Monday, 26 December 2011

Khazanah and GLC roles in National Transformation Agenda

At Invest Malaysia in March last year, at the launch of the New
Economic Model (NEM), Khazanah had outlined a five-point approach to play their
part in executing the NEM.

First, for the GLC Transformation Programme, to diligently stay the course as they
moved into the seventh year of the ten-year programme. Khazanah have outlined
clearly the various programmes and “rainbow-coloured books” and the use of KPIs and
so on in delivering this first principle. Governance and integrity is also part of this track,
and it is critical as the program grows, and even more so as it gets some successes, that
they must remain vigilant against such impostors that can breed complacency and hubris.

Second, to continue with the gradual regionalization programme of their key
companies so as to benchmark and integrate their national champions to compete to
become regional champions and beyond.

Third, to contribute significantly to private sector investments in new areas of growth
for the new economy, especially in targeted sectors including, inter alia, leisure &
tourism, healthcare, education services, Islamic finance, information and
communication technology (ICT) and creative industries.

Fourth, to intensify the collaboration and co-investments between Khazanah and
GLCs and non-GLCs private sector, both at home and abroad.

Fifth, to diligently focus on core competencies. This means continuing with the
orderly exit of non-core and non-competitive assets at the appropriate time. A
corollary of this is for a better, more level playing field and better regulatory
management to emerge, working with the Government and other industry players in
the process.

These are the five key roles of GLCs that they have charted and are indeed implementing,
to not just produce the “Gold” in the New Economic Model era and the new Malaysia Inc. but, to help contribute towards a new and better economic success.

It is in this regard, GLCs are taking the principle of focusing on core competencies, of taking no free lunch, but to instead build a strong kitchen and develop good cooks, continues to be at the top of our agenda. While those are the five specific roles for GLCs under the New Economic Model, indeed, there is now, in addition, a sixth role, specifically for Government Linked Investment
Companies (“GLICs”)

That is the imperative to better optimize the pools of national savings and funds residing in GLICs through a streamlining of investment styles and mandates. Perhaps an early manifestation
of this is the co-investment and streamlining of ownership between EPF and UEM in the ongoing PLUS acquisition and toll restructuring. In this case, with some careful design and proper execution, khazanah will be able to solve concurrently and balance the interests of minority shareholders, bond holders, toll users, taxpayers and indeed better match the different risk appetites and return objectives of two different GLICs. Khazanah is striving to complete this imminently and this efforts reflect an example of innovative and proper rebalancing that serves the interests of all valid stakeholders.

( Source: Adapted from a speech by Tan Sri Azman Mokhtar, CEO of Khazanah Nasional Berhad )

Friday, 16 December 2011


Accrual accounting provides many opportunities for unscrupulous managers or employees to commit fraud.

Accounts Receivable

The accounts receivable number that shows up in the asset section of a balancer sheet is almost always an estimate of what accounts are actually collectable. Why is the number an estimate? Because even if management can identify the precise amount its customers or clients owe the business, usually it is less than certain that this is the actual number that will ultimately be collected.

Sometimes the valuation of accounts receivable goes beyond simply making a good faith estimate of collectability. In some situations management may be tempted to commit outright fraud. Because no cash is collected when sales are made “on account”, a corrupt management can record fraudulent additional sales by simply creating fictitious customers and recording fictitious sales.

Another time honored-means of inflating accounts receivable and sales revenue involves “keeping the books open” at the end of the accounting period. In this case the customers and sales are real, but January sales are recorded as December sales so the end of year financial statements include inflated assets and revenue.

Part of the audit function is to test the existence and collectability of accounts receivable and this can serve as a brake on such fraudulent practices. In the audit of large companies with millions of dollars of receivables and hundreds of thousands of individual accounts, the audit process relies on statistical sampling, which usually provides a reasonable, but not exact, estimate of collectable accounts.

Accounts Payable

Management may have a motive to understate payables, as this understates expenses and overstates net income. Usually the amount of payable understatement is not too great and such understatement can easily be detected.

Deferred Revenue and Prepaid Expenses

A manager can overstate income and understate liabilities by treating deferred revenue as earned revenue. Essentially, this shady practice seeks to recognize revenue before it is actually earned. Such mischief often is not easy to detect, because it is not always clear when the earnings process is fully complete.

A manager also can understate current year expenses by claiming they are prepaid expenses. This amounts to a fraudulent claim that payments for a certain service benefit future accounting periods when, in fact they do not.

Fixed Assets

Management can make a firm appear more profitable than it really is by understating depreciation expense. Depreciation expense can be understated by overstating the useful life of assets. Management can also overstate its assets by keeping obsolete and no longer used assets on its balance sheet. Maintaining obsolete assets on the balance sheet also overstates net income because losses on the disposal of these assets are not recorded.


Inventory offers a big opportunity for management to manipulate their financial statements. If they want gross profits and, hence, operating profits to appear higher, the value of ending inventory simply needs to be overstated. There are many ways this can be done.
The ending inventory value can be fudged upward by overstating the amount of inventory on hand. Unit costs assigned to ending inventory can be inflated as well. Or obsolete or damaged inventory can be included in the ending inventory count.

Sometimes for income tax purposes, management may want to show lower gross and operating profits. Ending inventory mis-measurement can be used for this purpose as well. In this situation, management seeks to undercount and undervalue ending inventory. As such, accrual accounting is a golden haven for white collar crime to flourish. All auditors should pay more attention on all the above by optimizing " investigative minds " rather than 'auditing minds'. This approach would lessen fraud and enhanced shareholders wealth. The government would also benefit when corporations pay their taxes accordingly.

(Adapted from an article by Michael Sack Elmaleh, C.P.A., C.V.A.)

ISKANDAR MALAYSIA’s Fifth Anniversary Review Underscores a Track Record of Investments and Delivery

ISKANDAR MALAYSIA moves strongly into its second phase of development, attracting RM77.8 billion worth of investment commitments during its first stage of its 20-year development plan. As at September 2011, more than RM38 billion or nearly half of the investments commitments has been actualized. A number of important developments have either been completed, nearing completion or getting off the ground, underscoring a strong track record of investments and delivery.

Interest among local and foreign investors remains high, with scheduled launches of significant projects and new investments. At the ISKANDAR MALAYSIA’s Fifth Anniversary event held at Puteri Harbour, Nusajaya recently, 12 new investment commitments amounting to RM1.73 billion were announced, from both domestic and foreign investors.

In addition, it is envisioned that RM1.05 billion in projected investments would be generated from the knowledge-economy over the next 7 years. It is particularly significant as the knowledge economy is envisaged to transform not only ISKANDAR MALAYSIA’s economy, but is also a key pillar of Malaysia’s Economic Transformation Programme.

Speaking at the event, Managing Director of Khazanah , Tan Sri Dato’ Azman Hj. Mokhtar said: “After five years, it is clear that ISKANDAR MALAYSIA has achieved a strong momentum with the timely delivery of major infrastructure, iconic developments and catalyst projects.”
“Stemming from traditional and knowledge economies, the opportunities and benefits for the rakyat and businesses in ISKANDAR MALAYSIA in the near future are very encouraging: increased tourist arrivals are expected from 2012 onwards, thousands of students in a thriving education sector, further improved public infrastructure, more than 55,000 estimated new jobs, and enhanced safety and security overall,” added Tan Sri Azman.

The year 2012 will see major developments such as Legoland Malaysia theme park, Marlborough College and EduCity scheduled to come fully on stream. The realisation of these projects has translated strongly into enhanced investor and public confidence in ISKANDAR MALAYSIA, evidenced by increasing domestic and foreign participation and investment into the region.

( Adapted from Latest News at Khazanah Nasional Berhad website )

Tuesday, 13 December 2011


The three giant institutional investors(IV) in Malaysia, namely Employees Provident Fund (EPF), Lembaga Tabung Haji (TH) and Permodalan Nasional Berhad (PNB) have been venturing into overseas property market lately. All the three IVs are also known as Government Linked Investment Companies (GLICs). GLICs are an entities that invested most of their funds into GLCs in Malaysia. Like the EPF, both TH and PNB are looking to buy into existing premium properties for their yield. All three IVs had targeted London as their first choice, followed by Australian cities. However, it still isn't clear how much both funds are aiming to spend on overseas properties.

Last year, PNB bought an upmarket office block in Brisbane, Australia, called Santos Place, reportedly for more than A$290mil (RM928mil). The 37-storey building has 373,508 sq ft of lettable space with about two-thirds of that leased to Australian oil and gas giant, Santos. To date, the EPF has been the most aggressive among the Malaysian-based IV with most, if not all, its overseas investments in Britain.

The pension fund has so far confirmed the purchase of four British properties costing a total of 634mil (RM3.1bil). It issued a statement last year that it was putting aside 1bil (RM4.85bil) for its British property investments. Most of Tabung Haji's overseas investments to date have been in Mecca and Madina in the Middle East. It also has property investments locally.
PNB manages a fund size totalling RM150bil while Tabung Haji manages funds totalling RM28bil. Sources said both funds were looking to invest in properties primarily in London, Sydney, Melbourne and Perth, although they were open to other locations.

Unlike the EPF, which was putting aside RM1bil for overseas property investments, both PNB and Tabung Haji did not disclose any figures. The only criteria was that, their property investment must be syariah-compliant and has so far been very firm about this.

However, as responsible IVs in Malaysia, they should observe the main objective of their stakeholders. All investments must be really viable and transparent. Before going into the overseas market, risks analysis should be conducted to ensure that invested capital will not be lost along the way. There must be a short, medium and long term goals on each investment made. At the end of the day, these IVs should be accountable to their stakeholders.

Monday, 12 December 2011

G20 companies are growing strongly

GLCs and government-linked transformation companies are playing significant roles in the country's government transformation and economic transformation programmes. G20 is a selection of 20 largest government-linked companies (GLCs) where currently there are 19 companies in the list due to mergers, demergers and other corporate restructuring exercise.

Khazanah Nasional Berhad reported that the G20 under the government-linked companies (GLCs) transformation programme, which is at the final stage now, are on a strong growth trajectory where key financial indicators for 2010 have actually exceeded the highs recorded in 2007.G20 companies net income is expected to grow to RM22.1 bil this year from RM17.3bil last year. In 2010, G20 net income grew 49% year-on-year (yoy) to RM17.3bil. G20's total shareholders return generated a compounded annual return of 16.4% from May 14, 2004 (start of the GLCs transformation programme), outperforming non-G20 FBM KLCI by 1.9%. As at April 1 this year, its market capitalisation has more than doubled to RM353bil since 2004.
G20 delivered return on equity of 10.5% in 2010, up from 7.7% in 2009 while economic profit increased to RM765mil last year compared to an economic loss of RM647mil in 2009.

The GLCs transformation programme that started in 2004 is a ten-year programme where it is now at phase four, the final phase of the programme.
The final phase of the GLCs transformation programme coincides with an exciting period in the Malaysian economic landscape as we charge towards Vision 2020.

Saturday, 10 December 2011


The Star reported today( 11/12/11) that it is all good for Proton Holdings Bhd as its share price put on 89 sen or 24.6% to close at RM4.50, amidst talk that its largest shareholder, Khazanah Nasional Bhd, is divesting its stake in the national carmaker. It was also reported that Khazanah was likely to ask for business proposals from parties interested in its 42.7% stake in Proton.

Last Friday, Proton's shares and warrants were also actively traded with the counter closing 51 sen higher than the previous day. Its share price has shot up by 66% over the past three weeks, reaching a intra-day high of RM4.60 yesterday with 20.16 million shares traded. This is due to the fact that Proton is looking into the possibility of a partnership with an established auto manufacturer with technological capabilities. With Khazanah's entry price of around RM8 and Proton's net tangible asset per share of RM7.62 as of end September, the offer price for Khazanah's 42.7% stake should very well be above the last closing price of RM3.61, which works out to be about RM2bil.

If VW could benefit from DRB-HICOM's acquisition; this would give the German marque exclusive access to Proton's Tanjung Malim plant, accelerating its current Asean manufacturing timeline of producing 50,000 units of VW by 2018. CIMB Research motor analyst Loke Wei Wern said that a restructuring could take place, which could ultimately lead to a strategic partnership between VW and Proton. If this is true, it would be a very positive development for Proton. DRB-HICOM closed 20 sen higher at RM2.20 with 31.754 million shares changing hands.

In 2006 and 2007, Khazanah was in talks with VW to acquire a stake in Proton but the negotiations broke down in 2007 after the Government called them off. Last year, VW expressed interest in re-negotiations with Proton for a potential strategic partnership to localise the production of VW cars, but the deal fell through. Instead, VW partnered with DRB-HICOM.

Malaysia's Capital Market 2012

Reuters reported that the Malaysia's capital market will stay healthy next year (2012) despite the global downturn, led by consolidation in the energy and property sectors and fund-raising by banks to meet heftier capital requirements This was confirmed by JPMorgan's local investment banking head.

However, analysts expect capital market activity to slow to a trickle worldwide in 2012 due to Europe's deepening debt crisis and a lacklustre US economy.

Bursa Malaysia saw 27 listings so far this year which raised RM6bil compared with 29 in 2010 when economic growth accelerated to a 10-year high of 7.2%.

The country's Economic Transformation Programme (ETP), a RM1.4 trillion government initiative to boost investment and raise national income, would offset external weakness and help invigorate the market. This indicates that the government Economic transformation Programme would play a major role in uplifting the country's economy.

Meanwhile, consolidation in major sectors such as oil and gas and property would spur domestic merger and acquisition activity, while banks would look to raise funds to meet Basel III capital requirements, he said.

Recent Malaysian merger and acquisition activity has been led by property, energy and banking firms. UEM Land Bhd took over rival Sunrise Bhd last year while government asset manager Permodalan Nasional Bhd made a bid for SP Setia Bhd in September.

Friday, 9 December 2011

Corporate Governance in the U.S

After the collapsed of ENRON, the U.S government decided that enough is enough. Corporate governance based on recommendation i.e for corporate players to comply or if the situation in their companies being that its difficult to comply; then explained; is insufficient to curb corporate governance problems. As such, the Sarbanes-Oxley Act (2002)of the US was a serious wakeup call. It has been much debated and there are very mild protests in some quarters. Nevertheless, it is a call to get back to fundamentals and it identifies 58 separate provisions that affect internal auditing and the question of Directors of Boards looking the other way is unacceptable and must change. This message is applicable to the public and private companies alike. Some of the vital extracts from the BIS review 2003 on SOX (2002).

• Boards of directors should uphold their responsibility for ensuring the effectiveness of the company’s overall governance process.

• Audit Committee should observe their responsibility for ensuring that the company’s internal and external audit processes are rigorous and effective.

• CEOs and senior management should strengthened their responsibility to maintain effective financial reporting and disclosure controls and adhere to high ethical standards.
This requires meaningful certifications, codes of ethics, and conduct of insiders that, if violated, will result in fines and criminal penalties, including imprisonment.

• External Auditors should focus only in their audit work.

• Internal auditors should uniquely be positioned within the company to ensure that its corporate governance, financial reporting and disclosure controls, and risk management practices are functioning effectively. Although internal auditors are not specifically mentioned in the Sarbanes-Oxley Act, they have within their purview of internal control the responsibility to examine and evaluate all of an entity’s systems, processes, operations, functions and activities.

However, a specific section of Sarbanes-Oxley Act requires senior management to assess and report on the effectiveness of disclosure controls and procedures as well as on internal controls for financial reporting. All of these have to be in the public disclosure domain of the reports but outside the financial statements.

Further an internal auditor must have the highest ethics and be willing to sacrifice everything (consultation assignments) to maintain their independence within the auditing company. If there are different sections of companies, which offer turn-key management consultation, at least those who are involved in the audit exercise should disassociate themselves from being a part of consulting side of the company’s work. Some of the provisions in the Act are quite draconian particularly one would be the internal auditor of publicly traded financial services company, as there are threats of fines and imprisonment, the internal auditor’s voice is heard loud and clear by the Board.

As such, the introduction and implementation of Sarbanes-Oxley Act (2002) in U.S is really a divergence of corporate governance as usually practiced in many other countries around the world such as U.K and South East Asia. Just wondering how long this divergence could sustain or whether someday in the future, there would be sort of convergence in corporate governance practices.

Corporate Governance Theory- Resource Dependence

The basic proposition of resource dependence theory is the need for environmental linkages between the firm and outside resources. In this perspective, directors serve to connect the firm with external factors by co-opting the resources needed to survive. This means that boards of directors are an important mechanism for absorbing critical elements of environmental uncertainty into the firm. Environmental linkages could reduce transaction costs associated with environmental interdependency. The organization’s need to require resources leads to the development of exchange relationships between organizations. Further, the uneven distribution of needed resources results in inter-dependent organizational relationships. Several factors would appear to intensify the character of this dependence, e.g. the importance of the resource(s), the relative shortage of the resource(s) and the extent to which the resource(s) is concentrated in the environment .

In this context, many of the resources are directly and indirectly controlled by the government. Hence, appointing directors that have influence and access to key policy-makers and government is seen as an important strategy for survival because of their knowledge and prestige in their professions and communities, firms are able to extract useful resources. This could enhance the firm's legitimacy in society and to help it achieve their goals and improve performance. Through the resource dependence role, directors may also bring resources such as specialized skills and expertise. This concept has important implications for the role of the board and its structure, which in turn affects performance. In summary, resource dependence theory provides a convincing justification for the creation of linkages between the firm and its external environment through boards as firms that create linkages could improve their survival and performance.

Thursday, 8 December 2011

Market of transforming Malaysian GLCs goes up to RM312bil

The Star reported that the Deputy Finance Minister Datuk Donald Lim Siang Chai said that, the market of government linked companies (GLCs) undergoing the GLC Transformation Programme (GLCT) has gone up to RM312 billion. The total collective returns to shareholders of this group of GLCs have also gone up by an annual 14 per cent as of October 14 this year since the GLCT was initiated in May 14, 2004. Four companies in the group also saw a rise in their key perfomance index (KPI) by 72 per cent last year compared with 64 per cent in 2009.

However, several GLCs also recorded a drop in their financial performances due to external factors not within their control such as higher oil and raw materal prices.These GLCs have taken various measures to face these problems including joining forces with their competing companies and the private sector as well as replanning their market sector.
Datuk Lim also mentioned that in order to avoid the problem of “overcrowding” in the domestic market, GLCs with potential have been advised to venture into larger overseas markets. This is because Malaysia's population is only 28 million compared with Asean's 600 million, and such a big market will provide our GLCs with a wider market.

(Adapted From The Star, Malaysia)

Corporate Governance Index up slightly: MSWG

The Star reported that the Corporate governance score of Malaysian public listed companies (PLCs) saw a slight improvement over last year, according to the Minority Shareholder Watchdog Group’s (MSWG) Malaysian Corporate Governance Index (CGI) 2011.

The score for the top 100 companies in the index was 66.9%, up one percentage point over last year, while the average base score on compliance with best practices for all the 864 PLCs assessed increased to 57.19% from 55.6% in 2010.

In terms of board of directors, 82% or 708 companies separated the roles between chairman and chief executive officer. This percentage is comparable to FTSE companies and is much higher than US-based Standard & Poor’s companies.

A further 35.2% had independent directors as chairman, up from 33.5% in 2010. The index also found that 42.5% had boards comprising half or more of independent directors compared with 40.2% last year.

On female board representation, MSWG said: “It is not encouraging to note that the percentage of women directors on boards had been almost stagnant at 8% and has dropped to 7% in the top 100 companies.

“Therefore, more needs to be done by companies to make a conscious effort to include gender diversity in boardrooms.”

The index found that there was an average of 9% foreigners on boards of the top 100 companies and 8% for the top 10 government-linked corporations (GLCs).

The average age at the top 100 companies is 58, similar with the top 10 GLCs.

On the disclosure of directors’ remuneration by individual directors, the index revealed that only 8.3% did so, up from 5.6% in 2010. The MSWG said many were not prepared to disclose the details, despite it being a best practice recommendation under the Malaysian Code on Corporate Governance as well as in other jurisdictions.

The overall average remuneration for executive directors was about RM824,000 per annum, versus the RM3.2mil per annum given to directors in the financial sectors.

For non-executive directors, the overall average remuneration per director is about RM100,000 per year.

Non-executive directors in the financial sector, again, received the highest average remuneration per director at around RM250,000 per year.

( Adapted from 'The Star Online News).

Wednesday, 7 December 2011

Corporate Governance Theories- Stewardship theory

Unlike agency theory, stewardship theory assumes that managers are stewards whose behaviors are aligned with the objectives of their principals. The theory argues and looks at a different form of motivation for managers drawn from organizational theory. Managers are viewed as loyal to the company and interested in achieving high performance. The dominant motive, which directs managers to accomplish their job, is their desire to perform excellently. Specifically, managers are conceived as being motivated by a need to achieve, to gain intrinsic satisfaction through successfully performing inherently challenging work, to exercise responsibility and authority, and thereby to gain recognition from peers and bosses. Therefore, there are non-financial motivators for managers.

The theory also argues that an organization requires a structure that allows harmonization to be achieved most efficiently between managers and owners. In the context of firm’s leadership, this situation is attained more readily if the CEO is also the chairman of the board. This leadership structure will assist them to attain superior performance to the extent that the CEO exercises complete authority over the corporation and that their role is unambiguous and unchallenged. In this situation, power and authority are concentrated in a single person. Hence, the expectations about corporate leadership will be clearer and more consistent both for subordinate managers and for other members of the corporate board. Thus, there is no room for uncertainty as to who has authority or responsibility over a particular matter. The organization will enjoy the benefits of unity of direction and of strong command and control.

Corporate governance theories

There are five major theoretical frameworks that can be identified from the corporate governance literature: agency, stewardship, resource dependence, stakeholder and managerial-hegemony . These theories have evolved from many disciplines such as finance, economics, accounting, law, management and organizational behavior. For example, agency theory arises from the field of finance and economics and stakeholder theory from a more social-oriented perspective on corporate governance. All these disciplines have contributed to the development of theoretical aspects of corporate governance . Two of the theories; agency and stewardship were generally associated with several previous corporate governance researches in Malaysia and East Asia.

Nevertheless, a number of characteristics of the five governance theories are embedded in Malaysia’s business and corporations. This is because, Malaysia has the business culture and environment of a developing country combined with a unique socio-political background. As such, multi-faceted theories exist in Malaysia.

The first is Agency theory

The agency relationship is seen as a contractual link between the shareholders (the principals) that provide capital to the company and the management (agent) who runs the company. The principals engage the agent to perform some services on their behalf and would normally delegate some decision-making authority. However, as the number of shareholders and the complexity of operations grew, management, who had the expertise and essential knowledge to operate the company, increasingly gained effective control and put them in a position where they were prone to pursue their own interests .

The literature on agency theory addresses three types of problems that could transpire from the separation of ownership and management, which might consequently affect firm value. They are the effort problem, the assets’ use problem and differential risk preferences problem. The effort problem concerns whether or not managers apply proper effort in managing corporations so as to maximize shareholders’ wealth. Problems arise because principals are not able to determine if the managers are performing their work appropriately. Managers may not exert the same high effort levels required for firm value maximization as they would if they owned the firm.

The use of assets problem concerned the insiders who control corporate assets. They might abuse these assets for purposes that are harmful to the interests of shareholders such as diverting corporate assets, claiming excessive salaries and manipulating transfer prices of assets with other entities they control . The differential risk preferences problem arises because the principal and managers have different views on risk taking. Managers may not act in the best interest of shareholders and may have different interests and risks preferences. For example, managers have a wider range of economic and psychological needs (such as to maximize compensation, security, status and to boost their own reputation), which may be adversely affected by a project that increases a firm’s total risk or has rewards in the longer-term. This may result in managers being too cautious in making investments and thus failing to maximise shareholders’ wealth.

Hence, agency theorists recommended that corporate governance mechanisms are needed to reduce these agency conflicts and to align the interests of the agent with those of the principal. These mechanisms include incentive schemes for managers which reward them financially for maximising shareholder interests. Such schemes typically include strategies whereby senior executives acquire shares, conceivably at a bargain price, thus aligning financial interests of executives with those of shareholders. Other mechanisms include fixing executive compensation and levels of benefits to shareholders returns and having part of executive compensation deferred to the future to reward long-run value maximisation of the corporation. Besides that, appointing more NEX on the boards to check on managers’ behaviour could also reduce agency costs.

I will discuss the other four corporate governance theories in my next posting.

Tuesday, 6 December 2011

Board's Culture

Effective boards understand their role and duties, are actively engaged in the work of governance, and accept accountability for their performance and the performance of the organization they govern. Over time, either deliberately or not, every board of directors creates a governance culture—a pattern of beliefs, traditions and practices that prevail when the board convenes to carry out their duties. Each board is responsible for shaping its own culture. As stated by Joaan Reed:

“Good governance is hard work. Boards must develop a culture of accountability and engagement. Board leaders should pay strict attention to how much board time is spent passively listening to reports and how much time is spent discussing strategic issues and the duties of care and loyalty. Active and vigorous board discussion, debate and questioning is not only a sign of a good board, it is the sign of an engaged board. Board members should not allow a ‘don’t-ask-questions’ culture to thrive and become the norm. An open culture of cooperation and transparency is healthy and will attract skilled board members.”

In too many cases, boards are insufficiently committed, the governance culture is passive, and the result is under performance. There is a growing belief that effective governance requires a proactive culture of commitment and engagement that drives both the board and the organization it governs toward high performance.Non executive directors must be bold enough to challenge the CEO's decision so as to create healthy discussion and debate on company's business strategies. Board meetings is a place where board's members are able to contribute their ideas in decision making process. Many research findings has shown that an active board is able to drive company's performance.A good corporate governance practices must always be observed so that shareholders' interests is always paramount.

Monday, 5 December 2011


Fraud investigation is not an easy matter. It requires a qualified and experienced investigator to conduct and complete an investigation. An investigation framework is important as it allows investigators to detect the incidence of fraud at its preliminary stage. It is a strategic plan and model which guide investigators to perform their tasks in a systematic manner in ensuring all important aspects, procedures and steps are followed closely. It also assures that the chain of documents and evidence will not be lost. In any fraud investigation, it is vital to first understand any report or complaint received. The report should provide the basis and direction of the investigation approach in the quest to find details regarding the facts of the case, the extent of the fraud, legal violations and the suspects. Investigators should always consider the 1H (How) and 5 W (What, Why, Who, When and Where) in every step of the investigation process to ensure that nothing is being overlooked.

Internal investigation can be summarized as followed and the details of each phase can be revealed in the flowing section:-
i. Problem recognition
ii. Investigation planning
iii. Method of Investigation
iv. Gathering evidence and analyzing available documents
v. Conducting interview and recoding statement
vi. Evaluation and preservation of evidence
vii. Reporting

The initial stage of the framework is identifying fraud exposure. This is considered as one of the most difficult stage as it is not easy to immediately identify fraud perpetrated by the top management of a company. Analyzing financial statement alone would not suffice to detect any fraudulent activity in a company. Thus, according to Albrecht et al. (2009), the fraud exposure rectangle is helpful in identifying management fraud exposure. Figure 1 illustrates the fraud exposure rectangle.

Adopted from ' Forensic Accounting and Management Case Studies' , a book co-authored by Azmi Abdul Hamid and Rozainun Abdul Aziz


Fraud is defined by the Malaysian Approved Standards on Auditing (2001) as: an intentional act by one or more individuals among management, employees, or third parties, which results in a misrepresentation of financial statement. It is believed that fraud is among the most serious corporate problems. Management fraud can be defined as “deliberate fraud committed by management that injures investors and creditors through misleading financial statement” (Eliot and Willingham, 1980). According to Wallace (1995), fraud is “a scheme designed to deceive; it can be accomplished with fictitious documents and representations that support fraudulent financial statements”. The study of Vanasco (1998) on several fraud cases documented that cash, inventory, and related party transactions are more prone to fraud. Losses can occur in almost any area from cash to accounts receivable, expenditures and inventory losses (Spathis, 2002).

New Straits times (2001), reported that more than 60% of Malaysian listed companies surveyed had experienced some form of fraud. It was found that almost a quarter were found to have lost more than RM1 million each to fraud. However, there is no information or formal reports on the number of business failures that are caused by fraud. In Malaysia, for example, there were several cases involving public listed companies fraud schemes such as misappropriation of funds, submitting false statements to the Malaysian Securities Exchange Berhad (now known as Bursa Malaysia Securities Berhad), defrauding investors and other types of offences. Based on the Enforcement Related Press Releases produced by Securities Commission of Malaysia website, it is observed that most of the convicted case and the enforcement action taken included the top management personnel of the convicted listed companies. Chief Executive Officer, Managing Director, Chief Financial Controller were among persons convicted for misconduct. As such, accountability by all parties especially the board of directors play an important role in order for companies to reduce the number of financial fraud cases. This aspect is directly related to corporate governance good practices as stakeholders will be satisfied with all the information disclosed by the company that they have interest in. Accountability is a key point of interest in corporate governance and this also takes prominence in addressing issues relating to ethical conduct or behaviour.

Adopted from 'Forensic Accounting and Management Case Studies',book by Azmi Abdul Hamid and Rozainun Abdul Aziz

Saturday, 3 December 2011

What is a Learning Organization?

Recently Accounting Research Institute, the umbrella entity of Government Linked Companies Research Centre, organised a training in Islamic Finance. The two day training was conducted by IBFIM, a renowned training centre of Islamic Financing. The training was attended by 21 lecturers of the Faculty Of Accountancy, UiTM. It is part of our ongoing training to equip our lecturers in the skills of Islamic Finance.

Other than universities, , a corporation or companies also needs training. It has been shown in many research findings that a learning organizaton is able to perform well in their annual financial results. A learning organization starts from the top. If board of directors and senior management are serious in implementing learning and knowledge management in their corporations, middle and lower management including the lowest level of employees, would be more than ready to participate. A learning organization requires the board to commit to and act upon four conditions:

1. That each member of the organization is encouraged to learn regularly and rigorously from their daily work, and to ensure time is budgeted from this.

2. That there are systems in place to capture that learning, celebrate and reward it, and move it to where it is needed.

3. That the organization is encouraged by its owners and directors to transform itself continouslythrough its internal and external learning processes.

4. That such learning is valued in the appraisal and reward systems and in the asset base of the organization.


During the UMNO Convention at PWTC, Kuala Lumpur, a Perak delegate proposed that UMNO stalwarts should head GLCs to ensure that qualified Malay entrepreneurs and companies receive projects from GLCs. I doubt whether this is a good proposal.
Firstly, appointing politicians as directors could hamper firm performance. This is due to the fact that most of them do not possess appropriate expertise and skills in strategic goals, firm’s operations and products. Since they know very little about the nature of business of a corporation, what can they contribute to the board decision making? Running a political party is not the same as running a corporation. A corporation must be headed by a person who has the vision to enhance the shareholders’ value of the company. The company must be run with proper corporate governance mechanisms, with accountability, transparency and high integrity.
Since politicians were typically appointed as non-executive directors, they would have limited access to management except during board meetings. As such, their contribution to firm performance raises reservations. I would prefer GLCs be run by professionals who can deliver.
On top of that, tenders and contracts from GLCs cannot be distributed freely to all because only capable, and experienced companies, whether it is a bumi or non-bumi are allowed to make bidding.

Wednesday, 30 November 2011


Although Corporate Governance Codes that were released by many countries towards the end of the twentieth century and into the 21 st century was only a mechanism to check on the boards of directors and top management in running corporations, just imagine, what would be the situation of the corporate world without all these Codes? As I mentioned in my earlier posting, Enron, the largest corporation that collapsed at the beginning of this century, took into consideration all the best practices of good corporate governance. Yet, corporate governance best practices could not dig up and traced the corporate scandal until it was too late.

Nonetheless, just imagine if there were no governance codes at all. I am optimistic that a lot more corporate scandals and wrongdoings might have incurred in all these years. In Malaysia, the Asian Financial Crisis was a wake-up call for the country to study and eventually released its Corporate Governance Codes in year 2000. Even when the code was already in place, many corporations in Malaysia involved in activities that are contrary to the spirit of good governance practices.

Good ethical behaviors of corporate players are the main factor for corporate governance to have good impact on firm performance. These ethical behaviors would eventually reflect itself in their Annual Reports and Financial Statements. In turn, companies that performed well and provide good returns to shareholders are able to attract potential shareholders to invest in listed companies. This will eventually create a better capital marketplace for investors be they retail players, institutional investors or foreign investors to enter the capital market.

There are many advantages of good practices of corporate governance.
First, there will be an increased access to external financing by firms. This in turn can lead to larger investment, higher growth, and greater employment creation.

Secondly, good corporate governance is able to lower the cost of capital and associated higher firm valuation. This makes more investments attractive to investors, also leading to growth and more employment.

Third, there will be better operational performance through better allocation of resources and better management. This creates wealth more generally.

Fourth, good corporate governance can be associated with a reduced risk of financial crises. This is particularly important, as financial crises can have large economic and social costs.

Fifth, good corporate governance can mean generally better relationships with all stakeholders. This helps improve social and labor relationships and aspects such as environmental protection.
All these advantages matter for growth, employment, poverty, and well-being of corporations and countries.

Tuesday, 29 November 2011


Malaysia’s capital market is expected to grow more than double to RM4.5 trillion by 2020 under current forecasts and could hit RM5.8 if internationalization efforts succeed. The Malaysian capital market is now worth more than RM2 trillion and is home to more public listed companies than any other Asean country and its bond market is the third largest in Asia as a ratio of GDP as at March 17, 2011. The capital market had achieved an annual compounded growth of 11% from RM717.5 billion in 2000 to RM2,033.9 billion in 2010 due to rapid industry expansion and investors’ confidence in the Malaysian capital market. Out of total capital market capitalization RM2,033.9 billion in 2010, 61% or RM1,246.7 billion comes from the stock market, the balance of 39% or RM758.7 billion is from the bond market.

Equity market capitalisation grew by 27% from RM979 billion in 2009 to RM1.2 trillion in 2010 as the market sentiment improved on the back of the launch of new economic programmes. The FBMKLCI also closed at an all-time high of 1,528.01 points on 10 November and has consistently outperformed emerging and advanced market indices

The 2nd Capital Market Masterplan emphasized on good corporate governance practices in order to attract the domestic and foreign market. However, good practices of corporate governance is not enough to attract investors into the market. ENRON, the collapsed U.S company also practices good corporate governance. They even separated the role of CEO and Chairman, despite at that particular time, most American companies combined the two roles. ENRON also appointed independent outside directors to ensure no one individual director can control the board decision making process. Besides that, they also established various board committees such as audit, nomination and remuneration. Despite all the good practices of corporate governance were in place, yet ENRON collapsed?

What went wrong? Although Corporate governance good practices is important in ensuring excellent management, it doesn’t guarantee that a company can performed. What is important are the ethical behaviors of boards of directors, CEOs and senior managers in running a corporation. If the ethical values are embedded solidly in the mind and heart of corporate players, the financial rewards would surely come by easily.

Saturday, 26 November 2011

16 th Malaysian Capital Market Summit

The Capital Market Masterplan 2 (CMP2) was launched by the Prime Minister on 12 April 2011. This was a momentous landmark in the growth of the Malaysian capital market and also signifies the successful execution and completion of the first Capital Market Masterplan (CMP1) in the past decade. CMP1 managed to establish a diversified Malaysian capital market with strong intermediaries operating in a well-regulated environment. With the current capital market valued at RM2 trillion, it is anticipated that under CMP2, the markets will reach RM5.8 trillion within the next 10 years.

Following that, on 24th and 25th November 2011, ASLI (Asian Strategic Leadership Institute) organized The 16th Malaysian Capital Market Summit which was held at Sheraton Imperial, Kuala Lumpur. The President of ASLI, Mr.Mirzan Mahathir presented his welcoming remarks at about 9.30 am. The Minister of Finance II, YB Dato Seri Ahmad Husni Hanazlah presented the opening keynote address.

Among topics that were presented and discussed on the first day were:

1. ‘The Global Economic and Investment Outlook: The New Normal in the Market’

Speakers were:

a. Mr P.K. Basu, Former Managing Director/ Chief Economist(Asia Ex-Japan, Daiwa Capital Market, Singapore and
b. Mr Alan Tan, Chief Economist, Affin Investment Bank Berhad

Later, the Chairman of Bursa Malaysia Berhad, YABhg. Tun Mohamed Dzaiddin presented his luncheon address entitled ‘The ASEAN Opportunity: An Exchange Perspective’

The event was continued into the afternoon with two more papers discussed.

2. ‘The Capital Market Masterplan 2 and the Corporate Governance Blueprint 2011- What’s New?- How Effective Will This Be?’

Speakers were: Mr. David Burry, Executive Director, Boustead Heavy Industries Corporation Berhad, Dato Charon Mokzani, CEO, CIMB Investment Bank Berhad, Mrs Rita Benoy Bushon, CEO, MSWG, Mr Zaki Ahmad Shariff, CEO, FA Securities Sdn. Bhd and Mr. Ahmad Shahab Din CEO, MICG

3. The last session paper was ‘How will the Economic Transformation Programme Impact on the Capital Market?’

Speakers for this topic were: Datuk Nicholas Zefferys , Former President, American Malaysia Chamber of Commerce/ Member, National Economic Advisory Council, and Dr. Nazri Khan Adam Khan, VP, Head of Retail Research, Affin Investment Bank Bhd
I was invited to speak on the platform of GLCs Leaders –Transformation of GLCs –Creation of Wealth. My specific topic was ‘ The Capital Market- The importance of Corporate Governance.

I will write more about that in my next posting…….

Friday, 9 September 2011

Success stories of GLCs

The GLC Transformation Programme initiated some seven years ago under the PCG had sowed some of the seeds of what is now a national transformation agenda.It is a sucess story. Khazanah Nasional Bhd managing director Tan Sri Azman Mokhtar, who heads the PCG secretariat, said it was imperative to sustain GLC achievements under the National Transformation Programme.

He said the G20 (selection of 20 largest GLCs controlled by GILCs) had paid RM47bil in dividends and RM32bil in taxes since 2004, benefitting the rakyat. “The G20 achieved 74% of their headline key performance indicators (KPIs) set for 2010, up 64% from 2009,” he said in his speech.

The G20 outperformed the rest of FBM KLCI by 1.9% per annum, reaching 16.1% per annum from May 2004 to June this year. Market capitalisation grew by 123% to RM354bil from RM159bil for the same period. They made RM109bil of capital investments of which RM73bil was expected to benefit the domestic economy. The G20 also provided 36,159 scholarships worth RM434mil to Malaysian students in both local and overseas academic institutions since 2004.

Now Khazanah Nasional Bhd is embarking into collaboration efforts between GLCs and the private sector to spur both domestic and foreign growth.

Directing vs Managing: What is the ultimate role of directors?

My interests in corporate governance started way back in 2003. I still remember the first day when I arrived at the University of Exeter, UK,to start my postgraduate program in Corporate Governance.

'You know what is corporate Governance?....You are taking a corporate governance course....You must know the art and complexities of corporate governance on your fingertips....Corporate governance is the lifeblood of corporations....Malaysia is a developing be a developed country... corporate governance should be properly addressed.'

That's the first welcoming remarks from my supervisor, Prof. Dr . Paul Collier. Looking back, yes,...what he said is definitely true. Good practices of corporate governance is vital in enhancing shareholders' wealth, in building investors' trusts and confidence and attracting foreign investments. These practices should come from the top management and trickles down to the bottom. The chairman and CEO must ensure that they know their roles and responsibilities as Board of Directors.

But why board of directors of corporations, including GLCs are not practicing good governance? Is is difficult to adhere to the principles or they don't want to rock the boat? I believe that the shortcomings in poor governed corporations arise because of the overemphasis on managing( as they are professionals) and the consequent underemphasis on directing. A corporation needs effective management to keep its day to day operations running, but to ensure that it sustains itself in its long-term strategy, it needs effective directing too. Directing is essentially an intellectual activity. It is about showing the way ahead, giving leadership.It is thoughtful and reflective and requires completely different set of thinking skills.

Ask ourselves, how many of our board members, have had any training for their direction giving role, rather than their management role? In a survey conducted by the institute of Directors,ninety-two percent of board of directors in giant corporations ..said they had had no training or induction into their directoral role. As such, it is no surprise that most boards cannot spell out their main roles or tasks.

The key to good practices of corporate governance is a thoughtful and committed board of directors, not managers. The board must give a clear direction to the business and create the right climate in which its people can align and attune to that direction. It is the board's job to ensure that members are committed to a common purpose, with similar values and behaviours, so that the organization can function effectively and efficiently. Those who have the full understanding of a director's role are able to not only enhanced their shareholders' value, but also sustains it on a longer period of time.

Formation of GLCs in Malaysia

GLCs are defined as a company in which the government owns at least 20% of the issued and paid-up capital (Ministry of Finance, 1993). The formation of GLCs was carried out progressively through the process of privatisation and corporatisation. Many government departments were first privatised and later transformed into separate wholly-owned government companies (Malaysia, 1986). The privatisation policy was based on two major objectives. First, the policy would speedily achieve the NEP’s goal of providing more avenues for bumiputra businessmen to participate in the economic activities. Second, privatisation would reduce the government’s burden in providing essential services to the public (for example road constructions, health services, energy and power). As such, these services were privatised to bumiputra private companies, which had the right expertise and resources (Malaysia, 1986). This would allow the government to have more time and funds to focus efforts on other much more important tasks. Under the government patronage, these privatised companies thrived and became very successful. Subsequently, many of them were corporatised through the issuing of a portion of their shares on Bursa Malaysia. As the government maintained substantial ownership in these companies, these corporatised entities have come to be known as Government-Linked Companies or GLCs (Treasury Circular, Ministry of Finance, 1993).

Other than corporatisation exercises, the government also obtains substantial ownership in many PLCs directly or indirectly through its investment holding companies such as Ministry of Finance Incorporation (MOF Incorporation) and Khazanah Nasional Berhad (KNB). The government also controls other major institutional funds such as Perbadanan Nasional Berhad (PNB), Employees Provident Fund (EPF), Lembaga Tabung Angkatan Tentera (LTAT), Pilgrimage Fund Board (TH) and Tabung Amanah Kumpulan Wang Pencen (KWAP). A panel of supervisory boards manages all these trust funds and all decisions on their investment strategies are under the authority and jurisdiction of the government. They are collectively known as government investment portfolios (Treasury Circular, Ministry of Finance, 1993). Besides that, all State Economic and Development Corporation (SEDCs) and other state agencies that have at least 20% shareholding in PLCs are also considered as GLCs (Treasury Circular, MOF, 1993).

Thursday, 8 September 2011

Why Malaysian GLCs should go global?

Government-linked companies (GLCs) in Malaysia need to be tightened up to meet their transformation programme objectives by 2015. Launched in 2004, the 10-year Transformation programme, is meant to raise GLCs’ performance to be on par if not better than their Singapore’s counterpart, Temasek. Although few Malaysian GLCs are already on the global platform, more GLCs should become global champions by 2015, if we want to become a developed country by 2020.

This was released in the Ministry of Finance's 2009/2010 Economic Report recently. The report went on to state that the roles of change agents, including senior management, the boards, government-linked investment companies(GLICs), the government and the Putrajaya Committe on Performance, need to keep pace with a rapidly changing environment. CEOs and senior management of GLCs should consider expanding their business presence overseas as the current business environment in Malaysia is getting saturated. GLCs , which are better equip with capital, infrastructures and government backing are able to withstand few years of early establishment problems before reaping profits. The most important variables to consider are; foreign business cultures, proper networkings, viable business models, reasonable payback periods and good business ethics. In foreign business environment, GLCs have to compete not only with domestic established companies, but also with giant multinationals. Excellent track records and good business ethics are vital in securing tenders and contracts from foreign government and companies. Obviously, the treatment would not be the same as doing business in Malaysia where wide corridors and generous business opportunities are given to GLCs.

To date, 33 GLCs are listed on Bursa Malaysia, which accounts for only 4.0 per cent of the total listed companies have a market capitalisation of RM235.5 billion or 49 per cent of total capitalisation and employ more than 300,000 people.

Tuesday, 6 September 2011

Why Corporate Governance is important?

Corporate governance refers to the structures and processes for the direction and control of companies Corporate governance concerns the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital.


Corporate Governance is important especially for emerging market countries. It  improves and serves a number of important public policy objectives. Good corporate governance reduces emerging market vulnerability to financial crises, reinforces property rights, reduces transaction costs and the cost of capital, and leads to capital market development. Weak corporate governance frameworks reduce investor confidence, and can discourage outside investment. Also, as pension funds continue to invest more in equity markets, good corporate governance is crucial for preserving retirement savings. Over the past several years, the importance of corporate governance has been highlighted by an increasing body of academic research. Studies have shown that good corporate governance practices have led to significant increases in economic value added (EVA) of firms, higher productivity, and lower risk of systemic financial failures for countries.

Source: World Bank  Report on the observance of Standards and Codes of Corporate Governance

Friday, 19 August 2011

Share swap between Malaysia Airlines and Air Asia

The share swap between Malaysia Airlines and Air Asia was a very brilliant move of a two competing airlines in Malaysia.  I hope that the exercise would benefit both entities in enhancing their shareholders wealth. The share swap and code-sharing between the two airlines would increase travel efficiency and reduce costs. They could cover more destinations with fewer resources and save on fuel and wages. Obviously, the savings can be translated to lower fares for customers. The swap would also lead to a more uniform level of service, better connectivity and shorter transit times.

However, there is no guarantee that the air fares will be lower than the existing structures. This is because, the two entities will no more be competing  on air fares structure. Just like two sundry shops in a village that eventually  operate as one entity. Obviously the village-folks  have to get their supply at whatever price whether they like it or not. They don't have the power anymore to negotiate on the pricing as they enjoyed before. Yes, share swap is a great deal for both the airlines. But the welfare of the stakeholders/ people should be put on top priority. The air fares is the most important variable in attracting people to fly.  It is  hoped that after the share swap, the air fares would be lowered based on the earlier arguments that both airlines can share resources and save on fuel and wages. This would further encourage more people to fly as more new destinations  are opened.

Tuesday, 16 August 2011

Government-Linked Companies (GLCs) Transformation Programme

The transformation of GLCs into high-performing entities is critical for the future prosperity of Malaysia.
Its principal mandate is to design and implement comprehensive national policies and guidelines to transform GLCs into high performing entities and establish the institutional framework to program-manage and subsequently to oversee the execution of these policies and guidelines. The Government's efforts at improving performance in companies under its control  will have a positive  effect on the rest of the corporate sector.

GLCs and their controlling shareholders, GLICs (Government Linked Investment Companies), constitute a significant part of the economic structure of the nation. GLCs employ an estimated 5% of the national workforce and account for approximately 36% and 54% respectively of the market capitalisation of Bursa Malaysia and the benchmark Kuala Lumpur Composite Index. Even with active divestment and privatisation, GLCs remain the main service providers to the nation in key strategic utilities and services including electricity, telecommunications, postal services, airlines, airports, public transport, water and sewerage, banking and financial services.

There are 3 key principles to the GLCs Transformation including:
  1. National development foundation - the GLC Transformation Programme is a subset of the broader national development strategies that include the principles of growth with equity, improving total factor productivity, the development of human capital, and the development of the Bumiputera community.

  2. Performance focus - the underlying rationale of the GLC Transformation Programme is to create economic and shareholder value through improved performance at GLCs. Hence, specific policy guidelines and initiatives will be driven by principles of performance and meritocracy within the broader national development focus described above.

  3. Governance, shareholder value and stakeholder management - the GLC Transformation Programme, while being led by the Government, fully observes the rights and governance of shareholders and other stakeholders. Hence, the policy measures to be implemented come in the form of policy guidelines rather than rules that GLCs are expected to implement through their Board of Directors in line with good governance. In addition, and within the context prescribed above, GLCs are expected to engage in managing other valid stakeholder interests, in particular those of employees, customers, suppliers and the Government itself as regulators and policy makers.

    Source: Khazanah Nasional Berhad, Malaysia

Monday, 15 August 2011

Characteristics and effectiveness of Audit Committees (AC) in Malaysia

In the wake of corporate scandals in Malaysia in the middle of 1990s, AC has a vital role in discharging their oversight responsibilities particularly in improving companies’ accountabilities and governance. The integrity of the corporate reporting process requires AC members to understand the various developments affecting financial reporting, internal controls and assessment of the objectivity of external auditors. Collier (1992) concluded that AC should have the following characteristics: they are a sub-committee of the board, composed mainly of non-executive directors and have the responsibility for reviewing the financial statements and the external audit and control systems. Nevertheless, a report of the FCCG (1999) shows that AC was ineffective in most Malaysian PLCs. This statement was supported by the Malaysian Institute of Accountants (MIA), which felt that the AC in most PLCs have not lived up to initial expectations (Akauntan Nasional, 1994). This suggests that the formation of AC in PLCs was more inclined towards conforming to regulation but not in substance to the spirit of good governance.

The ineffectiveness of the AC could possibly be the reason on the occurrence of company scandals and failures in Malaysia in the 1990s. Some of the scandals that involved both GLCs and NGLCs were Perwaja Trengganu Sdn. Bhd (PTSB), Renong Bhd, Aokam Perdana Bhd, UEM and KFC Bhd. The failure of PTSB was caused by, among other things, poor management and irregularities in payments and award of contracts (Ibrahim, 1995). An internal audit report, which became public in December 1995, disclosed that PTSB was insolvent, and was unable to pay any interest and principal on its RM5.7 billion in domestic and foreign borrowings (Thomas, 2002). The Renong Group, the biggest government conglomerate in Malaysia also ran into difficulty and had to be rescued by the government. As a result, the awareness of corporate governance heightened during this period.

To address the problems, the Companies Commission of Malaysia (CCM) issued Voluntary Codes of Conduct for company directors and secretaries in 1996. The issuance of the new Code was to check on the behaviours of directors and to curb corporate scandals and failures. Apparently, the issues of corporate governance continued to be highlighted through the Asian Financial Crisis period. 

Now, the issue of audit committees' ineffectiveness is seldom heard. This is due to the various planning and actions embarked  by the Security Commission and Bursa Malaysia to improve the competency of AC. Fifteen years ago, most audit committees of PLCs would meet on an average of 3 times per annum. But now, due to the regulation  imposed  on AC, they have to meet at least 4 times a year. Some bigger PLCs would  meet more than eight times per annum.  Reason being, they have to review and check the quarterly reporting of  their financial statements, internal control and governance before all those matters are considered and  endorsed by the board of directors.

Sunday, 14 August 2011

Four different Cultural Traits in an Organizations

Using data from 764 organizations, Denison and colleagues showed that four different cultural traits (mission, consistency, adaptability and involvement) were related to different criteria of effectiveness. Their research found that the traits of mission and consistency were the best predictors of profitability, the traits of involvement and adaptability were the best predictors of innovation, and the traits of adaptability and mission were the best predictors of sales growth.

The Denison model is based on four cultural traits of effective organizations that are described below.

1.    Involvement

Effective organizations empower their people,build their organizations around teams, and develop human capability at all levels. Executives, managers, and employees are committed to their work and feel that they own a piece of the organization. People at all levels feel that they have at least some input into decisions that will affect their work, and that their work is directly connected to the goals of the organization.

2.    Consistency

Organizations tend to be effective because they have ‘‘strong’’ cultures that are highly consistent, well coordinated, and well integrated. Behavior is rooted in a set of core values, and leaders and followers are skilled at reaching agreement even when there are diverse points of view. This type of consistency is a powerful source of stability and internal integration that results from a common mindset and a high degree of conformity.

3.    Adaptability

Ironically, organizations that are well integrated are often the most difficult ones to change. Internal integration and external adaptation can often be at odds. Adaptable organizations are driven by their customers, take risks and learn from their mistakes, and have capability and experience at creating change. They are continuously changing the system so that they are improving the organizations’ collective abilities to provide value for their customers.

4.    Mission

Successful organizations have a clear sense of purpose and direction that defines organizational goals and strategic objectives and expresses a vision of how the organization will look in the future. When an organization’s underlying mission changes, changes also occur in other aspects of the organization’s culture.

Source: Corporate Culture and Organizational Effectiveness: Is Asia Different From the Rest of the World? Organizational Dynamics, Vol. 33, No. 1, pp. 98–109, 2004

GLCs and Network Governance

With regards to this matter, the implementation of NEP (1971), the implementation of ICA (1975) and the subsequent formation of GLCs were considered as a direct result of the uncertainty of the bumiputra business agenda and unique social environment in Malaysia. This phenomenon triggered the network governance framework in Malaysia. The formation of GLCs and other special programme under its stable, fine tune and stabilize this environment. It intensifies coordination and focus between government and firms that shoulders the responsibilities of seeing the noble objectives of NEP and GLCs materialized.  All of this distinctiveness could be observed in the implementation of NEP (1971), ICA (1975) and GLCs in the early 80’s in Malaysia.

Specifically, the network governance characteristics could be obviously noticed in the appointment of senior government officers (SGO) and politicians (POL) as directors. Many of them were appointed as directors in GLCs and even in NGLCs. These characteristics were largely influenced by their close linked to the government and lawmakers. 

 However, it is not known whether their presence as boards’ member would contribute anything towards firm performance as there were only few studies that explicitly relate POL to firm performance in Malaysia. As for SGO, there were no studies  yet except those conducted on Singapore’s GLCs. Singapore is a handy comparator as it was once part of Malaysia before the two countries split in 1965


The basic proposition of resource dependence theory is the need for environmental linkages between the firm and outside resources. In this perspective, directors serve to connect the firm with external factors by co-opting the resources needed to survive (Pfeffer and Salancik, 1978). Thus, boards of directors are an important mechanism for absorbing critical elements of environmental uncertainty into the firm. Williamson (1984) held that environmental linkages or network governance could reduce transaction costs associated with environmental interdependency. The organization’s need to require resources and these leads to the development of exchange relationships or network governance between organizations. Further, the uneven distribution of needed resources results in inter-dependent in organizational relationships. Several factors would appear to intensify the character of this dependence, e.g. the importance of the resource(s), the relative shortage of the resource(s) and the extent to which the resource(s) is concentrated in the environment (Donaldson and Davis, 1991).  

In the Malaysian context, huge business resources are directly and indirectly controlled by the government. Hence, appointing directors that have influence and access to key policy-makers is seen as an important strategy for business survival. This is because directors’ knowledge and prestige in their profession provided the required resources into their firms.  This could enhance the firm's legitimacy in society and helps it achieve their goals and improve performance (Provan, 1980). Gales and Kesner (1994) suggest that in the resource dependence role, directors may also bring resources such as specialized skills and expertise.This concept has important implications for the role of the board and its structure, which in turn affects performance. Hillman (2003) held that if the need for network governance increases, more outsiders would be needed on the board as directors. In summary, resource dependence theory provides a convincing justification for the creation of network governance between the firm and its external environment through boards.  Firms that adopt this mechanism could improve their business survival and performance.
Source: Network Governance in GLCs and NGLCs in Malaysia


Controlling shares of Malaysian Airline (MAS) will remain in the hands of Malaysians

 The Star, a Malaysian newspaper reported today that the Government guarantees the controlling shares of Malaysian Airline (MAS) will remain in the hands of Malaysians. Second Finance Minister Datuk Seri Ahmad Huzni Hanazlah said that the share swap was done in good faith to bring the national carrier back to its glory days. He noted that the decision to carry out the share swap was to enable MAS to compete globally in view of the current stiff competition it faced from other airlines.  MAS would concentrate on long-haul flights and premium services while AirAsia would focus on local and regional connections. In many countries including Singapore, a national carrier is a flagship company of the nation. It is imperative that the government must control their airlines. It is considered as a critical business backbone of the country. As such, the comment by Datuk Sri Ahmad Huzni Hanazlah is welcomed by all MAS stakeholders. The most important step now is to build up the image and performance of MAS.  

Obviously, the appointment of CEO is the most difficult decision faced by the government.
Whoever appointed should develop a power base because a CEO power depends primarily on maintaining the confidence of the board, the staff, and in some cases the broader membership as well. That implies serving them well and, more importantly, gaining and maintaining their confidence. This requires CEO to demonstrate that they are in command of the organization’s affairs. Managers respect CEO who has a reputation in their field of endeavor, especially who has the expertise to make press comments or give speeches that strengthen their position within their organizations. They gain a reputation by networking with co-coordinating groups and by building a profile in their field through writing or hosting seminars. Leaders should have a burning desire to achieve specific objectives. They must be clear about what they want the organization to accomplish and how they are going to help realize it.

Friday, 12 August 2011

GLCs need to create value and enhance their stakeholders’ wealth.

GLCs are controlled by the Malaysian government via the Government-Linked Investment Companies (GLICs). GLICs are investment arms of the government that allocate government funds to the GLCs. In addition to having ownership in GLCs, the Malaysian government also has an influence in the appointment of members of the board of directors and senior management positions. The government also has a controlling stake in making major decisions-e.g. contract awards, strategy, restructuring and financing, acquisition and divestments. As such, government intervention in GLCs is common not only in Malaysia but also other countries. The issue is, does intervention by the government creates value for GLCs?

Research findings suggest that there are two opposing schools of thoughts.  According to the first, companies with government intervention are better governed (Ramirez and Tan, 2004; Ang and Ding, 2006). More specifically, these companies are not only under the watchful eyes of the public, i.e. namely investors and shareholders, but also the government. In contrast, the second school of thought belief that companies in private hands are more competitive and have more incentive to innovate and contain costs ( Dewenter and Malatesta, 2001; Sun and Tong, 2002).

A recent research by Lau and Tong (2008), published in International Applied Economics and Management Letters, found that government intervention improves firm value. Results of this study provide preliminary evidence on the effectiveness of the ownership and control structure of Malaysian GLCs in creating shareholders’ wealth. Such finding is consistent with the government’s aim of building up the nation through GLCs. The Malaysian government’s priority is economic development. In order for GLCs to contribute towards the country’s economic development, GLCs need to create value and enhance their stakeholders’ wealth. 

Thursday, 11 August 2011

Malaysian Government geared up to cut stakes in some companies, list a few and sell the rest

The Star newspaper reported that the Malaysian Government has identified 33 of its companies as ready for divestment. Under the plan to rationalize the portfolio of government-linked companies (GLCs) in Malaysia, the Government will reduce its stakes in some of these companies, list a few others and sell the rest.
Minister in the Prime Minister's Department, Datuk Sri Idris Jala said that the action plan would involve the paring down of the Government's stakes in five companies, listing of seven companies and outright sale of 21 companies. The move was part of a Strategic Reform Initiative (SRI) to define the Government's role in business so that there would be greater liquidity in the capital market and more opportunities for private investment. Of the 33 companies identified under the divestment programme, 24 would see the exercise affected on them between this year and 2012.
Khazanah Nasional Berhad, the investment arm of GLCs in Malaysia, is the major mover for the divestment exercise. This is an excellent move by Khazanah as it could focus on its core operations and leverage on what it does best. In finance and economics, divestment is the reduction of some kind of asset for either financial or ethical objectives or sale of an existing business by a firm. There are few reasons why the divestment exercise is good for corporations especially a huge corporation like Khazanah.
First, divestment is a form of retrenchment strategy used by businesses when they downsize the scope of their business activities. It usually involves eliminating a portion of a business. Firms may elect to sell, close, or spin-off a strategic business unit, major operating division, or product line. This move often is the final decision to eliminate unrelated, unprofitable, or unmanageable operations. Often the term is used as a means to grow financially in which a company sells off a business unit in order to focus their resources on a market it judges to be more profitable, or promising. Sometimes, such an action can be a spin-off.
Second, a motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.
Last but not least, divesting is to create stability due to maybe a part of the company is under-performing or even failing. Firms sometimes reach a point where continuing to maintain an operation is going to require large investments in equipment, advertising, research and development, and so forth to remain viable. Rather than invest the monetary and management resources, firms may elect to divest that portion of the business.