Bhd – it is clear that the MOF performs both the regulating and ownership roles, providing for some obvious conflict of interest situations.
    Third, the guidelines also recommends that SOEs should observe high levels of transparency and are subject to the same high quality accounting, disclosure, compliance and auditing standards as listed companies. Some of our GLCs do so, such as Petronas (which submits annual reports the way a listed company would). But for many others, this is not the case.
    1MDB was reported as failing to file its accounts on time this year, for the reason that it was "given permission by the companies regulator to miss the September 30 deadline" (Financial Times, Oct 1). Subsidiaries were also seeking extension to deadlines for "further clarifications". In this case, why should extensions be given to them on an exceptional basis?
    Finally, the boards of SOEs should have the necessary authority, competencies and objectivity to carry out their functions, acting with integrity and being held accountable for their actions. Specifically, board composition should allow the "exercise of objective and independent judgment", and mechanisms should be implemented to avoid conflicts of interests that prevent board members from acting objectively, and "to limit political interference in board processes".
    In Malaysia, many of our GLCs' board members are linked to their main shareholders, whilst 1MDB has as its board of advisers' chair the prime minister; the key question is whether the board composition allows them to act objectively and without political interference. This is where minority shareholders can play an active role (the Minority Shareholder Watchdog Group does well in being vocal), where legal rights should be duly given and exercised.
    In fact, it was noted that SOEs can have non-commercial objectives but this needs to be made publicly known and adequately compensated by government. In Malaysia's case, these "non-commercial" (ie public policy objectives) would be to fulfil bumiputra requirements. It would be interesting to ask how and to what extent governments should be compensating GLCs for carrying out their public policy objectives.
    In the Philippines, the government set up a Governance Commission in 2011, whose role is to govern SOEs using performance scorecards, with an emphasis on transparency. Because they are an Open Government Partnership implementing country, this helped by making what they call an Integrated Corporate Reporting System, an online repository of information on all their SOEs, which adheres to open data standards – something our GLCs could surely learn from.
    It is also impossible to speak of GLC reforms without recognising the impact the Trans Pacific Partnership Agreement (TPPA) will have on Malaysia, since one of the key chapters is that on reforming SOEs, namely "to ensure a level-playing field between SOEs and private entities that compete in the market". Although there are some exceptions, the rule of thumb is that the government has to ensure SOEs act in accordance with commercial considerations (ie in a non-discriminatory manner) in its purchase or sale of goods and services.
    Finally, what is interesting is that the new guidelines recommend that governments specify their rationale for state ownership. The OECD believes it is possible to have well-governed and efficient public enterprises, but perhaps one ought to question state ownership in the first place. It is a philosophical question of why the state exists in the market place: should the government not stick to what it does well, and not enter the domain of (and hence crowding out) the private sector? Even if GLCs can fulfil certain public policy objectives, what then if these are public policy objectives in the wrong direction?
    Tricia Yeoh is the chief operating officer of a local, independent think-tank.

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