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.