Re-imagining the governance of GLICs

Given their size and roles in our society, GLICs should be governed and managed on similar, if not better, standards as other commercial institutions

pic TMR

GOVERNMENT-LINKED investment corporations (GLICs) play significant roles in contributing towards our well-being in this country.

The Employees’ Provident Fund (EPF), for example, is responsible for investing the forced savings of workers to finance their retirement. Lembaga Tabung Haji (TH) is the institution for Muslims in Malaysia to save to perform haj while the Armed Forces Fund Board (popularly known as LTAT, short for Lembaga Tabung Angkatan Tentera) is the pension fund for serving members of the Malaysian Armed Forces.

There are many more institutions which fall into the GLICs definition. Common features across the GLICs are that they are established by statutes, controlled by the government while managing funds raised and belonging to their respective members, depositors or beneficiaries. They are also managing a sizeable amount of funds and are significant investors in our capital market. EPF manages funds exceeding RM1 trillion.

Given their size and roles in our society, GLICs should be governed and managed on similar, if not better, standards as other commercial institutions which are acting in the role of trustees, or those raising public funds either as their capital or through other financial instruments. However, given that GLICs are creatures of statutes, those statutes prescribe their governance structures. The statutes decide who has the authority to appoint their board members as well as senior management, especially the CEOs. As statutory bodies, they are required to comply with the Statutory Bodies (Accounts and Annual Report) Act, 1980. Notwithstanding their sizes and complexities, they are audited by the auditor-general (A-G).

Significant progress has been achieved in enhancing corporate governance in our capital and financial markets. However, similar progress has not been observed in the GLIC space. The gap in governance has caused some GLICs to be involved in controversies such as delayed projects, resulting in huge cost overruns, huge asset impairments necessitating government financial intervention and financial fraud.

However, it is observed that the consequences on those involved with these governance mishaps are not as serious compared to if those governance failures were to occur in the private sector.

Even if the GLICs adopt governance standards as prescribed to capital and financial market participants, it would only be on a voluntary basis. Such adoption, although commendable, may not be effective. The statutes governing those GLICs may set lower expectations or may not even cover certain areas which are critical to governance effectiveness.

Most statutes will empower the ministers in charge of these GLICs to appoint their board members and CEOs. The power could be absolute and the ministers may not need to justify their choice of appointees. Directors for banks, for example, are subjected to a strict fit and proper test by the central bank and those who are politically active would be disqualified. It would be uncanny if a person who may not be eligible to be appointed as a board member of a well-governed company, to appear on the board of a GLIC.

The other issue which involves governance is which party takes precedence when it involves strategic and major investment decisions. As the funds under management or fees charged came from the public, it would be logical for GLICs to place the interests of their contributors above others. Given their financial power, it is not unexpected for the government to expect GLICs to support government initiatives or projects. What is the GLIs’ position if the project conflicts with the interests of their members, depositors and contributors? For example, when asked to be involved or to finance strategic projects with huge risks and long payback periods?

Another important aspect of governance is financial reporting and audit. Given that GLICs hold huge financial assets, their financial reporting could be as complex and comparable to banks and other financial institutions. While the Ministry of Finance has issued guidelines on financial reporting, the application of these standards may not be as robust as the implication for the failure in financial reporting and are not as serious compared to the fines and penalties that could be imposed on directors of listed companies.

Institutions involved in complex activities with similar complex financial reporting requirements must be audited by auditors who are competent and experienced. My experience in the Audit Oversight Board (AOB) suggests that GLICs should only be audited by auditors who have adequate experience in auditing complex financial institutions. We need to reconsider limiting GLIC audits to the A-G.

As our economy and markets become more complex and complicated, it would be timely for us to reimagine how GLICs should be governed. We owe it to the rakyat as GLICs are influencing their life, from fulfilling their religious obligations to ensuring they have adequate retirement savings. The pressure for us as a community to address climate change will add further complexity to the governance, management and leadership of GLICs. Modern and up to date governance principles and practices must be embedded in their statutes to further protect their stakeholders.

Datuk Nik Mohd Hasyudeen Yusoff, a chartered accountant by profession, currently sits on a number of PLCs. He was the former executive chairman of Securities Commission Malaysia’s AOB and former group MD of TH.