New Economic Model for Malaysia - The first part of the NEAC report

New Economic Model for Malaysia - Policy Direction

Download the full NEAC report here.

MIA: Standing in the eyes of the world

FOR those who don't remember, Standing In the Eyes of the World was the official song of the 1998 Commonwealth Games held in Kuala Lumpur. Composed by Wah Idris and David Gates, the Malay version of the song was sung by our very own pop queen, Ella.

The lyrics of the song talk about sacrifice, hard work, passion, hope and dreams. How true these key words are when we reflect on the successes of our present sport stars such as Datuk Nicol David, Datuk Lee Chong Wei and Azizulhasni Awang.

All of them have to compete with the world's best without relying on any quota or special privilege. They have to make many sacrifices, work hard, have deep passion for success and carry not only their personal hopes and dreams but yours and mine as well. Success can only achieved if they are indeed the best in the world. A very high benchmark for average Malaysians like us.

Success breeds success. For the champions, winning means more sponsorships, access to better trainers and training facilities and being supplied with better sporting equipment. This is not much different from business.

Once a person has demonstrated that he or she can identify opportunities and able to realise whatever business plans that they had, they will open themselves to more opportunities and support. Like sports, sacrifice, hard work, passion, hope and dreams are equally important in business. No shortcut allowed.

There is so much we could learn about life from sports. One of the most important elements is we cherish our sport champions irrespective of the colour of their skin, religion and culture. Definitely there is merit for this sort of attitude to be actualised in other aspects of our society.

While Malaysia may not feature in this year's edition of the soccer World Cup in South Africa, our accountancy profession will be hosting the World Congress of Accountants (WCOA) in November. The WCOA is equivalent to the Olympics of the accountancy profession, held every four years in countries which won a global bid to be the host.

Winning the bid four years ago was an honour, not only for the Malaysian Institute of Accountants (MIA) which represents the accountants in this country, but reflects the trust of the global accountancy towards Malaysia as a whole. Now is the time for the MIA to deliver all the promises, and position Malaysia as a respectable investment and business destination.

The theme for the WCOA — Accountants: Sustaining Value Creation — would certainly provide opportunities for a wide range of issues and topics to be discussed by globally renowned accountants and other experts from related fields. Certainly, areas such as Islamic finance, where Malaysia has the competitive advantage, would be prominently featured. We should play to our strengths when there are opportunities to showcase ourselves to the world.

While we would certainly be anxious to watch how WCOA would unfold, our accountants should continue to enhance their roles in nation building. The challenges in implementing International Financial Reporting Standards, further enhancement of corporate governance and improvements in business integrity are among the areas which accountants are playing significant roles. The successful performance of our accountants in these areas would enable them to walk tall during WCOA.

It would also be interesting how our accountants position themselves in the new economic model which would be revealed soon. Given that the services sector would be playing more a important role in generating economic growth, accountants should prepare themselves for the new playing field and support businesses to compete and create more values to the society. This should be achieved without compromising the fundamental value of the profession, integrity.

It may be rather challenging to bring 4,000 foreign delegates to Kuala Lumpur for the WCOA, especially when some global organisations are still finding their footing after the global financial crisis. Not only do we want them to come, they should be convinced of our potential and be excited by the beauty of this country and our sincere hospitality. Like sports, one could not be a world champion if one chooses to avoid hardship when striving to be the best in the world.

The MIA has that opportunity to stand in the eyes of the world, and the WCOA would be the best platform for our accountants to make Malaysia proud and honoured.

This article is also published on the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/162592-mia-standing-in-the-eyes-of-the-world.html

Saving Planet Earth

8.30pm, Saturday, March 27, 2010 has been earmarked as Earth Hour 2010. Millions of people from thousands of cities are expected to switch off their lights for one hour as a symbol of support for the planet which is experiencing stress from climate change issues.

What was started in Sydney, Australia, in 2007 has now been adopted by millions of people around the planet as an initiative to create awareness on the risks of climate change and encouraging more people to do anything within their power to make a difference.

Would switching off lights for an hour be adequate to save the planet?

Although climate change issues have been debated at many forums at the global, regional and national levels, they are still being considered as "problems of the future" by many of us.

Some may have even taken the stand that we may not live long enough to suffer the consequences.

Worse, if such thinking is held by people with power and influence who have the capacity to decide on matters which are related to climate change problems.

Let us consider whether it is really true that we are yet to experience the consequences of overlooking matters that relate to sustainability of our planet?

Malaysia is located close to the equator where water supply should be abundant with the kind of rainfall that we are blessed with. Yet, some of us may be living in areas where water supply has been disrupted due to drought. Blame this on the effect of El Nino. Or could this be the consequences of not having adequate long-term and contingency plans for such a situation?

As water is cheap here, most of the population have no problem in wasting treated water. In fact, we are demanding for the cheap water regime to continue so that there would be no need for us to change our lifestyles.

We have to remember that the population of this country is growing and more people would be demanding for quality treated water in the future.

On the other side, the sources of raw water remain the same if not depleting due to development projects and logging activities upstream. With such a scenario, would it not be better for us to make the change now while things are still very much in our favour?

Some even see the water problems as presenting opportunities, economically! Just imagine if you could secure the contracts to change old pipes or be the supplier of pipes to various water projects. Without robust governance and oversight, the risk of unnecessary price inflation is very real.

When such things happen, the cost would ultimately be paid by you and me, the poor consumers.

Some global companies have demonstrated their seriousness regarding issues relating to climate change and sustainability. Unilever and Nestle had dropped the supply of palm oil from a supplier in Indonesia.

This is due to concerns regarding the effect of plantation practices of the supplier on the environment.

As we are heavily involved in palm oil production, we should be concerned that our palm oil companies are not subjected to similar risk.

More importantly, we should have similar interest in ensuring our planters ensure sustainable practices so that our ecosystem remains viable for living as well as economic activities.

Subsidies that we enjoy as Malaysians have shielded us from paying the real cost of many things. The electricity that we consume, for example, is largely generated from gas-powered generators. The gas supplied to our power generation companies is subsidised.

The end-result is we are not challenged enough to change the ways we consume electricity, at the private level or by even by the industrialists. Thus, the stress on the government budget will grow while our competitiveness eroded as the need for our companies to be energy efficient is not there due to the subsidised electricity that they enjoy.

Some of the issues are inter-related. Excessive logging enabled by corruption could reduce sources of raw water which would eventually affect the availability and quality of treated water supplied to our homes.

While we may not be able to influence all matters, our collective voice in demanding more sustainability practices in our society and our collective action in walking our talk will shape the future of our children and grandchildren.

Whether you and I will be switching off lights this Saturday will be based on our individual choice.

It is not even critical, as the exercise is largely symbolic. The more important question is how much more could we, individually, do to make a difference in saving our planet?

This article is also published at the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/162074-saving-planet-earth.html

Time to Adopt Integrity Pact Across the Board?

The introduction of the Integrity Pack in its contracts with vendors and suppliers had certainly won the Port Klang Authority a lot of support and encouragement.

The Transport Minister delivering his speech at the signing ceremony of the Integrity Pact

In a nutshell, Integrity Pack is a commitment by all parties not to participate in activities link to the payment, offering, demanding or accepting of bribes and also to refrain from colluding with competitors to obtain contracts or engaging in such abuses while carrying out the contract. Any party violating the pact will face serious consequences like the termination of contracts, blacklisting and forfeiture of performance bonds.

I suppose the question from the public with respect to this development is when would Integrity Pact be part and parcel of all contracts, both the in the public and private sectors?

If corruption is the evil the would derail nation building and destroy fair and equitable distribution of wealth among our citizens, why not make this mechanism as part of out way of life the soonest possible!

Our collective responsibilities in eradicating corruption

IT has been a year since the Malaysian Anti-Corruption Commission (MACC) was established with a more robust check and balance framework in meeting the expectations of Malaysians at large. To put it simply, the MACC went through a very "eventful" first year.

While different individuals may have different conclusions on how far the MACC had achieved its goals in that short period, another question that needs answer is about how Malaysians, collectively, participated in eradicating corruption from our society?

As Malaysia has no unlimited natural resources, the way forward for us as a country is to encourage Malaysians to be competitive, not only in the economic sense but also intellectually as the main drivers of value creation are knowledge and brain power.

Not only does corruption distort the distribution of opportunities and wealth, it also creates an inefficient business environment and discourage people to compete on merit. Worse still, if it rewards mediocre people with great connections instead of smart and bright Malaysians with no access to opportunities.

As with any other elements in life, corruption exists and evolves in an ecosystem. If we wish to reduce or even eliminate corruption, focusing on enforcement and prosecution alone would not be adequate. The roots need to be identified and neutralised.

Let's consider the demand side. The history of mankind is full of stories about greed and willingness to compromise values in the pursuit of wealth. 

What happened in the global financial market in the last few years had unveiled many situations where people who were influenced by greed went very far in engineering high-risk financial products which eventually caused countries and global corporations to suffer huge financial losses.

Can we eliminate greed? Certainly the answer is No! If this is the case, what are our options in order to mitigate the risks?

Perhaps the first line of defence is inculcating the right values in our people, especially young Malaysians who will eventually inherit the leadership of this country. 

This task should be shouldered by all parents, yes, you and me! While we may argue that our children spend most of their life in schools, there is only so much their teachers could do. 

We should be asking ourselves how much effort we have made so far in ensuring our flesh and blood grow up with the right values, including treating corruption as the worst possible evil?

This is why the report in a daily newspaper over the weekend about the desire of our youth to be millionaires by the age of 35 warrants our serious attention. 

When asked whether they are willing to sacrifice ethics and morality in being millionaires, 9.5% of the 1,678 Malaysians surveyed indicated their strong agreement, another 14.7% agreed while another 32.8% were unsure. 

Only 43% of the respondents disagreed. We must be wondering who the role models are, who have managed to impress our youth that sacrificing ethics and morality is all right in pursuing wealth. Are we, through our conduct and behaviour, responsible for this?

The second line of defence is by ensuring those occupying high offices in public and private sectors are people who breathe and uphold integrity.

We may not have many opportunities to influence the decisions in selecting these people but every opportunity counts. Again we have to ask ourselves, have we decided on our choices, whenever we had opportunities, based on ethics and morality or we succumbed to other selfish interests which are only known to ourselves?

Having robust and transparent systems and processes could be another line of defence in reducing incidences of corruption in our society. 

Sounds easy as a concept but a challenge to be implemented especially when this issue is mixed with other matters such as rights and privileges.

Unfortunately, the weakness in this area is the one causing us to pay big dollars in terms of overpriced contracts, defective assets and lost opportunities to bring investments into our economy. Have we, as a society, indicated our feelings towards this issue strong enough?

Enforcement action is perhaps the last line of defence in the battle against corruption. This really matters if we have failed to get the other defence mechanisms working.

In other words, this is only critical when we, as a society, have not done enough to eradicate corruption. While enforcement agencies have the responsibility to be effective, they may not be able to meet our demands if the whole ecosystem is not supportive of their mandate.

As we evaluate the performance of the MACC on their first anniversary, it would also be meaningful to assess our own performance in the area of corruption eradication. Remember, we have a duty to ensure all lines of defence are up and running and should shoulder the responsibilities if we have failed to do the right thing ourselves.

This article is also published at the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/161586-our-collective-responsibilities-in-eradicating-corruption.html

Selling their Souls to be Millionaires?

It is interesting indeed to read about 96% of 1,678 Malaysian youth surveyed by a local newspaper* believe that being a millionaire is a doable achievement. Nearly a third of them want to achieve their first million by the age of 31 t0 35. Ambitious indeed.

Out of a number of questions asked during the survey, one question which attracts my attention is regarding the means to be millionaires. When asked "Do you agree that you are willing to sacrifice the following in order to become a millionaire?" 9.5% of the youths surveyed responded with "Strongly agree"  to sacrifice ethics and morality, another 14.7% "Agree" while 32.8% was "Not sure". Only 43% of the respondents "Disagree" with the statement.

Since the target group consist of youth up to the age of 30, I am concern that our future leaders may not see ethics and morality as important, even when pursuing their private goals. Collectively, 57% of the surveyed youth are either willing to compromise ethics or morality or not sure whether they should stand by the universal good values.

Before yelling for the government to take actions, we should reflect what have we done, as a person or through organisations which we are affiliated with, in inculcating ethics and morality in the hearts and minds of young Malaysians. While having high aspirations is commendable, achieving goals at all cost may not be something that we would be proud of later.

As we progress together into a "High-Income Economy", we should not lose our sights on why we embark on the journey in the first place. I suppose at the end of the day, the whole thrust about increasing income levels in this country is enable its people to have great life without selling our souls to the devil.

* The statistics referred to in this posting is published in the hard copy version of the article.

Financial management challenges for SMEs

SMALL and medium enterprises (SMEs) are a very large sector in our economy in terms of the number of entities that fit into the category. This is not unique to Malaysia. Consequently, a healthy SME sector would certainly be great for Malaysia in an increasingly challenging environment where product life-cycles are shorter and competition could come from any angle, domestically or abroad.

One of the key drivers in sustaining a business is the quality of the financial management practised in the economic entity. Cash is the blood for business and when cash flow is not managed properly, sooner or later, the entity will have to face its eventual demise.

In a 2003 report which looked into the management needs of SMEs in Canada, it was noted that SMEs would need to go through four stages of growth before reaching the stage when they could compete globally. The stages are:

1. Start-up stage where the business model applied is validated;
2. Fast-growth stage where the business is growing for survival; revenue starts to grow as products or services receive market acceptance;
3. Sustainable stage where profitability can be sustained and the entity reaches a maturity level with proven business model and leadership;
4. Global enterprise where the entity continues looking for other opportunities to sustain growth.

The funding needs of entities at the different growth stages differ as well. Entities at the start-up stage hunger for seed financing as what drives most of the entrepreneurs at that stage is purely their vision of being successful.

The financing risk at this stage is very high as the entities have yet to prove the validity of the business model adopted. While passion and energy are appreciated, they could not mitigate the risks of selling products with no market or demand for them or with manufacturing outfits that could not produce products at the right quality.

The fast-growth stage, as the name suggests, is when funding is required to support a growing business. This is a critical stage as failure in managing finance could turn an optimistic outlook into an ugly nightmare.

A growing business would require additional funding to support the growth of inventories, receivables as well as to bring in new production capacity. This stage could also inject the false sense of success into the business owners. Some may end up allocating the limited funds to worldly rewards to themselves such as new cars or even life partners.

Once an enterprise reaches the sustainable stage, the financial management capabilities are expected to reach certain maturity in ensuring earnings are retained and returns to the entrepreneurs are maximised. However, if the entrepreneur is not careful, cost could outpace profitability and the risk of declining business remains real.

At the global enterprise stage, the issues are about growing and competing with competitors in different markets. This could be through acquisitions which may require external financing. Establishing cross-border presence could also create new financing challenge as access to finance in the new market abroad may not be as straight forward as it is domestically.

The issue of whether adequate financing is made available to the SME sector is a never-ending one. The reasons are very simple.

First, the number of entities in the sector will continue to grow, and any amount of financing will not be enough. 

Second, chances are the group that may have difficulties in accessing funding from banks and other institutions would be those in the start-up stage or even at the fast-growth stage as these are the stages where the risks are the highest.

Banks and financial institutions are there to make profit, and taking risks unnecessarily may not be a great corporate governance practice either. In Malaysia, the government has and continues to address this gap through guarantee schemes and other incentives. We have to remember, whenever this sort of initiatives are made, we the taxpayers are the taking the risks.

There is no single solution to improve the financing gap apart from efforts by all stakeholders in this delicate issue.

The SMEs themselves should shoulder the highest responsibility by ensuring efforts are made to improve financial management in their enterprises. It is not uncommon for SMEs not to keep proper accounting records. How do they demonstrate to the bankers that they deserve financing when they are not sure of the financial position of their businesses?

As mentioned earlier, a growing business requires additional financial management capabilities. Costing, for example, is very critical as a business should not be selling products below their production cost. But don’t be surprised if this is happening in many enterprises simply because they do not operate with the correct information.

SMEs must be willing to invest in people and system in building capacity in financial management. Funding is meant only for deserving entrepreneurs with good business model and responsible management. The challenge is how do entrepreneurs prove this to the potential funders? Answering the question is part of entrepreneurship.

This article is also published at the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/161095-financial-management-challenges-for-smes.html

Age Was Not the Hindrance

It was certainly a classic ending at the Maybank Malaysian Open golf tournament held at the Kuala Lumpur Golf and Country Club today.

Watching the eighteen year old Noh Seung-Yul birdied the 18th hold to seal the tournament was certainly exciting considering the challenges that he had to go though after his ball went flying towards the 10th hold. Worse was the noise of the crowd cheering K.J. Choi, a 39 year old Korean champion, when Choi birdied his final hold to tie the score with Noh. Keeping his cool, Noh hit his second shot which landed on the buggy track near the green.

Despite needing two free drops, Noh managed to make a wonderful chip, passing a lamp post and landed the ball around two and a-half feet from the hole. He later held a rather comfortable put.

When interviewed after his winning, Noh acknowledged that K.J. Choi had told him that it is about time for him to win tournaments.

Age certainly was not an issue in deciding who would be champion. Certainly in an international tournament like this, quota - something that some Malaysians like - will not apply as well. If we observe how Koreans fly to Malaysia in drove to practice their golf, having Koreans winning even the US Masters should not be a surprise. On the other hand, Malaysians like to declare higher handicaps, with the hope of an easier pathway to win, just like how much we love subsidy.

We should reflect on Noh's winning and ask ourselves why aren't Malaysian even in the top 10 when the tournament is played on our home ground? After all, golf is a competition between the player and the course, it is not a physical contest.

BNM Moves OPR to 2.25 Percent

Following up on it's earlier statement to normalise monetary conditions, the Monetory Policy Committee of Bank Negara Malaysia (BNM) today decided to increase the bank's Overnight Policy Rate to 2.25%. Such move would result in the increase in the interest rates on bank borrowings in Malaysia.

In a statement today, BNM also predicts that the general price level will be on the upwards trend in line with higher economic growth resulting in moderate inflation. Such move indicates BNM's confident of the recovering economy. 

While higher interest rates may increase cost of capital, higher economic activities would provide more opportunities for enterprises to experience growth. However, better understanding of the landscape and effective implementation of strategic plans would be among the critical ingredients towards business sustainability.

Decision-making perspectives

JUST imagine we are 20,000 feet above the ground and trying to figure out how to reach a certain destination. Chances are we will find it impossible to get the route mapped out, as things will appear very small to the naked eye.

However, we may be able to observe larger areas of land and space, which provide us with better understanding of the overall landscape.

When we are on the ground, everything would be clearer but our vision is limited though it is not blocked by anything in front of us. We may not be able to know that a car is coming from around a sharp corner or a crocodile is waiting to snatch our legs in a beautiful river.

Sometimes, even when things are sharp and clear, we may not be able to see clearly because we have problems with our eyes, being short-sighted or otherwise. This is where visiual aids will be handy.

The situations highlighted above may be similarly applicable in decision making. While not necessarily true all the time, the quality of decisions would be influenced by how the decision makers view facts or information in arriving at the decisions.

Boards, for example, are supposed to chart the strategy for the organisations under their care in ensuring the missions and objectives of the organisations are achieved. This is akin to having a 20,000ft perspective of the landscape.

Management, on the other hand, are operating closer to the ground and should have a clearer view of the realities and what is going on, provided their views are not blocked.

It is the combination of the different perspectives which help the board and management to make strategic and operational decisions. It is important for the management to appreciate the wider perspectives of the board and for the board to be fed with information from the ground to validate their understanding of the landscape. 

What are the possible circumstances where things could go wrong?

First is when boards and management teams are looking at two different directions. While this may sound funny and impossible, it could happen when there is a breakdown in communication between the board and the management.

The risk here is that a board would be fed with information which is out of line from its perspective. This is where it is important for the board members to have the acumen to understand and evaluate the facts and challenge management when they have concerns.

Second, the management could be feeding the board with information which only supports the views of the board while suppressing alternate facts or viewpoints.

This would certainly make the board happy and proceed with whatever decisions which they are pursuing but such happiness would not last when realities start to reveal their true colours. Such situation would normally happen in organisations where rewards and performance are taken lightly. 

Third is where both the board and management fail to appreciate that there are blind spots in their perspectives and fail to detect the changing landscape. Given the dynamic environment in which we are living, the awareness about how much things have changed and would continue to change is really important.

Given that the directors are looking at the bigger picture, their perspectives on issues are wider. They may decide to embark on horse trading in ensuring the best interests of the organisation are served. Failure to understand the perspectives of the board may also result in the decisions being understood differently by other parties, and this could result in implementation failure.

Sometimes decisions need to be made based on certain timelines and all relevant facts and information may not be available. In such circumstances, framing the right questions to be addressed is very critical so that the process of gathering data and information would be more focused and the process could be shortened. Wrong questions would lead to wrong facts being gathered and wrong decisions formulated.

The larger an organisation, the more challenging the decision-making process as more stakeholders would be affected or become involved in the process.

Having specialised committees of the board or management could be one approach to mitigate the risks in making decisions as discussed above. This will enable members with more in-depth knowledge to look at details and review different views. Audit committees and nomination committees are examples of such specialised committees.

We have to remember that life revolves around many decisions that we make every day. The clothes that we wear, the food that we eat, the route that we choose and the movie that we watch are examples of decisions that we make daily in making our lives meaningful.

In any decision that we make, please pause and consider the perspectives from which answers to our problems are being formulated. Hopefully, this step will provide us more insights before the final position is decided.

This article is also published on the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/160578-decision-making-perspectives.html