Corporate Governance

NAME        :        THILAGA LETCHIMENON

ID NO        :        M18701038

Corporate governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term share-holder value, whilst considering the interests of other stakeholders. Corporate governance became an attractive issue for Asian researchers especially after financial crisis in 1997. Finance Committee on Corporate Governance in Malaysia has defined corporate governance as ‘the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective.’ From the economic perspective, corporate governance plays an important role in achieving an efficiency in which scarce funds are moved to investment project with the highest returns. It is also becoming a crucial determinant for institutional investments and components of institutional investors’ reform initiatives. There are various factors which contributed to the collapse of the Malaysian economy include economic factors, poor or ineffective corporate governance practices, ineffective enforcement and public institutions.

The government’s first visible reaction to the financial crisis was to set up, in early 1998, the Finance Committee. The Finance Committee was mandated to look into establishing a new framework for corporate governance, and to set the benchmark for best practices for the industry. The committee was described as a partnership effort between the government and the private sector. Their work culminated in the Report on Corporate Governance, published in February 1999. Prior to its publication, a draft was circulated to selected bodies not represented on the committee for consultation, but the views of the public were not called upon. The thrust of the corporate governance reform agenda underlying the report focuses on three areas which is the development of a Code on Corporate Governance, reform of laws, and training and education.

Malaysia is a developing country that currently occupies the top half of the list in formulating legislation, rules and regulations for corporate governance. But when it comes to implementation and enforcement, Malaysia occupy the lower half of the list. The country’s weakness in corporate governance lay in its inability to enforce the rules and was the major cause of its many scandals. Business ethics practiced in Malaysia have come under scrutiny in recent years. Part of the reason is due to the fact that Malaysia's economy grew at the impressive rate of more than eight percent per year from 1987-1997. Malaysia is striving to be considered a developed nation by the year 2020, and critics have blamed this economic goal for a lack of business ethics in that country. Corruption is said to be rampant and concerns abound that the environment is being sacrificed in favour of economic progress. When the Political and Economic Risk Consultancy (PERC) conducted its annual survey of businessmen, Malaysia received a ranking of 6.25. In 2006, Malaysia scored 6.13. Under the PERC rating system, a perfect score would be zero, and the worst score would be 10. Bankers and managers working for multinational companies were among the survey participants. The poll results are significant for Malaysia, since foreign businesses may make choices about where to locate and invest funds based on their perception of a particular country. The more ethical a country appears to be, the easier it will be to attract foreign investors.

Perwaja was established in 1982 by HICOM Bhd., a company owned by the government in collaboration with a Japanese company, Nippon Steel Corporation to fulfill the government's mission in implementing the heavy industrial policy. This is an example where the government had direct interest, as shareholders in a company. The state ownership in the company created close relationship between business and politics. Since incorporated, Perwaja had not only failed to gain any profit but was involved in endless scandals and corruption. Within six years, it was knocking on bankruptcy's door. Perwaja suffered losses of RM2.95 billion and at the same time owed banks another RM7 billion. Perwaja was also facing colligations of corruption and mismanagement in tender and contract awarding. Furthermore, doubtful trading transactions and payments were carried out to non-existing company. However, no legal actions were taken against Perwaja until Eric Chia was arrested in Mac 2004. Today, Perwaja is still in operation with fresh funds being injected by the government.