For most countries, government intervention in business activities is inevitable. After all, the government is there to govern and ensure businesses are conducted in a fair and healthy manner that could grow the economy and benefit the people.
Government intervention have also lead to the rapid growth of many emerging markets especially in East and Southeast Asia as can be seen when China’s government opened its economy which led to the country becoming one of the world’s economic powerhouses.
This rapid growth was also spearheaded by the active participation of the government in the form of state-owned enterprises (SOEs), or government linked companies (GLCs).
“SOEs have become tools for some countries to better position themselves for the future in the global economy given increased global competition for finance, talent, and resources,” PricewaterhouseCoopers said in its ‘State-Owned Enterprises Catalysts for public value creation?’ report.
For Malaysia, the Institute for Democracy and Economic Affairs (IDEAS) said in its ‘Government-Linked Companies: Impacts on the Malaysian Economy’ report published last year said te role that state-owned enterprises (SOEs) or, more generally, GLCs play in the Malaysia economy is widespread and pervasive. In terms of countries that have the highest SOE presence among their largest firms, Malaysia ranks fifth highest in the world.
But often, tempted by the access to the country’s vast resources, members of the government embroil themselves in corporate affairs and mingle politics with business for personal gains.
Over the last few years, Malaysia’s government linked companies (GLCs) and government linked investment companies (GLICs) have been associated with many of the nation’s economic scandals.
The whole 1Malaysia Development Bhd (1MDB) debacle opened up many criticisms and debates on the level of the government’s intervention in Corporate Malaysia and how it affects the growth of every other non-government linked companies in the country.
The open and vast abuse of Malaysia’s public funds funneled via GLCs and special purpose vehicles companies (SPVs) for exorbitantly priced projects domestically and internationally, were one of the main reasons for Malaysia’s dramatic shift in its political landscape earlier this year.
Following the change in Malaysia’s government, with Pakatan Harapan (PH) ending the previous government’s 60-year rule, many corruption cases involving the previous government and several corporations were uncovered, leading to the implementation of new policies to ensure higher transparencies in the corporate world.
Since May 2018, PH announced a slew of corporate cleansing and ordered the discontinuation of several mega construction projects it deemed as unnecessary or expensive.
This had also led to the market’s roller coaster ride since May 2018 as companies and investors adjust to the changes in Corporate Malaysia made by the government.
BizHive Weekly takes a look at the pros and cons of these changes and the involvement of the government in the corporate world via GLCs.
GLCs: The good, the bad, the ugly
The question on the government’s involvement in corporate affairs to drive industrialisation is not unique to Southeast Asia as experts have pointed out that Malaysia’s rapid modernisation has been attributed to its adoption of an interventionist model, driven also by GLCs.
IDEAS in its ‘Government in Business: Diverse form of intervention’ report, noted that statutory bodies and public enterprises have been a part of Malaysia’s economic landscape since the 1950s.
“However, active government intervention in the economy commenced as one response to the riots that occurred in 1969. These riots were, in part, to protest inequities in wealth distribution and the form of
development in post-colonial Malaysia as little structural change had occurred.
“The nature of government-business relations has since become acutely complex, as they are normally grounded on ethnically-constructed preferences, to conform with the affirmative action-centred New Economic Policy (NEP) that was introduced in 1970.
“The NEP was a progressive 20-year plan to eradicate poverty and redistribute wealth equitably between ethnic groups by creating a Bumiputera Commercial and Industrial Community (BCIC); Bumiputera corporate ownership then stood at a mere 1.5 per cent.
“Government intervention entailed establishing public enterprises to act as trustees of the Bumiputeras, particularly the poor,” it explained.
Public enterprises were also introduced at the federal and state levels to play a developmental role in the economy, by promoting rural and regional development to increase agricultural productivity, it added.
“These federal- and state-level enterprises, now called GLCs, have, however, not evolved in a coherently linear direction; they incorporate hybrid features and are required to fulfil a variety of business and social duties, though there is much public expectation that they should register profits like other commercial enterprises.
“GLCs are owned by a variety of government institutions, including statutory bodies, foundations, or yayasan, government-linked investment companies (GLICs), special purpose vehicles (SPVs) and investment trust funds,” it added.
Despite all the flak GLCs have gotten for decades due to its reputation for housing corruption and cronyism, Malaysia’s GLCs have supported the growth of the nation.
Many GLCs have emerged as leading enterprises in the region and have been among at least seven of Malaysia’s top ten quoted firms since the turn of the century.
However, IDEAS pointed out that countervailing pressures are also present, with the ubiquity of the GLCs in the economy now viewed as seriously undermining entrepreneurial development by crowding out domestic enterprises including those owned by Bumiputeras.
“Critics of GLCs contend that a bi-polar corporate system is now a characteristic feature of the economy, pitting these government enterprises against privately-owned largely non-Bumiputra, particularly Chinese, companies,” it added.
Crucial questions have also been raised on this hybrid system of GLCs and private enterprises competing in the private sector to create a dynamic market that drives development.
(SOURCE: IDEAS Report)
However, many have also questioned the level of competitiveness between GLCs and other companies as IDEAS have pointed out that the share of GLCs in the Kuala Lumpur Composite Index (KLCI) of the stock market increase
significantly.
It also highlighted their significant presence in every major sectors in Malaysia.
“While other ministries employ GLCs with differing levels of corporate presence, the Big Four merit crucial attention as they have a direct interest in Malaysia’s most prominent enterprises and intervene in the economy and in society adopting fundamentally different methods.
“These enterprises include socioeconomic-based statutory bodies such as the Federal Land Development Authority (FELDA), incorporated to redistribute land to the poor, Majlis Amanah Rakyat (MARA), introduced to groom Bumiputeras for entry into the economy, and the financially well-endowed national oil corporation, Petronas.
“Interestingly, these three major institutions, owners of a myriad of GLCs, are under the purview of the Prime Minister through the PMD.
“The Ministry of Finance (MoF) controls important institutions such as Malaysia’s sole sovereign wealth fund, Khazanah Nasional Bhd, and the exceptionally well-endowed savings-based Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) which have investments in a variety of enterprises in the economy,” it noted.
Nevertheless it pointed out that attempts to review development through government intervention have been undermined by another serious issue.
“Government intervention through GLCs has resulted in rent-seeking activities, leading also to grand-scale corruption, a principal reason why there is considerable discontent in society with these enterprises,” it added.
Instead of engendering a new class of self-reliant and independent Bumiputera enterpreneurs, IDEAS had pointed out that these GLCs had given rise to crony capitalism, state-dependence, regulatory capture and grand corruption.
“Evidence for these types of concerns are generally difficult to identify or quantify, but there are indirect indicators.
“For instance, according to the Economist’s crony capitalism index (Economist, 2016), Malaysia had the second highest share of crony wealth as a share of GDP (next to Russia) in 2016, up from number three in 2015.
“The share of non-crony wealth, on the other hand, was the lowest among the 22 countries included in the sample,” it noted.
The mass reshuffle of top management in GLCs
So prevalent was the government’s hand in the nation’s corporate game, that when Malaysia saw the shift in its political landscape, its corporate world was taken for a ride as many of its major stocks came under fire and were questioned for their transparencies and business activities.
Within a week after the PH’s takeover, the new government dropped the axe on many high profile personnel in GLCs and financial bodies whom it sees as ‘corrupt’ or in cohorts with politicians from the previous government.
One of the first few individuals which were said to have been part of this mass layoffs include Federal Land Development Authority (Felda) chairman Tan Sri Sharir Abdul Samad in May 2018, followed by Bank Negara Malaysia’s former governor Tan Sri Muhammad Ibrahim, and Telekom Malaysia Bhd’s (TM) former managing director and chief executive officer (CEO) Datuk Seri Mohammed Shazalli Ramly who tendered their resignations on June 6.
Following their departure, the corporate purge continued with the ‘retirement’ of Malaysian Resources Corporation Bhd (MRCB) managing director Datuk Mohamad Salim Fateh Din, and Malaysia Airports Holdings Bhd’s managing director Datuk Mohd Badlisham Ghazali, and the resignation of BIMB Holdings Bhd’s CEO Khairul Kamaruddin.
Government linked investment companies (GLIC) such as Permodalan Nasional Bhd (PNB) and Lembaga Tabung Haji (LTH) also so the discontinuation of contracts or ‘retirements’ of chairman Tan Sri Abdul Wahid Omar and managing director Datuk Seri Johan Abdullah.
National O&G company Petronas was also not spared as its chairman and director, Tan Sri Mohd Sidek Hassan and Datuk Mohd Omar Mustapha, tendered their resignation in June.
In July, corporate Malaysia was once again shaken by the drastic mass resignation of Khazanah Nasional Bhd’s directors and a new line-up was announced by the Prime Minister’s Office.
Prime Minister Tun Dr Mahathir Mohamad assumed the post of chairman while Minister of Economic Affairs Datuk Seri Mohamed Azmin Ali was also appointed as a director.
Other appointees were former Petronas President and CEO Tan Sri Mohd Hassan Marican, former deputy governor of BNM Dr Sukhdave Singh and Shangri-La Hotels (Malaysia) Bhd director and former Securities Commission Malaysia executive director Goh Ching Yin.
Khazanah also announced the appointment of Employees Provident Fund chief executive officer Datuk Shahril Ridza Ridzuan as managing director, effective August 20.
Reforming a flawed system
Many of Malaysia’s GLCs were born out of the need to elevate the nation’s economy with the support of the government and many of these companies have done exactly so. But due to the acts of several individuals, these companies have gained an unpleasant reputation over the years, giving rise to the need to reform policies surrounding these companies.
According the reports by Bernama, Assistant Professor of Management at Asia School of Business Dr Renato Lima de Oliveira said a series of resignations and changes in the GLCs would give greater leeway to the new government to pursue their policy priorities and manifesto.
“There is a lot of goodwill with the current government, with Malaysia’s historical alternation of power, and PH will have the ability to put together their governing team. Many can see these changes as part of a unique historical moment,” he was quoted as saying.
However, there is still a lot that needs to be done to reform what seems to be a flawed business system which benefits only certain people as Oliveira stressed it is important that one of the key points of PH ascension to power was to strengthen the country’s institutions.
“It is important in the long run to strengthen the governance of GLCs and protect them from political changes and pressures,” Oliveira, who is also a a fellow at the IDEAS, was quoted as saying.
Despite the changes, Oliveira stressed that the new government needed to draft a vision and engage the society via public hearings, forums or parliamentary debate.
“Ideally, recruit (the right people) through a system such as an independent search committee that ensure positions are filled by merit. If you are not changing the vision but just changing teams, it would be easier to replace,” he added.
He also highlighted that this way, key state positions would not have to change hands every time there was a change of government.
Nevertheless, he noted that the GLCs should be protected from political changes and pressures to enable them to become more focused in executing the policy priorities of the government in power.
IDEAS also pointed out that another reason for widespread dissatisfaction with government intervention and a critical factor that has hampered the rise of entrepreneurial firms is the manner of implementation of affirmative action-based policies.
“While it is important to nurture entrepreneurial Bumiputeras, to rectify the injustices of colonial rule, how this is to be done must be reviewed. This is imperative for two reasons: first, to inspire investor confidence and to reduce investment risks, such as expropriation, as a firm develops; second, an outcome of trying to simultaneously foster entrepreneurial firms and Bumiputera-owned companies has been the undermining of both objectives.
“The costs of government intervention in business have been huge because institutional constrains are weak and legal protections against expropriation by powerful politicians are ineffective, inhibiting entrepreneurship in the process,” it highlighted.
It further pointed out that the level of transparency of government intervention in the corporate sector through the GLCs must also be enhanced to avoid political abuse on these GLCs which could lead to inefficient allocation of public resources.
“A key factor contributing to corrupt practices within GLCs is the appointment of politicians to their boards of directors. The members of these boards are public trustees, but do not act as such. One consequence of this practice, also a form of political patronage, is that it undermines public ownership of corporate enterprises and contributes to the idea that this form of government intervention is not viable or sustainable.
“This practice of appointing politicians to the boards of listed GLCs is more common among enterprises owned by the state governments, where the conduct of patronage is extensive.
“What is required of GLCs is a set of well-defined long-term goals, in line with policy priorities, with regular checks on their progress.
“The reasons why GLCs get involved in corporate exercises must be publicly disclosed to constrain the self-serving behaviour of politicians. Disclosure is important as political leaders, through GLCs, have access to enormous funds and rents that can be deployed to garner electoral – even party – support.
“How GLCs are employed in the economy can also have a bearing on the implementation of ethnically-based affirmative action, as this policy can be deployed by politicians to garner support during electoral battles, particularly in Bumiputera-majority constituencies,” it explained.
Combating fraud and corruption in the corporate world
With years of fraud and corruption within Corporate Malaysia, especially involving GLCs and GLICs, there needs to be a way to ensure that businesses are conducted in a fair manner and in a healthy but competitive environment.
But, there isn’t a clear cut solution that involves just top personnel with regulations to keep them in line.
PricewaterhouseCoopers (PwC) in its Malaysian report based on its ‘Global Economic Crime and Fraud Survey 2018’, highlighted that compliance programmes and processes could only be part of the solution.
“If you asked your senior leadership team what their roles are in fighting economic crime, it is likely you would hear a variety of answers.
“That’s a problem. Leaving things to chance because there’s no time to address risks, overlaps in responsibility, and grey areas where ‘it’s not my responsibility’; are gaps that can have a detrimental impact on the overall effectiveness of your fraud prevention efforts, financial performance, and regulatory outcomes,” it said.
It highlighted that investing in the human element of business ethics such as building a culture of compliance and encouraging ethical business conduct is also important for an organisation.
“Organisations are feeling the pressure to weed out fraud at the highest levels, especially with declining public tolerance for bribery and corruption.
“We believe they can start by tackling the root of the proble: organisational culture,” PwC Malaysia managing partner Sridharan Nair told reporters during a press conference in conjunction with the launch of its ‘Global Economic Crime and Fraud Survey 2018’ (Malaysia report).
“Whether your organisation belongs to an emerging market, a developed market, or is in a public or private sector, it will always be at risk of fraud.
“It’s not possible to entirely prevent this, but building stronger controls will better arm you in the fight against fraud,” PwC said.
Some of a few factors PwC suggests to buff up a companies intolerance towards corruption and fraud include investing in and deploying disruptive technologies.
It also pointed out that a culture of compliance and transparency is vital for a company.
“Malaysian organisations have made good progress in developign corporate cultures that combat fraud, but more needs to be done,” PwC said.
It suggested that companies should have a culture that rewards the right behaviours and penalises those that goes against accepted practices or the law.
“A balance between prevention, detection, investigation, and remediation is crucial to any organisation’s anti-fraud programme,” it added.
“With transparency and the right balance between controls and culture, a company will be well positioned to absorb the shocks of an unexpected event, and ultimately emerge stronger,” PwC highlighted.
Overall, according to PwC, SOE or GLCs are in a unique position to leverage its external influence by co-creating value with other stakeholders in society and being a catalyst or driver for external good growth, linked to its purpose, mission and strategic objectives.
These companies can also take an active role in developing local, regional and national innovation systems as well as play a key role in developing the infrastructure and conditions for the private sector to flourish.
While the current government also has its flaws based on its members’ previous experience with GLCs and GLICs, and it is still too early to determine the policies it will put in place to ensure a transparent and fair business environment, the new government is, at least, a change in a possibly better
direction.