Overview of the Malaysian Institutional Situation Finance Essay

CHAPTER 2

2.1 Introductions

This chapter presents an overview of the Malaysian institutional situation. Section 2.2 briefs on the background of the political economy which formed the Malaysian capital market. Informations on the development of the Malaysian Code of Corporate Governance (MCCG) are given in section 2.3. Finally, Section 2.3 concludes this chapter.

2.2 The Malaysian Political Economy

Malaysian capital market is shaped from the close identification between the racial and economic function in Malaysia (Gomez & Jomo, 1999). Malaysian society consist of multi-racial which shaped the country and business are run externally, thorough political (Mohammad, Hassan, & Chen, 2006), and internally through cultural values (Haniffa & Cooke, 2002). The three main groups in Malaysia are Bumiputeras which refers to Malays and the Malaysian indigenous ethnic groups (Haniffa & Cooke, 2000). The Malays and indigenous literally means "sons of soil" are consisting of little half the Malaysian population. Second main population is Chinese (almost one third the total populations) and third main population Indian (slightly less than one tenth of the total population) of Malaysian population. Chinese and Indian population considered as non-bumiputeras which do not share some privileges of Bumiputeras group benefits. Since the independence day of Malaysia on 31 August 1957, Malaysian political landscape in Malaysian has been lead by the coalition front (Barisan Nasional) representing by the three dominant ethnic groups: United Malay National Organization (UMNO), Malaysia Chinese Association (MCA) and Malaysian Indian Congress (MIC). Although, political power is shared amongst ethnic groups but the economic wealth is dominated by Chinese. Only 1.5 percent of the corporate equity in Peninsular Malaysia is dominated by Malay Bumiputeras in 1960s. The imbalance of the economic wealth among the ethnicity has cause the 1969 riot between the Malays and the Chinese. The riots have force the government to initiate the New Economic Policy (NEP) in 1970 in order to reduce the imbalance wealthy among the races and overcome the inter-ethnic crisis. The NEP formulated to restructure the controversial socio-economic problem during the year of 1971 under the second Malaysian Prime Minister Tun Abdul Razak. The main focus of NEP is to achieve national unity by reducing the gap of poverty among the races, create a unity among the races by restructuring the society to achieve inter-ethnic economic parity between the Malay Bumiputeras and Chinese non-Bumiputeras (Gomez & Jomo, 1999). However, the NEP has impact positive institutionalised discrimination in favour of Bumiputeras by offering them concession such as grants, education, trade and employment (Haniffa & Cooke, 2002). The government play an important role in order to achieve the NEP objective (Gomez & Jomo, 1999). Among the important role taken by the government is increasing the corporate ownership of Bumiputeras in three government bodies. The first body are comprises of public sector such as water supply, telecommunication, civil aviation, and refuse collection. While second body consists of statutory bodies established by law at federal and state level and third body comprises of government-owned private or public firms established under the 1965 Companies Act. The main objectives of these three government bodies are to promote Bumiputeras involvement in education, employment and mainly to corporate stock ownership. The restructuring of foreign equity participation has raise the equity from zero to 30 percent and Chinese and Indian equity maintained at 40 percent (M.Norhashim & Aziz, 2005). After 20 years of the NEP policy, the Chinese equity ownership rose from 27.2 percent 1970 to 45.5 percent in 1990. Furthermore, NEP has successfully reduced the dominance power of foreign ownership control of economy from 63.3 percent in 1970 to 25.4 percent in 1990. However, the 30 percent of Bumiputeras ownership targeted still yet to be met, then the fourth Malaysian Prime Minister Tun Dr Mahathir replacing the NEP with the National Development Policy (NDP) 1991.

2.3 The Malaysian Code on Corporate Governance (MCCG).

The 1997 financial crisis has revealed the important of corporate governance practise which cause many organizations in Asian region collapse because of the poor corporate governance practise (Fraser, D.R, & C.Derasid, 2006). The pressure of globalization, external funding needs and effective investor protection increased the demand of information transparency. Corporate Governance practise in organization become a main concern issue for the shareholder, investors and etc. A joint survey done by KLSE (now known as Bursa)/Price Waterhouse commissioned by the Ministry of Finance in 1998 find that 94 percent of firm surveyed desired the needs for investors' confidence, need of transparency in directors', protection of minority shareholder and focus on directors' fiduciary duties. The main purpose of the survey is to improve the corporate governance framework and ensure companies conduct their business operation with the best possible standard of practise. To monitor the best practise of corporate governance in Malaysia, the Finance Committee on Corporate Governance (FCCG) was created on 24 March 1998. FCCG responsible to look into establish the corporate governance framework and setting the best practise for Malaysian public listed companies. FCCG is chaired by the Secretary-General of Treasury of the Minister of Finance and its members consists of Governor of Central Bank, the Chairman of Securities Commission, the Chairman of the Bursa, the Chairman of the Financial Reporting Foundation and representative from various industry organisations. Result from the FCCG members discussion into deep consultative process where feedback was required by the respected practitioners and academics, a report by the FCCG was handed to the Ministry of Finance. The report from the FCCG led to the birth of the Malaysian Code on Corporate Governance (MCCG) in March 2000. The consideration of FCCG toward the corporate governance practise is not only to the shareholder but to other stakeholders. As define " ....the process and structure used to direct and manage the business and affairs of the firm toward enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value, whilst taking into account the interest of other stakeholders.." (FCCG, 2000). In 2001, the MCCG became the important part of the change on the Bursa Listing Rules which requiring all firms to disclose "extent of compliance" with MCCG. Although compliance with best practices is voluntary, firms are required to reveal in their annual report the extent of their compliance with an explanation for any departure. Furthermore, the MCCG also follows the United Kingdom (UK) code. Internal governance structure enclosed in the Code of Best Practise of the Cadbury report was adopted and suit in the Malaysian context. These include the recommendation that same person should not appointed into two most powerful posts which are chief executive officer (CEO) and chairperson of the board. Besides that, the non-executive director should be adequate in order the independence of the board's decision making. Furthermore to mitigate the regulatory burden on firms, MCCG used a similar approach to corporate governance as recommended by Hampel (1998) where focus on the broad principle of good governance which should be applied flexibly based on individual firms' operation rather than on explicit rules which is also need to be followed. Two primary objectives that concerned by the MCCG. The first objective is to enhance the corporate disclosure which benefits the investors in term of timely relevant information that contribute toward investment decision making. Second objective is MCCG provide the guide to the board of director such as clarify the board of director responsibilities and also provide prescription to strengthen the control which they exercise (MCCG, Part 1, paragraph 1.8). MCCG has identified and single out the following principles in establishing good corporate governance: (i) every listed firm should be headed by an effective board which should lead and control the firm; (ii) the board should include a balance of executive director and non executive director (including independent non-executive) such that no individual can dominate the board's decision making. Best practise recommend that independent director should be at least one-third of the board; (iii) the board should be supplied with timely information of relevant form and quality for decision making and (iv) there should be a formal and transparent process for the appointed of new director to the board such as creating a nomination committee comprise of non-executives.

2.4 Intuitional Investor

Investors in Malaysia are dominated (99%) by local institutional. Employees Provident Fund (EPF), Permodalan Nasional Berhad (PNB), Lembaga Tabung Angkatan Tentera(LTAT), the Pilgrim Funds Board or Lembaga Tabung Haji (LTH) and Social Security Organization (SOSCO) are the main big institutional in Malaysia. EPF was established in 1951 and considered as Malaysia's largest contractual saving institution. The employees from private sector is mandatory to contribute as a key source of long term investment capital and public sector has optional whether to contribute to EPF or continue with the national pension scheme. As at 2009, EPF assets worth RM 98.8 billion and the investment portfolio are mandated by the Malaysia government. EPF has to invest 70 percent of it fund in Malaysia Government Securities (MGS) while domestic equity investment is limited to 25 percent of it funds (Thillainathan, 2003). Permodalan Nasional Berhad (PNB) is Malaysia's first unit trust which created to encourage saving by Bumiputeras. PNB introduced with single unit trust named as Amanah Saham Nasional (ASN) and now PNB has provided more unit trust provide for all group of people such as youths (Amanah Saham Didik) and for non-Bumiputeras ( Amanah Saham Malaysia). These unit trust saving schemes pay competitive dividends that average of 7 percent since 2007 to 2010(www.pnb.com.my). Lembaga Tabung Angkatan Tentera, also known as LTAT, was established on August 1972 by an act of Parliament. LTAT is a superannuation fund, mean the serving members of the other rank in Armed Force are required to contribute 10% , while the employer contribute about 15% (www.ltat.org.my). The objectives are to ensure the members of Armed Forces have retirement fund and other benefit that able to support after their retirement age. Next, Lembaga Tabung Haji (LTH) was established in 1962 which target to encourage Malaysia Moslems to save money to perform Hajj in Mecca. LTH's role evolved from mere saving depository to provide some return from their investment. LTH's investment must exclude saving investment from non-halal company (e.g. ambling company, alcohol company and etc). Thus the investment advisory board includes Islamic scholars who monitored and ensure all investments are accordance to syariah. [i] Finally, Social Security Organization (SOCSO) was established in January 1971 under act of Parliament through the Social Act 1969. SOCSO serves as an insurance scheme for all Malaysian employees working either in public or the private sector. The main objective of SOCSO is to ensure and guarantee the timely and adequate provision of benefit in a social and to promote occupational safety and health. Like the other institutional investors, SOCSO has an investment advisory board which consist from various representatives from the government, employers and employees.

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