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.

Climate Change In Action?

While climate change is quite a main stream issue in continents like Europe, it may not be the same in this part of the world. The common excuse which I heard before is that, "the Westerners had messed up their environment in the past and now they want us to take care of the planet on their behalf".

I was brought up in Kota Bharu which is located at the Kelantan delta. Hence, flood was a common phenomenon since my childhood. We differentiated between flood caused by rain and the real flood which originated from the highlands at the southern part of the state. We could guess whether there would be flooding from the speed of the wind and the direction of the cloud.

However, fast forward 50 years later, Malaysians could not claim that we are free from environmental issues especially from land clearing for various commercial reasons, legal or otherwise. Many popular highlands are no longer as cool as before. Flood is getting more devastating compared to before. However, are we taking climate change seriously?

The Malaysian government is committed to reduce carbon emission by 45% by 2030, a very serious target. The question is whether this aspiration is shared by all of us, Malaysians, and what are our contribution towards achieving this target? Are we distracted by the Covid-19 pandemic or we are simply clueless?

The flood season this year appears to be more serious than before. From the news, there are reports about many houses destroyed, life lost and property damaged. While many of us are starting to talk about the root causes of these calamities, we have to wait whether we as a society will be following up on climate change matters when things get back to normal. 

I have a small plot of land in Batang Kali. The Batang Kali river flows along side this property. When it rains heavily upstream, the river will swell and sometimes can overflow. Just imagine if the volume gets larger due to heavier rainfall and the water level downstream is higher than usual? There could be flooding and the life of people along this river could be affected. What would be the situation 30 years from now?

Perhaps, being exposed to the risk of climate change causes me to appreciate what possibly could go wrong if we do not do anything collectively as the occupier of this planet, our only planet. What about those who are chasing profits and share prices without being bothered whether their conducts and behaviours contribute towards expediting climate change impacts?

It is time for major investors in Malaysia to step up their game to bring climate change issues main stream and send a clear message to corporate Malaysia that they have to start making the difference. 

Family Covid-19 Strategy

Many people look forward to the resumption of "normal" life come Monday. There are also people who are concern whether going back to normal would cause more infection of Covid-19.

The debate about "life vs livelihood" under the present circumstances is not limited to Malaysia only. It is a legitimate question, which one should take precedent or can we have both?

Realistically, the Covid-19 pandemic would be around for a while. While staying at home for the past 6 weeks had helped in breaking the chain of infection, many had also lost their income and livelihood shattered. We have no choice but to walk on the tightrope. We need to live with Covid-19 for a while.

Hence, each of us has to take responsibility to take care of ourself, our family and the society. This is where each family has to agree of its own Covid-19 strategy. What to do at home, when using public transport, when shopping and when coming back home? Need to work on the stock of face mask and hand sanitiser as we can't assume they will be provided. What about family activities such as during festivities? 

I trust by taking responsibility, we would be able to deal with both challenges, life and livelihood.

Back On The Governance Circuit

I was invited to be a panellist at a forum which touched on anti-corruption  the week before last. This was the last session at the Governance Convention 2019 organised by Institutional Investors Council and the Securities Industry Development Centre. My co-panellist was Tan Sri Abu Kassim, the Director General of the Governance, Integrity and Anti-Corruption Centre (GIACC) which is leading the fight against corruption in addition to the Malaysian Anti-Corruption Commission (MACC).

Tan Sri Abu Kassim shared key initiatives rolled out by the GIACC to combat corruption including asset declaration by our members of Parliament. He also alluded to the introduction of Political Financing Act, which according to him a very critical component of anti-corruption as politicians have influence and could override systems and processes of public institutions.

I shared few key points with regard to the implementation of section 17A of the MACC Act which will be effective June next year. The new provision would introduce corporate liability to businesses which are involved in corruption unless they are able to demonstrate that they have implemented adequate procedures to prevent corruption.

Corporations and organisation which have high standards of corporate governance would have treated corruption as an evil which they would not be associated with and would be part of their risk management and internal control policies. The effectiveness of section 17A would only make these organisation more focus on the effectiveness of their anti-corruption systems.

On the other hand, any system implemented in organisations would be effective if they are ran by people who have integrity and committed to the highest level of corporate governance. Hence, over reliance on systems and processes without continuous efforts to educate and develop the hearts and minds of people in organisations could also result in surprises.

The tone from the directors from the top must shape the tune in the middle and the tap of the feet on the ground. Management must ensure everybody is dancing to the same song. The the board fails to ensure management and the rest of the corporations to play ball, the risk of corruption and failure of governance would remain high even though there is a new law regarding corporate liability due to corruption.

A corporation operates in a wider ecosystem where external elements can also shape its behaviour especially when competition for business is intense. If there are elements which can misbehave and remain are out of reach from enforcement actions, other elements in the ecosystem would be under pressure to play to the tune. Hence, laws such as section 17A would only be effective if it is enforced without fear or favour and complemented by political financing law which is said would be enacted.

Being back on the governance circuit was something which made me happy. So many things had happened since my last posting on this blog. I pray that I would be able to walk my talk in carrying out the responsibilities which I am now carrying.

Governance And The Modern Society

I was invited to share my views on governance and its importance in a modern society at Masjid Al Iman, Kemensah. This was my second appearance in a masjid to discuss about governance and integrity, topics which are rarely discussed from the societal perspectives in mosques.

Given the audience, I thought it was appropriate to simplify my thoughts into the following points:

• A modern society relies heavily on the services provided by various agencies, organisations and institutions in the public and private sectors such as utilities, education, health and security;

• The quality of leadership, management and governance practices in these organisations would determine the policies and strategies they formulate, the service levels they offer and the prices charged or cost recovered from the public;

• The government is not an alien structure but a representative body elected by the Rakyat to govern and administer our funds, resources and affairs on our behalf;

• Government's funds consist of taxes which we pay, proceeds from our assets which they sold, royalties etc from resources extracted from our lands and borrowings made on our behalf. Hence, if development and operating expenditures are not made prudently, we may need to pay more taxes or government may need to borrow money to pay for these additional expenditures;

• Borrowings by the government involve cost, the interest or financing charges paid. For example, if government's borrowings are RM 100 billion, cost on these borrowings wound be approximately RM 4 billion, which is a huge sum of money and is deducted from the amount otherwise would be spent for the benefits of Rakyat;

• Governance in the public sector is equally important as in the private sector although the Code on Corporate Governance was conceived in 2000 for the application in the capital market;

• Management involves activities and processes to move organisations towards their missions and visions. This include strategy formulation, operations, marketing, financial management, talent management and development as well as compliance with rules and regulation;

• Governance on the other hand is the process to oversee management and the running of organisations and to ensure their objectives are met and risks managed. This involve stewardship, roles and functions of the board, risk management, internal control, assurance and culture;

• While governance and management could involve the application of various systems, processes and policies, their effectiveness is dependent upon the people who are given the trust and responsibilities;

• Corporate governance failures occur not due to the lack of people with knowledge, skills and values required to perform their duties but when they do not have the courage to do the right thing at the right time. Good people simply look the other way when transgressions happen; and

• Doing the right thing requires courage and the willingness to confront the adverse consequences which come with it.

I appealed to the audience to continue to demand good governance for the sake of their children and our future generations.

Proposed MIA Competency Framework: Why industry should care

The Malaysian Institute of Accountants (MIA) this month had issued a draft competency framework for public exposure and comments. Based on my recollection, this is the first time MIA attempts to develop a formal and structured competency framework to ensure accountants who are registered with MIA are able to perform and deliver professional services to their employers and clients.

In coming up with the proposed competency framework, MIA took into considerations the recommendations of the Committee to Strengthen the Accountancy Profession (CSAP) and the Report on Observation of Standards and Codes for Accounting and Audit which was conducted by the World Bank in 2012. It engaged the Accounting & Audit Research Consultants to draft the framework (MIA CFM).

According to MIA "The MIA CFM is a set of principles that defines the baseline competencies and skill sets required to become accountancy professionals who are able to demonstrate their proficiency at different levels namely “Foundation”, “Intermediate, and “Advanced” as defined by the framework issued by the International Accounting Education Standards Board (“IAESB”). The development of MIA CFM helps to assure the market that the title refers to accountancy professionals who have demonstrated the achievements of the baseline competencies required to excel in a specific role".

When MIA was established in 1967, it was empowered by the Accountant Act, 1967 to register accountants in Malaysia and to conduct examinations to assess their level of competencies. However, the examination power was never exercised, instead MIA recognised those who are members of professional accountancy bodies to be registered with MIA as Registered Accountants and Public Accountants. In early 70's, graduates from recognised institutions of higher learning started to be recognised for registration as well. The reasons for the inclusion of these graduates were never properly documented and remains as a contentious issue until today as this is not practiced in economies where the accountancy profession is considered matured.

What makes this issue worse is when most of the graduates of the recognised university qualifications are given partial exemptions by various professional accountancy bodies, sending a signal to the market that they are not equal. These graduates would need to sit for additional professional papers before given full membership.

In 2000, the Accountant Act was amended to abolish the examination power of MIA and those registered with MIA are known as Chartered Accountants. This created a perception which is different from the original intention of the law. Other than MIA, I am not aware of any other bodies which refers to their registrants as Chartered Accountants, without a proper professional assessment.

While the exposure draft on MIA CFM focuses on the competencies of the three levels of membership as proposed, we as the stakeholders in the industry, should also consider the whole membership framework to ensure it is robust enough to produce accountants as envisaged in the MIA CFM.

Malaysia had been benefiting from the services of accountants trained by various professional accountancy bodies from Commonwealth countries which are recognised here. These bodies do not only train our accountants to achieve their baseline competencies but those competencies were regularly reviewed to ensure they meet the demands in the various markets they serve. This is very important as not only we get our accountants to be close to the curve but their perspectives and specialisations provided huge value to our companies and institutions which need to compete with global peers and competitors. It would be unfortunate if this arrangement is made more difficult due to pressure from interested groups within the accountancy profession.

I really hope that market participants and industry players would take this opportunity to provide feedbacks and expectations for MIA to seriously consider. It is important to note that the reason MIA exists is to be the guardian of professional standards through registration. This is a statutory requirement which requires MIA to place public interests ahead of any sectoral interests within the accountancy profession. MIA should not abdicate this responsibility.

The exposure period ends 10 May 2019.

Goodbye Goh Joon Hai, a True Friend in the Accountancy Profession

As I was preparing to wrap another year, I received a message from a friend about the passing on of Goh Joon Hai, a senior accountant who I have a lot of respect. Although I had not been hearing from him for a long time, he was instrumental in providing me with the insights and guidance in discharging my responsibilities in the leadership of the Malaysian Institute of Accountants (MIA).

When I was voted into the MIA Council in 2000, I was assigned the responsibility to chair the Public Practice Committee (PPC), a committee which was tasked to look into matters related to public accounting practitioners in Malaysia. As a young rookie, it was certainly a heavy task. Furthermore, some of the heavyweights from the previous committees were still there, including Goh Joon Hai.

While I was adapting to the dynamics of the committee, Goh Joon Hai provided me with counsel and explanations about the histories or principles behind the many policies and practices of MIA with respect to public practitioners. Sometimes, he would be disagreeing with my views, albeit in very professional and fatherly ways. That sort of interactions hastened my progress in chairing this committee, which had the reputation of being the toughest in MIA.

As the chairman of the PPC, I was also involved in trade negotiations which were ongoing at many levels those days. These negotiations were very important to accounting practitioners in Malaysia as they involved market openings and recognition of qualifications for market access in various markets of the trading partners of Malaysia.

Goh Joon Hai helped me to understand the mechanics of trade negotiations and the various commitments made by Malaysia at the World Trade Organisation, Asean and a number of bilateral and multilateral negotiations which we were involved in. We travelled together to attend meetings of regional and global accounting bodies. During the free time at those meetings we became closer and I learned a lot from his past experiences which he shared.

No many people realise that Goh Joon Hai was among the first set of lectures in University of Malaya who taught the pioneer students in the Advance Diploma in Accounting programme which later allowed them to be members of the MIA. Goh Joon Hai was sent to Canada to understand the concept of the professional programme offered by the Canadian Institute of Chartered Accountants, a body which he is a member of. This is a significant milestone in the history of the development of the accountancy profession in Malaysia.

While we celebrate the progress of the accountancy profession in Malaysia as it is today, we should not forget the contributions of those many accountants in building the profession over the years. Goh Joon Hai is certainly one of those who had given his best contribution and for that we thank him from the bottom of our hearts.

As far as I am concern, Goh Joon Hai was one of the accountants who held tight to his professional values and personal principles. We wouldn't mind to lose out to maintain what he believed.

Goodbye Mr. Goh. I will always remember you as one of the friends who helped me to be who I am today.

Discourse on the Integrity of Public Institutions

Within a week I had the opportunity to share my views and thoughts on governance and integrity at 3 different events.

I was invited by the People and Family Development Board (LPPKN) to discuss about governance of public institutions. I shared the elements of corporate governance including board effectiveness, the check and balance mechanisms and effective communication. I related those elements to public sector situations where finance outcomes may not necessarily be the only focus.

On of the key messages for LPPKN's board and management was that none of them are too small or insignificant to contribute towards governance excellence. Each of them have important roles to play to achieve their mission in making Malaysian families to enjoy the growth and prosperity of the nation and uphold values which will make Malaysia a great country.

I was also invited to be a panellist at the first public event between the Menteri Besar of Kedah and the state civil service. During the event, Dato' Seri Mukhriz Mahathir admitted that as the head of government, his accountability is not only to the state by he would also be assessed by Allah during the Day of Judgment. His message was clear, everyone must be honest in discharging their responsibilities to the citizens of Kedah.

After his speech, a discourse on Public Sector Integrity took place. In addition to myself, Tan Sri Ambrin Buang, the former Auditor General and Tan Sri Zabidi, the former Director General of Public Service Department shared their thoughts and experience in how public service could be strengthened and efficiency enhanced. 

Tan Sri Ambrin encouraged the civil servants to continue to explore opportunities for improvements and not to wait for the Auditor General department to point out where their weaknesses are before acting on those weaknesses. Tan Sri Zabidi, on the other hand, reminded civil servants regarding the oath they had made to serve the public without fear and favour. He also encouraged civil servants to be innovative in servicing the rakyat.

The thrust of my discussion was the importance of placing the right persons at boards and senior management of public institutions. They would be setting the tone which would be reflected by the tune of the dance of middle management and the tap of the feet of others on the ground. Effective system of check and balance would be critical in ensuring people's mandate are upheld and civil service remained on track in performing their duties. I also reminded them that governance and integrity is part of the Islamic tradition and demonstrated by Abu Bakr and Omar, the first 2 caliphs after Prophet Muhammad who extended the concepts taught by the Prophet. 

Dato' Seri Mukhriz, his Exco members, senior civil servants and all other participents then took the oath of integrity to reinforce their commitments to serve citizens honestly and with integrity.

The third event of a live interview on Astro Awani on governance and enhancing integrity of the public sector. I was interviewed together with Tian Chua, the Vice-President of People Justice Party (PKR). 

One of the issues that was focused on was on debts, guarantees and obligations of the Federal government. This topic became hot after the new Prime Minister disclosed that the Federal government debts had breached the RM 1 trillion mark. My view was that no one disputed the existence of those liabilities but the debate at the moment is on their classification. The Federal government adopted a modified cash accounting system where assets and liabilities are not brought on balance sheet like the system used in the private sector. Hence, the health of the economy is appraised based on other data and information including the ratio of our debts to the GDP. Some people use international practices in defining the relevant debts while others use the ultimate obligor who will settle those debts and obligations to support their point of views.

I suggested that a portal is set up as a depository of all audited financial statement of public institutions at the federal, state and local government levels. This will allow the public to obtain official information regarding financial performance and positions of those institutions and able to have discourse with better information and understanding. This will also force public institutions to be more responsible for their financial management and ensure financial statements are well kept and prepared on time and are audited promptly as well. This platform is not expensive but the impact could be huge.

Again, a shared about the need to place people with competency and who have conscience at the board and as leaders of public institutions. They must also be committed to do the right thing. Public institutions must also be independent and able to make decisions on their own to ensure the interests of citizens are protected. 

In conclusion, I reminded citizens that their duties towards the country in a democratic system do not end only when the general election is over. They must continue to follow developments in the country and voice their views when necessary. This is a collective responsibility and should be shouldered by everyone. This is the reason by government must be transparent and allow the media to share important information. This could be used by the citizens to discharge their duty, as expected in a democracy.

A Meaningful Birthday

Our birthdays is fixed. However, events which occur on our birthday can make it more meaningful as well.

The 14th general election was held on 9th May 2018, on my 53rd birthday. As citizens, me and my family members voted in a number of constituencies; Gombak, Wangsa Maju and Kajang.

When the results started to trickle in that evening, a different trend started to emerge compared to last elections. Eventually, around 4.30am on 10 May 2018, the Election Commission officially announced that Pakatan Harapan, led by the former Prime Minister, Tun Dr. Mahathir Mohamad, managed to secure a simple majority in the Malaysian Parliament.

The focus then was on the appointment of the Prime Minister. Although the former Prime Minister, Dato Sri Najib Abdul Razak, acknowledged the results in his press conference in the morning, he did not concede and congratulate the opposite side.

After some drama, eventually Tun Dr. Mahathir was sworn in as the 7th Prime Minister around 10pm on the 10th of May.

For those who had decide to choose a fresh set of people to lead the country, they would be waiting for Pakatan Harapan to fulfil its election promises. Certainly not all of those promises would be fulfil in the short term but the people would expect the 100 day promises to be delivered just as promised, within 100 days.

A nation is not only built by those in leadership and administration but citizens, like you and me, have our roles to play. We can't just wait for whatever that we wish to happen, we have to make it happen through our efforts and contributions.

While what happened on my birthday this year was not planned, my birthday this year was certainly very meaningful.

Walking In The Middle of Jalan Sudirman

I did it again. I was able to walk in the middle of Jalan Sudirman, one of the busiest roads in Jakarta together with thousands of others. No, we were not demonstrating but today was their “car free day” when the busy road was closed so that people could do their things along the busy street.

What was started as a commitment to ensure the air in the city to remain liveable, the car free day has allowed citizens to be involved in healthy lifestyle activities and business. While the Jakartarians walk, jog, ride and do all other stuff, some others can take the opportunity to open small stalls along the road to sell stuffs as well.

This morning, a huge crowd turned up and the whole of Jalan Sudirman was turned into a huge lifestyle centre. I could observe government departments, commercial entities and charitable organisations having all sort of activities with their people and the public such as aerobics, walkabout, product demonstrations and singing. Everyone seemed to have enjoyed themselves.

The takeway is very simple, citizens need spaces to enjoy. After all, cities are built for them to live, not just for commercial organisatiions to build buildings everywhere, making huge profits but denying citizens their rights to a good living.

There is somewhat a similar concept in Kuala Lumpur but it is done once a month only and to cater mainly for cyclists. There is also no funfair like activities such as the one in Jakarta. 

Perhaps the difference is the Mayor of Jakarta was elected by its citizens whereas the Mayor of Kuala Lumpur was appointed by a minister who himself was not elected by Kuala Lumpur people. Hence, both mayors have different bosses and priorities. 

Those in public offices must understand why they their chairs were created in the first place, to serve the public. Once this is forgoten, their conducts and behaviours may not be consistent with their real bosses, the people.

Jakartarians seem to be a bit more lucky, if the car free day is used as a barometer to gauge public policies.

Are Corporations Taking Their Citizenship Roles Seriously

The news regarding how personal data from Facebook was abused by Cambridge Analytica is just another example of how much our lives are affected by the conducts of corporations. Not only corporations like Facebook profited from the data provided to them by the millions of their users worldwide for free, it had failed to honour its obligations with regards to how those personal data and the privacy of their users were managed.

In the last number of years, the issue of how much these global corporations pay their fair portion of taxation was also raised and debated in many jurisdictions. Given the breadth of their operations across many geographical locations, they were able to structure their business arrangements in ways leading them to pay close to nothing. Legally, these corporations claimed that they had complied with the relevant taxation laws in all jurisdictions. However, when a average middle class person is subjected to a higher tax rate than corporations which made billions of dollars in profits, something is just not right.

Corporate conducts had also affected the environment, culture and lives of people around them. These are well documented in many countless cases globally. The Deepwater Horizon oil spill in the Gulf of Mexico was one disaster which resulted in severe damages to marine and wildlife habitats as well as the fishing and tourism industry in the affected areas. The Volkswagen scandal where emission test results were changed is another example of how much safety of people were risked in the pursuit of profits. Even corporate collapsed, mostly due to scandals and misadventures, had resulted in many employees being retrenched and lost their livelihood.

Limited corporations are the preferred structure used in many parts of the world for business. Apart from their ability to own assets, to sue and be sued in their own rights and having perpetual life, the separation of liability between their owners and the corporations is an important factor which makes the corporate structure an ideal way of risk taking. However, different from natural persons who actions and conducts are determined by their hearts, minds and souls, the conducts of corporations are influenced by many people - shareholders, directors and employees. Hence, the collective values, wants and ideals of these people, determined in complex legal and moral arrangements eventually shape the behaviours of corporations in dealing with their customers, suppliers, financiers, regulators and other stakeholders.

If a person who is a citizen of a country is expected to observe laws and behave in ways which benefit the society at large, should corporations carry the same responsibility of being good corporate citizens? While the answer appears to be obvious, why corporations, especially the larger ones ended up to be at the wrong side of the scale due to their conducts and behaviours?

As corporations are set up as means of creating value to their shareholders, maximisation of profits seems to be the normal order. Directors are pressured by shareholders to deliver more profits and dividends while investors and fund managers on the other hand demand corporations to provide ever-optimistic business outlook so that their share prices remain high. Senior management’s remuneration and bonuses are linked to performance, mainly profits. These various pressure points and conflicts in one way or another are pushing corporate interests away from the interests of the societies around them.

There are a number of efforts out there to bring good governance and corporate citizenship issues into board rooms and general meetings. Integrated reporting is one of them. In preparing integrated reports, corporations are required to define their value propositions and how they are achieved. The impact of their conducts on the stakeholders around them would need to be clearly articulated. It would be interesting to observe how much of the disclosure reported in integrated reports stimulate debates around good corporate citizenship.

Regulators in the financial services industry are also requiring financial institutions to re-design their remuneration structure so that excessive risk-taking is not encouraged. The issue of corporate culture is also under scrutiny. How much of that would change for the better would be something which we need to monitor.

The above observations are not meant to deny the benefits brought by corporations to our societies. Through their wealth creation activities, much progress had been achieved and shared across. However, as more corporations are becoming dominant in more aspects of our life, the need for them to be good corporate citizens is becoming more critical. 

This article was published in the Malaysian Reserve on 23 March 2018

Lies, Damn Lies and Statistics

No. I am not writing about anyone who lied. In fact this is to recap some points which I picked up during the presentation by Tan Sri Lin See Yan on his views of our economy. It was an event for FIDE directors, those who sit on boards of financial institutions in Malaysia.

Of course Tan Sri Lin doesn't need further introduction as he is known to be the former Deputy Governor of Bank Negara and a Harvard graduate. His service records, contributions to the country and his efforts in sharing his thoughts were all captured in his presentation that morning. He appeared very casual but his intellectual observations were very sharp.

In analysing our economic data, he arranged them in a particular time series and theme on which he formed his views. For me, Tan Sri Lin managed to capture our challenges on a single slide.

Amongst his observations were:

There is a disconnect between our GDP numbers and the reality faced by citizens on the street. This is simply because our GDP is an aggregate number and only by disaggregating that, we could see a better picture of our realities. He our CPI index as an example where, according to him, does not capture the differences in geography, urban and rural.

Our growth is mainly through consumption and the investment component had been shrinking over time. This increases household debts and could pose challenges to future growth as citizens could not carry more debts. They can't be expected to consume beyond their means.

The manufacturing sector is also weakening and the growth in the past few years were generated by the construction sector. The shift into Industry 4.0 kind of economic activities would also pose a danger if we do not have the ability to move up the value chain.

Tan Sri Lin also raised the issue of Government-Link Companies (GLCs) crowding out private enterprises. While this topic had been debated a lot before, he pointed to the fact that 75% of the value of Bursa Malaysia are from these GLCs.

While he was not conclusive, Tan Sri Lin also pointed towards the risk of having growth without the corresponding employment growth. Although new types of work would be created, this requires quick adjustments to our education system, which has problems on its own. The low-cost labour model which many companies are adopting would lead many of them towards problems in the future.

One quotable quote that he made was:

"We know the problems, we know the solutions and we also know that they would not be implemented".

Whether that summarises our real problem - not recognising that we have problems and not having the political will to solve them - is for everyone to decide for themselves.

According to him, we are performing below our potentials and this is reflected in the value of Ringgit, which according to Tan Sri Lin should be much higher. He produced data which suggested that the value of Ringgit at present is not much better compared to the days where our economy was only based on tin, rubber and agriculture products. We have nor benefitted from the modernisation of our economy, something that we have to acknowledge.

True to the label as an honest intellectual, Tan Sri Lin provided policy proposals to address our present and future challenges. However, as what was quoted earlier, do we have the desire to do things differently or we will only change when there is a burning platform?

Why Entrepreneurs Should Worry About Governance

Corporate governance, in the present form, was introduced in Malaysia after the Asian financial crisis in the late 90's with the publication of the first Code on Corporate Governance (CG Code) by the Securities Commission in year 2000. 

This CG Code, which was revised a number of time over the years, was enforced through the Listing Requirements of Bursa Malaysia. Given the needs of the time and the consequences if the governance practices of our listed companies were not up to mark, the focus of the code was for larger structures with significant external shareholdings. 

Although the outcomes of good corporate governance would improve any organisations, for profits or otherwise, big or small, the principles, best practices and other recommendations in the CG Code are more practical to be implemented by larger business organisations. What about small and medium enterprises (SME)? Should entrepreneurs start to worry about governance and leadership when their businesses grow into bigger companies?

Corporate governance is defined as "The process and structure used to direct and manage the business and affairs of the company towards business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value, while taking into account the interest of other stakeholders". There are a number of concepts which are important to all businesses, irrespective of their size - "process and structure", "direct and manage" and "long-term shareholder value" amongst the few.

SMEs have many structures and processes; they require to be directed and managed; and more importantly, entrepreneurs normally are their major shareholders. Hence, if the outcomes of good corporate governance create long-term shareholders value, their entrepreneurs who are their major shareholders would benefit if their businesses have good corporate governance practices.

One of the major challenges for good corporate governance to be implemented by SMEs is the way governance are discussed in the public space. The focus had always been on the structures such as committees and various controls and assurance activities. All of these appear to be too overwhelming for entrepreneurs to relate to their smaller SMEs. The distinction between governance, leadership and management are also not clear. Hence, entrepreneurs tend to focus more of the management aspects since that would bring them profits and neglect governance and leadership part of business simply because they are too complex to be understood.

It is suggested here that when the three key concepts; governance, leadership and management are discussed with entrepreneurs, their interests (being the major shareholders) should be the focal point. Governance should be sold as the mechanism for them to protect their profit generating machines and whether they like it or not, they have leadership roles to play in their respective businesses.

My recent session on governance and leadership for SMEs. Entrepreneurs are not only keen but they also indicated their challenges in enhancing governance and leadership in their enterprises

Rather than worrying too much on the structures, entrepreneurs need to be encourages to focus on the principles of governance and be creative in getting the outcomes. For example, instead of having independent directors, they could create an advisory structure where independent people could advise them on governance, leadership and management issues faced by SMEs. This will avoid those advisers from being exposed to business and conduct risks of SMEs.

A lot more need to be done to enable good corporate governance be adopted in the SME sector. This require responsible leadership by the entrepreneurs themselves. Good governance should result in effective management and more sustainable enterprises. At the end, entrepreneurs should be also to see and benefits the most, since they are the owners and assume the highest risks of ownership.

Boardroom Effectiveness - Personal Performance or Group Performance?

Board of directors as a whole are expected to be effective. Given that boards are collection of people, the question of whether effectiveness comes from individual performance or collective performance could arise. Let us consider some factors which could influence board effectiveness.

Board composition

Like any other team structure, the composition of the board is critical. Who sits around the table, what skills and values do they bring and whether collectively they have what it takes to bring the company forward successfully are pertinent questions.

Unlike a soccer team where a manager would determine the composition of the team based on his philosophy of playing, the composition of boards is determined by the nomination committees consisting of existing board members themselves. To a certain extend, there would be challenges in shaping compositions of the future if some of the committee members would nee to be excluded. Tough job!

Having agreed on the composition is just one part of the story. Convincing the right candidates to join would be the other part. Sometimes, the reputation of the controlling shareholders or the company as a whole may determine whether competent and qualified people are keen to join or otherwise.

Board dynamics

A soccer team full of stars would not necessarily win competitions. It all depends on how well the team members play together in accordance with the strategy of the coach and the strength of the opponents.

Similarly, in boardrooms, how the members interact and work together would also influence their effectiveness as a whole. Are there enough candour where people are free to share their thoughts and views or are there prima-donnas who are keeping the airtime only to themselves?

How the board eventually arrive at their decisions would be influenced by the dynamics. In some cases, decisions are not made until everyone has given their views, no issue with this. In some other cases, few individuals in boardrooms could be the decision makers, especially when the rests are merely seat warmers and would follow the flow of the deliberations. Would this be fair to the companies they serve?

To a certain extend, the ways chairmen of boards allow the meeting to flow would have impacts on board dynamics. Some chairs are firm with a particular way of deliberations while there could be chairmen who let meetings find their own causes.

Staying the cause

Directors are expected to be honest and act in the best interests of the companies they serve. Achieving this could be influence by many factors;  strategy adopted, quality of management; situation of the industry; strength of competition, economic conditions naming the few. 

Hence, boards have to be clear of the way forward, oversee management, ensuring proper check and balance mechanisms are in place, guide management in dealing with market dynamics and competition and more importantly, setting the tone on values and culture would eventually lead them to the fulfilment of their duties and responsibilities.

Both aspects must be there

Looking at the above issues as a whole, both personal performance and group performance are important. Each board members has to bring value to the table. At the same time, their collective performance would also matter as in most cases, boards would be judged based on the decisions made in the cause moving their companies forward and provide returns to shareholders and investors.