Enforcement is the problem, not the rules

There are about 200 countries in the world:

• Ranked by GDP, landmass, population, trade etc Malaysia will be somewhere in the 15^th to 40^th spot, in the first quarter, a very good position to be in.
• From a CG point of view (or regarding the quality of the judiciary, police etc.) Malaysia definitely deserves to be in the second quarter of the country list.

A (very) disturbing disconnect between the two.

Malaysia always had an excellent set of laws and rules, but enforcement without fear and favor has been very disappointing, to say the least. Other statistics have also not been good, Malaysia’s FDI (once clearly outstripping China’s) has fallen sharply, hundreds of thousands of Malaysians have recently left the country (this number might be very much understated) and the number of expats has been decreasing. Some time ago you could not open a book or magazine about emerging markets and Malaysia would be prominently featured. The last few years I have seen the same kind of books and magazines, and Malaysia wasn’t even mentioned one time. Malaysia once formed 30% of the emerging markets index, currently it is reduced to 3%. For international investors, Malaysia has become a more or less irrelevant country. In the 1997/98 crisis, many companies lost huge amounts of money due to mismanagement or outright fraud, my guess that the total amount of damage is around RM 100,000,000,000. This represented real money from the shareholders and it would have enabled the companies to grow substantially into a multi fold by now. SC and BM had their work cut out for them, but failed completely.

SC, BM and (indirectly) EPF/PNB (EPF, PNB, LTAT, ValueCap, Khazanah Nasional, Bank Pembangunan Malaysia Berhad etc.) have done a bad job in the last 20 years and Minority Investors rights have been trampled upon. Proof of this is that not a single high profile corporate leader has ever been convicted of a prison sentence. Also, for a Minority Investor it is simply impossible to win a case against a Majority Investor. The few convictions of high profile corporate leaders that have occurred (for instance Tiah & Soh for Omega Securities, receiving a RM 3 million and RM 6 million fine when the total damage was 100 times larger) were more of an encouragement than a deterrent for future bad behavior.

The Corporate Governance Blueprint 2011 (CGB) more or less assumes that bad CG practices have to do with the rules. I dare to object to this view: the rules have always been good (although they can be improved here or there), the issue has always been enforcement (or rather, the lack of it). Paying a lot of attention to the rules is dangerous since it could be used by certain parties as an excuse for the past.

The CGB also doesn’t take into account the very disappointing role played by SC/BM, and possible (perceived) pressure applied on SC/BM, “Independent” valuers, EPF/PNB and the MSWG to take certain actions. In Malaysia these possibilities are unfortunately very well possible.
In my opinion, there needs to be first some sort of retrospection, cleaning and healing before retail and institutional investors will even consider coming back in droves to the Malaysian share market.

Recommendation 1: that the following 4 steps will be taken with the results of each step to be made public:

·         A truly independent group of experts will do research on the worst cases of the corporate misdeeds of listed companies in the last 20 years

·         An evaluation of all that has been wrong, plus the rather dubious role that SC and BM played in it (why have they so seldom taken any action and never against a high profile corporate leader?)

·         A constructive, detailed plan of action to right the wrongs

·         A clear commitment towards this plan for a better future, to prevent it from happening again

Needless to say, there will be pain for some involved, but for the good of Malaysia in the long run, I strongly believe this is the right path. How can we ever improve if we are not investigating what went wrong in the first place?

Recommendation 2: don’t be hypocrite, instead be humble.

Everybody can hire a PR agency who will write a glossy brochure full with beautiful sentences how well they have done. The SC and BM have done a really bad job in enforcement the last 20 years, both have let the country down hugely causing a long lasting negative effect. Therefore the SC and BM should show much more humility in their brochures, in their speeches and on their website about what has actually been achieved regarding CG matters, there is absolutely nothing to be proud of.

The last few years, under the current Chairman of the SC, some progress has been booked. A few low profile corporate leaders are caught, clearly more than before, but still never a high profile one. The improvements came however from an unbelievable low base (actually from no base, the previous two Chairmen who held office during and after the crisis of 1997/98 had absolutely nothing to show for), and have been much too slow, a clear case of too little, too late. Also, since 1998 the recessions in Malaysia have been relatively mild, if there would be a large recession comparable to 1997/98 then the number of corporate misdeeds will rise very strongly. SC and BM will (again) not be ready to take appropriate and fast action, Minority Investors will again be hugely disadvantaged.

EPF, PNB, LTAT, Khazanah Nasional etc, are all in my opinion part of the problem, not off the solution, they had their chance in the last 20 years and they blew it. They could have voted against proposals that hurt Minority Investors, they could have been vocal, they could have been transparent, they could have tried to rally the Minority Investors for just causes, they chose not to do so. These mammoth organizations should change drastically and open up to public scrutiny.