CORPORATE GOVERNANCE AND INVESTORS' CONFIDENCE IN THE CAPITAL MARKET

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.

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…….

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 country....to 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).

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.

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.

WHY IS CORPORATE GOVERNANCE IMPORTANT?

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