By Terence Gomez
As the core issues surrounding the 1Malaysia Development Bhd (1MDB) controversy came to the fore over the past months, a fundamental point became extremely clear. Inadequate reforms following previous controversies of a similar nature have contributed to the 1MDB crisis. One example was the Asian currency crisis of 1997 which drew attention to a key matter: the mode of corporate governance.
Following this crisis, a slew of reforms were introduced to enhance corporate governance, primarily to determine how members of the boards of directors of public-listed companies – and government-linked companies (GLCs) – implemented their duties. These remedies, we then suspected but now know for certain from the 1MDB controversy, were ineffective, demanding major political reforms.
Corporate governance – responsible directors?
Tajudin Ramli
The outbreak of the 1997 crisis necessitated bailouts of some well-connected public-listed companies that were heavily burdened with loans, including from foreign financial institutions. The listed companies that were then taken over by GLCs included the Renong group, under the majority ownership of Halim Saad, and Malaysia Airlines, similarly owned by Tajudin Ramli.
Both men would later allege that the reason why their companies were mired in trouble was because they did not have full control of these firms. They had to take instructions from their political masters while running these companies.
In response to the 1997 crisis, among the major corporate governance reforms the government instituted included training programmes for company directors aimed at ensuring that they were fully informed of their fiduciary duties to their shareholders.
However, although it was obvious that one major reason why these companies were in a financial mess was because of political interference, no measures were introduced to deal with this problem, a factor that left the door open for a controversy such as 1MDB to emerge.
Indeed, controversies of a similar nature have occurred in the recent past, where members of the boards of directors have played little or no role in checking misuse of company funds. One case when this was said to have occurred involved the National Feedlot Corp controversy which also implicated a sitting senior federal minister.
Learning from 1MDB
When the 1MDB controversy broke, a key question that emerged was why its directors had allowed the company to land itself in a situation where it was left having to service a huge volume of loans.
Najib Abdul Razak
If the reports on this controversy are accurate, 1MDB’s directors may not have had full control over decision making about these loans, having had to take the cue from those who had appointed them to the board. 1MDB is directly controlled by the Finance Ministry, headed also by Prime Minister Najib Abdul Razak.
Regardless the outcome of the investigation of 1MDB, which is having serious repercussions on the company and the economy, there is sufficient concern to insist on an arm’s-length relationship between politicians in power and GLCs.
Immediate reforms have to be instituted to ensure that all GLCs and their holding companies are led by an autonomous board of directors. These reforms include ensuring that these directors are accountable to an independent body, for example the legislature, but definitely not to the executive.
The issue of the chain of command between GLCs and the government has to be reviewed to ensure decisions are taken in the interest of the company and the shareholders, in this case all Malaysians.
Such reforms are imperative because one key allegation that has emerged from the 1MDB controversy is that funds from this enterprise have been used to finance election campaigns, including during the last general election, a serious matter as this raises concerns about the legitimacy of the electoral results.
Similar allegations of GLCs and public-listed companies channelling funds into politics, particularly during party, federal, and state elections, have been prevalent in political discourse for over a long period of time.
Unblemished directors
Another issue emerging from the 1MDB controversy has to noted and addressed: the directors of GLCs have to be free of allegations of corporate malpractices. And, if allegations of financial impropriety are made against them, they have to relinquish their board appointments until a decision has been reached following an investigation.
Lodin Wok Kamaruddin
What is shocking in the 1MDB case is that one of the directors, Lodin Kamaruddin, the chairman, has been implicated in another major scandal, involving the purchase of defence equipment from abroad. This scandal has also implicated the sitting Finance Minister.
Questions can also be posed about decisions taken when appointing the board of advisors to 1MDB’s board of directors. This board of advisors ostensibly serves as a mechanism to ensure checks and balances in the management of 1MDB.
One advisor, Nor Mohamed Yakcop, was formerly a key figure at the central bank, Bank Negara. In that capacity, he was implicated in a currency speculation controversy that had resulted in a major financial loss for the government.
Following this controversy, he was appointed a federal minister! Interestingly, a core aspect of the 1MDB controversy includes alleged irregular fund flows in and out of the country.
Political will to institute reforms?
Dr Mahathir Mohamad
Will genuine reforms be instituted where such issues will be considered when decisions about directorships in GLCs are being made? This is unlikely, but we have to insist on this. There won’t be much political will to introduce meaningful reforms as this would entail the need to devolve power to independent oversight agencies.
Former prime minister Dr Mahathir Mohamad voiced a similar call for reforms when he made an astonish admission. According to Mahathir, too much power is concentrated in the office of the prime minister, a factor he claims that contributed to the problems now prevailing in 1MDB.
While Mahathir must take responsibility for concentrating so much power in office of the executive, this is an important assertion by an ex-premier who is well aware of how the political-business system works.
As reluctant as Umno may be to institute meaningful corporate governance reforms, this is now imperative if the government hopes to renew confidence in public governance of GLCs.
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Terence Gomez is based at the University of Malaya. He is the author of Politics in Business: Umno’s Corporate Investments and Malaysia’s Political Economy: Politics, Patronage and Profits.
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