By Mak Yuen Teen
Public governance and corporate governance have been said to be like two wings of a plane. Malaysia’s reputation in corporate governance has suffered from a perception that it had been flying on one wing because of its state of public governance.
About two years ago, I was speaking in an international investor event in Malaysia on corporate governance in Asia. In the audience were some of the top regulators from Malaysia and regional countries. During the Q&A, someone asked me about the impact of the 1MDB scandal on corporate governance in Malaysia. I said that it will undoubtedly have an impact on public governance and public governance is linked to corporate governance, but we need to bear in mind that 1MDB is not a publicly-listed company. Therefore, the lack of enforcement with regard to 1MDB has nothing to do with Bursa Malaysia and Securities Commission Malaysia. However, I said that the 1MDB scandal could damage other public institutions, such as Bank Negara and those involved in investigating corruption and enforcement.
In reality, Malaysia has been doing quite a lot when it comes to corporate governance of listed companies and, in my view, does not get enough recognition for its enforcement efforts for listed companies. Some of its rules are also in my view better than Singapore’s. For example, the Malaysia Companies Act specifically requires an interested director not to participate in discussions or vote in a contract or proposed contract where the director has a direct or indirect interest. It is not just disclosing and abstaining from voting as is the case here, but not participating in discussions. In Singapore, whether a director can participate in discussions where he is interested in a contract is a matter for the articles or company’s code of conduct for directors (if any). In relation to certain duties and responsibilities, the Malaysian Companies Act also considers the chief executive officer, chief financial officer, chief operating officer and any other person primarily responsible for the management of the company to be a “director”. My sense is that Malaysia considers the realities in its own market when formulating its rules and is prepared to set a higher watermark, rather than just copying what other jurisdictions do.
In terms of listing rules, Malaysia has for many years imposed a limit on number of listed company directorships an individual can hold. It used to be 10, but has been reduced to 5. Here, any attempt to set even a non-binding guideline will meet with considerable resistance – Singapore seems to be home to “Superman directors” who can take on any number of directorships. I also like the fact that for disclosure and approval of related party transactions, the thresholds that are set are based on a number of different bases, rather than just NTA like we do here. I have argued in the past that it makes no sense to just use NTA as the base if, for instance, an interested person transaction is a revenue item. But that is what we do here. I also like the Practice Note 17 (PN17) for Mainboard companies [and Guidance Note 3 (GN3) for ACE market companies] in the Bursa rulebook, which requires financially troubled companies and those with certain types of modified auditor’s opinions to be put on what amounts to a watchlist, with such companies having to provide certain periodic updates. There are other examples I can cite.
However, much of the good work that the Malaysian regulators have done has not been recognised because of concerns about the quality of Malaysia’s public governance. The recent 1MDB scandal had also damaged her reputation for enforcement. After all, it is easy for critics to say “look at 1MDB” whenever anything positive about Malaysia is said. However, this all looks set to change and the improvement in public governance should also have positive spillover effects on the corporate governance of Malaysia companies.
I am particularly excited with the move by the new Malaysia government to stop the practice of political appointments to the boards of government-linked companies and to review political representation in the country’s largest government-linked investment firms, including the main sovereign and state pension funds. A joint statement from six funds said the new government emphasised the importance of “separation between professional management of the institutions and any undue interference from political or any other external parties.” At a conference in Malaysia last year, a commentator criticised the fact that the then Malaysian prime minister was also the finance minister (and of course, also the chairman of the board of advisors of 1MDB). Now Malaysia is set to not only separate the roles of the prime minister and finance minister, but also between the government and the sovereign wealth funds, state pension funds, and government-linked companies. What a remarkable transformation this will be.
However, it is not only political appointments to boards of government-linked companies and government-linked investment firms that is a concern. The appointment of members of parliament and senior civil servants to boards of non-government-linked companies is also a concern. There should be strict rules about that. It is not just conflict of interest. It is ensuring that those in government and civil service focus on serving the citizens,. Ideally, there should also be a cooling off period after a minister, member of parliament or civil servant retires before he or she qualifies to serve on private sector boards. This will ensure clearer separation between government and business. The lack of clear separation may affect the ability of Parliament to set appropriate rules for business and the perceived and actual ability of regulatory agencies to take enforcement action against certain “politically connected” companies and individuals.
Of course, what is good for Malaysia in this case is also good for other countries. If the momentum can be sustained, Malaysia can become a role model for other countries when it comes to corporate governance and how to separate government from business, something which very few countries get right.
