WHAT if the next major investment loss is not caused by a lack of due diligence – but by a lack of independent challenge?
The reported RM200mil loss by Retirement Fund Inc or KWAP arising from its investment in Indonesian aquaculture technology startup eFishery has sparked an important governance conversation.
Public reports indicate that KWAP was among several institutional investors affected by alleged fraudulent financial reporting by the company’s management.
Investigations remain ongoing, and it would be premature to draw definitive conclusions. However, the situation raises broader questions that extend well beyond a single investment or institution.
This is not simply about one case.
It is about whether investment governance is evolving fast enough to keep pace with increasingly complex and sophisticated risks.
For decades, institutional investors have relied on well-established due diligence frameworks designed to assess investment opportunities and mitigate risk.
These frameworks remain essential and continue to form the backbone of sound investment decision-making. They typically include:
> Audited financial statements
> Legal and financial due diligence
> Independent advisers and specialist consultants
> External auditors and professional assurance
> Investment committee scrutiny
> Co-investor participation and market validation
These elements are not optional – they are fundamental.
They provide structure, discipline and a degree of assurance that investments are being evaluated rigorously.
However, there is a growing recognition that these processes, while necessary, may no longer be sufficient on their own.
The risk lies in allowing due diligence to become a compliance exercise rather than a critical thinking process.
When governance frameworks focus primarily on verifying that procedures have been followed, rather than questioning the substance of the information being reviewed, they can create a false sense of security.
The reported case serves as a reminder that even experienced institutional investors operating within established governance frameworks can be exposed to sophisticated fraud.
This is not unique to any one market or institution.
Globally, high-profile cases such as Wirecard, Greensill and FTX have demonstrated how complex financial structures, persuasive narratives and, in some instances, deliberate misrepresentation can evade conventional oversight mechanisms.
These cases highlight a fundamental shift in the nature of risk. Fraud and misrepresentation are becoming more sophisticated, often designed to withstand traditional forms of scrutiny.
As a result, governance frameworks that rely heavily on documentation and formal processes may struggle to detect deeper inconsistencies or behavioural red flags.
This raises an important question for boards and investment committees.
The question is no longer simply: “Did we complete the due diligence?” Instead, it must evolve into: “Did we sufficiently challenge the reliability of the information on which we based our decision?”
This distinction marks the transition from compliance-based due diligence to what can be described as intelligence-based governance.
Compliance-based due diligence focuses on process. It ensures that all required steps have been completed, that reports have been reviewed and that approvals have been obtained.
While this approach provides structure and accountability, it can sometimes prioritise form over substance.
Intelligence-based governance, by contrast, places greater emphasis on judgement, scepticism and independent challenge.
It recognises that information provided during the investment process may not always be complete, accurate or unbiased.
As such, it requires decision-makers to actively interrogate assumptions, test narratives and seek alternative perspectives.
This approach involves asking more difficult and, at times, uncomfortable questions:
> What assumptions are we relying on, and how robust are they?
> What independent evidence exists to challenge management’s narrative?
> Are the business fundamentals commercially plausible and sustainable?
> What governance, cultural or behavioural risks may not be immediately visible?
> Under what circumstances should we decide not to invest, even if the opportunity appears attractive?
These questions are not intended to slow down decision-making unnecessarily.
Rather, they are designed to enhance the quality of decisions by ensuring that risks are more fully understood and that optimism is balanced with critical analysis.
Importantly, intelligence-based governance does not replace traditional due diligence – it builds upon it.
The objective is not to discard existing frameworks, but to strengthen them by embedding a culture of inquiry and independent thinking.
Following major investment failures, many leading institutional investors have already begun to evolve their governance practices. This includes strengthening the role of independent directors, enhancing the capabilities of investment and risk committees, and placing greater emphasis on behavioural and cultural assessments alongside financial analysis.
There is also increasing recognition of the importance of diversity of thought within decision-making bodies.
A board or committee that encourages constructive challenge and welcomes differing perspectives is more likely to identify potential risks that might otherwise be overlooked.
The lesson, therefore, extends well beyond any single institution or investment.
In an increasingly complex and interconnected investment environment, governance must move beyond verifying documents to continuously testing the credibility of information, assumptions and judgement.
This requires not only robust processes, but also the right mindset – one that values scepticism, curiosity and the willingness to question prevailing narratives.
Ultimately, the next evolution of investment governance is not about adding more layers of compliance.
It is about enhancing the quality of thinking that underpins investment decisions.
It is about recognising that even the most comprehensive due diligence cannot eliminate all risks, particularly when those risks arise from human behaviour, incentives and judgement.
Intelligence-based governance represents a shift towards a more dynamic and adaptive approach – one where independent challenge, critical thinking and informed judgement are given equal weight alongside formal processes.
As institutional investors continue to navigate an increasingly uncertain landscape, the ability to ask the right questions may prove just as important as the ability to find the right answers.
The key question for boards and investment committees is therefore clear: How should institutional investors evolve their governance frameworks to address increasingly sophisticated fraud risks?
Dr Anthony Dass is the chief executive of FSG Advisory and an affiliate member of the Institute of Corporate Directors Malaysia. The views expressed here are the writer’s own.
