Sunday 11 July 2021

Governance and Leadership of public entities (Part 1)

I was invited by the Faculty of Economics and Muamalah Universiti Sains Islam Malaysia (USIM) to share my experience and thoughts on governance and leadership of public entities. This is an important topic given how much public entities influence our life as citizens. 

Throughout my career I had fairly deep involvements with a number of public entities. I was a council member and later the President of the Malaysian Institute of Accountants. I was also a board member of the Malaysian Accounting Standards Board and later the Financial Reporting Foundation. I was the founding Executive Chairman of the Audit Oversight Board and later the Executive Director in-charge of Market and Corporate Supervision of the Securities Commission. My latest involvement in a public entity was when I was appointed the Group Managing Director and Chief Executive Officer of Lembaga Tabung Haji.

In setting the scene for the discussion, I provided the audience with the differences between private business ventures and public entities. Private business ventures, whether individually owned or publicly owned, are primarily driven by maximisation of shareholders value. Although lately the conversation on this topic has significantly shifted towards value creation of stakeholders, profits remain the focus of these entities.

Public entities on the other hand consist of organisations of different structures and shapes depending on how they were established. At the federal government level we have various ministries, government agencies and companies created and controlled by the government, directly or indirectly. In the states, we also have state agencies and state-owned companies which are the extension of the state government and agencies.

Hence, we cannot expect corporate governance principles and structures which are being successfully applied in the private sector to be equally working with public entities. For example, in many public entity structures, the board or its equivalent does not exist. The entities are lead by a director general reporting to a minister. Hence, even if they have independent units such as internal audit, these units report to the director general instead of to an independent audit committee in the private sector.

The governance structure of public entities are dependent on the instrument which created them in the first place. Ministers receive their powers through the delegation of power as provided by our Federal Constitution and specific laws, many government agencies were established by federal laws or state enactments while limited liability companies under the Companies Act, are also used as part of government instruments.

Some of these laws and enactments were enacted many years ago and their provisions could have been outdated due to the changes in our ecosystem and the continuously improving governance practises applied in the country.

The balance between prescriptions and principle-based provisions in these laws and legislations would also share their governance practises. Some principle-based provisions could provide flexibility of their applications. However, this requires people running them to be people of principles and able to determine the appropriate approaches as things are changing. Otherwise, principle-based provisions could be confusing when people are too dependent on their literal interpretations. The same challenge applies to prescriptive provisions.

Their establishing documents set the purpose and functions of public entities. This is very important in differentiating one entity to another. Governance and leadership of public entities should be based on their purpose of establishment and their intended functions as envisaged in their establishing documents.

Next we will explore keys issues in governing public entities.