Governance of state-owned enterprises

Like in many Asian countries, state-owned enterprises (SOE) form a significant proportion of the Malaysian economy. Based on some estimates in recent years, Malaysia is ranked at the top end of the spectrum across the globe for the degree of prevalence in terms of SOEs. The sheer presence of SOEs in Malaysia can perhaps earn them the moniker of being Significantly Overt Enterprises!

Against this backdrop, better governance of SOEs is imperative to sustain the economic dynamism in the country. Premised on this realisation and in line with the holistic economic reforms by the MADANI government, we have witnessed a slew of reform measures undertaken in recent months to strengthen the governance of SOEs and the accompanying ecosystem.

Earlier this year, we were greeted by the issuance of guidelines on the management and governance of federal statutory bodies by the Implementation Coordination Unit (ICU) of the Prime Minister's Department. This was followed by the announcement that a new piece of legislation to govern federal statutory bodies and their subsidiaries will be introduced. More recently, as gathered from the budget speech, a coordinating rationalisation office will be established to examine the direction, financial viability, and streamline overlapped roles across federal statutory bodies.

Additionally, the National Audit Department asserted that it will be auditing 2,000 government-linked companies beginning next year to usher in a new era of enhanced governance in Malaysia. This initiative follows the recent approval of the Audit Act 1957 amendment bill in July 2024, which significantly strengthens the auditor-general’s powers, thus, enabling a more comprehensive oversight of public spending in Malaysia.

Apart from the aforementioned initiatives, the Guidelines on Governance for SOEs and Government-Linked Companies Limited by Guarantee (“Guidelines”) were rolled out, forming the focus of this article given the systemic implications and the wide catchment of entities that are subjected to the said directive. To put it broadly, the Guidelines aim to improve the management and governance of SOEs and government-linked companies limited by guarantee by focusing on the roles of those charged with governance responsibilities and heightening the accountability of supervising ministries in overseeing the management and governance of the entities reposed under their purview.

A key thrust of the Guidelines revolves around the element of averting conflict of interest. While the Attorney General’s office is spoilt for choice in terms of bringing forth a charge for offences relating to conflict of interest given the wide-ranging legislative provisions on this matter, the importance of reinforcing the prevention aspect cannot be overemphasised. In fact, findings from the recent Deloitte Asia Pacific Conduct Watch Survey Report 2024 showed that conflict of interest represents a sizeable proportion of whistleblowing disclosures for companies in this region.

To this end, the Guidelines underscore the need to manage conflict of interest among board members in an end-to-end manner which entails identifying the competing interest, declaring the interest, and managing it. In other words, there should be clear procedures which contemplate the potential scenarios of conflict of interest and how to deal with them including the envisaged disclosure and recusal mechanisms. Indeed, from experience, we have seen many cases where disclosures on conflict of interest are made in a narrow, non-specific manner or even informally and bilaterally to selected individuals instead of open fora.

As an added heft, the integrity preservation measures outlined in the Guidelines also call upon the chief executive officers of SOEs and government-linked companies limited by guarantee to perform an asset declaration covering the possessions held by them and their immediate family members or trustees. The declaration is to be escalated to the Secretary Generals of the supervising Ministries and the Malaysian Anti-Corruption Commission, based on the premise that legal actions can be meted out in the event the declarations run afoul with the Statutory Declarations Act 1960.

Another key pivot of the Guidelines is with regards to the appointment of board members across SOEs and government-linked companies limited by guarantee. As board members are the key levers in shaping the strategic and policy direction of an entity, having suitable individuals helming directorship positions would go a long way in aiding the entity’s course of creating value for stakeholders.

To this end, the Guidelines emphasise the need for board appointment to be made based on objective and meritorious considerations. Most notably, in the event that politicians are appointed to these boards, official consent from the Prime Minister has to be obtained upon completion of the due screening process. This dovetails with recent studies which shows the current government recorded a relatively lower proportion of political appointments in federal statutory bodies and government linked companies.

In terms of board composition, the need for independence is reinforced with the clarion call for SOEs and government-linked companies to have at least one third of its board composed of independent directors. The quest for independence is fortified with the restriction on board chairman to chair any board committees to ensure that recommendations which flow from the board committee to the board can be mediated in an impartial manner. Boards are also urged to conduct an annual assessment to evaluate the performance of the board as a unit and the individual directors.

The Guidelines put in place a coherent frame of reference to catalyse the goal of strengthening integrity, transparency, and accountability across the country. For the intended impact to be realised, the Guidelines need to be accompanied with the molar for implementation and supervision as well as capacity building efforts. Armed with good governance, the country will not only be known for the prevalence of SOEs but also for the performance of these entities.

Kasturi Nathan is Deloitte Southeast Asia’s Enterprise Risk Leader, and Krishman Varges is a Strategy, Risk & Transformation Director of Deloitte Malaysia. The above views are their own.