CORPORATE INTEGRITY IN MALAYSIA

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CORPORATE INTEGRITY IN MALAYSIA Edited by Mohd Nizam Mohd Ali

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Malaysian Institute of Integrity

CORPORATE INTEGRITY IN MALAYSIA

Corporate Integrity in Malaysia Published by Malaysian Institute of Integrity (I1M) © Copyright Malaysian Institute of Integrity (1IM), 2014 All rights reserved. No parts of the book may be reproduced or transmitted in any forms by any means, electronic or mechanical, including photocopying, recording or any forms of storage and retrieval system, without permission in writing from the copyright owner.

First published December 2014

Perpustakaan Negara Malaysia

Cataloguing-in-Publication Data

CORPORATE INTEGRITY IN MALAYSIA / Edited by Mohd Nizam Mohd Ali ISBN 978-967-5091-31-5 1. Corporate governance-Malaysia. 2. Business ethics-Malaysia.

I. Mohd Nizam Mohd Ali. 658.4009595

Malaysian Institute of Integrity (IIM) Menara Integriti Persiaran Tuanku Syed Sirajuddin Off Jalan Tuanku Abdul Halim 50480 Kuala Lumpur Malaysia http://www.iim.org.my Acknowledgement and disclaimer The views expressed in this publication arc those of the authors and do not necessarily represent those of the institutions or the organisations or the Government of Malaysia or the Malaysian Institute of Integrity.

Printed by Pemiagaan Normahs Printed in Malaysia

CONTENTS

•» • • • .•

Corporate Integrity Agenda: Trust and Accountability

Case for act ion Corporate Integrity Monitoring Framework Systemic risks Fraud risks and corruption Homo Economicus Persona The overarching objective: Competitiveness Corporate integrity in Malaysia Trust and integrity Conclusion References

1 1

3 4 4 6 7 8 8 10

Review of Corporate Governance in Malaysia (1999-2013)

11

1999: The watershed year The Code and the Blueprint Protecting the shareholders Shareholder activism makes a difference The boardroom: Centre of the CG universe Conclusion

I1 16 22

In Search for Ethics in Business Eat before you come Following the Prophets Searching the soul of humanity, looking for answers Defining and identifying ethics in business Coming at it from al! angles

28 33 36 ■ 41

43 44 46 47 50

Who lights the spark?

Who is responsible for ethics?

Institutions confuse ethics in business with CSR Shutting the revolving door Doing the right thing The lobby giants Legislating ethics and regulating character Media-based societyfor transparency Laying the next bricks Ending on sobriety References Corporate’ Social Responsibility

51 52 53 55 55 56 59 61 64 67 69 71

Emerging CSR thrust that goes beyond philanthropic activities CSR is Just about everything Concept of CSR Triple bottom line reporting Expanded CSR stakeholders Expanded interest in social responsibility Is there a needfor a standardfor social responsibility?

SR core subjects in ISO 26000 Expectations ofsociety Socially responsible investment SR Instruments and initiatives

71

Profiles of writers

79

71 72 72 73 73 74

75 76 76 77

CORPORATE INTEGRITY IN MALAYSIA

CORPORATE INTEGRITY AGENDA: TRUST AND ACCOUNTABILITY Mohd Nizam Mohd AH

A National Integrity System encompasses the institutional pillars of governance, civil society and private enterprise1. Underlying its sturdy structure is the conception of accountability in both dimensions of horizontal and vertical relations. The related parties in each dimension vary according to the nature of organisations and their respective core operations. In private enterprise setting, shareholders hold the directors accountable for decisions and direction of the business venture in vertical axis during general meetings.

In the same manner, the general populace will hold any elected government officials to account through the legislative process.

Yet, the dimension of horizontal accountability is harder to behold due to its inherent quality of trustworthiness. In the absence of formal exercise of power and duties, being accountable to an agreed decision is achieved through deliberated consensus, hence, the demand of basic honesty and clear conscience must be met in mutual trust. This essay is about the fundamental elements of an integrity system that serves as a guiding framework for such professionals in private enterprise realm.

CASE FOR ACTION Corporate Integrity Monitoring Framework Economic goals (Countries / companies)

GDP/P&L/ Competitiveness

mm

Professionals Trade groups Academia

authorities /

PLCs

Enforcement agencies

SMIs

a

(Ss)

Regulatory

GLCs

SMEs retailers

x!' 'j' 'I' 'J' 4' 4/ 'I'

Service / products

Consumers / market (Dd) CNuam Ah. 2009

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CORPORATE INTEGRITY IN MALAYSIA

In Malaysia, the market players’ identity and accompanying roles are specifically recognised under the national strategic thrust for good governance. The largest and strongest force in this triangle is the regulatory bodies and enforcement agencies. In Malaysia the main bodies are Bank Negara Malaysia, Securities Commission of Malaysia, Bursa Malaysia Berhad, Companies Commission of Malaysia, Commercial Crime Investigation Department (of the Royal Malaysia Police), the Malaysian Anti­ Corruption Commission, and the Ministry of Domestic Trade, Cooperatives and Consumerism.

The private sector is obliged through the laws and regulations regulating all matters to the economic integrity and corporate governance to these regulatory bodies. Any violation or noncompliance is subject to punitive measures. These regulators and mforcers are responsible for drafting, upholding and enforcing, re rules and regulations of doing businesses and wealth making irough ethical and legal means.

The professional bodies, trade groups and chambers of commerce impose their own code of ethics and code of conduct within their respective membership. Between these two entities, the private sector players - the transnational and multinational corporations, the government-linked companies, public-listed companies, retailers, and the small and medium size industries have in one way or the other subscribe themselves to an integrity system that serves their stakeholders’ interest well. Positive reinforcement and non-regulatory sanctions are put in place to reinforce and enable a wider check and balances via non­ governmental organisations such as the Minority Shareholders Watchdog Group and Business Ethics Institute of Malaysia.

I

Professional bodies such as the Malaysian Institute of Accountants, Institute of Engineers and Association of Certified 2

CORPORATE INTEGRITY IN MALAYSIA

Fraud Examiners reinforce and provide structure and shape to governance through its members, by their bylaws, constant monitoring and when necessary, punitive and enforcement measures. By modelling good behaviour and setting a high standard of professional conducts for their members, they are empowered to be custodians and the conscience-bearer in discharging their duties.

In the common objective of sustaining an economy that can meet both the country and organisational economic goals, the foundation underneath this entire structure is the consumers i.e. the market for which the private sector exists to provide goods and services. This supply-demand equilibrium relies upon mutual trust that ethics and integrity functions well with each other. Anybody could be a ‘whistle-blower’ in the event the private sector players fail to provide the goods and services that were promised. In the event of such breaches of promises, the integrity system should be attended to by strengthening its core and due process to avoid its eventual break down. More important than the financial consequences is the loss of trust.

Systemic risks

The World Economic Forum’s Report on Global Risk2 (2010) highlighted the impending risks that inherently exist in the post­ recovery reform agenda. Apart from the usual geopolitics and economic risks, there are now valid reasons for all and sundry to be on the watch for systemic risk of fraud and economic crime in many organisations across the globe.

PricewaterhouseCoopers’ 5th Global Economic Crime Survey (2009) scrutinized these fraud and integrity risks in the prevalent economic downturn and affirmed its global phenomenon. Of the 3037 respondents in 54 countries, 30% were reported having 3

CORPORATE INTEGRITY IN MALAYSIA

experienced at least one incident of fraud in the last 12 months; 62% reported a decline in financial performance and 40% saying that the risk of economic crime had risen due to the recession with almost half saying the cost of fraud is greater than experienced before3.

Fraud risks and corruption

In 2009, KPMG Malaysia Fraud Survey Report estimated that 40% ofthe fraud cases were perpetrated internal ly by management and non-management employees whilst the remaining 60% were done by external sources, namely customers, suppliers and service providers. This is at least on the low side compared with PricewaterhouseCoopers’ findings of 53% internal versus 44% external perpetrators4. However, there was an increase in the percentage of survey conducted by the KPMG. According to KPMG Malaysia Fraud, Bribery and Corruption Survey 2013, 68% of the reported fraud cases experienced by companies were perpetrated internally by management and non-management employees while 32% of the cases were perpetrated by external sources including customers, suppliers and service providers5.

Transparency International’s Global Corruption Barometer Report (2009) stated that there is an increase in perception that the private sector is more corrupt than it was last five years ago and that there is also an increase in experience of petty bribery6.

The World Bank Institute (2009) in fact have estimated that the cost of corruption globally could be as high as USD1 trillion or between 5-6% of any countries’ GDP that could be put to better socio-economic use.

Homo Economicus persona When John Stuart Mill coined the term “economic man i.e.

4

CORPORATE INTEGRITY IN MALAYSIA

homo economicus” in his 19th century works, he is referring to “a being who desires to possess wealth and who is capable of judging the comparative efficacy of means for obtaining that end...as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences and luxuries, with the smallest quantity of labour and physical selfdenial with which they can be obtained.”1 Yet one can argue that such a being is not inclusive of the one that characterizes the Ponzi-schemers or the big-bonus money-getters out of tax payers financial institution rescue packages. In fact the very idea of earning wealth without due works proceeding it is as detestable to Ghandian economics as it is now to any developing countries’ promoters of capitalism. The whole house of cards of the financial realm crumbled down precisely because of such extravagant idea that since everybody is doing it than it must be legal or morally right to join the game. The fundamental element of trust that makes or breaks any deals is lost to such band of conmen. Trust is essential for business and economic success yet scandals have been occurring all over the world repeatedly.

In Malaysia, the market players’ identity and accompanying roles are specifically recognised under the national strategic thrust for good governance. The regulatory authorities such as the Companies Commission of Malaysia (SSM) and Securities Commission (SC) are depended upon to maintain market integrity and economic worth of private ventures. SSM oversees 1.5 million companies and 5 million businesses through its registry and enforces the Malaysia’s Companies Act 1965 (amended 2007) with a balanced enforcement regime. SC monitors 950 public-listed companies and capital market players through the Malaysian Code of Corporate Governance 2000 (reviewed 2007) and the Capital Market and Services Act 2007.

The World Bank in 2005 and 2012 has assessed Malaysia’s voluntary submission to its Corporate Governance Reports on 5

CORPORATE INTEGRITY IN MALAYSIA

the Observance of Standards and Codes based on a methodology that is benchmarked against the internationally accepted OECD Principles of Corporate Governance. Malaysia has been commended for having largely observed the 32 benchmarks in six categories.

The overarching objective: Competitiveness The delicate balance of market integrity has one over-arching objective - one shared by any or all nations: its competitiveness.

In the Ease of Doing Business Report by the World Bank, rankings are based on the ease of economy in doing business amongst 189 countries. A high ranking indicates that the regulatory environment is more conducive to the starting and operation of a local firm. Malaysia has increased its standings from number 12 in 2013 to number 6 in 2014 out of 189 countries.

The Global Competitiveness Index by the World Economic •'orum measures the competitiveness landscape of 148 economies providing insight into the productivity and prosperity of the countries. Malaysia in the year 2013 stands at number 24 moving one rank ahead from 2012.

The World Competitiveness Yearbook by Institute of Management Development provides a global ranking and analysis on how an economy manages the entirety of its resources and competencies in increasing the prosperity of its population.

Malaysia is placed at number 12 over 60 participating countries in 2014, moving from number 15 in 2013.

It can be seen that the various initiatives undertaken by Malaysia has laid the foundation for it to achieve the developed nation status.

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CORPORATE INTEGRITY IN MALAYSIA

Corporate integrity in Malaysia The Malaysian Institute of Integrity (IIM), since 2004 have attempted to bring all these elements together in a cohesive manner through some strategic thrusts; which among others are strengthening corporate integrity; promoting ethical business; strengthening cooperation among all sectors including trade unions; and continuing social justice programmes8.

The principle of good governance must be taught as early as childhood, especially within the school curricular and nurtured within ethical working environment. IIM has nurtured its own integrity champions by teaching the selected student leaders and young professionals the concepts of Corporate Social Responsibility and Corporate Governance9. It can be argued that this educational process will take some time before these leaders chart their professional growth to be corporate integrity champions in the economic enterprises.

Hence, here lies the John Stuart Mill’s homo economicus ethical challenge. How does such persons, in the current seas of corruption, maintain and becoming an island of integrity?

Martin Brown (2005) traces this interpersonal perspective in ‘The Meanings of Corporate Integrity’ where he extended the original notion of integrity as an integral ‘wholeness’ to four other meanings that arises from the right relationships among the parts of a whole i.e. integrity as consistency, as relational awareness, as inclusion and as pursuing a worthwhile purpose.

Charles Watson (1991) in his “Managing With Integrity” depicts this meaning of integrity as “the consistency in what a person says and does, his upright conduct and character that is marked by an undaunted quest for important ends far larger than his own needs, comforts and interests. ” 7

CORPORATE INTEGRITY IN MALAYSIA

Trust and integrity

In a person’s perspective, trust is earned after a promise is fulfilled. In a business, after a service is rendered satisfactorily and products delivered timely. What about in a professional dimension? If we ask the accountants; the context of materiality, timeliness and true and fair value could be reasons enough for trust to be expected and mutually respected. Federation of European Accountants (2009) attempted to define the core element of integrity in professional ethics as "being straightforward and honest in professional and business relationship; fair dealing and truthfulness; not being associated with information that contains materiallyfalse or misleading statements or information furnished recklessly. ”10 FEE believes that there is a case to argue that integrity is actually the core principle of professional behaviour; as without integrity, no professional activity can be relied upon. To make such a definitive proposition more meaningful, and taking the ever-changing demands of professional works that they have to juggle, another fundamental question has to be answered even if not asked explicitly. "Am I trustworthy, truly? " is perhaps such a question. It brings out the required resonance within a personal context that could be aligned to the organisational set-up in a professional agreement.

Conclusion Given the risky outlook, one would expect that by being truly professional, honest and conscientious in one's daily tasks, will bring better results in any setting. Professionals in the management and leadership teams at any given organisation could fittingly serve as the thread that binds the corporations’ promised destiny and its humble origin. Yet to cany out such 8

CORPORATE INTEGRITY IN MALAYSIA

expected roles without due recognition of personal integrity as the core of any formal and business relationships will end in disastrous consequences. The onus is on the management to share with the leadership team the definitive framework of fraud from its simplest form of falsification of claims to more complex criminal breaches of trust and assets misappropriation - as well as the internal detection mechanism to weed it out. This exercise should not just be done as a knee-jerk reaction to circumstantial challenges or problems but must be institutionalised and monitored.

At the end of the day, no matter what the systemic risks are, extenuating circumstances and whatever reasons there might be to be corrupt, it is not just the system that matters. It is integrity at the individual level. It is still about honesty and being true to one self. More studies need to be conducted to link integrity with competitiveness. The rethinking whether governments should be governed like business enterprises could start with corporate integrity as one of the answers to the dilemma of the economic turmoil of this decade.

By being true and honest to one self, all the time and every time; one could take up any assignment and work challenge with full confidence. Not only the work outputs and results will testify to one’s conscientious mind but more importantly the way one delivers them reflects one’s ethical mind. It is almost like the current emphasis of corporate social responsibility proposition of "not just how much money you make, but how you make your money’ to corporate citizens in relations to the environment and societal conditions they operate in.

9

CORPORATE INTEGRITY IN MALAYSIA

REFERENCES 1. UNDP-11M Capacity Building Project. “National Integrity System: A Guiding Framework”. (Kuala Lumpur: UNDPIIM, 2007) 2. World Economic Forum. “Global Risks 2010: A Global Risk Network Report.” World Economic Forum 2010.

3. PricewaterhouseCoopers’. “The Global Economic Crime Survey: Economic Crime in a Downturn”. (UK: PWC, 2009).

4. KPMG Malaysia. “KPMG Malaysia Fraud Survey Report 2009.” (Kuala Lumpur: KPMG, 2009).

5. KPMG Malaysia. “KPMG Malaysia Fraud, Bribery and Corruption Survey 2013.” (Kuala Lumpur: KPMG, 2014).

6. See http://www.transperency.org/news_room/latest_news/ press_release/2009/2009_06_ 03- gcb2009_en 7. Wikipedia.

8. The National Integrity Plan. (Kuala Lumpur: IIM, 2004).

9. In consecutive orders, refers to CSR Rebung Programme, Integrity Business Club & the Tan Sri Azizan Zainul Abidin Integrity Circles for Young Professionals (2006-2009).

10. Chartered Institute of Management Accountants. “Fraud Risk Management: A Guide to Good Practice.” (UK: CIM A, 2008).

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CORPORATE INTEGRITY IN MALAYSIA

REVIEW OF CORPORATE GOVERNANCE IN MALAYSIA (1999-2013)

Errol Oh

1999: THE WATERSHED YEAR

Corporate governance in Malaysia did not spontaneously come into existence in 1999, but it was definitely a watershed year in the development of the country’s corporate governance landscape. In March that year, the high-level Finance Committee on Corporate Governance published its Report on Corporate Governance.

It is without question a seminal document in the evolution of corporate Malaysia. Many of the report’s findings and proposals continue to have an impact until today.

Even the definition of corporate governance that was developed as part of the committee’s work remains relevant after all these years. For example, the Securities Commission’s (SC) Corporate Governance Blueprint 2011 kicks off by citing it, and the Malaysian Code on Corporate Governance 2012 uses it as well.

Here is that definition: “Corporate governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value, whilst taking into account the interests of other stakeholders.

1 Finance Committee on Corporate Governance’s Report on Corporate Governance, p. 52.

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CORPORATE INTEGRITY IN MALAYSIA

Alternatively, there is the World Bank’s explanation that corporate governance refers to the structures and processes for the direction and control of companies. It concerns the relationships among the management, board of directors, controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital.2

Given the pivotal role of the Report on Corporate Governance, this review of corporate governance in Malaysia from 1999 to 2013 has to start with the circumstances that led to the formation of the Finance Committee on Corporate Governance.

The catalyst was the 1997/98 Asian financial crisis, which began in July 1997 with the collapse of the Thai Baht, and quickly 'pread to other parts of East Asia, including Malaysia.

Ji Abdul Kadir, who was appointed the SC chairman in March 1999, gave a fine capsule description of what happened during the crisis. He recalled that the crisis shocked many people, including the established gurus and futurists.

Seemingly robust economies crumbled virtually overnight, he said, as problems in one country triggered a loss of confidence in neighbouring countries, exposing the vulnerability of the region’s financial markets to the vagaries of herd behaviour.

Stock markets plunged as investors fled the region in panicked droves and economic performance slid into negative territory in what was, for many countries, the first time in well over a decade.3 2 The World Bank’s Report on the Observance of Standards and Codes, Corporate Governance Country Assessment: Malaysia, July 2012.

3 Commemorative lecture at 42nd anniversary of Malaysian Association of Certified Public Accountants, 24 October 2000.

12

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CORPORATE INTEGRITY IN MALAYSIA

As damaging and frightening as the crisis was, its aftermath presented an opportunity to address the country’s corporate governance issues. After all, poor corporate governance practices were among the institutional weaknesses and inefficiencies that had contributed to the crisis.

There had already been ongoing efforts to improve corporate governance in Malaysia (such as the SC’s decision in 1996 to shift to disclosure-based regulation), but the crisis injected a lot more urgency into the mission.

In March 1998, then Finance Minister Anwar Ibrahim announced the formation of the Finance Committee on Corporate Governance as part of several measures to further boost and stabilise the local economy.4 Headed by the then Secretary General of Treasury Dr Aris Othman, the committee’s main tasks were to look into establishing a framework for corporate governance and to set best practices for corporate governance.

This move reflected the fact that enhanced standards of corporate governance can strengthen investor confidence. The economic turmoil caused by the crisis had taught Malaysia a harsh lesson on how the lack of corporate governance can quickly and deeply hurt the capital market.

Those represented in the committee included the regulators (the SC, Bank Negara Malaysia and the Registrar of Companies), the stock exchange, the local accounting standard-setting body and the capital market participants (such as the commercial and merchant banks, stockbroking companies and listed companies).

4 Finance Committee on Corporate Governance’s Report on Corporate Governance, p. 42.

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CORPORATE INTEGRITY IN MALAYSIA

The committee also consulted several bodies representing other stakeholders before finalising its report.

At the time, there was little in the law and in the capital market rules that explicitly addressed corporate governance.

According to the Report on Corporate Governance, the roles and responsibilities of directors, shareholders and auditors, as well as the relationships between them, were governed mainly by company law. This statutory framework governing these roles, responsibilities and relationships was further reinforced with the subsequent introduction of rules and guidelines such as the stock exchange’s Listing Requirements and the SC’s Policies and Guidelines on Issue/Offer of Securities, as well as the introduction of certain provisions in the Securities Commission Act 1993.5 The problem with such a framework is that it did not take into account the difference in the origins, size and level of maturity of the listed companies.

The report noted that the 1988 launch of the stock exchange’s Second Board had a significant impact on the state of corporate governance among Malaysia’s listed companies just before the Asian financial crisis hit.

The Second Board was meant to help smaller companies with good growth prospects to tap into the capital market.

However, something else happened as well. Overnight, said the committee, the owner-entrepreneur who had used to be the alter ego of his private company, now found himself the director of a listed company subject to a web of regulatory requirements the significance of which he neither understood nor appreciated.6 ■ Finance Committee on Corporate Governance’s Report on Corporate Governance, p. 42.

6 Ibid, p. 42.

14

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Ineffective governance structures have led to a number of wellpublicised cases of corporate abuse and failure. The difficult economic situation during the Asian financial crisis amplified the problem, with some people cutting corners and ignoring the rules.

Some instances mentioned in the report included questionable related-party transactions (RPTs), capricious decision making by corporate leaders, asset shifting, blatant and abusive conflict-of-interest transactions without proper disclosure, and weak financial management.7 It did not help that enforcement was inadequate and that some listed companies had dominant shareholders who were very eager to assert their power.

On the enforcement front, issues that surfaced had to do with the autonomy of regulators to do their jobs, confusion over jurisdictional boundaries, and the transparency of regulators in overseeing the markets.8 The investing community became sceptical about the reliability of the directors and regulators, resulting in a massive loss of confidence in the Malaysian capital market. Corporate governance in Malaysia was ripe for reform, and that, of course, was to be spearheaded by the Finance Committee on Corporate Governance.

Its Report on Corporate Governance covered three areas: The development of the proposed Malaysian Code on 1.

Corporate Governance, which set out a set of principles and best practices for good governance, and was mainly directed at boards of listed companies.

The reform of laws, regulations and rules so as to 2. strengthen the overall regulatory framework for listed companies. ’Ibid, p. 42. * Finance Committee on Corporate Governance’s Report on Corporate Governance, p. 43.

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3.

Training and education that can expand the pool of qualified directors to undertake the responsibilities expected of them.9

In addition to the Code, the committee came up with well over 80 recommendations for the latter two areas. The Code and many of the recommendations became the foundation for Malaysia’s corporate governance framework.

THE CODE AND THE BLUEPRINT

<1

It is almost universally accepted that coiporate governance is important, but if we need a properly articulated argument for this, we can turn to the Organisation for Economic Co-operation and Development (OECD), for example.

>1

tl

51

The OECD says coiporate governance is a key element in improving economic efficiency and growth as well as enhancing investor confidence because it provides the structure through which the objectives of the company are set, and the means f attaining those objectives and monitoring performance are etermined.

Good corporate governance, according to the OECD, should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.10 ’ Ibid, p. ii.

10 OECD Principles of Corporate Governance, 2004.

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The World Bank says for emerging market countries, improving corporate governance can serve a number of important public policy objectives.

It adds that good corporate governance reduces emerging market vulnerability to financial crises, reinforces property rights, reduces transaction costs and the cost of capital, and leads to capital market development. Weak corporate governance frameworks reduce investor confidence, and can discourage outside investment. Also, as pension funds continue to invest more in equity markets, good corporate governance is crucial for preserving retirement savings.

Over the past several years, adds the World Bank, an increasing body of academic research has highlighted the importance of corporate governance. Studies have shown that good corporate governance practices have led to significant increases in economic value added of firms, higher productivity, and lower risk of systemic financial failures for countries.11 And yes, corporate governance benefits the company as well.

The International Finance Corporation, a member of the World Bank Group, points out that good corporate governance is not just about keeping companies out of trouble. Well-governed companies often draw huge investment premiums, get access to cheaper debt, and outperform their peers.12

To have good corporate governance practices, there must be in place a sturdy legal, institutional and regulatory framework for corporate governance.

11 The World Bank's Report on the Observance of Standards and Codes, Corporate Governance Country Assessment: Malaysia, July 2012.

12 International Finance Corporation’s The Irresistible Case for Corporate Governance, March 2006.

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It is telling that the first of the OECD Principles of Corporate Governance is ensuring the basis for an effective corporate governance framework.

This framework, says the OECD, should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.13 Prior to 1999, corporate activity in Malaysia was largely governed by three pieces of legislation; the Companies Act 1965, the Securities Industry Act 1983 and the Securities Commission Act 1993. Apart from these, issuers and intermediaries had to comply with the listing requirements of the stock exchange, then known as the Kuala Lumpur Stock Exchange.

This was not yet the cohesive framework that the OECD has in mind. That began to take shape with the completion of the work of the Finance Committee on Corporate Governance.

k 2001 World Bank assessment noted that some of the committee’s recommendations that were implemented included law reform (such as the amendment of the Securities Commission Act to introduce enhanced disclosure obligations on issuers and stringent sanctions for false and misleading information in prospectuses) and the mandatory accreditation of directors.14

Arguably, the committee has made the biggest impact by coming up with the Malaysian Code on Corporate Governance, which comprised principles for good corporate governance, best practices in corporate governance, exhortations to other corporate participants (namely, investors and auditors), and explanatory notes.

13 OECD Principles of Corporate Governance, 2004.

14 The World Bank's Report on the Observance of Standards and Codes, Corporate Governance Country Assessment: Malaysia, 2001 (www.worldbank.org/ifa/rosc_cg_ malaysia.html).

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The Code has been called a significant milestone in corporate governance reform in Malaysia.15

It was crafted to address the directors of listed companies, based on the committee’s conclusion that ensuring good corporate governance was largely the responsibility of the board.

Although compliance with the Code was voluntary, the listing requirements of the stock exchange were amended to make it compulsory for the listed companies’ annual reports to incorporate statements of compliance with the Code.

In these statements, the companies disclosed how they had applied the principles set out in the Code and the extent of compliance with the Code’s best practices. Instances of non-compliance with the best practices must be specified and explained.

This is the hybrid approach to the issue of corporate governance, combining the prescriptive approach (where the standard of corporate governance is set by specifying desirable practices coupled with a requirement to disclose compliance with those practices) and the non-prescriptive approach (merely requiring disclosure of a company’s corporate governance practices).

The committee opted for the hybrid approach because it felt that the standards of corporate governance in Malaysia had to be raised and it was not enough to just rely on disclosure of existing corporate governance practices.

Best practice prescriptions were necessary. At the same time, the committee felt that each company should have the flexibility to develop its own approach to corporate governance. The statement of compliance enabled the investment community to decide whether to support a company’s approach or to reject it.16 15 Then SC chairman Zarinah Anwar said this in the foreword to the 2012 version of the Code.

16 Finance Committee on Corporate Governance’s Report on Corporate Governance, p. 63.

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The Code was issued in March 2000 and has since been revised twice. The first time was in October 2007 and was essentially a tweaking exercise. The key amendments included spelling out the eligibility criteria for appointment of directors and the role of the nominating committee. There was also the addition of eligibility criteria for appointment as an audit committee member, the composition of audit committees, the frequency of meetings and the need for continuous training. Another significant change made it mandatory for all listed companies to have internal audit functions.

The next round of changes in March 2012 was in fact an overhaul of the Code, and this was spurred by the release of the Corporate Governance Blueprint 2011. Recommendations from the Blueprint are folded into the 2012 Code, which also contains parts of the 2007 Code.

The 2012 Code sets out eight broad principles and 26 corresponding recommendations on structures and processes that companies should adopt in making good corporate governance an integral pail of their business dealings and culture.

Observance of the Code remains voluntary, and the requirement for compliance statements in the companies’ annual reports is intact as well.

It appears that the authorities have dialled down slightly their reliance on the Code to push up the standard of corporate governance in Malaysia.

In the foreword to the 2012 Code, the SC chairman Zarinah Anwar noted that a code of corporate governance is just part, y* significant part, of the coiporate governance

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She said several key recommendations of the Blueprint would be implemented through Bursa Malaysia’s Listing Requirements or legislative amendments. She added that a company’s own internal codes and procedures were critical in fostering a strong culture of corporate governance.17 While the 2012 Code is an offshoot of the Blueprint, the latter is one of the deliverables of the Capital Market Master Plan 2 (CMP 2). Released in April 2011, the CMP 2 observed that an effective corporate governance framework required a broad­ based approach that calibrated the many complementary levers of control to achieve the desired outcomes.18

Hence, the SC established a committee of representatives from the public and private sectors to work out policy recommendations to be presented in the five-year Blueprint, which was published in July 2011.

The Blueprint reflects the shift in Malaysia’s regulatory philosophy for the capital market. Whereas previously the emphasis was on promoting market and self-discipline with strong oversight, the view now is that the capital market has matured to the point where intermediaries, investors and other stakeholders can play a more active role in shaping sustainable and socially aligned behaviour. It is important therefore to encourage more active stakeholder participation in governance.19 The Blueprint argues that good corporate governance cannot be achieved through regulations alone. Apart from regulation, corporate governance hinges upon fully functioning self and market disciplinary mechanisms, where all stakeholders assume responsibility for their decisions and actions.20 17 Malaysian Code on Corporate Governance 2012, p. 2. ,H CMP 2, p. 79. ,Q CMP 2, p. 84.

20 Corporate Governance Blueprint 2011, p. 3.

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mUSMtiBER^ISTARI

CORPORATE INTEGRITY IN MALAYSIA

As such, the Blueprint considers approaches aimed at strengthening self and market discipline, to complement regulatory discipline, and promoting the internalisation of corporate governance culture to underpin the sustainable growth of corporate Malaysia.21 The document covers six components of the ecosystem (Shareholder Rights, Role of Institutional Investors, The Board’s Role in Governance, Disclosure and Transparency, Role of Gatekeepers and Influencers, and Public and Private Enforcement) and offers 35 recommendations.

PROTECTING THE SHAREHOLDERS

A main thrust of the Malaysian corporate governance reform agenda that began with the formation of the high-level Finance Committee on Corporate Governance in 1998, is the fair treatment of all shareholders and protection of shareholder rights, with particular focus on the rights of minority shareholders.

The OECD says the corporate governance framework should protect and facilitate the exercise of shareholders’ rights.

Substantially covered by the Companies Act, these rights include the right to: • secure methods of ownership registration; • convey or transfer shares; • obtain relevant and material information on the corporation on a timely and regular basis; • participate and vote in general shareholder meetings; • select and remove members of the board; and • share in the profits of the corporation.

In addition, the framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders.

21 Ibid, p. 4.

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All shareholders should have the opportunity to obtain effective redress for violation of their rights.22 The need for such an emphasis in Malaysia was underscored by earlier episodes of perceived shabby treatment of minority shareholders. Chief among these was United Engineers (M) Bhd’s (UEM) acquisition of a 32.6% stake in Renong Bhd. When UEM disclosed the plan in November 1997, the stock market reacted badly - the main index shed 16% over five days - because UEM was not required to make a general offer for the rest of the Renong shares.

In the SC’s 1997 annual report, then chairman Dr Mohd Munir Abdul Majid wrote that the announced purchase rocked confidence in the KLSE as no other single corporate event did in the market crisis of 1997.

The acquisition was perceived as a ‘bail-out’ of a cash-starved company and its major shareholders by a healthy, financiallystrong company with scant regard for UEM shareholder interest.

It was seen as a precursor of many more such ‘bail-outs’ to come.

The fact that UEM and its concert parties had been granted a waiver from having to make a general offer for the remaining shares in Renong by the Foreign Investment Committee (FIC) gave the impression the perceived ‘bail-out’ was supported by the authorities.23

He added that all the issues raised and the bitter taste left by the UEM-Renong debacle were matters that would be closely reviewed by the SC to avoid a repeat of the loss in confidence in regulation caused by the controversy.24 22 OECD Principles of Corporate Governance, 2004.

23 Chairman’s statement, SC's 1997 Annual Report (www.sc.com.my/wp-content/uploads/temp/ html/rcsources/annual/1997_eng/chairman2.hlml).

24 Chairman’s statement, SC's 1997 Annual Report (www.sc.com.my/wp-contcnt/uploads/temp/ html/resourccs/annual/1997_eng/chairman3.hlml).

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In 1998, the SC and the stock exchange changed some rules to better shield the rights of minority shareholders. For example, the listing requirements were amended to make it a must for a listed company to appoint an independent adviser to advise minority shareholders on the fairness and reasonableness of certain types of transactions. Also, directors, substantial shareholders and connected persons are barred from voting on a resolution on an RPT. This was only the beginning. The 1999 Report on Corporate Governance discussed many issues relating to shareholder­ rights, such as abuses by controlling shareholders at the expense of minority shareholders, the quality of general meetings, RPTs, rnd provisions dealing with shareholders’ rights and remedies. .-'or example, the report looked at the efficacy of the existing law in providing shareholders remedies, and favoured changing the law to allow derivative actions. It said there should be alternative forms of statutory remedies that may be instituted by regulators on behalf of individuals or companies to provide redress where the individuals have been treated unfairly or where wrongs have been effected on the company.

This is to allow regulators to bring actions for a wrong done to individuals or to the company, where it is in the public interest to do so. It will provide an alternative form of redress for individuals or companies who/which may not otherwise enforce their rights because of the cost implications and other legal impediments.25 The report recommended the enactment of a provision to allow the relevant regulatory body to conduct civil proceedings on behalf of any company or individual in certain circumstances.

25 Finance Committee on Corporate Governance’s Report on Corporate Governance, p. 24.

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The Securities Commission Act was amended in 2000 to empower the SC to pursue civil action on behalf of investors where it is in the public interest to do so. Other changes to the Act include the introduction of enhanced disclosure obligations for listed companies and stringent sanctions for false and misleading information in prospectuses. In addition, investors are given the right to pursue civil action against companies, directors and their advisers where there has been a contravention of the law.26 Another notable recommendation in the report was that the penalties for breach of RPT provisions be modernised and substantially increased.

The Malaysian Code on Corporate Governance proposed in the report encouraged dialogue between listed companies and investors, saying the companies and institutional shareholders should each be ready, where practicable, to enter into a dialogue based on the mutual understanding of objectives. The Code also urged the companies to use the annual general meetings to communicate with private investors and encourage their participation.27

The efforts to protect and bolster shareholder rights are ongoing.

In 2010, for example, the Malaysian Code on Take-Overs and Mergers was revamped, the privatisation of listed companies via the disposal of assets was reviewed, and measures to improve the quality of independent advice were put in place.

At the time, a major controversy was that a number of listed companies had been taken private by disposing all or a substantial part of their assets, which meant they could not remain listed.

26 The World Bank’s Report on the Observance of Standards and Codes. Corporate Governance Country Assessment: Malaysia, 2001 (www.worldbank.org/ifa/rosc_cg_malaysia.html).

27 Finance Committee on Corporate Governance’s Report on Corporate Governance, p. 68.

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The problem was that these disposals had required a minimum shareholder approval of a simple majority. Minority shareholders complained that this made it easy for controlling shareholders to sidestep the takeover rules and to push the deals through despite the misgivings of the minorities. Following a review, the threshold for shareholder approval was raised to 75%. In addition, listed companies undertaking such asset disposals are required to provide shareholders with independent advice and detailed disclosure on the utilisation of proceeds from the transactions.

The Corporate Governance Blueprint 2011 focuses on promoting a fair, efficient and transparent voting process that will enhance shareholder participation and voting at general meetings. It champions poll voting (as opposed to voting by a show of hands) and wants changes that will facilitate voting through proxies and corporate representatives.

n November 2011, the SC solicited the public’s views on whether poll voting should be mandated for all resolutions requiring shareholders’ approval, instead of for just resolutions on RPTs, as recommended by the Blueprint. The aim here is to allow disinterested shareholders to convey to companies that such transactions are not acceptable unless they benefit the companies.28 Apparently, for the public, less is more. When the stock exchange amended its listing requirements in November 2012 to strengthen and enhance corporate governance practices of listed issuers, poll voting was made compulsory only for RPTs that require specific shareholder approval.

28 Securities Commission press release, 15 November 2011 (http://www.sc.com.my/ posi_ archive/sc-invites-comments-on-independent-chairman-and-poll-voting/).

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One of the eight principles in the 2012 edition of the Malaysian Code on Corporate Governance is to strengthen the relationship between the listed company and its shareholders. The board, says the 2012 Code, should facilitate the exercise of ownership rights by shareholders. The board can achieve this by taking reasonable steps to encourage shareholder participation at general meetings, encouraging poll voting and promoting effective communication and proactive engagements with shareholders.29

Despite the constant efforts to tighten investor protection, allegations of abuse by those in control continue to make the headlines from time to time.

A high-profile case erupted in August 2011 when conglomerate Sime Darby Bhd bought a 30% stake in property player Eastern & Oriental Bhd (E&O) at a significant premium to the market price from three big shareholders.

There was the argument that given the circumstances of the deal, Sime Darby should make a general offer for the rest of the E&O shares. The matter was complicated by the fact that E&O chairman Azizan Abdul Rahman, who is the husband of then SC chairman Zarinah Anwar, had bought some E&O shares ahead of Sime Darby’s acquisition.

In October that year, the SC ruled that Sime Darby was not obliged to undertake a mandatory general offer under the Malaysian Code on Take-Overs and Mergers. The review was led by the two most senior independent commission members, while Zarinah had recused herself from the onset.

Another source of investor displeasure surfaced after the SC refined its guidance on independent advice for takeover offers 29 Malaysian Code on Corporate Governance 2012, p. 22.

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in November 2012. With this change, advisers are required to consider ‘fair and reasonable’ as two discrete terms in making a recommendation on an offer. This has given rise to advisers describing offers as ‘not fair but reasonable’. Investors struggle to make sense of such advice and many feel that these recommendations are of little help.

These issues notwithstanding, the World Bank’s latest assessment of corporate governance in Malaysia notes that basic shareholder rights are largely in place.30 This has long been the case, but in the context of corporate governance, the basics alone are never sufficient. When it comes to investor protection, the regulators’ foresight and alertness will always be crucial. However, the shareholders have a part to play as well.

SHAREHOLDER ACTIVISM MAKES A DIFFERENCE

t is easy to paint minority shareholders as being utterly at the tiercy of controlling shareholders, but that ignores two things.

One, as discussed earlier, investor protection is one of the principal functions of the Malaysian capital market’s regulatory framework, and this aspect is frequently reviewed and improved upon. Two, there have been serious efforts to invigorate shareholder activism.

The SC takes the stand that shareholders have equal responsibi 1 ity to protect and advance their own interests, to ensure that the companies they have invested in are well governed. This can be done through greater shareholder activism, such as participating in the company’s decision-making process through voting.31 50 The World Bank’s Report on the Observance of Standards and Codes, Corporate Governance Country Assessment: Malaysia, July 2012. >i SC press release, 15 November 2011 (http://www.sc.com.my/posl_archive/sc-invitcscommenls-on-indepcndent-chairman-and-poll-voting/).

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The first firm step towards encouraging shareholder activism in Malaysia was the proposal in the 1999 Report on Corporate Governance for the setting up of a minority shareholder watchdog group to monitor and combat abuses by insiders against the minority.

The report observed the expanding role of shareholders, particularly institutional investors, in demanding and pursuing higher corporate governance standards. The Malaysian Code on Corporate Governance, for example, relied substantially on market regulation to hasten the widespread adoption of the Code, and this is where certain institutional investors were called upon to provide support.32 It was recommended that the Employees Provident Fund (EPF), as the country’s largest institutional investor, take the lead in forming the watchdog group, possibly with technical assistance from the World Bank or the Asian Development Bank. The Malaysian Institute of Corporate Governance, Malaysian Investors Association and Malaysian Association of Asset Managers were also mentioned as potential participants. The report envisaged that as the growth of the fund management industry in Malaysia accelerated, through decentralisation of EPF’s investments, the fund managers could play a more active role in the watchdog group.33

The Minority Shareholder Watchdog Group (MSWG) was incorporated in August 2000 as a company limited by guarantee.

Other than the EPF, the other institutional funds that funded the MSWG were Lembaga Tabung Angkatan Tentera, Permodalan Nasional Bhd, the Social Security Organisation and Lembaga Tabung Haji.

52 Finance Committee on Corporate Governance’s Report on Corporate Governance, p. 198.

33 Finance Committee on Corporate Governance's Report on Corporate Governance, p. 198.

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A recommendation of the first Capital Market Master Plan, issued in February 2001, was that the SC would strongly support the efforts of the MSWG in promoting shareholder activism in Malaysia. The Master Plan said the MSWG’s primary role was to monitor and combat abuses by insiders against the interests of minority shareholders. It was in a good position to disseminate such information to the public because its members were the country’s largest institutional investors and it could thus rely on their resources, capabilities and access to information on listed companies.

The MSWG’s work, according to the Master Plan, might include providing in-depth analyses of governance issues related to listed companies. Among such issues were board composition and he directors’ independence from the controlling shareholders, [id advice to shareholders on resolutions put forward by listed jmpanies.

It was pointed out that the MSWG’s effectiveness in working for the benefit of minority shareholders rested not only on it being structurally independent, but also on it being perceived as independent. As such, the SC strongly supported the maintenance of autonomy in the MSWG’s operations and decisions. The regulators will also help the MSWG achieve its objectives.34

In the MSWG’s early days, the vision of it being a self-funding organisation seemed an impossible dream. Apart from the start­ up funding from its members, it received a RM250,000 grant from the SC in April 2002. But this was being spent fast as the MSWG went about building capacity and establishing itself as a credible champion of the minority shareholders. There was the worry that it might fade away if its funding problem was not solved. w Capital Market Masterplan, Feb 2001, p, 222.

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That solution arrived when the Capital Market Development Fund (CMDF), which was created following the demutualisation of the stock exchange, stepped in to provide funding in 2005.

Today, the MSWG is substantially funded by the CMDF, supplemented by sales of the watchdog group’s products and services.

The MSWG says it has evolved over the years into an independent research organisation on corporate governance matters. It provides a platform and a collective voice to both retail and institutional minority shareholders, and it advises on voting at general meetings of listed companies.35 The watchdog group tends to be gentle and conciliatory when highlighting issues and engaging with listed companies, whereas many people expect it to sometimes be more strident, aggressive, proactive and even litigious when battling perceived wrongs.

Perhaps the more controlled approach is by design, given that its membership comprises government-linked investment companies (GLICs) that generally do not go public with their conflicts with investees.

Nevertheless, the MSWG has had some success in steering public opinion on several controversial corporate developments and in spearheading some corporate governance projects.

Among its key achievements was the publication of its Policy Statement on Corporate Governance and Shareholder Voting Guidelines in 2009. This is a framework for the MSWG to adhere to as a shareholder while stimulating shareholder engagement and participation. It believes that the document can also assist shareholders in identifying issues that need to be considered

” Minority Shareholder Watchdog Group website (www.mswg.org.my).

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before deciding to vote for or against the resolutions at general meetings.36 In the same year, the MSWG introduced the annual Malaysian Corporate Governance Index.

The Index was replaced by the Asean Corporate Governance Scorecard project, which was given to MSWG in 2012 for implementation in Malaysia.

Apart from the work by the MSWG, there are few strong examples of shareholder activism in Malaysia. There have been some cases of institutional shareholders voting against resolutions tabled by the management of listed companies, as well as instances of shareholders apparently banding together to try to thwart proposals. However, the institutional shareholders have rarely been open about the reasons for their actions. Many times, when shareholders have publicly opposed management decisions, these are essentially tussles for control rather than rue shareholder activism in action.

Notable episodes of minority shareholders managing to sway outcomes include Petroliam Nasional Bhd’s failure to privatise MISC Bhd in 2013 because not enough shareholders accepted the national oil company’s general offer (despite an increase in the offer price); the major shareholder of MBf Holdings Bhd raising his takeover offer price last year in response to shareholder dissent; the scrapping of a plan by Bandar Raya Developments Bhd, announced in 2011, to sell prized assets to a major shareholders; and institutional shareholders of Malaysian Oxygen Bhd applying pressure to extract a higher general offer price in 2007.

It is equally disappointing that private institutional funds, such as the unit trust funds, are rarely on the forefront of shareholder activism. Usually, when a fund manager is not happy with how 36 MSWG Annual Report 2009, pg. 12.

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a company the fund has invested in is run, he votes with his feet, that is, he sells the stock in disgust and moves on. This may change soon. In January 2014, the SC and MSWG jointly issued a consultation paper to get views from the public on the Malaysian Code for Institutional Investors 2014, another product of the Corporate Governance Blueprint 2011.

The Blueprint argues that the formulation of an industry-driven code can strengthen the accountability of institutional investors to their own members and investors. The new code will require institutional investors to explain how corporate governance has been adopted as an investment criteria and the measures they have taken to influence, guide and monitor investee companies. It is also important for institutional investors to include governance analysis in their investment appraisal to help identify companies that are governed well.37 Apart from the MSWG and the five GLICs that back the MSWG, those represented on the steering committee that developed the Code were the Retirement Fund Inc, Malaysian Association of Asset Managers, Malaysian Takaful Association and Private Pension Administrator.

The Code sets out eight principles together with guidance for institutional investors on effective exercise of stewardship responsibilities towards the delivery of sustainable long-term value to the institutional investors’ ultimate beneficiaries or clients.38 THE BOARDROOM: CENTRE OF THE CG UNIVERSE

Good corporate governance rests firmly with the board of directors. This was the position of the Finance Committee on 37 Corporate Governance Blueprint 2011, p. 16.

38 MSWG media release, 15 January 2014.

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Corporate Governance and was thus expressed in the 1999 Report on Corporate Governance.

Shareholders and auditors play secondary roles, said the report, because there were limitations to shareholders and auditors taking on a leading role in corporate governance.39 Accordingly, the Malaysian Code on Corporate Governance was directed principally at boards of listed companies.

This is by no means a unique viewpoint. Britain’s 1992 Report of the Committee on the Financial Aspects of Corporate Governance (better known as the Cadbury report), arguably the granddaddy of corporate governance reports, kicks off with this observation: “The country’s economy depends on the drive and efficiency of its companies. Thus the effectiveness with which their boards discharge their responsibilities determines Britain s competitive position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of \ood corporate governance. ”40 The Malaysian regulators’ emphasis on the directors’ role in corporate governance has not wavered. The Corporate Governance Blueprint 2011 maintains that because boards are stewards and guardians of companies, they are key to raising corporate governance standards. Their unique position at the helm of the companies means they are often the first line of defence against corporate governance infractions.41

The Report on Corporate Governance examined plenty of issues relating to directors in Malaysia, but its most immediate impact on the boardroom was that some of its recommendations were 59 Finance Committee on Corporate Governance’s Report on Corporate Governance, p. 11.

40 Report of the Committee on the Financial Aspects of Corporate Governance, December 1992.

41 Corporate Governance Blueprint 2011, p. 21.

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incorporated in the stock exchange’s revamped listing rules released in January 2001. These changes were meant to create an environment that demanded higher standards of conduct and higher quality disclosures from companies, boards of directors and management, said the SC.42

Among the new requirements that directly affected directors were the ones that mandated the inclusion of statements on corporate governance and on state of internal control in the listed companies’ annual reports. This meant the directors needed to be aware and understand their responsibilities in this new environment of greater disclosure and transparency.

In 2007, the Malaysian Code on Corporate Governance was reviewed to spell out the eligibility criteria for appointment of directors and the role of the nominating committee. In addition, the Code was amended to specify the eligibility criteria for appointment as an audit committee member, the composition of audit committees, the frequency of meetings and the need for continuous training.

The CMP 2 and the Corporate Governance Blueprint 2011 provide a fairly current picture of what is expected of a board.

The former points out the importance of regulation facilitating a more balanced mix of directors in terms of independence, size and stakeholder representation to ensure that corporate decision­ making benefits from diverse views and expertise and takes into account the requirements of a broad range of stakeholders.

Board deliberations will also benefit from diversity of expertise, background and gender.

It adds that the increased presence and effectiveness of independent directors can be critical in ensuring greater reliability SC press release, 29 January 2001.

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of financial information, in deterring self-dealing, in managing conflict of interest situations, in assessing corporate transactions and in assessing the performance of management.43

An SC review in 2009 identified these common characteristics of the boards of listed companies that warranted further attention: independent directors who are related to each other, independent directors with long tenures, relationships between chairmen and CEOs, and boards with sizeable numbers of executive directors.44 The Blueprint lays out the major areas that boards must recognise - roles and responsibilities, independence, composition and commitment. This is refined further through the 2012 version of the Malaysian Code on Corporate Governance, which focuses on strengthening board structure and composition in line with the role of directors as active and responsible fiduciaries.

Bursa Malaysia offers additional counsel via its Corporate Governance Guide, first published in June 2009 and updated in October 2013.

There is no doubt that directors of listed companies have come mder increasingly intense scrutiny over the last 15 years. The ore stringent rules and supervision have led to noticeable iprovements in board quality and performance, especially .mong the larger companies. However, the challenge is to ensure that Malaysia has a pool of directors who can provide the companies with the necessary independence, diversity and calibre.

CONCLUSION

The string of policies and developments discussed above shows 45 CMP 2, p. 79.

44 CMP 2, p. 80.

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that corporate governance is a priority in Malaysia. Apart from addressing the corporate governance framework, shareholder rights, shareholder activism and boardroom excellence, there have also been initiatives to improve disclosure and transparency, gatekeepers and influencers,45 whistleblowing, and enforcement.

That is not to say that all is well in coiporate Malaysia, but there is no doubt that the authorities (with SC at the forefront) have largely been consistent, earnest, balanced and forward-looking in their efforts to enhance coiporate governance practices. That is always a good start, and this has received due international recognition.

In the World Bank’s Doing Business 2014 report, the latest instalment of an annual survey that measures and tracks changes in regulations affecting several areas in the life cycle of a business, Malaysia is ranked 4th among 189 economies in the category of investor protection. It was in the same position the year before.

A separate 2012 assessment46 by the World Bank describes Malaysia as. a regional leader in corporate governance, with high levels of compliance in a number of key areas, including more sophisticated ones, like prohibition of insider trading and implementation of high-quality accounting standards.47

It is nice to have such bragging rights but it must be understood that such recognition means little if the investing public has a different perception. It is one thing to have a set of comprehensive laws and rules, but it is quite another to convince people that 45 Gatekeepers include company secretaries, internal and external auditors, corporate advisers, lawyers, rating agencies and valuers. Influencers are analysts, financial journalists, watchdog groups and other corporate governance advocates.

46 The assessment is based on the OECD Principles of Corporate Governance.

47 The World Bank’s Report on the Observance of Standards and Codes, Corporate Governance Country Assessment: Malaysia, July 2012, p.3.

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the spirit, intent and purpose of corporate governance is widely embraced.

There is a sense that most listed companies fare well when it comes to following the rules, but most of them do so without a genuine appreciation of the essence of corporate governance, which is, as explained by former SC chairman Zarinah Anwar, a deepening of the relationship of trust among companies, stakeholders and regulators.™

Indeed, there remains a lot of scepticism over many aspects of corporate governance in Malaysia, such as the independence and competence of boards, the preparedness of listed companies to engage with minority shareholders, the fairness of controlling shareholders, the quality of independent advice, and the regulators’ ability and commitment to go after wrong-doers. "or example, one is hard-pressed to find anybody who truly Sieves that there is no incidence of corporate insiders having a and in manipulating the stock market. Yet, prosecution of such jases is rare. And even when the authorities do act, there are often question marks.

CG Watch 2012, a report produced by independent brokerage and investment group CLSA Asia-Pacific Markets in collaboration with the Asian Corporate Governance Association, expresses concern about delays in enforcement.

It says it is common for cases to take years to resolve and often go on appeal, while few judges have deep expertise in company and securities law. The report also claims that many market observers think politically connected people are more often than not likely to get off with a slap on the wrist.49 48 The assessment is based on the OECD Principles of Corporate Governance.

49 CG Watch 2012, September 2012, p. 101.

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It is a harsh view, but one that is hard to counter as long as people continue to see apparently blatant misconduct in the stock market that go unpunished.

In reviewing the SC’s enforcement track record in recent years, the World Bank says the regulator has been relatively aggressive in using its powers and enforcement tools. On the other hand, there have also been notable scandal and investigations that remain ongoing. The delays in imposing sanctions in these cases cast doubt on the willingness to pursue them, especially if prominent persons are involved. The World Bank also points out that the effective of the SC’s probes frequently rely on the cooperation of the Companies Commission of Malaysian and the police.50 Then again, corporate governance can never work well without a broad buy-in. It is only right that SC has the last word on the subject: “Corporate governance is a shared responsibility. It is not the sole preserve of the regulators but the obligation of all participants to exercise greater care and responsibility in promoting value creation and sustainability through mutually reinforcing efforts. ”51

50 The World Bank's Report on the Observance of Standards and Codes, Corporate Governance Country Assessment: Malaysia, July 2012, p. 15.

51 Corporate Governance Blueprint 2011, p. viii.

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IN SEARCH FOR ETHICS IN BUSINESS

Firoz Abdul Hamid

Of all the properties which belong to honourable men, not one is so highly prized as that of character. " Henry Clay (1777-1852)

rules afd of r'»9bt

rec

When 1 was invited to write on the topic of ethics in business by the Malaysian Institute of Integrity (IIM), the first thing that crossed my mind was - where does one begin? Defining ethics and seeking consensus? The consensus, if reached, has to be a universally accepted definition of ethics that cuts across creed and culture, sovereignty and markets, traditions and ideals.

One then has to overlay these principles to be applied across the different needs of industries and sectors serving the varied demography in the diverse setting of countries with distinct political and economic requirements.

We then move into the argument of where does ethics or its teachings begin, who sparks this, who is liable and responsible for it, and how does one enforce ethics. Can you legislate ethics?

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That is like asking can you legislate a person’s character.

The discourse on ethics in business is only the tip of the iceberg, given the remits of this essay. There are numerous components and parameters that contribute to ethics interalia:

• • • • • • • •

• • • •

• • • •

How does gender affect ethics or does it?

Treatment of workers and labour The role of watchdogs as an oversight and their limitations The role of governments and policymakers ‘Media and ethics’ is a huge topic that warrants research in and of itself Civil society’s role in ethics and building ethics in businesses and the agenda of civil society The role of education from the dinner table to the boardroom The revolving door and lobbying culture between public and private sector Ethics across specific industries (energy, finance, medical etc.)

The roles of international institutions and what that should entail in instituting ethics across businesses How does one address leadership issues (e.g. narcissism) Role of morality in corporate governance and ethics and the difference between them The remits of corporate social responsibility (CSR) as a tool to building ethics in business and not a tool for evading tax How do you track ethical behaviour? What are the standards?

Can character be legislated and regulated by law?

Role of faith and religion in business ethics The role of politicians in enabling or disabling ethics in business

KU8AF DUMBER fliSIARI MUTUT WTEQRlTi

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The list above is only an attempt to address areas that need a serious discourse publicly by all parties concerned with a leading body or institution or persons that are able to converge the divergent views to arrive at some consensus.

This discourse needs to desperately begin, with able people who have the understanding of the subject and the disposition to bridge the different and opposing views. Efforts have been made to set up institutions, bringing in people from private sector into public sector and the likes to address corruption and corporate governance. Corruption is the end product of the lack of ethics.

The method of addressing and weeding out bad behaviour in society needs to be redefined and transformed. This needs to begin from top down and bottom up across all sectors of society.

It is proposed that capable individuals should be brought in to develop the country to achieve its economic and societal goals through imbuing sustainable practices of ethics in business.

This discourse is urgent as we only have to read the cries in the media that are cries for ethics from the man on the street in an environment where the boardroom is clenching on profits. If we do not address these cries, our children will question the state of this planet and our role in diminishing its state.

There is a Greek proverb which reads - A society grows old when old men plant trees whose shade they know they shall never sit in. This world is not inherited from our ancestors but borrowed from our children. Thus what we leave behind for them will define how the stories of the two generations be told.

EAT BEFORE YOU COME

“The greatest homage we can pay to truth is to use it. ” Ralph Waldo Emerson 43

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Michelle Obama turns 50 on Saturday, 18 January 2014. An Australian newspaper that carried her birthday bash commented, “...the need to demonstrate frugality may have been the reason for the letters ‘EBYC’at the end of the invitation: guests have been advised to ‘eat before you come ’ to the party, which merely promises snacks, sips, dancing and dessert. Associated Press reported, “...guests to the bash at the White House have been advised to EBYC in a sign of the administration's attempts to guard against any appearance of extravagance in continuing tough economic conditions. " This on a day that saw Francois Hollande was accused of an alleged affair. On a normal day in France, this affair as most French papers have commented would have been another day in France. The Financial Times reported (on 12 Jan 2014) that, “...the timing could hardly have been worse. Headlines alleging that Francois Hollande was having a secret affair with a film actress eruptedjust days before the French president is to make one ofthe most anticipated public appearances ofhis struggling, 20-month old presidency. Now awkward questions about his private life threaten to overshadow an occasion that will also be closely watched by France s European partners, anxious that the Eurozone s second biggest economy should not become a drag on the continent s post-crisis recovery ”.

Following the Prophets It has been said that the oldest business cycle in the history of mankind was probably developed in the time of Prophet Joseph.

When the King had a dream about seven lean and fat cows and sought for his interpretation, Prophet Joseph advised the King what we would today term as macroeconomic model and business cycle. He advised him to keep a part of the grain sowed 44

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in the good years in the grain house as an investment or savings for the ensuing bad years. In essence the advice, if taken literally in today’s economic principles, would be: In the good years, slow down your growth and save as investment for inevitable bad years. The Czech economist Tomas Sedlacek eloquently argues this case in his The Economics of Good and Evi! model.

Much of the economic crisis today is not due to lack of growth.

In fact many have argued it is due to too much growth. In a world of consumerism, we seek our freedom through debt. We create things to serve us only to be enslaved by them. This can be seen in finance, technology, food, etc. We push our economies beyond the plateaus of what consumers can realistically and logically consume and sustain. The role of economists is not to chase growth. Instead they should be advising politicians to decrease the amplitude of business cycles so that we do not overspend in good years (i.e. not pumping up growth) to save for the bad years.

As simplistic as this theory may sound, unwittingly we live in a world that pushes the envelope on competitiveness and growth beyond the means and capacity of human consumption and sustainability to remain relevant.

The notion of‘eat before you come’ to any events that bear public funds is the call of the day. The public are in no mood to see funds - public or private - be wasted when famine and poverty are not receding but rising globally. One billion people are going hungry when another one billion suffering from obesity, unemployment of the educated is rising and this planet is being wrecked in the name of progress. This is laced with heart-wrenching conflicts that are tearing families and communities apart.

Those in positions of responsibility need to be sensitive of their actions and words. Their words need to be tailored to the times.

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The hardest part of leadership is not leading but being in touch with reality, seeing things as they are and not as they wish it to be.

Proposal: Lessons to be learned

Businesses and leaders need to be sensitive of the times they are steering in. All actions especially in bad and down times are seen through a microscope by the world.

In good times reward the masses.

Searching the soul of humanity, looking for answers

We must seek insights from leaders from all walks of life on their definition and notion of ethics in the business they are either involved in or operate.

Ethics is so straight forward and CEOs should understand this by the time they ascend to the rungs of being a CEO or Managing Director or Board of Director.

Abdal Hakim Murad, the Dean of Islamic School at Cambridge, wrote in a 2009 article in The Guardian, “...ours is an age that has made idols of the great banks andfinance houses, driven to frenzy by competition amongst billionaires who are kept awake at night by the thought that a rival might make a business deal quicker than them. A banker who can asset strip companies and throw its employees out onto the street is someone who is in the grip of an obsession that has thrown him beyond the normal frontiers ofhumanity. ”

We should ask questions like - Is ROI and ROE equivalent to ethics? Is meeting stakeholder expectations enough to run an 46

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ethical business? Indeed what is ethics in business? Where are our hearts and souls when we leave our homes every day for work?

Ultimately we take nothing with us but our deeds, and leave behind our reputation and credibility for the world to pass a judgment on; for all else passes away!

DEFINING AND IDENTIFYING ETHICS IN BUSINESS “What you cannot enforce, do not command. ” Sophocles, Greek playwright (c. 496 BC-406 BC)

Year in - year out we have the World Bank, World Economic Forum, IMD in Switzerland to name a few, grading countries’ competitiveness and business processes. Yet the most competitive countries are not necessarily the happiest to live in according to the World Happiness Index. Where does ethics rank in any of these rankings? How do we evaluate ethics? Is ethics in business so nebulous in its concept and form that we shy away from measuring or legislating it? Indeed who should be regulating and legislating ethics? How does one legislate human character?

In the final analysis it is human who are enabling the destruction we sometimes proclaim to do in the name of progress.

The argument is we have corporate governance standards globally done by the OECD and industry specifics like the financial industry. Yet with corporate governance standards, we saw galactic failures in the most advanced of countries and regions. Yet again the whole notion of what is ethics is brought to the centre of business world.

When I interviewed Dr Tariq Ramadan of University of Oxford and asked him his definition of ethics, he had this to say: 47

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"What is ethics and what is applied ethics? Applied ethics is to question the goals of what we are doing. So, in business as in any other types of activities, we always have to question what are the goals and the ends ofour activities. In fact what we have now which is the Global Ethics is that the world is coming back to this for two reasons -first because we are facing in business, commerce or trade or even in the world today, limits that if we do not respect some principles we are going to destroy the world md even act against our own interest as human beings. So you have a way to come back to ethics because of the way we are treating the world, the universe and even our fellow human beings. In the world of business now we are losing dignity or justice; we are treating people as ends and not as means. The second one is because of principles which are coming from different traditions; moral, secular or religious ethics and we find that we have things in common. So universal (global) ethics can be based on principles or based on facing challenges of our times. ”

Dr Ramadan’s definition cut a different light to Dr Ali Hamsa’s answer of the same question.

"...business ethics is about doing the right thing for your business’ stakeholders. Economic and social goals do not have to be mutually exclusive if we consider the importance of striking a balance among different groups of stakeholders - the board and its shareholders, employees, customers, regulators and government, as well as the greater market and community at large. Character in business and markets definitely need to be regulated, and I believe this is possible through the enforcement of codes and regulations. ”

Dr Rebecca Sta Maria commented the following on the definition of ethics after elaborating on a couple of poignant examples to demonstrate ethical failures in business: 48

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“... hence my simple understanding ofbusiness ethics: Doing the right thing, even when no one is looking over your shoulder.

It is about the big picture, the impact of your business not just on your stockholders, stakeholders and clients, but on the citizens at large. It is about being concerned about the impact on the environment, not just the bottom-line. It is not just about creating wealth while complying with national laws and regulations. Ethics also means transparency ofyour practices, your procurement methods and being good corporate citizens. ” Saadiah who led and built KPJ Healthcare Bhd for 20 years into a RM 1 billion company before her retirement, had the following to say when I asked about her views on ethics in the medical industry:

“Ethics is serving with integrity. Ethics is giving patients what they really need, without making them pay for unneeded treatment. Having said that, however, I believe we must look at the patients’ bigger picture in ensuring that the patients 'welfare is protected - not only caring for one aspect of treatment but essentially giving holistic care. ” She also said the following when asked what is morally and ethically correct in the medical business:

“...ethical principles are derivedfrom moral values. It is quite unlikely that what is ethically necessary will be morally wrong.

There are a number ofareas where morality and ethics continue engender debate. They are often no clear answer. Withdrawing a treatment from a patient who is terminally ill and request that treatment be stopped may be ethically the right thing to do.

However, morally, one may argue that one must preserve life at all cost. ”

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The examples quoted above do not necessarily address the agreed universal definition of ethics. Let us ask ourselves what defines ethics. Is ethics be defined by what is right by law, by faith and tradition, by political and social needs or by our conscience?

Indeed what and who controls our conscience? What moves the conscience?

Proposal: Define and arrive at a consensus on ethics in business

Seek consensus on definition of ethics in business universally and by industry.

Have competent people lead this consensus.

COMING AT IT FROM ALL ANGLES “Leadership at one time meant muscle.

Today it means getting along with people. ” Indira Gandhi, Prime Minister of India (1917-1984) It is arguable that the lack of consensus on the definition of ethics has caused many a heartache in lives and governments across the world.

It may be that Country X is defining ethics or rather doing the Tight thing’ by the needs of the times, or otherwise known as populist drives. Whilst Country Y arguing on true essence of its faith and traditions, Country Z is posturing from the angle of law and regulations in its country. And as the saying would go - One man s meat is another man s poison - there is an obvious gap which needs a mediator to fill in, ratify and seek consensus on.

This is so plainly demonstrated in profit making and cheap labour dilemma. The disaster in the garment factory in Bangladesh 50

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summoned many a debate not least that on what exactly is profit and do businesses chase it at all costs. Can there ever be a convergence between ethics and profit? Can profit and ethics mix? Can we ever have dignified profit? Are we - public and private sectors, policy makers and business leaders - chasing the mirage of a water in a desert of success that they have not the motivation nor the incentive to debate and reach a consensus on what ethics is in the making of a business.

Even if there is the motivation from business leaders to seek consensus on ethics, who is moderating and enabling this process at a regional, national or global level?

Proposal: Lead ethics diplomacy

Malaysia can lead on ethics in business through its efforts nationally with private sector and public sector.

As part of cultural diplomacy, Malaysia can lead on specific projects that relate to ethics in business globally.

WHO LIGHTS THE SPARK “We may pretend we are basically moral people who make mistakes, but the whole of history proves otherwise. ” Dr A.P. Kalam ofIndia

“What we need is a carrier of eternal goodness and wholesomeness in human conduct, which is 'Righteousness'.

Terry Hands, British theatre, opera director

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In April 2007, the former President of India, Dr A.P. Kalam said the following in his speech: "There is beauty in the character. When there is beauty in the character, there is harmony in the home.

When there is harmony in the home, there is an order in the nation. When there is order in the nation, there is peace in the world.

This is true, for the whole world. When we need peace in the world, we need order in the nation; we need harmony in the home, whether in Europe or in India or in any part of the world, the origin is righteousness in the heart. How do we evolve righteousness, in the hearts of every citizen of the world?”

Who is responsible for ethics?

Dr Kalam’s insights were not far removed from Dr Manfred Kets De Vries who spoke candidly about narcissistic inclinations in leaders and if not addressed could affect the soundness and sustainability of organisations. When asked about where does ethics begin, he shared the following:

"Having a sense of what is right, and what is wrong is essential for all people in leadership positions. After all, leaders are merchants of hope - to quote Napoleon. They speak to the collective imagination of their people to create a group identity.

But, as we all know, leadership has its darker side. Regressive forces are always around the corner. As Lord Acton s statement goes, "Power corrupts, and absolute power corrupts absolutely.

And given the pressures on leaders, it does not take very much.

Before they are even aware of it, leaders will be surrounded by Yea-sayers, and lose touch with reality. Paranoia is said to be 52

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the disease of kings. So when you live in an environment that does not promote value - driven leadership - a society that goes for Band-A id solutions and shallow appearances - unfortunately people like that will come to the fore. You will create a vicious circle of negativity. To prevent that from happening, it would be wise that the leader has some kind of wise fool — like the fool of King Lear — who shows him or her reality. Particularly, when they are in powerfor too long, they may lose touch. ”

Dr Belaid Rettab shared his views on where ethics in business begins:

“Leadership is central to ethics in business; it can change an organisation s culture for better or worse. It is very difficult for change to occur within an organisation unless the management is completely on board. Culture change requires setting the tone at the top and then creating alignment throughout the organisation with the values you espouse to live. ” AR. Rahman said the following when asked where morals began: “I cannot talk about piracy and I do not want to. It is a moral thing within you, I cannot teach morals to you. It is a conscience thing — ifyou want to support a musician, buy the music. ”

With so much insights globally on where ethics should begin, with departments set up to drive corporate governance and ethics yet countries and companies still flounder.

Institutions confuse ethics in business with CSR Nicholas S. Zefferys spoke passionately about ethics across the world today and how it is affecting the character and value system of the younger generation. He said the following in my interview with him: 53

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“...Training or ethical behaviour comes from ones persona! efforts, the communities within which one engages, one's parents and the cultural environment. Every community of which we are a part has certain rules, principles and standards.

Parents have a teaching role, for example, when those influences are negative and they have to teach the correct way forward when their children take the wrong path. When in adulthood, they take on political, societal and business or corporate roles and even become corporate chiefs, they are influenced by the people around them. However, the weight ofthese influences can matter little if they are viewed within the context of ultimately ‘getting what I want.’ Sincerity and seriousness of a manager is uncompromising emphasis on integrity of character. It is character the example and is imitated. ” Interestingly, Daud Vicary said when asked about the role of ethics in the growing Islamic finance industry; “...there is very limited discussion on business ethics for a number of reasons.

Boards are not required to disclose its ethics initiatives to any party. The perception that ethics beyond compliance will be costly is reflective ofa mindset that sees ethics as an aberration.

There is no requirementfor the practice to be audited. Secondly there is a wide gap between talking ethics and practicing ethics.

This is partly due to the scarce literature on Islamic business ethics. Thirdly, compliance is the floor of ethics and is possibly complied for instrumental reasons rather than as part of the beliefsystem. It is likely that ethical responsibility is (abdicated * by the board because the Shariah committee is considered more qualified to handle such issues. Shariah governance framework ought to review to incorporate this responsibility as part of the responsibilities of the board. Ethical parlance of the fish rotting from the head is most applicable in Islamicfinance. This cannot be the mindset of directors. ”

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Proposal: Ethics training Imbue ethics trainings and syllabus.

Reward ethical practices.

SHUTTING THE REVOLVING DOOR

“Relativity applies to physics, not ethics ” Albert Einstein (1879-1955) Without fail all countries and governments invest in efforts towards enhancing corporate governance and ethics. Yet there is a parallel way of doing business in some markets and countries, often defined as the traditional ways of doing business. There is always the quips that this is Country A’s way of doing business, Country B’s and so on and so forth. One needs to understand how business is done here to succeed - a statement that is still bandied about in many markets. Therein emerges the lobbying culture and the unethical but approved way of doing business.

This happens sadly in all industries, markets and countries around the world.

Doing the right thing

The Hofstede Power Distance Index (PDI) demonstrates the role of culture in authority deference. Some low power index countries are: • United States: 40 • United Kingdom: 35 • Ireland: 28 • Sweden: 31

Some high power index - bureaucratic and steeped with authority traditions and deference - countries are: 55

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• France: 68 • China: 80

• India: 77 • Brazil: 69

Where the power distance index is high, it reflects a potential culture of lobbying as there will be reticence in organisations to voice disagreements. Instead there will be an inclination to defer to authorities. It is in these times where organisations and countries have the following options to implement if there is serious commitment to institute ethics in how businesses are run in their markets: • Change the culture of leadership by lowering the Power Distance Index r Come down tough on lobbyists. e Lobby Giants At the height of the 2008 financial crisis and the economic turmoil that ensued in the US and EU, there were several caricatures done to demonstrate the culture of lobbying

World Development Movement, an anti-lobbyist movement in Europe, reported of the culture of lobbying in Brussels - by the term ‘the Revolving Door’ in 2011.

“In September this year a British guy, Parvez Khan went to workfor one of the major lobby consultants in Brussels. No one knows how many lobbyists there are in Brussels exactly, but estimates range from 15,000 to 30,000. But what makes Khan interesting is that he was previously a financial attache for the UK government working in Brussels and on loan from the UK Financial Services Authority.

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So here is someone with experience of working for the UK regulator of the banks is now working for a Brussels lobby consultancy, one of whose major clients is RBS - Royal Bank of Scotland.

This is a good example of the phenomenon of the revolving door between public institutions and the private sector, and the Alliance for Lobbying Transparency and Ethics Regulation (ALTER-EU) of which World Development Movement is a member, launched a campaign to block the revolving door in Brussels. The European authorities have no transparency about how many officials go through the revolving door, but it is clear to Brussels watchers that the revolving door problem is serious and makes a major contribution to the cozy relationships between the EU institutions and big business. The revolving door can lead to privileged access and conflicts of interest on a massive scale. ”

Logic would simply suggest that if one has to lobby, either the system of business in that market or country is broken and unethical or the company lobbying hasn’t got the expertise for a job it is lobbying for.

Nicholas Zefferys said the following of the culture of lobbying in the US; "...the number of lobbyists operating in Washington D.C. has increasedfrom around 3,000 in the early 1990s to over 35,000 today. This quite clearly signals that what cannot be won in the marketplace is won in the political arena to gain business favour Many retired politicians become lucrative lobbyists.

Practicing politicians are reliant upon lobbyists for campaign funding. It is an insidious relationship with little in the way of checks and balances.’’

Dr Rebecca said that ail businesses, including civil society organisations, are sometimes guilty of lobbying in her response to my interview on the culture of lobbying in Malaysia: 57

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"Just as corporations lobby for rules to beformulated to further their bottom line, the interests of smalt businesses and the civil society too have an influence on the shape of environmental and labour regulations as well as human rights legislation. It is easy to paint big business as the villain and civil society as driven by altruism. The interests of these groups need not be diametrically opposed to each other. The role of the government is to find the balance among the interests of these groups. And this can find a solution in more engagement, openness and transparency.”

Culture of lobbying kills competition. It annihilates the ability of all Malaysians, including and especially the man on the street to get a fair share of hard work. It is the role of governments and private sector to block this culture. The companies that have been laden with scandals all over the world had well qualified CEOs, and credible Board. Yet it floundered. It floundered not for the lack of knowledge of the industry they operated in but rather they were in a rush. Human greed took over the steering wheels of their leadership and businesses.

The role of senior management and boards is to ask the piercing questions on methods of tender and procurement. The role of shareholders is to dissect where from and how profits were made. So as utopian as the calls are to blocking the revolving doors between public and private sectors, they form the path to sustainable business. They form the bricks to building credible leadership and business. They most definitely make the example to dignified profit.

Mohd Sidek Hassan said the following in 2011; “In our every quest to great change, we miss the small but important determinants that would manifest change in its every element. As Malaysia prepares towards becoming a high income economy, our focus must reach out to the seemingly peripheral determinants for 58

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sustainability of that vision. Whilst the resounding determinant of high income is gross national income or GNI, we must not lose sight of the people who will make and sustain that GNI. High income does not only relate to leather office occupants or Ivy League graduates. It must apply to 'every man and his do ' as said in the colloquial English term. What does high income really mean to the trader at Chow Kit, or the technology gizmo at Low Yat Plaza or thejanitor at Kuala Lipis Genera! Hospital?

What will it mean to the waiter at the Marriott or the one at the stalls? Do we increase the pay of one league and not the other? Will the janitor be able to afford a better education for his children? Indeed will his own children have a better future than his or her own? ”

Proposal: No more lobby • The culture of lobbying must not be accepted.

LEGISLATING ETHICS AND REGULATING CHARACTER In my interview with Dr Ekmeleddin Ihsanoglu, he commented the following when I asked him about the role of media in ensuring ethics in business. "...Media can play an important role in boosting businesses transactions and creating new partnerships through advertising, marketing and by shaping the minds of the target audience.

Hence, media in their various forms print, broadcast and electronic - are potential tools in imparting ethical values and morals among businesses. However, such move rests within the hands of media owners and media professionals whether or not they care much about infusing ethical values in business companies and among entrepreneurs. " 59

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Dr Ali Hamsa said the following to the same question; "... highlighting such practices will benefit the citizens, in that they are informed that the government does not condone such practices, whether in the public or private sector, and a reminder to them that action will be taken against those who go against the rules and regulations of the country, be it in business or other sectors. In the development ofsocial media such as Twitter and Facebook in the country, the role of the media may have doubled, as the channels of reporting such bad and unethical practice are no longer done through the mainstream media but directly to the authorities through such access. There should be a win-win situation between the media and companies and smart partnerships should be developed. Media can educate the business fraternity through the publishing of news on the best practice they shouldfollow, and which agency they should refer to in order to evade any unethical practices. ”

Dr Ramadan saw the role of media somewhat differently and he said the following when asked on the same question: “...Media is difficult. We need to have codes of ethics for journalists, which is also important. But, you know, specific things which is respect the privacy of people. Anything to do with public which that has to do with yourjob, with the common interests we have to expose. We should avoid exposing private and personal dealing of the people. This is their business. But anything that has to do with money and the public involvement ofpeople - we should say we are not going to let you do that because you are playing with the interest of the society as a whole. And on the other side (government) there is the code of ethics and there is a part of informal things where you are giving the outlines andframework and you are judging on action. ” Yong Poh Kon said the following on media’s role; "...the lack of information to the public is among the reasons why corruption 60

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continues and education of the masses is not happening at the rate that it should. Such restrictions do not apply to alternative media and with the increasing adoption of social media, online news portals and streaming videos, the landscape is rapidly changing and what could be covered up in the past can go viral in a matter of days.”

Media-based society for transparency

I bring up the role of media to put forth the argument that instituting ethics or its oversight cannot just be in the form of media projects. We can’t just keep taking society to courts to institute ethics. There are a collection of societal responsibilities that drives ethics in a society, organization or country. A litigations society leads to suspicion and animosity. A media based society kills the ability of that society to maintain dignity and privacy. Media would be having an unofficial licence to pierce into everyone’s lives. Ethics is then practiced not because one believes in it but to simply avoid a fine or summon.

Legislation can control external actions of a person, but not the mind of people.

Every entity is a business at the end of the day. They have shareholders and the commitment of the management of those entities is to their shareholders. This would include media and civil societies that sometimes forget the fact that they too are businesses with ROE and ROI to meet for their investors and shareholders. It would then beg the question where their loyalties lie, even as we hope it lies with the truth. But the reality of running a business is that your ethics is tied to your loyalty.

Therein lie the big debate on the motivations of those loyalties.

In all my interviews thus far - when asked about legislating ethics - the response has been ‘. .you can legislate processes and 61

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systems but not character, thoughts, or ethics. You imbue ethics.

You practice ethics. You promote ethics through consensus but you cannot legislate ethics. The punitive culture of authority has to be reformed if ethics is to be imbued. Culture of deference to authority has to be reformed if ethics is to be instituted. We have CEOs in the same position for over 5 years; that in and of itself breeds a sense of invincibility. If democratic countries are having elections every 4 or 5 years to change leadership - why shouldn’t the private sector demand that CEOs cannot be in the same position for more than a prescribed time?’

The same goes to leadership positions in public sector. When people are placed in a place for over a certain period of time, regardless of the fact the company may have seen good returns during their tenure, it is the continual placing of these people in the same position that with time breeds a sense of invincibility and self-righteousness which leads to the many ethical challenges in the private sector.

The issues on authority and leadership could not have been better articulated than the following statement from Nicholas Zeffreys when 1 asked him about leadership and greed. “...In one sense, they were all victims of what is called the Abilene Paradox. This requires an understanding of the context ofgroup dynamics at work as to how decisions are made and the quality of communications at work (or lack of it) in this context. When things go wrong in an organisation, it is often because of what is called 'mismanaged agreement ’ or unchecked agreement. This is an 'agreement 'that has not been validated by honest and open consensus of all those involved. AU the parties act under the assumption that everyone else agrees to what is taking place, when in reality this is not the case. Consequently, bad behaviour continues unabated based on thefalse assumption that decisions made are valid and universally accepted. This is the result of 62

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the failure of anyone to voice their feelings or reservations about what is going on and there are no opportunities for open discussion. This reluctance to speak out is derived from both a fear of doing so and of being ostracised from the group - in a fear of separation. Anxieties about the risks of open discussion and negative fantasy of what might happen upon doing so lead to mindlessly following the leaderless flock.”

Dr Manfred had similar insights to share on leadership invincibility; “ ...leaders have to be aware that the moment they are in a powerful position, candour disappears. Candour disappears with authority. You will have yea-sayers around you.

And so these leaders lose touch. It corrupts. No party should be too long in the office. You need to create an honest environment where feedbacks and consultation are encouraged.Initially, Alexander the Great had this great support system, which he built around him. He had his companions. He was a great leader as a result. Of course, when he decided to be a god, the feedback system failed. The environment of your workplace and society breeds the kinds ofleaders you create. Industry captains must not be persecutedfor showing leadership and courage. They should be assessed by the soundness of their business and characters and not how politically affiliated they are to decision makers.

Dr Ramadan addressed the implementation of ethics in his interview as follows; “...I think there are two ways ofdoing this.

The first is to deal with the creeds, traditions and sources that people are relying on. For example you can ’/ come to a global culture or business or commerce or trade without understanding that at the end of the day we are dealing with human beings, in a specific region, in a specific country. We should not only rely on GDP (Gross Domestic Product) to assess success but also on well-being and happiness. Japanese know this well. When the people feel good they are more efficient. Feeling and efficiency are important. Feeling in cultural terms are based on feeling good about your beliefs, principles and cultural traditions.

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So this is one side. The other side is, another way to convince them is -just look at the world today and you need to deal with nature, the environment, global warming, poverty and all these.

We can convince the powerful people, or the executive side of the political spectrum or thefinancial spectrum or the economic powers that at the end of the day this is going to help you. Not to think of itfrom the perspective of ethics or profits, but think of it from perspective of dignifying your profit. ”

Proposal: Publicise ethical rules

Seek for organisations to make public their programmes on ethics and how this is different from Corporate Governance and CSR. Review roles of leadership tenure in public companies.

Laying the next bricks ‘7 am surprised at three things:

[A] man runs from death while death is inevitable.

One sees minorfaults in others, yet overlooks his own major

faults.

When there is any defect to one s cattle he tries to cure it, but does not cure his own defects. ” Umar Ibn Al-Khattab, Second Caliph of Muslim

The following are some ideas on ethics.

I. On how companies must operate on ethics a. Companies and market must mature into a self-regulated environment; 64

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b. Board of Directors must be made accountable for decisions made for the company; c. Selection criteria of Independent Directors must be made more onerous and stringent and requirements made transparent; d. There must be a rigorous mechanism and oversight on selection of Independent Directors; e. In current scenario, although independent directors are selected to Boards, they may not necessarily be totally independent in their decision making; f. A body could be created that would vet and create a pool of certified independent directors; and g. KPIs of Board must place emphasize on character, ethics or other factors beyond profit maximisation and bottom line.

II. On level of government involvement in private sector governance a. Whilst market should self-regulate, there must be an oversight on what the ultimate brand of Malaysia should stand for.

Leadership need to define this through business and ethics brands. This has to be based on substance, possibly through cultural diplomacy of business and not public relations project; b. Government could play a role in defining: i. Model of export based market; ii. Deliverables based on FTA environment; c. Market based of equitable wealth distribution for all d. Human capital skill development for moving up the value chain; and e. Requirement and guidelines for corporate social responsibility, ethics, governance for all industries. There are guidelines on some of these for financial sector and this could be extended to other sectors and industries.

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HI. On risk management and business ethics a. Roles of Risk Management committees in companies are not very clear in all industry. Its expectations are clearly set for financial industry but may not be for all sectors and industries; and b. Risk management for various clusters of market must be developed to prevent gambling on risks that could cause the collapse of a country’s economy.

IV. On building a character-based market environment a. Ultimately, the strength of a company and its Board is made of the collective strength of character of its members and no amount of regulation and oversight can create that; b. Malaysia should invest in teaching character to its young, youth and professionals; and c. Government could play a key role in building a culture based on character and building leadership based on character in every walk of society.

V. On Public Service delivery a. Avoid flip flop announcement and measures; b. Ensure good enforcement to gain investor and public confidence on regulations and guidelines announced; and c. Call for further engagement with private sector for better understanding of requirements and expectations from both sides.

VI. Mending and patching loopholes a. To develop mechanisms to ascertain the actual state of company beyond announcements and annual reports; b. To take individual members of an organisation to task on failure and not the entire company when trust and ethics are breached; and C. Recognize those who do well publicly too as part of standard setting.

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Ending on sobriety I would like to end this paper with the famous three last wishes of Alexander the Great:

"With death staring him in his face, Alexander realised how his conquests, his great army, his sharp sword and all his wealth were ofno consequence. He now longed to reach home to see his mother s face and bid her his last adieu. But, he had to accept the fact that his sinking health would not permit him to reach his distant homeland. So, the mighty conqueror lay prostrate and pate, helplessly waiting to breathe his last. He called his generals and said, ‘7 will depart from this world soon, I have three wishes, please carry them out without fail. " With tears flowing down their cheeks, the generals agreed to abide by their king s last wishes.

"My first desire is that", said Alexander, "My physicians alone must cany my coffin. "After a pause, he continued, "Secondly, I desire that when my coffin is being carried to the grave, the path leading to the graveyard be strewn with gold, silver and precious stones which I have collected in my treasury". The kingfelt exhausted after saying this. He took a minutes rest and continued. "My third and last wish is that both my hands be kept dangling out of my coffin ",

The people who had gathered there wondered at the kings strange wishes. But no one dared bring the question to their Ups. Alexanders favorite general kissed his hand and pressed them to his heart. "O king, we assure you that all your wishes will be fulfilled. But tell us why do you make such strange wishes? " At this Alexander took a deep breath and said, ".../ would like the world to know of the three lessons I have just learnt. I want my physicians to cany my coffin because people should realize 67

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that no doctor on this earth can really cure any body. They are powerless and cannot save a personfrom the clutches ofdeath. So let not people take life for granted. The second wish ofstrewing gold, silver and other riches on the path to the graveyard is to tell people that not even a fraction of gold will come with me. I spent all my life greed ofpower, earning riches but cannot take anything with me. Let people realize that it is a sheer waste of time to chase wealth. About my third wish of having my hands dangling out of the coffin, I wish people to know that I came empty handed into this world and empty handed I go out of this world". With these words, the king closed his eyes. Soon he let death conquer him and breathed his last. ”

In the final analysis we only leave behind a legacy and take the deeds that built that legacy with us to face our Creator. We are all given the free will to define the deeds that would build that legacy.

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‘CORPORATE’ SOCIAL RESPONSIBILITY

Michael Chiam, Ph.D

Emerging CSR thrust that goes beyond philanthropic activities Not a week goes by without corporate news and announcements of the noble and popular intention of doing well while doing good. Whether it is a weekend frolicking with a tree planting exercise or organizing a golf tournament, it comes under the ambit of Corporate Social Responsibility (CSR). So is CSR the magical tool that will propel businesses to improve its corporate image and clout that will receive the necessary acceptance and visibility of the public and society? After all, CSR is perceived as the philanthropic gestures that will not take a strain on the resources of the business and the budget. What have we got then? Even the offer of a marginal discount to use the highways, at an unearthly hour, after a continuous rate escalation over the years is CSR.

CSR is just about everything Unaware to many entrepreneurs, and other stakeholders, there is a new interpretation and dimension to CSR. The way fast food chains produce and market their products, their target market, the ingredients and the effects on health, drew criticism as being socially irresponsible under the CSR label. This is notwithstanding that these corporations have been extraordinarily generous in their societal contributions. Even the waste disposal methods in manufacturing processes from organizations and environmental care, air and water pollution can come under scrutiny in the name of CSR. There is a growing trend of categorizing all sorts 71

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of topics under the banner of CSR but at the same time certain behavioral characteristics of organizations are often intentionally kept out of the CSR concept, such as compliance with laws and niles as well as governance.

Concept of CSR

The concept of CSR is an old concept, born together with the notion of modem enterprise. CSR is used to describe a wide range of economic, social and environment initiatives by enterprises that go beyond legal requirements and mostly voluntary in nature. There is a social dimension to it and covers treatment of employers (labour policies), corporate governance, fair business practices, environmental care and consumer interest. As good corporate citizen, all organizations including SMEs will be expected to go beyond what is the legal requirement and should not focus only on profitability but also the people and the planet. priple bottom line reporting

Before the new millennium, Triple Bottom Line reporting was trendy and organizations in the developed economies started to introduce this in their regular annual reports. The Triple Bottom Line reporting was seen as a minimum expectation in the globalized market and extends the responsibility of SMEs and Multi-National Corporations (MNCs), to environment care, social and community development, good corporate governance and business ethics. Taking on these responsibilities were not new challenges to many organizations, although the extent and depth of involvement were not seen to be adequate or structured.

Trivial monetary contributions and philanthropic activities related to society development and environment were not norms that can be accepted in the global trade and socially responsible investors.

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Expanded CSR stakeholders

The Corporate prefix to Social Responsibility (SR) implied that it is the corporations or businesses that should bear the responsibility for society well-being. Dissecting this phrase further, what is social? Is it activities or practices relating to human society? This article will not attempt to elicit a ‘right’ definition for CSR. There is no short of publications and pronouncement on CSR definitions and no less than a score of organizations, whether from business corporations, government and non-government organizations (NGOs) and the academia have attempted to justify their definition as closest to its intention.

The new trend and now widely accepted globally, is the expanded list of stakeholders in the CSR arena. Besides the corporation' or business community, the other stakeholders, since th view is accepted that social responsibility is applicable to al. organizations and every individual or group in society would include the government, the labour union, NGOs, the consumers, researchers and the academia. In line with the expanded roles of stakeholders, the prefix ‘Corporate’ will be eliminated and the subject will now focus on Social Responsibility (SR). There is now a global movement to draw up a Guideline Standards on Social Responsibility.

Expanded interest in Social Responsibility (SR) There are many factors that contributed to the expanded interest in social responsibility of organizations. Over the past decades, globalization has resulted in an increase in the power and influence of organizations and to some extent, a relative ‘weakening’ role of the public sector in some countries.

Globalization has also thrown a new dimension in the interpretation, definition and expectation on SR. The new trend 73

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introduces other stakeholders, as mentioned above, and issues.

The imposition of SR standards, if at all one that can be agreed upon, must take cognition of the gap between developed and developing countries. Would the SR concept be a new trade barrier or another tool to assess the competencies of Malaysian companies fighting for a slice of the international trade? New trends in doing business, such as outsourcing and the fast pace of technological advances have created problems in the home countries of some developed economies and is the developing of SR Standards brought in to level the playing fields?

Labour and human rights principles are core issues now being addressed under the SR umbrella. Thus corporate behaviour and operating practices are expected to be socially acceptable by Society. Corporations can also be complicit in the human rights abuses. So are poor or unfair labour practices and all these are considered as infringement of basic rights which is deadly wrong and against the principles of good SR. It must not be mistaken that infringement of these social responsibility principles may not only be a direct violation that calls for censure but the indirect violation due to the activities in their supply chain can impact on the organization too.

Is there a need for a Standard for Social Responsibility?

A simple answer from many folks is ‘yes’ and it is due to ‘globalization’ but one have to look beyond the reaches and implication of a global standard. Globalization has also created new and huge opportunities for integration between the people of the whole world and also for their improvement in life quality.

Arising from this, it has brought in gigantic challenges. Small and medium enterprises (SMEs) may think that they are small business entities and introduction of the SR guidelines will be inconsequential to them. SMEs form part of the supply chain 74

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in the globalised trade and it will not be exempted from the throes of such challenges. The way SMEs behave and function in their business activities has an impact on society and on the environment. They too mobilize substantial amount of materials and cumulatively a big pool of human resources throughout their productive chains which can cause social and environmental impacts.

SR is increasingly becoming one of the important influences on an organization’s performance. SMEs performance in relation to the social environment in which it operated, and its impact on the natural environment has become a critical part of measuring its overall performance. SMEs as a cog in the global supply chain will need to ensure healthy ecosystems, social equality and organizational governance.

SR Core Subjects in ISO 26000 The proposed introduction and development of a SR Guideline Standards by ISO is not to be dismissed as just another standard in management for the conduct of businesses. ISO 26000 organizes the multiple topics related to SR into seven big core subjects, with many issues under each core topics. Whether it is labelled as CSR, Corporate Responsibility (CR) or Sustainability Reporting, the core issues do not differ very much. The ISO 26000 core subjects are:

Human rights Labour practices Environmental concerns Fair operating practices Consumer issues Social and economic development of the community Organizational governance 75

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The many issues attached to each of these core topics are complex and will have to be expanded in another report, should this publication continues. For the comfort of MNCs and SMEs in Malaysia, it is decreed that ISO 26000 Guidelines on Social Responsibility will be a voluntary and will not be a management system and it is not intended for certification purposes but some elements of this may be incorporated to the existing management systems.

Expectations of society In the borderless society, with greater ease of travel and the availability of instant communications, individuals and organizations around the world are finding it easier to know about the activities of organizations. This implies both transparent and ethical behaviour that contributes to sustainable development and is in compliance with applicable law and consistent with international norms, conventions and initiatives. A fundamental element of SR is respect for the rule of law and compliance with legally binding obligations. Many people use the terms social responsibility and sustainable development interchangeably and there is a close relationship between the two but they are different concepts.

Socially Responsible Investment

More companies are now owned by institutions rather than individuals. Thrust is now in the direction of investment only in socially responsible companies in socially responsible countries.

This carries with it wide implications for many organisation.

There is a growing view among institutional investors that environmental, social and corporate governance issues can affect the performance of investment portfolios. This takes the CSR agenda another step further into the basic CSR concept.

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The subject on environment care and governance are complex and guided by many international conventions, initiatives and bilateral agreements.

By coincidence when this article was written, the Prime Minister of Malaysia, who is also the Minister of Finance, tabled the 2014 budget in Parliament. He announced five main thrusts in the formulation of the 2014 Budget under the theme of "Strengthening Economic Resilience. ” The first thrust was "invigorating economic activity” with focus on providing a conducive environment to attract more domestic and foreign investments. In the move to strengthen the financial market under the first thrust, he proposed that "efforts will be intensified to promote Malaysia as a market for Social Responsible Investment (SRI)”. In the fifth thrust, the Prime Minister also announced new initiatives for environmental conservation and resource management. SR enthusiasts would be pleased with these developments in the budget as these have been consistent with this author’s regular reports and awareness programmes.

There is now a clarion call to all socially responsible organizations that environmental, social and governance (ESG) are important pillars and effort should be taken to integrate these practices into their businesses and operations. The Prime Minister in his speech added: "Among the measures which will be implemented is the introducing of the ESG index to raise the profile of listed companies, which have high socially responsible practices. In addition, the government will establish a SRIfund to be invested in listed companies which demonstrate high accountability, transparency and sustainability, including inclusiveness in diversity encompassing gender, age and ethnicity”.

SR instruments and initiatives In moving up the scale of gradual compliance with global SR guidelines, it may be necessary to come to grip on the background 77

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and source of the principles and practices expectation for all stakeholders. There will be layers of reference materials, mostly publications from the developed economies and very little from the developing countries.

How these instruments that will be translated into a global guidelines and what will be its impact on the businesses will be expanded in future reports.

At this juncture, it can be concluded that CSR or SR is beyond basic community welfare and societal care and which is an absolute necessity to live up to the image of good corporate citizenship. It can still be a good public relation exercise and fillfilling it will get the corporation by for corporate reporting in compliance with local listing requirements. In the longer term, to gain the competitive edge and overcome the technical trade barriers, the corporation will have to objectively look beyond the bottom line and not be complicit in areas of human rights, labour practices, fair operating procedures and environmental care.

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PROFILES OF WRITERS Mohd Nizam Mohd Ali is the Director for Private Sector at the Malaysian Institute of Integrity since 2004. He leads his team in implementing the National Integrity Plan by engaging the economic institutional stakeholders in corporate governance, ethical business conducts and corporate responsibility areas.

Some of his integrity-themed publications on the anti-corruption and ethics advocacy topics are used as referred texts in modular integrity programmes. He welcomes like-minded professionals and practitioners to join his Corporate Integrity System Malaysia growing network of integrity champions via email: swasta@iim. org.my or www.iim.org.my and www.cism.my.

Errol Oh is an executive editor with The Star and has been a journalist for over 20 years. He has spent more than half that time covering business and finance. He writes a weekly column for The Star and a monthly column for ACCA’s Accounting and Business magazine. He has won awards for feature writing, and received the Corporate Governance Journalist of the Year Award in conjunction with the Malaysia-Asean Corporate Governance Index 2013.

Firoz Abdul Hamid is a consultant advisor to LKY School of Public Policy, National University of Singapore, fellow of Royal Society of Arts and Advisory Board Member Centre for Islamic Business and Finance Research (CIBFR), University of Nottingham, Malaysia. With over 20 years experience, she has been very involved in various sectors and industries in international public and private sectors and global academic institutions. She has led and created branding and marketing strategies for new image of countries, companies, institutions, initiatives, products and markets. Her experience has also spanned leading and facilitating organisational change in public and 79

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private sectors, developing and implementing communications and reputational strategies for organisations and governments.

DrMichaelChiamisamemberoftheNational MirrorCommittee and Expert on Social Responsibility (SR) representing Malaysia in the ISO Working Group on SR. He represents the Industry Group from the developing countries and was involved at all its Global Plenary meetings and dialogues on the development of ISO 26000 Guideline Standards on SR. He was appointed to various Task Groups, the Liaison Task Force and a substantive member of the Drafting Group on the ISO 26000. An accountant by profession, he has been in the Human Resource Management environment for most part of his 33 years whilst attached to a MNC. He lectures in Strategic Management and HRM for the Executive MBA programme. He is now the Executive Director of Paragon Corporation Sdn Bhd and a Director of SOCSO as well as a Member of the National Labour Advisory Council. He is also the President of the Commercial Association of Peninsular Malaysia and the HR Bureau Chairman of the SMI Association.

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Expert Group Fellowship 2014

Private Sector Team, Malaysian Institute of Integrity, 2014

b'rarn left to right ■ Num! Hilda Shazlan. Mohd .Nizam, Mohd Rezaidi.

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