The changing face of corporate Malaysia

Government connection: The GLICs are the Ministry of Finance Incorporated (MoF Inc), Permodalan Nasional Bhd (seen here), Khazanah Nasional Bhd, Employees Provident Fund( EPF), Lembaga Tabung Angkatan Tentera(LTAT), Lembaga Tabung Haji (LTH) and Retirement Fund Inc (KWAP).

EVER wondered who dominate corporate Malaysia?

While Malaysia has its fair share of tycoons who have built their empires over the years, most of the country’s largest corporations are actually controlled by a select group of government-linked investment companies or GLICs who own major stakes in many large listed corporations in Malaysia dubbed government linked companies or GLCs.

For example, GLCs make up eight out of the 10 largest listed companies in Malaysia by market capitalisation and these eight have a combined market cap of a staggering RM452bil. There are a whole host of other GLCs in Malaysia, listed and unlisted.

And these GLICs in turn are under the control of the Finance Ministry, Universiti Malaya economics professor Dr Edmund Terence Gomez points out. (See graphic)

While similar structures exist in countries such as Singapore, Gomez, who presented a paper on the ownership and control of GLICs this week, is of the view that this is an inefficient ownership structure for corporate Malaysia.

Wan Saiful Wan Jan, the CEO of the Institute Democracy and Economic Affairs (Ideas) which commissioned the study, adds that the government should not be involved in business.

“It should be left to the markets. The market cannot operate efficiently when public sector companies compete with the private sector,” he told StarBizWeek.

But how did we get to this ownership structure in the first place?

The story dates back to 1971 when the New Economic Policy was created to with the aim to raise the corporate equity holdings of Bumiputras to 30%.

According to government data, 63.3% of corporate equity in Malaysia at that time was owned by foreigners, while the Bumiputras owned 2.4%.

Through the NEP, major corporations, concessions and contracts were dished out to a select few Malay businessmen who then grew these companies even bigger, taking on sizeable debt in the process.

Large companies in industries ranging from telecommunications, banking, airlines and highway operations were left in the hands these businessmen.

GLICs themselves sought to buyout foreign owners of local corporations, which the colourful saga of the “dawn raid” by Permodalan Nasional Bhd (PNB) is often used as an anecdotal reminder of past efforts to wrest control over ownership of local assets.

That was in 1981 when PNB launched a takeover of the then London-listed British plantation group Guthrie, gaining 51% of the company after two hours of active buying of the company’s shares. (Guthrie is today part of Sime Darby Bhd, one of the world’s largest plantation groups with a market capitalisation of RM48.3 bil and which in turn is 53% owned by PNB and 13% by The Employees Provident Fund.)

But crisis struck in 1997 and that changed the ownership landscape. The tycoon led companies were faced with paralysing debt (mainly from taking on too much US dollar denominated debt that could not be serviced when the ringgit crashed) and that in turn resulted in massive bailout operations by GLICs.

“When the Asian Financial Crisis occured in 1997, we saw the fall of many of these entreprises and many of them were bailed out resulting in them becoming GLCs,” notes Gomez.

This in turn had sparked the rise of the GLC domination of corporate Malaysia.

Today, there are seven main GLICs owning significant stakes in key Malaysian companies and in many instances, controlling stakes.

The GLICs are the Ministry of Finance Incorporated (MoF Inc), Permodalan Nasional Bhd(PNB), Khazanah Nasional Bhd, Employees Provident Fund(EPF), Lembaga Tabung Angkatan Tentera(LTAT), Lembaga Tabung Haji (LTH)and Retirement Fund Inc(KWAP).

Many Malaysian GLCs have risen to notable heights. Axiata Group Bhd for example has grown into one of the top global telecom firms, with a footprint in most of the emerging economies in Asia.

The Khazanah Nasional Bhd-owned CIMB Group Bhd had acquired one of Indonesia’s largest banks and later the Asian operations of global banking group RBS.

In his study, Gomez also found a positive development relating to board membership of these GLCs.

He found that fewer Umno politicians are being appointed to the boards of companies controlled by GLICs, compared to 20 years ago.

Dr Gomez says these positions have now been replaced by bureaucrats, citing several prominent former ministers and chief ministers who are now on the boards of large GLCs and GLICs.

With less politically-linked directors, and the use of “super entity” NOF Inc, government’s control over the companies is now more structured, he says.

He says that there are eight “control enhancing mechanisms” which the government uses to exercise control.

The mechanisms are legislation, business groups, interlocking stock ownership, control of the financial sector, policies, directorships, golden shares and proxies.

Despite the increased control, Dr Gomez says the GLICs were performing well.

Pictures byline of Wan Saiful Wan Jan from IDEAS, columnist in Thinking Liberally section. IZZRAFIQ ALIAS / The Star. July 8th, 2013.
Wan Saiful: ‘It should be left to the markets. The market cannot operate efficiently when public sector companies compete with the private sector.’ 

“Five of these GLICs are statutory bodies, which means that they were established by law, and this is where using laws or legislations as a control mechanism becomes very important,” he says.

In the study, Gomez’ team only examined the seven GLICs, but these groups control about 227 companies in total.

“These companies they control are of very high value.

“The concentration of wealth in these seven companies is very significant,” he said.

Wan Saiful adds that governance is at issue, especially with GLICs that are under state governments.

“It is to the extent that even the definition of GLIC controlled companies is becoming blur.

“In Sarawak, for example, there is a clear blurring of lines between government and private companies because government officials control private companies,” he says.

Wan Saiful adds that GLIC-controlled entities are less efficient compared to the private sector, and says the government should be out of the corporate world.

Gomez, however, asks who would the government divest these companies to?

This is because Malaysian GLICs are facing the problem of having too much equity in listed companies and unable to divest because of a valuations mismatch.

There are not many takers for the current market prices of the stocks.

Who Owns Corporate Malaysia Now?: Ownership and Control of GLICs by Prof. Edmund Terence Gomez.
Gomez: ‘In Sarawak, for example, there is a clear blurring of lines between government and private companies because government officials control private companies.’ 

Adding to the problem is Bursa Malaysia, which carries a higher valuation compared to the other markets in the region.

On the average Bursa Malaysia carries a valuation of 16x PE while China is 12x.

So, for instance, a banking stock is more expensive in Bursa than in Hong Kong or China. Fund managers say that Bursa Malaysia high valuation is because of constant support from large funds such as EPF that does not have many places to put their money.

So EPF is generally focused on the top 100 stocks, which explains why the GLICS formed 42% of the market capitalisation of these top 100 companies on Bursa Malaysia in 2013, So how can Malaysia move forward from this concentration of power in the office of the executive?

Gomez cites the policy recommendations by former Prime Minister Abdullah Ahmad Badawi to professionalise the management of GLCs.

But that is a long process because of the lack of capable professional managers with a proven track record. Another option is for GLCs to reduce its interest gradually to pave the way for a more balanced shareholding structure for an effective check on the management.

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