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UNIVERSITI UTARA MALAYSIA KUALA LUMPUR CAMPUS

CORPORATE GOVERNANCE IN MALAYSIA:THE EFFECT OF CORPORATE GOVERNANCE & STATE BUSINESS OWNERSHIP
BY AHMAD FAISAL BIN ABDULLAH 808465 LECTURER: ASSOC. PROF. DR. AYOIB CHE AHMAD SUBJECT: SEMINAR IN CORPORATE GOVERNMENT CODE: BKAL 5033

Date Submit: 30 June 2012

TABLE OF CONTENTS BIL DESCRIPTION PART 1 RESEARCH ISSUE, MOTIVATION & LITERATURE 1. REVIEW PART II HYPOTHESIS DEVELOPMENT 2. PART III RESEARCH METHOD & CONCLUSION 3. 4. 5. 6. 7. 8. 9. PART IV CORPORATE GOVERNANCE & ITS IMPORTANCE PART V CASE STUDY 1 : PERWAJA STEEL TERENGGANU SDN BHD PART VI : CORPORATE REFORMS IN MALAYSIA PART VII : PERWAJA STEEL PROGRESS PART IX : CONCLUSION REFERENCE PAGE 3 4&5 6 7&8 8,9 & 10 10 & 11 11,12 & 13 13 14

PART 1 RESEARCH ISSUE, MOTIVATION & LITERATURE REVIEW

The Asian Financial Crisis in 1997 & the scandal of several local big companies like Perwaja, Renong & MAS had prompted adoption corporate governance by Malaysia Government. The purpose is to study implementation the code & rules of corporate governance since the public realize the close relationship between business & politics. Agencies that involve into enforcement of corporate governance includes Ministry of finance,Kuala Lumpur Stock Exchange, Securities of Commission and Registrar of company. However it is sadly noted that companies which are involved in corporate malpractices & has good relationship with states excluded from the legal corporate affairs. It is significance that the implementation of the code & rules of corporate governance from the political economy perspective. Political economy define as evolving links between politicians and large scale enterprises with emphasis given to the changing pattern of ownership and control ties among political well connected companies.

PART II HYPOTHESIS DEVELOPMENT

According to II C. N. et al., (1999), to create good governance, five subsystems are required: Internal System of Corporate Governance concerns the relationship between management and shareholders, or between corporate insiders (management and controlling shareholders) and outside shareholders. The internal and external system of corporate governance system of financial institution ensures that they are managed as profit-seeking entities with due consideration on soundness, rather than functioning as simple conduits of funds into the corporate sector. External system of corporate governance by financial market concerns the relationship between the firm and other supplies or fund such as creditors. External of system corporate governance by the market for corporate control concern the relationship between the firm and potential investors/entrepreneurs in the stock market. System Governance by insolvency mechanisms concerns firms which have fallen into deep financial trouble or gone bankrupt due to failures in their internal and external corporate governance or simply as a result of bad luck, or a combination of both. This concept can be further illustrated by using Figure Black Box Model of Corporation 1995 as shown below:

PART II HYPOTHESIS DEVELOPMENT

Further analysis were carried out using the Black Box Model Corporation by Blair 1995 which explains how the elements of the corporate governance function.
SHAREHOLDERS

Dividends Voting power Board of Directors

Equity Capital

Wages Employees Corporation

Supervisory Power

Debt Capital Lenders

(Management and physical capital) Labour Input Suppliers Market price Goods & Services Int. Payment Market price Customers

According to Blair of his Black Box Model in 1995, even though corporate governance recognised the right of shareholders & directors, they are still subjected to the law regulated by government. In other words how much state intervenes in the company (the state is the actual controller).

PART III RESEARCH METHOD & CONCLUSION

This study uses qualitative research methodology. It uses extensively secondary data from various past researches, articles, company annual reports and working papers. The focus of this study is to study the relationship between state & capital. A case study is carried out on Perwaja Steel Sdn Bhd. It is analyzed according to the hypotheses Model of which had mentioned earlier. The basis for this assumption also refers to Malaysia long history of close political links in various forms (Gomez 1990, 1994, 2002) referring ruling parties owned companies. Secondly corporate figures that have strong political network and owned firms that once belonged to government and eventually renationalized and lastly government owned firms through state investment arms. The research attempted to answer assumption Companies which have good relationship with states will always be excluded from penalty under rules and code of corporate governance

PART IV CORPORATE GOVERNANCE & ITS IMPORTANCE

The High Level Finance Committee Report on Corporate Governance defined as the process and structure used to direct and manage the business affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long-term shareholder value while taking into the account the interest of other stakeholders (Lee, 2003:41).The importance of corporate governance can be summarized as follows: First of all, rules, regulations and ethic that practice regularly by the Board of Director regulate directors duties and restrain them from abusing powers (Ali R., 1999). Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the serve the best interest of the company as well as ensuring the observance and compliance with laws, regulation and code of conduct and best practices. Board decisions may affect different shareholder groups differently. Therefore, the board should treat all shareholders fairly. Second, practice of corporate governance will enable investors, shareholder and stakeholder and all party concern to examine the management and staff at all level. Respected laws will protect the stakeholder right (OECD Principles of Corporate Governance, 1999). Rules and regulations ensure the management carry on their duties coherent to their obligation and responsibilities. Third, corporate governance contribute to the restoration of confidence. It will increase markets and investor confidences to encourage more stable and intentional investment (Ng K. C., 1998). Disclosure of transparency and accountability resulted from practice of corporate governance make any market player and investor ease to examine the performance of corporate profile of any company. It will sustain the growth of corporate value in the long run.

Finally, corporate governance contributes to the restoration of confidence in an organisation (Ng K. C., 1998). Internal relation and communication flow in an organisation based on confidence by both side. The high level officer in an organisation believes that their subordinates will work in good faith. The normal worker hoping that their hard work will be well rewarded. In turn, it will create a healthy organisation that work together with mutual understanding.

PART V CASE STUDY 1 : PERWAJA STEEL TERENGGANU SDN BHD

Formed in year 1982 as joint venture between state government (Trengganu)19%,HICOM(51%) and Nippon Steel(30%).The paid-up capital was RM 250 million and has secured loan of Yen 81.5 billion (equivalent to RM 850 million in 1982) from Japanese Export Bank and guarantee by MOF Faced problem from beginning,The Direct Reduction Plant face technical problem & by 1987 Nippon Steel left the company.By 31 March 1988 accumulated loss is RM 1 billion by Price Water House auditor. By 1988 engaged World Renowned Consultant, Buzz Allen & Hamilton and which Eric Chia was invited to present proposal plan.Appointed as Managing Director on 23 March 1990. This resulted Japanese Companies and HICOM sold off all their shares to the MOF.Perwaja Steel Sdn bhd(PSSB) was established & further RM 250 million injected by MOF. Role of PSSB is much dependence to the government policy since members BOD appointed by the merit of the government. This practices limited the BOD as a rubber stamp that only endorsing the decision that have been made by others.

By the end of 1995 audited by Price Water House reported accumulated loss of RM 2.985 bilion & total liabilities of RM 6.9 billion.In August 1995 Eric Chia was retired and succeeded by Wan Abdul Ghani bin Wan Ahmad.The government arrange borrowing from local banks, foreign banks & government funds amounting RM 464 million. Internal companies report in 1997 mention management irregularities during era Eric Chia.Example Mah Sun Company were awarded RM967 million without proper authorization from BOD.RM 107 million also awarded to the same company but without trace of documents. Other doubtfull trading with non-existing company Frilsham Enterprise.Datuk Seri Anwar Ibrahim(Minister of Finance) informed that Perwaja was insolvent.In July 1999, the ex-minister then Datuk Seri Anwar make police report alleging the Prime Minister involvement in the Perwaja Scandal. March Year 2001, Datuk Ahmad Zaki Husin director of ACA announced that finding transfer of RM 76.4 million to a Swiss Bank Account registered in the British Virgin Islands. However no legal actions taken against Perwaja until Mac 2004 when Eric Chia was arrested. The company still continues nowadays but with the help of the government.

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Other factors Contribute to Failure of Perwaja

Production Costs remains in excess of Selling Price. Heavy Internal & External debts. No evidence of financial budgets being prepare to monitor actual performance and management of working capital. No evidence of competitive quotations in awarding tender & contracts with BOD review. High cost procurement of raw materials

PART VI : CORPORATE REFORMS IN MALAYSIA

In year 1999, Ministry of Finance establishes committee known as High Level Financial Committee on corporate governance. The committee was given the responsibility to study, analyse and develop corporate governance in the country. The study concluded areas of weakness such like transparency & disclosure requirement.

Based on the study corporate governance code was formed to encourage transparency and full disclosure of information to investors. It is also serve as a guidelines to Board of Director of how to manage the company.

Bursa Malaysia and Securities Commission also had gazette new rules and procedures for public listed companies. Information includes financial status, shareholders structure and loan position. Failure to comply resulted penalty or

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jail or both. Malaysia Institute of Corporate Governance (MICG) had been given a grant of US$100,000 to conduct study, research & training programme.

Minority Shareholder Watchdog Group was established in August 2000 to educate the minority group about their rights & enforcement as well to encourage the BOD & Management of the company to comply with Corporate Governance Code.The membership of committee comprising EPF,Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji,Perkeso and Permodalan Nasional Berhad.

These efforts put by government and private sectors in Malaysia earn Malaysia highest score of 9.0 compared to other Asian countries as rated by Asia Corporate Governance Association (ACGA) and CLSA Emerging Market. However the same institutes also rate 3.5 in term of enforcement. This difference is quite staggering and one need a lot of reform from enforcement agency as well from the government.

PART VII : PERWAJA STEEL PROGRESS

Perwaja to write off losses via capital reduction PERWAJA Holdings Bhd will write off its entire RM550.02 million accumulated losses via capital reduction by the end of this year, by reducing its paid-up capital from RM1.22 billion to RM787.78 million. Initially, the write-off of the accumulated losses was supposed to be carried out before the initial public offering (IPO). But two months ago, the Securities Commission approved of Perwaja writing off its entire accumulated losses by the end of this year. Perwaja's borrowers have consented to the capital reduction, as mentioned by managing director Tan Sri Pheng Yin Huah.

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The RM550.02 million in accumulated losses is encapsulated in Perwaja Steel's shareholders' funds and the capital reduction is offset from the share capital and share premium. The move is a cosmetic change to comply with SC's requirement that Perwaja Holdings and Perwaja Steel start on a clean slate. None of the Perwaja Holdings shareholders, existing or potential, would be affected by this capital reduction because the shareholders' funds or value of the company will remain the same. Potential investors can rest assured that they are not buying into Perwaja's accumulated losses, the net tangible asset is clean. Perwaja to finish paying off govt loan by end-2012 PERWAJA Holdings Bhd, en route to the main board of Bursa Malaysia, expects to finish paying off a RM250 million government loan by end-2012. When Kinsteel Bhd bought into Perwaja in September 2006, the latter's major liabilities amounted to RM786 million. They consisted of RM220 million owed to Alliance Bank Bhd, RM310 million in unpaid electricity bills to Tenaga Nasional Bhd (TNB) and a loan from the government amounting to RM256 million. The repayment of government loan is expected to be completed within five years. Perwaja settled its debt with Alliance Bank in 2006, and TNB last year. At the start of this year, it had started to repay the government loan. Perwaja posts Q1 pre-tax profit of RM16.2m Perwaja Holdings Bhd posted a pre-tax profit of RM16.2 million for the first quarter ended March 31, 2012 compared to a pre-tax loss of RM24.3 million in the same quarter of 2011.

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Revenue for the period concerned fell to RM406.121 million from RM426.105 million. The slight decrease in revenue was mainly driven by a drop in sales volume, Perwaja said in its filing to Bursa. However, the lower cost of raw materials and higher steel prices, resulted in a profit during the current quarter. The group remains cautiously optimistic over the iron and steel industry for 2012. In the domestic market, demand for steel will be supported by various government mega projects, to be rolled out under the Economic Transformation Programme. -

PART IX : CONCLUSION
1. The state as capacity as shareholders has the right to be informed about the business operation & plan. 2. Secondly, the state as the owner of financial institution. 3. Thirdly, the state as provider of contracts, tender and so on. 4. Fourth, the state as enforcer of any rules and legislation. 5. This role causes interruptions in the appropriate ownership and control practice. 6. This case conform to Blairs Model that the rights and power of the principle and agent in the companys management still subjected to the degree of government intervention 7. The degree of government should be limited and for the good of the public as it will affect the credibility of the government.

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REFERENCES

Website : www.alumnivel-kusza.tripod.com/corpgov.htm Asian Academy of Management Journal, Vol.12, No. 1, 23-34, January 2007 Corporate Governance in Malaysia, Nor Azizah & Halimah(Faculty of Accountancy,UUM web.usm.my/aamj/12.1.2007/AAMJ%2012-1-2.pdf http://wtfreport.wordpress.com/2011/12/15/the-perwaja-steel-scandal/ http://www.limkitsiang.com/archive/2004/feb04/lks2875.htm

Ibrahim A.(1999) The Police Report 19625,Tun H.S.Lee Police Station,KL

Gomez,E.T.(1990) Politics in Business;UMNO Corporate Investment

http://www.btimes.com.my/articles/Perwaja_to_finish_paying_off_govt_loan_b y_end-201220081027224155/Article#ixzz1zAxKIvMX

http://www.btimes.com.my/Current_News/BTIMES/articles/20120515190618/ Article/index_html#ixzz1zAxnyRoR

http://www.btimes.com.my/articles/perwaja3_xml/Article/#ixzz1zAwpJpLa