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“In moving forward a review of the implementation issues and problems at the ground level may be necessary. Enforcement and surveillance mechanisms by the regulatory bodies are critical. There is little doubt that the reality of corporate governance is that those in control of corporations will always have one eye on the laws governing his / her actions and more particularly the penalties that go with any breach thereof and another eye on wealth-making for the corporation (Chan, 2001).”
Political economy
The World Bank’s Report on Observance of Standards and Codes (2005) highlighted large government ownership as a key challenge for corporate governance reform in Malaysia.
Stijn Claessens et. al. (2000) provides insight of Malaysia banking sector as following:
State control is significant in Malaysia.
Ownership data are either completely missing, available only on nominee accounts, or not sufficient to collect more than half of the ownership rights in Malaysia.
Family ownership is significant in Malaysia.
Significant evidence of cross-holdings in Malaysia.
Four-fifths or more of companies in Malaysia have managers who belong to the controlling group.
Medium size firms show the most separation of ownership and control.
The separation of ownership and control in state-controlled firms occurs in Malaysia with the smallest firm displaying the most separation, such as families firms.
Firms held by financial institutions do not display significant ownership and control.
Family controlled firms in Malaysia increases from 58% to 67%.
Older firms are more likely family controlled.
A quarter of the corporate sector in Malaysia is controlled by largest ten families.
The largest 15 families in Malaysia held a significant 76% of corporate assets as a percentage of GDP in 1996.
These findings can be interpretated as indicative of both the motivation for and the means to crony capitalism in East Asia. The concentration of corporate control in the hands of a few families creates powerful incentives and abilities to “lobby” government agencies and public officials for preferential treatment, whether through trade barriers, non-market based financing, preferential public contracts, or other means. Concentration of control might also have been a detriment to the evolution of the countries’ legal systems. Finally, the direct participation by government officials in the control of a large part of the corporate sector opens up the possibility of wide-spread conflicts between public and private interests of some individuals, leading to crony capitalism. While we can not document whether and through what channels crony capitalism has developed in East Asia, the large ownership concentration certainly raises the likelihood of it.
The author concluded that while there is a separation between ownership and management, there is not a separation between control and management. These leads to wealth concentration in the hands of few family which could negatively affect the evolution of the legal and other institutional frameworks for corporate governance and the manner in which economic activity is conducted. It could be a formidable barrier to future poliy reform.
Third is the interaction between corporate governance and public governance. As suggested in several studies reviewed in this paper, governments and politicians can determine the rules of the game and the nature of competition in the market place. Listed companies’corporate governance practices are likely to be influenced by the rules, in particular how and to what degree the rules are enforced. Therefore, it would be important to examine how corporate governance practices of a country are shaped by the quality and the integrity of its government and its regulatory policies (Stijn Claessens et. al., 2002).”
“In a research that examine the separation of ownership and control for corporations, Stitjn Classens et al., 2000 find state control to be a significant corporate governance environment exists in majority of Malaysian corporations (Stijn Claessens et. al., 2000).”
“Malaysia and Hong Kong show the highest degree of family ownership, with 67.2 per cent and 66.7% of total market capitalization controlled by family groups. Certain industry, such as, banking sector might be heavily regulated and the State may own a controlling stake in the companies in such industries. Malaysia has the second most significant, after Singapore, State ownership with 13.4% of value under State control (Stephen Y.L.Cheung et. al., 2004)”
“Stijn Classens et al., 2000 find Malaysia to be among other East Asian countries in examination, with highest concentration of control rights in the hands of the largest blockholder (Stijn Claessens et. al., 2000)”
“The continual lack of public confidence in corporate governance of Malaysia banking system despite hardwork of BNM may be inherited in the potential area of concern in the post-merger domestic banking that the ownership structures of dominant domestic banking institutions financial conglomerates have become more complex and opaque.” (Lum Chee Soon et. al., 2006)
Markets and Competition
In a paper to study the relationship between ownership structure and governance quality, Joseph P.H.F. et al., 2006 found that different ownership structures between widely held foreign banks and family / state-controlled banks in Asian nations may be due to their different business models. The implication of this result was that concentrated ownership structures should not be given much weight in the measure of good corporate governance. The paper also provides detail empirical data relating from banks’ characteristics…
After reviewing major governance concepts in general, Ross Levine (2004), discusses two special unique attributes of banks, namely, greater opaqueness than other industries and greater government regulation.
With the perception that these unique attributes of banks weaken many traditional governance mechanisms, Ross Levine (2004) concluded that existing work suggests the importance to strengthen the ability and incentives of private investors to exert governance over banks rather than relying excessively on government regulators.
“The continual lack of public confidence in corporate governance of Malaysia banking system despite hardwork of BNM may be inherited in the potential area of concern in the post-merger domestic banking that the ownership structures of dominant domestic banking institutions financial conglomerates have become more complex and opaque.” (Lum Chee Soon et. al., 2006)
Reputational agents
“One possible corporate governance role of institutional investors in Asia, and emerging markets in general, is certification. When ownership is concentrated and a firm is subject to agency conflict between controlling owner and minority shareholders, the firm may invite institutional investors’ equity participation so that it can borrow their reputation to enhance its credibility to minority shareholders. Institutional investing, however, may or may not lead to subsequent improvement of corporate governance or be accompanied with active monitoring. As in any situation with rent seeking and relationship-based transactions, institutional and other minority investors may prefer to let controlling owners continue to protect their rents and not force them to disclose all information, as otherwise their own values are negatively affected (Stijn Claessens et. al., 2002).”
[Regulatory v Market Discipline] Following a decade of corporate governance implementation in Malaysia, there is no lack of write up on the subject matter. Existing literature, however, focuses their attention on legal and regulatory aspects, such as descriptive details on regulatory reform of corporate governance in Malaysia…
Despite the importance of the Malaysian Code of Corporate Governance, preliminary review of literature has discerned the following public perceptions of corporate governance quality to be of significant barriers to on-going mplementation of corporate governance in the Malaysian banking industry:
Past experience of government regulatory forbearance: Effectiveness of the board
Lack of separation of ownership and control
Connectivity of banks and corporate borrowers
Opaqueness of banking institutions
High degree of government intervention
Following a decade of corporate governance implementation, this chapter provides review of literature from both academic and professional sources to establish a strong grounding on the subject matter of corporate governance quality, with particular focus on public perception of corporate governance quality in the context of Malaysian domestic banking institutions. |
