Monday, February 19, 2018

Reimagining Malaysia Part 4: Government-Linked-Companies (GLCs) Governance

When it comes to the topic of governance and management of public funds, many people think only about government agencies and departments. However in Malaysia, government-linked companies (GLCs) (and some statutory bodies*) as well as government-linked investment companies (GLICs) also handle significant amounts of public wealth. Therefore, attention must also be focussed on their governance and performance to protect and maximise the people’s interest. 

GLCs as Political Vehicles

According to studies conducted by Universiti Malaya’s Prof Edmund Terence Gomez, seven federal GLICs – Minister of Finance Inc (MoF Inc), Khazanah Nasional Bhd, Permodalan Nasional Bhd, the Employees Provident Fund, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji and Kumpulan Wang Persaraan (KWAP) – control 35 of the top 100 listed companies in Malaysia, and have a combined market capitalisation of 42 percent of the total market capitalisation of the companies listed on Bursa Malaysia.

Ten levels down, these GLICs have exposure to 6,342 companies by way of shareholding of their listed companies, subsidiaries and associates. The figure below shows the web of control of the GLICs with respect to the government agencies[1].

From this chart, it isn’t difficult to see that the prime minister, who’s also the finance minister, now has large control not only in the political world but also in the corporate world. There is a dangerous concentration of power in just one person – the Prime Minister. 

The concentration of political and corporate power combined with the weak institutions has made the ground fertile for the birth of the biggest scandal in the history of Malaysia.

Therefore I strongly believe the lowest hanging fruit among all the institutional reforms discussed in this book is this – to enact law to prohibit the prime minister from holding the position as the finance minister. This simple step will prevent the prime minister from having almost absolute control over public wealth via both the government machineries as well as the GLCs.

Because of the lack of governance and oversight over GLCs, they have traditionally been used for political patronage. It is common to see politically-linked businesses having lopsided joint ventures with GLCs or getting contracts from them without competitive bidding.

I have been a committee member of the Select Committee of Agencies, Statutory Bodies and GLCs or Jawatankuasa Pilihan Agensi, Badan Berkanun dan Anak Syarikat (JP-ABAS) in the Selangor state assembly since 2013.

JP-ABAS provides examination and scrutiny of all the accounts and administrative matters to Selangor Agencies, Statutory Bodies and GLCs. It also scrutinise all matters and concerns published in the Auditor General reports related to or in matters as the committees deem fit. Below are pictures of the several of the many hearings and visits our committee has done for the past 5 years. 

Photo Credit: Saari Sungib

One of the challenges we face is identifying the exact number of GLCs in Selangor formed pre-2008 (before the change of government). There are many, and many levels down. Even the state audit department is unable to give us the full list. We have managed to identify more than 100 throughout the years, some of which are undergoing restructuring exercises initiated by the Selangor government.

I believe there are many more unidentified GLCs at the federal level, especially those that are not listed on Bursa Malaysia. Because there is no legislative committee similar to that of JP-ABAS at Parliament level, there is no way to keep track and provide decent oversight of these GLCs. Even worse, we may not even even know exactly how many of them actually exist.

GLCs Performance Challenges

Furthemore, GLCs tend to face lacklustre corporate performance problems, particularly if they are not publicly listed. Listed GLCs are still subject to market and investor pressure to perform as well as their counterparts.

Various studies have pointed to the trend that many state owned enterprises (SOEs)** around the world underperform when compared to their counterpart private firms in the same industry as many of these SOEs are shielded from competitive pressure, are prone to heavy bureaucracy and are often inefficient. In addition, SOEs often juggle with multiple, unclear, or conflicting financial and social objectives.

The Economist, in its article “Fixing China Inc”, reported that while Chinese SOEs showed some promise at the beginning of the century, they are now struggling to keep up with the performances of private firms, with a return on assets (ROA) that is 45 percent lower than that of private firms [2]. See figure below.  

Since the government is the biggest shareholder in GLCs, inefficiencies that lead to losses and low profitability is actually a loss of benefits for the rakyat.

Over the past few years, whenever a Selangor GLC is reported in the Auditor General’s report, JP-ABAS conducts hearings and follow-ups with the GLCs concerned on the recommendations made by the Auditor General. We also conduct hearings when there are reasonable grounds for concern on the governance and/or performance of specific GLCs.

I have found that one of the biggest inherent weaknesses of GLCs is that they usually have conflicting social and economic functions. Because of this, it is difficult to benchmark GLCs’ financial and operational performance indicators against the industrial average. For example, it is unfair to compare PKNS, which needs to build affordable housing in prime land for Selangorians, to private property developers.

The absence of benchmarks makes it difficult to monitor and demand for improvement of GLC efficiencies. This is especially true for GLCs that are earning profits. How do you tell the profit-making GLCs that the profits they are making are not enough when compared to an efficiently-run corporation?

This is my constant struggle as a member of JP-ABAS.

The conflicting social and economic roles of GLCs also tend to result in off-budget spending. Without a clear governance structure, GLCs can decide where to spend the profits in the form of corporate social responsibility (CSR) or sponsorship to government programmes without the approval of the state assemblies or parliament.

Such off-budget spending reduces transparency and complicates government budget analysis, especially on social welfare planning. This kind of system also opens doors for politicians to exert their influence, whether in the boardrooms or in the peripherals, to request for sponsorships for their pet projects (such as their favourite football teams) or lavishly-run-but-glamour-only NGOs, or more severely, channelling funds for their political goals.

Future: Good GLC Governance Framework

Since GLCs control a huge chunk of public wealth, it is important to institutionalise a proper GLC governance framework to ensure that they are run efficiently and are able to achieve comparable corporate performances as their counterparts in the private sector.

In fact, Malaysia is not new to the concept of improving the performances of its GLCs. In 2004, then Prime Minister Datuk Seri Abdullah Ahmad Badawi launched a 10-year GLC Transformation Programme, which aimed to enhance financial performance, improve corporate governance and contribute to national socioeconomic development. In August 2015, the GLCs that participated in the programme “graduated” from the GLC Transformation Programme [3].

The effort made by the federal government to systematically track and monitor the GLCs was commendable. However, only 20 GLCs participated in the programme. After various mergers, demergers, divestments and other corporate exercises over the years, the number of GLCs in the GLC Transformation Programme has been reduced to 17. All of these companies are public listed or established bodies, which by law and convention means they already practise more stringent corporate governance.

I believe that the crux of the GLCs governance problem in Malaysia lies not so much in those that are listed but in those that aren’t (1MDB was not listed). When it is not listed, corporate governance is lax and the company’s financial and operational performances usually go unchecked because of the absence of a proper oversight framework.

Therefore, for the best interests of the people, there should be a proper governance framework to ensure that all GLCs adopt a strong corporate integrity and operate efficiently. Ideally, such a framework should apply to all GLCs and their subsidiaries – listed, non-listed, state and federal. I’ve discussed in my book (Reimagining Malaysia) the features that should be included in Malaysia’s GLC governance framework in details. 

Overall, there is no doubt that we need a comprehensive framework to ensure good governance in all GLCs, both at federal and state level. We also need independent oversight bodies, such as the equivalent of JP-ABAS in parliament, to monitor the implementation of such a framework in all GLCs at all levels. Whenever possible, such mechanism must be institutionalised into laws so that its compliance does not rely on the political will of those in power.  

By having strong governance of all GLCs in Malaysia, public wealth can be protected and maximized through higher accountability and transparency as well as better operational and financial performances.

This article is extracted from a chapter of my book, "Reimagining Malaysia."

* This article does not differentiate between GLCs/GLICs and statutory bodies (known as badan berkanun or perbadanan) that run businesses as all of them handle public wealth in the corporate world. The difference between GLCs and statutory bodies is that the former is incorporated under the Companies Act while the latter is through enacting legislation; for example, PKNS in Selangor was formed through enacting the Perbadanan Kemajuan Negeri Selangor Enactment 1964.
**GLCs is more commonly known as SOEs in other parts of the world and international context.

[1] Chua Sue-Ann. Who controls corporate Malaysia? The Edge Malaysia. 8 Aug 016 [cited 30 Aug 2017]. Available from
[2] Fixing China Inc. The Economist. 30 Aug 2014 [cited 30 Aug 2017]. Available from
[3] Khanazah. GLCs successfully complete and graduate from 10-year GLC transformation program. 7 Aug 2015 [cited 30 Aug 2017]. Available from: