Governance and Leadership of public entities (Part 1)

I was invited by the Faculty of Economics and Muamalah Universiti Sains Islam Malaysia (USIM) to share my experience and thoughts on governance and leadership of public entities. This is an important topic given how much public entities influence our life as citizens. 

Throughout my career I had fairly deep involvements with a number of public entities. I was a council member and later the President of the Malaysian Institute of Accountants. I was also a board member of the Malaysian Accounting Standards Board and later the Financial Reporting Foundation. I was the founding Executive Chairman of the Audit Oversight Board and later the Executive Director in-charge of Market and Corporate Supervision of the Securities Commission. My latest involvement in a public entity was when I was appointed the Group Managing Director and Chief Executive Officer of Lembaga Tabung Haji.

In setting the scene for the discussion, I provided the audience with the differences between private business ventures and public entities. Private business ventures, whether individually owned or publicly owned, are primarily driven by maximisation of shareholders value. Although lately the conversation on this topic has significantly shifted towards value creation of stakeholders, profits remain the focus of these entities.

Public entities on the other hand consist of organisations of different structures and shapes depending on how they were established. At the federal government level we have various ministries, government agencies and companies created and controlled by the government, directly or indirectly. In the states, we also have state agencies and state-owned companies which are the extension of the state government and agencies.

Hence, we cannot expect corporate governance principles and structures which are being successfully applied in the private sector to be equally working with public entities. For example, in many public entity structures, the board or its equivalent does not exist. The entities are lead by a director general reporting to a minister. Hence, even if they have independent units such as internal audit, these units report to the director general instead of to an independent audit committee in the private sector.

The governance structure of public entities are dependent on the instrument which created them in the first place. Ministers receive their powers through the delegation of power as provided by our Federal Constitution and specific laws, many government agencies were established by federal laws or state enactments while limited liability companies under the Companies Act, are also used as part of government instruments.

Some of these laws and enactments were enacted many years ago and their provisions could have been outdated due to the changes in our ecosystem and the continuously improving governance practises applied in the country.

The balance between prescriptions and principle-based provisions in these laws and legislations would also share their governance practises. Some principle-based provisions could provide flexibility of their applications. However, this requires people running them to be people of principles and able to determine the appropriate approaches as things are changing. Otherwise, principle-based provisions could be confusing when people are too dependent on their literal interpretations. The same challenge applies to prescriptive provisions.

Their establishing documents set the purpose and functions of public entities. This is very important in differentiating one entity to another. Governance and leadership of public entities should be based on their purpose of establishment and their intended functions as envisaged in their establishing documents.

Next we will explore keys issues in governing public entities.

GameStop: A Distance Observation

When I was with the Securities Commission, one of my responsibilities was to oversee the capital market. This included ensuring all parties in the market such as the stock exchange, brokers and their sales representatives operate in accordance with applicable rules, regulation and expectations. The main objective is to ensure trading is done in a fair and orderly manner to maintain market confidence and to protect investors, especially the retailers.

Last week the investment fraternity was surprised when retail investors in the US ganged up and pushed the price of GameStop when they realised that hedge funds were shorting the counter. The price went up from around an average of USD 18 to somewhere beyond USD 500. Certainly such an upswing would not reflect the improvements of the fundamentals of the company within a short period of time.

Upon some quick research, I noted some interesting facts which behind the battle between the retail community against hedge funds which were considered representing capitalists who did not care about the consequences of their market conducts, as long as they were profitable.

It all started when hedge funds started to short GameStop share due to its weak fundamentals. They borrowed shares mainly from broker dealers and sold them with the idea of buying them at lower prices when the share price drop as what they expected. At the same time, retail investors who were grouping on WallStreetBets, a group at Reddit, started a movement to surprise the hedge funds. They bought shares and options of GameStop to drove the price beyond the expectation.

As the price was moving upwards, the hedge funds were incurring losses and had to buy shares at higher prices to cut loss or to fulfil their obligations with the lenders of the shares under the Securities Borrowing & Lending (SBL) contracts with them. This resulted in more demand for GameStop shares and the price went up further.

Many observers were describing what happened last week as a David vs Goliath episode where the hedge funds were at the losing end and the retailers were victorious. While this could be true in the short term, an unrealistic share price would have to eventually come down. When this happens, those retailers who went to buy the shares towards the peak would find their fingers (and other parts of their bodies and mind) burnt.

It was reported that people who join WallStreetBets were encouraged to "invest" in unconventional manners. One idea which was promoted was to invest in a counter with whatever funds which they had. YOLO - "You Only Live Once", they said. While this could be true, what was not said was, "You may suffer for a long time before you die!"

The Malaysian Securities Commission issued a reminder to investors to be careful with suggestions to ramp up prices of shares as that could breach our securities law. While it was observed that the glove counters on Bursa Malaysia saw price increments, it would not be easy for the GameStop play to happen here.

First, short selling is regulated and limited to specific counters only. Normally, the companies must have sound fundamentals, hence the down side risks is much smaller. Retail investors may have no access to options, which allow them to leverage and bet on share prices.

When there is a sudden surge in share price, Bursa Malaysia will issue a warning which is popularly known as UMA, the short name for Unusual Market Activity. The counter could also be suspended when it breached certain threshold to cool the market and allow investors to reconsider their trading position.

While the number of retail participations on Bursa Malaysia had increased significantly since the Covid-19 pandemic, in similar trend with other markets due to various assistance by governments, the presence of institutional investors remain influential in maintaining market stability. 

I certainly hope that our retail players would do their homework before deciding to be involved with adventures like what happened to GameStop shares. It could be a nice story and narrative but eventually many fingers will be burnt.

A Conversation With MyPAC Students And Alumni

The Malaysian Professional Accountancy Centre (MyPAC) was established to encourage and facilitate students, especially Bumiputera, to pursue professional accountancy qualification. While we have more than thirty thousand accountants registered with the Malaysian Institute of Accountants, the number of Bumiputera accountants in Malaysia is only around 2 two thousand only.

I was a director of MyPAC together with a number of senior partners of the Big-4 before I resigned due to work commitment. The whole idea of MyPAc is to enable students to be globally competitive and attain knowledge, skills and values through passing professional examinations of accountancy body of their choice. MyPAC supports professional programmes of ACCA, MICPA, CAANZ and CPA Australia, amongst others.

Yesterday, I was invited to share my views and thoughts on professional accountancy and governance by a group of MyPAC students and alumni. I originally planned to participate from my orchard in Batang Kali. However, due to movement restriction, I joined the virtual meeting from my home.

I shared my journey in becoming a professional accountant through CPA Australia. After graduating in 1986, I worked in accounting firms in Australia and Malaysia before opening my own accounting practice in mid-90's. The firm was then merged with few like minded friends to establish Khairuddin, Hasyudeen & Razi (KHR) which remains as one of a medium-sized accountancy practice until today. I left the firm in 2005 to establish a strategic advisory company before joining the Securities Commission as a founding Executive Chairman of the Audit Oversight Board.

Governance is a very important part of any company or institution. It is supposed to ensure the company or institution to be governed and managed towards its objectives such have having strategy which was properly crafted and effectively executed. Management is responsible to ensure all aspects of business and operation are in line with the strategy and attain the intended outcomes. Hence, governance is about doing the right thing the right way.

Accountants can be involved in strengthening governance is a number of ways. They can be in the board, lead management or in charge of roles and functions which contribute towards good governance and organisational effectiveness. I was the Chairman of Cagamas Holdings Berhad, the holding company of our national mortgage corporation. As mentioned before, I was in the leadership of the Securities Commission which is tasked to ensure the fairness and orderliness of our capital market. I was also a member of the Operational Review Panel of the Malaysian Anti-Corruption Commission. So I encourage all the young accountants and students to be a significant part of ensuring good governance in Malaysia.

Integrity is also one of the professional values of the accountancy profession. Based on this, professional accountants should a natural partner of any effort to enhance governance. However, one has to ensure that he or she is excellent at the workplace and never compromise on any conduct or behaviour which will taint governance or even breaking the law. With excellence track record as a professional and known for integrity and upholding professional values, one should be able to walk away if pressured to do the wrong thing and secure better position elsewhere. Excellence is important in upholding values and principles.

I was asked many questions including dealing with pressure from outside. My view is simple, just focus on doing the right thing for the organisation and stakeholders. If the organisation is not performing, it would be very difficult to influence others. So, we need to ensure we get the right outcomes for the organisation as part of the ways to deal with various ideas and views from outside which are hard to control. Focus on what we can control.

More than 800 professional accountants had been born from the work of MyPAC. They have more than 200 students at various stages of professional programmes for a number of professional accountancy bodies. Even if MyPAC produces 1,000 Bumiputera accountants, they are already successful in doubling up the number.

The journey is ongoing and there are huge potentials for MyPAC to be an active player in nation building. MyPAC will always have my endorsement and support, InsyaAllah.

Climate Change In Action?

While climate change is quite a main stream issue in continents like Europe, it may not be the same in this part of the world. The common excuse which I heard before is that, "the Westerners had messed up their environment in the past and now they want us to take care of the planet on their behalf".

I was brought up in Kota Bharu which is located at the Kelantan delta. Hence, flood was a common phenomenon since my childhood. We differentiated between flood caused by rain and the real flood which originated from the highlands at the southern part of the state. We could guess whether there would be flooding from the speed of the wind and the direction of the cloud.

However, fast forward 50 years later, Malaysians could not claim that we are free from environmental issues especially from land clearing for various commercial reasons, legal or otherwise. Many popular highlands are no longer as cool as before. Flood is getting more devastating compared to before. However, are we taking climate change seriously?

The Malaysian government is committed to reduce carbon emission by 45% by 2030, a very serious target. The question is whether this aspiration is shared by all of us, Malaysians, and what are our contribution towards achieving this target? Are we distracted by the Covid-19 pandemic or we are simply clueless?

The flood season this year appears to be more serious than before. From the news, there are reports about many houses destroyed, life lost and property damaged. While many of us are starting to talk about the root causes of these calamities, we have to wait whether we as a society will be following up on climate change matters when things get back to normal. 

I have a small plot of land in Batang Kali. The Batang Kali river flows along side this property. When it rains heavily upstream, the river will swell and sometimes can overflow. Just imagine if the volume gets larger due to heavier rainfall and the water level downstream is higher than usual? There could be flooding and the life of people along this river could be affected. What would be the situation 30 years from now?

Perhaps, being exposed to the risk of climate change causes me to appreciate what possibly could go wrong if we do not do anything collectively as the occupier of this planet, our only planet. What about those who are chasing profits and share prices without being bothered whether their conducts and behaviours contribute towards expediting climate change impacts?

It is time for major investors in Malaysia to step up their game to bring climate change issues main stream and send a clear message to corporate Malaysia that they have to start making the difference. 

Celebrating 35 Years of Togetherness

I am thankful to Allah for allowing me and my wife to celebrate our 35th wedding anniversary yesterday. On a Thursday evening 35 years ago, we were solemnised at her home in Kubur Kuda, Kota Bharu.

We met in Perth when we were both students. When I indicated to my friends that I was looking for a girl from Kelantan to be my future wife, I was introduced to her. After courting for a while, we decided to get married in Australia.

I got in touch with my father to convey my intention. He asked me to hang on and finish my study. I told him "if I don't get married, I can't study". Eventually my family conceded but they wanted us to get married in Kelantan. We agreed.

We went through a lot over the next 35 years as husband and wife. Our first son, Abdul Hadi, was born when we were studying at the Western Australian Institute of Technology (now known as Curtin University). Taking care of him when we both had to attend classed was tough. We were lucky that our friends took turn to take care of him.

When we came back to Malaysia in 1986, Malaysia was going through a tough recession. There was graduate unemployment and the government had to come up with a training scheme to employ them at various government agencies with a RM 400 monthly allowance. I started working as a finance person at a Proton dealership in Kota Bharu. Proton cars were selling like hot cakes at that time. Then I went to work in Kuantan with an accounting firm. That was when our second child, Nur Hafizah, was born in Kota Bharu.

We then moved to Kuala Lumpur when I got an offer with another accounting firm. We rented a house in Taman Greenwood. I could only afford to buy a stove and a refrigerator. When my mother in-law came to visit us, she thought that I belonged to a dakwah group and was not fond of worldly stuff. She did not realise our financial situation at that time. We went shopping around Jalan Tun Razak. I still remember of taking a bus where we have to carry our shopping bags while holding the hands of our kids at the same time.

My wife stayed at home and was taking care of our children while I was building my career in accountancy. I founded my own accounting practise in the 90's and went on to take a number of responsibilities at various organisations and institutions. Our family kept on growing with the arrivals of Nur Hanani, Muhammad Hazim, Nurul Aliah and Hanna Yasmin.

Looking back at what we had to go through, I am ever thankful that my wife understood my working demands and provided me with emotional support and encouragements while she herself have to deal with the daily demand at home.

I pray to Allah that we would be together again in heaven.