Corporate Governance Reforms in Malaysia: the key leading players' perspectives

• DOI: http://doi.org/10.1111/j.1467-8683.2007.00618.x
• Published date: 01 September 2007
• Date: 01 September 2007
• Author: Pik Kun Liew

Corporate Governance Reforms in

Malaysia: the key leading players’

perspectives

Pik Kun Liew*

This paper focuses on the corporate governance reforms in Malaysia since the 1997/1998 Asian

f‌inancial crisis. Drawing upon ten in-depth semi-structured interviews conducted with

leading players who were highly involved in Malaysia’s corporate governance development,

together with a review of the literature in this area, the paper offers evidence on the meaning

of corporate governance in the Malaysian context, the factors behind the recent reforms and

views on the appropriate corporate governance system for Malaysia. While it is shown that

Malaysia’s corporate governance reforms has modelled on the Anglo-American systems to a

large extent, the majority of the interviewees placed greater emphasis on the social aspect of

corporate governance in contrast to the traditional notion of shareholder accountability. The

main concern raised in the paper is that without changes in the previous problematic corporate

culture, the intended purpose of the recent corporate governance reforms will unlikely to be

achieved.

Keywords: Corporate governance reforms, Malaysia, Asian f‌inancial crisis, corporate gover-

nance systems, globalisation

Introduction

Up until the 1997/1998 Asian f‌inancial

crisis, corporate governance practices in

Malaysia were not a matter of concern accord-

ing to many international bodies, in particular

when the World Bank concluded that East

Asian countries (including Malaysia) had the

basics right in terms of economic management,

and effective public institutions and gover-

nance (see World Bank, 1993). This view

changed rapidly following the 1997/1998

economic crisis in most East Asian countries,

especially South Korea, Thailand, Malaysia

and Indonesia. Corporate governance came

to be seen as a problem with a range of inter-

national agencies (such as the World Bank,

International Monetary Fund (IMF), Asian

Development Bank (ADB)) and the Malaysian

government advocating reforms in corporate

governance practices as a way of managing the

f‌inancial crisis.

The aim of this paper is to provide evi-

dence on the corporate governance reforms in

Malaysia following the crisis, in relation to

the meaning of corporate governance, the

reasons behind the reforms, and views on the

appropriate corporate governance system for

Malaysia. The evidence is based on the views

of ten key leading players who were highly

involved in the nation’s corporate governance

development (at the time the interviews took

place) interviewed between June and August

2002.

The structure of the paper is as follows. The

f‌irst section provides a historical background

of the corporate governance practices in

Malaysia prior to the economic crisis. This is

followed by a discussion about the initiatives

taken by the Malaysian government to

promote improved corporate governance

practices in the country. The next section

describes the research method adopted for this

research, followed by the f‌indings from ten

*Address for correspondence:

Department of Accounting,

Finance and Management,

University of Essex, Wivenhoe

Park,Colchester CO4 3SQ, UK.

Tel: +44 (0)1206 873844; Fax:

+44 (0)1206 873429; E-mail:

pliew@essex.ac.uk.

724 CORPORATE GOVERNANCE

Volume 15 Number 5 September 2007

© 2007 TheAuthor

Journal compilation © 2007 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA

semi-structured interviews. Finally, the last

section summarises the paper and ref‌lects

upon the evidence presented.

The scope of corporate governance

in Malaysia before 1997/1998

f‌inancial crisis

Corporate sector development

in Malaysia

The Malaysian corporate sector in the 1990s

could be described as rapid in its growth

compared to other East Asian countries. The

average annual growth rate in the number of

listed companies throughout the 1990s in

Malaysia was 10.9 per cent (from 285 in 1990 to

795 in 2000) (KLSE, 2002) compared to 10 per

cent, 7 per cent and 1 per cent in Indonesia,

Thailand and South Korea respectively

(Khatri, 2001). In addition, the total market

capitalisation of companies listed on the

main and second boards of the Malaysian

stock exchange grew at an annual average of

40 per cent (http://www.klse-ris.com.my),

which was largely driven by increasing share

prices and a high level of new equity issues

and privatisations. The development of the

Malaysian corporate sector was closely linked

to the government’s policies in developing the

private sector to promote industrialisation

while restructuring society in terms of partici-

pation and ownership. Since the early 1980s,

the government had recognised that purely

state-owned enterprises were not the best

vehicles for achieving both rapid growth and

social goals (in particular, the goals of the 1971

New Economic Policy (NEP)1). In 1983, priva-

tisation (primarily divestment of state-owned

enterprises, although various other means had

been used) was f‌irst introduced when the then

Prime Minister Mahathir saw privatisation as:

the transfer of government services and enter-

prises to the private sector...(as) companies

and services owned and managed by (the) gov-

ernment have been less successful or have run

at a loss because government’s management

methods differ greatly from those of the private

sector. (Mohamad, 1989, p. 10)

Nearlyeight years later after the policy was f‌irst

announced, Malaysia released its Privatization

Masterplan in February 1991 (Malaysia, 1991),

which called for the privatisation of key indus-

tries. Among the most important privatisations

were that of the national electricity company,

Tenaga Nasional Bhd (TNB), the distributor

of the national car, Edaran Otomobil Na-

sional (EON), and the national telecommunica-

tion company, Syarikat Telekom Malaysia

Bhd (STM) in 1990; the national airline,

Malaysia Airlines Bhd (MAB), Heavy Indus-

tries Corporation of Malaysia Holdings Bhd

(HICOM) that owned the majority of the

national automobile company (Perusahaan

Otomobil Nasional, Proton), and Petronas

Dagangan Bhd in 1994; and Petronas Gas Bhd

in 1995. The public offering of TNB was the

largest to date in Asia, generating the equiva-

lent of $1.2 billion dollars in local currency.The

Privatization Masterplan had a signif‌icant effect

on the Malaysian economy overall, between

1992 and 1995. The proceeds generated from

privatisationaveraged 3 per cent of annualGDP

and more importantly, the privatisation efforts

demonstrated the ability of local capital mar-

kets to successfully mobilise new equity as

about one-quarter of the Malaysian privatisa-

tion resulted from public offerings in local

capital markets (Harvey and Roper, 1999).

One of the main features of the corporate

sector in Malaysia, like many other East Asian

countries, is the high level of ownership

concentration, cross-holdings and signif‌icant

participation of owners in management –

an insider system of corporate governance

(Khatri, 2001). In a study of the 100 largest

companies in Malaysia, Lim (1981) found a

high degree of concentration at various struc-

tures. First, a major proportion of the f‌inancial

assets and productive capacityof the corporate

economy was concentratedin a few large com-

panies. At the second structure, the concentra-

tion occurred at the level of share ownership,

notwithstanding the relatively large market

capitalisation of the Malaysian share market;

shares were not widely distributed and were

concentrated in the hands of a few institutional

and corporate investors. Finally, a third struc-

ture of concentration was of control over the

large companies. A complex system of inter-

locking or pyramiding share ownership had

developed which enabled a few individuals

and entities to control an amount of capital

many times more than what they actually

owned. In practice, the main form of pyramid-

ing or cross-holdings in Malaysia took place

through holding companies that owned a

minor but signif‌icant proportion of shares in a

large number of companies.

More recently, La Porta et al. (1998) and

Claessens et al. (1999) conducted studies of

corporate ownership across East Asia using

data froma large number of f‌inancial and non-

f‌inancial f‌irms. Theformer examined f‌irst level

ownership of the ten largest publicly listed

companies in 49 countries and found a high

degree of ownership concentration in Malay-

sia, where the averageshare of common equity

owned by the largest three shareholders in

the ten largest companies was 54 per cent

CORPORATE GOVERNANCE REFORMS IN MALAYSIA 725

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Journal compilation © BlackwellPublishing Ltd. 2007