Reformasi extends to capital markets too
RE-FOR-MA-SI, RE-FOR-MA-SI – this was the rallying cry of Malaysians exactly a month ago as the unexpected, as far as the outcome of the 14th Malaysian general election was concerned, occurred, to the extent what was a surprise election result was not a surprise on Bursa Malaysia, well at least as far as the first few trading days were concerned.
Pakatan Harapan’s promise of “reformasi” of course refers to its election manifesto, which among others include the clear separation of powers between the legislative, executive and judiciary. Separating the role of the Prime Minister (PM) and Finance Minister (I am sure many of you have not heard of a CEO who is also a CFO) while empowering Parliament with more authority as key institutions of the government will likely report to the August House instead of the PM. The new Pakatan government also expects to provide to the media, universities, as well as civil societies greater freedom of speech as it promises to remove certain restrictive laws.
While all of the above is well and good as the nation moves towards Malaysia 2.0, the Pakatan manifesto touches very little on capital markets in general or to be more specific protection for stakeholders. The capital market too needs reform.
The Securities Commission (SC) had released the Malaysian Code of Corporate Governance in 2017 (MCCG2017) with the emphasis on providing greater responsibility to the board of directors as well as the corporate itself when conducting its affairs. This also applies to how it complies with the various principles and practices via the concept of “apply or explain an alternative” as against “comply or explain” option in the previous Code.
While the Code itself is not law, some of the practices are in actual fact governed by Bursa’s Listing Requirement, while those related to the company or certain duties and responsibilities are governed by the Companies Act, 2016.
In reforming our institutions, be it those promised by the Pakatan government, or what is being spelt out presently, we must look beyond what is practised in Malaysia or even globally.
We must take steps to make Malaysia a market that protects investors and stakeholders with greater demand for transparency and checks and balances to improve the level of integrity not only among public institutions, but also the listed companies where the public has an interest at large.
In today’s environment, a company cannot operate without the help of professionals, especially the external ones and this include lawyers, consultants, investment bankers, advisers, valuers as well as auditors.
What is interesting is that while these professional bodies carry out their duties in good faith and professionally, their level of commitment towards protecting the rights of all stakeholders can be questionable or arguable. To what extent is the advice given by these professionals in the best interest of all stakeholders? This arises from the fact that their fees for work carried out are borne by the same corporate that is being advised. Hence, it can be said that there is a conflict of interest.
The level of awareness globally in drafting the Code of Corporate Governance arose due to events that questioned why investors lost money in some of the world’s largest corporate failures, the likes of Enron, Worldcom, Lehman Brothers and even near misses of too-big-too-fail giants like AIG.
Scandalous episodes
Closer to home, we had Pan Electric in the 1980s, the burst of the second board bubble in the 1990s, the Asian Financial Crisis in 1998 as well as the Global Financial Crisis in 2008 and the latest being 1MDB.
While some are genuine failures, in cases where the failures were due to accounting fraud, breach of fiduciary duties among directors or an audit lapse or even an advice by an investment banker for the purchase of another asset/company at a seemingly high price, badly advised ratings for private debt securities are acts that can be mitigated if the professionals carrying out their duties are not paid directly by the company itself.
For this, Malaysia needs to move forward with the formation of a Company Professional Advisory Center (CPAC) whereby all professional bodies and companies are registered and CPAC itself acts as a one-stop centre that matches demand and supply for professional services. The distinction lies in the fact that the company no longer pays for the professional services directly but to obtain the professional services, a company would need to make the same payout as if it was hiring the professional advice on its own to CPAC.
CPAC itself can act not only as a matchmaker in obtaining the best advice but at the most reasonable price.
Should the formation of CPAC take place, it is likely the level of transparency and integrity of corporate Malaysia will improve as investors are now better protected than ever before. We need RE-FOR-MA-SI in the capital markets too.