Speech at 7th Annual Corporate Governance Summit (e/c)

SPEECH BY YAB TUAN LIM GUAN ENG, CHIEF MINISTER OF PENANG AT 7th ANNUAL CORPORATE GOVERNANCE SUMMIT
8th of June, 2015 @ The Westin Kuala Lumpur “PROMOTING SUSTAINABLE ENVIRONMENT FOR INVESTORS”

I am honored to be given this opportunity to address such an august crowd on a topic which is of paramount importance to Malaysia’s corporate leaders and those who are interested in investing in our country.
This is a particularly timely event especially given the many questions surrounding the issue of corporate governance involving some of our largest government linked companies and of course, the elephant in the room, Satu Malaysia Dalam Bahaya or 1MDB.

But before I go into that, let me set the context by saying that the challenge of promoting corporate governance and increasing investor confidence is not a uniquely Asian phenomenon. For those of us who have short memories, let us not forget the collapse of Enron in 2001 as a result of a massive accounting fraud. Not only did thousands of employees lose their jobs and their retirement accounts, shareholders lost $74 billion, and the big 5 became the big 4 when Enron’s auditors, Arthur Andersen, had to be dissolved.

Fast forward to 2008, just prior to the 2008 US financial crisis, and Bernie Madoff was exposed as the operator of the largest Ponzi scheme in US history. Investors were duped to the tune of $64.8 billion and Madoff was given a 150 year sentence.

Given the size of the US financial markets, the scale of these scandals are, of course, massive. But underneath these massive numbers are the real life stories of employees who have lost their entire life savings when the stocks of their employer became essentially worthless. Many of these employees, who had dedicated their lives to these companies, and who had built many strong friendships with their colleagues in these companies, saw their hard work disintegrate before their very eyes. It is a stark reminder to us that the failure of corporate governance have very real consequences.

In Malaysia, we have had our fair share of corporate governance scandals which have led to companies collapsing or being delisted. I think that many in this room are old enough to remember the spectacular Pan-Electric crisis in 1985 which caused the closure of the Kuala Lumpur and Singapore Stock exchanges and led to the jailing of a major Barisan Nasional politician.

More recently, in 2010, Sime Darby shocked us with a massive RM2.1 billion in provisions for losses and investments in its energy and utilities division. I understand that Sime Darby filed a civil suit against the former CEO over these losses and I understand that the same former CEO is also being charged for Criminal Breach of Trust (CBT) and cheating.

Whether in Malaysia or in the United States, these examples of corporate fraud and malfeasance have a few common threads running through them.

Firstly, unscrupulous individuals took advantage of poor or inadequate legislation to exploit existing loopholes in the system. We can think of how weak consumer protection laws allowed certain financial institutions to offer very attractive mortgage rates to otherwise not credit worthy customers and how this blew up into the sub-prime mortgage crisis in the United States in 2008.

Secondly, there was often poor internal governance structures where the presence of checks and balances were very weak or altogether not present. The phenomenon of board of directors being beholden to the chairman or CEO for their appointments, which is quite commonplace in the United States, calls into question the ability of the BoD to perform its internal governance role. Separately, the presence of many of the same individuals in the board of directors in various GLCs and sovereign wealth funds in Malaysia also raises questions about possible conflicts of interest.

Thirdly, there is often poor external oversight. This could be in the form auditors who are complicit in covering the tracks of unscrupulous CEOs or the management team who book non-existing revenues or inflate sales or hide ballooning losses. Or it could be poor enforcement by external agencies such as the central bank, the securities commission, the companies’ commission or other regulatory agencies.

I do not want to delve into how public listed companies can improve its corporate governance structure and in doing so improve investor confidence in the Malaysian market. I’m sure there are many more experts here who are more qualified than I to talk about this at length.

I do, however, want to raise certain questions about better corporate governance within the government and especially within government owned companies. I believe that the best principles of corporate governance within publicly listed companies should also be applied on government owned companies which do not face the same shareholder scrutiny but are nonetheless very important entities in our economy. And nowhere do we see the failure of corporate governance demonstrated on a massive scale within a government owned company than what we have seen within 1MDB.

The rot started right from the beginning in terms of corporate governance. We often complain about how long it takes for the government to move and to approve business transactions. [But for the case of the joint-venture between 1MDB and Petrosaudi, which took place in 2009, the whole deal, which was worth US$2.5b at that time, was wrapped up in less than 10 days! Seemingly, all it took was a few email exchanges between the then CEO of 1MDB, the CFO of PetroSaudi and Jho Low as the go between to secure US$1 billion of 1MDB’s money in the 1MDB-Petrosaudi Joint Venture. And one can only wonder about the type of corporate governance within 1MDB which allowed US$700 million of 1MDB’s investment in the joint venture to be transferred to an account that has been alleged to be controlled by Jho Low.

The rot also seems to have started from the top. At first, our Prime Minister said that he has no knowledge of the transactions that were going on in 1MDB as he was not involved in the day to day management of the 100% Ministry of Finance owned company. And then, it was recently revealed that according to 1MDB’s memorandum of articles, the Prime Minister has the final say over any “financial commitment” undertaken by 1MDB’s precursor, the Terengganu Investment Authority (TIA). How then can the Prime Minister, who is also the first Finance Minister, absolve himself from the decision making process within 1MDB when he must give his written approvals on any of the firm’s investments? This too, raises huge question marks as to the presence, or in the case, absence of proper procedures and reporting processes in 1MDB, not to say proper corporate governance structures.

Why would a so-called ‘advisor’ like Jho Low, who has no formal position within 1MDB, have the power to seemingly call the shots on some major investment decisions of the company? To what extent is he correct when he says that the ultimate responsibility for 1MDB’s decision must lie with the decision makers including the management, board of directors and the Prime Minister? After that, he was quoted to have said the following in an interview earlier this year – “Are you telling me the Prime Minister doesn’t make his own decisions”?” That, my friends, is the RM42 billion dollar question we are facing right now.

Questions involving conflict of interest were also recently raised when Tabung Haji agreed to buy over a small piece of land at the Tun Razak Exchange (TRX) from 1MDB for close to RM190 million. This land sale caused former UMNO Deputy Minister for Higher Education, Datuk Saifuddin Abdullah, to ask if there was a conflict of interest since the Lembaga Tabung Haji group managing director, Tan Sri Ismee Ismail, is also on 1MDB’s board of directors. In addition, Tabung Haji’s deputy group managing director Datuk John Abdullah, who is also the chairman of 1MDB’s energy subsidiary, Edra Global, was the leading the negotiations in purchasing the TRX land from 1MDB.

Some have tried to justify 1MDB’s financial health by saying that its assets of RM50 billion outweighs its debts of RM42 billion. But what is left unsaid and unexplained is that RM13.4 billion of these “available-for-sale” investments may not be worth that much. Part of this RM13.4 billion are the US$1.1 billion in assets which are held in BSI Bank in Singapore. Or rather, the “units” which are held in this bank. At first, it was supposed to be cash, later on it was classified as assets and now, the 2nd Finance Minister has said that it is being held in “units” although he refuses to clarify what exactly these “units” are…

Even the accounting fraternity has not been left out of this fiasco. Member of Parliament for Petaling Jaya Utara, Mr. Tony Pua, has made two official complaints to the Malaysian Institute of Accountants over the role of auditing firms, KPMG and Ernst & Young (EY) over their failure to report “highly dubious and fraudulent” transactions involving 1MDB and its PetroSaudi Joint Venture in 2009 as well as Deloitte Malaysia over its failure to conduct the necessary due diligence of 1MDB’s cash flow and liquidity risks in 2014. It seems that the only audit firm that was and is NOT involved with 1MDB is PriceWaterhouse Coopers (PWC)!

Of course, there is much more about 1MDB which I could go into but I think that many of you are already up to speed with the news which seem to capture the headlines one day after another. But the point of highlighting these details is to show that there was a systemic absence of proper corporate governance in 1MDB from regulatory oversight, to internal governance procedures and processes, to proper audit procedures, to the lack of scrutiny and possible conflict of interest among the board of directors, to the possible involvement or non-involvement of the Prime Minister himself… This only shows how the lack of proper corporate governance can create an environment where all things which can go wrong does go wrong… and in the case of 1MDB, going wrong in a spectacular fashion.
We are still waiting for the Auditor General’s report on 1MDB which I believe will be ready sometime this month. And we await the findings of the Parliamentary Accounts Committee (PAC) which still has not managed to call as witnesses, the new CEO as well as the former CEO of 1MDB, in the latest round of their questioning.

Now that we have seen an example of how things can go spectacularly wrong, how then can we create an environment to ensure that these kinds of risks can be minimized?

In Penang, we focus on the principles of Competency, Accountability and Transparency (CAT) when it comes to how the state government operates, especially in the area of finances. Given the limited resources and revenue sources of the state, we have no choice but to ensure that we raise sufficient revenue to run the state government and that we spend the money we raise efficiently and effectively. And by focusing on these principles, we are confident that we can create a sustainable environment for corporations, businesses and individuals who want to invest in the future of Penang.

Our record in Penang in terms of financial management has been acknowledge by many including the Auditor General.
In stark contrast to the usually abysmal findings in the audit of federal ministries and other states, Penang has maintained a stellar record. Commendations have been accorded to the state government for its clean, efficient and transparent governance – and not only by the Auditor-General’s Report but also by international watchdogs such as Transparency International. We are proud to be lauded as amongst the best managed and most efficient state administrators in Malaysia yearly since 2008.

In the latest 2013 report, Penang saw its revenue collection rise by 27.4%, as compared to the federal government’s 2.6%. This growth in revenue collection (in percentage) is observed to be the highest in the nation. Even the Prime Minister’s home state of Pahang saw a decrease in revenue collection by 2.2%.

Penang has recorded a budget surplus every year since we took power in 2008. From 2008 -2013, budget surpluses amounts to RM453 million, with the largest surplus in Penang’s history of RM138.31 million recorded for the year 2011 alone. In this period (2008-2013), Penang’s accumulated budget surpluses amounting to RM453 million even exceeds the total surplus of RM373.6 million recorded over the 50 years from 1957 until year end 2007.

Every year Penang’s finances grows stronger. In 2013, our Consolidated Fund reached RM1.29 billion, after an increase of RM99.85 million or 8.4%. This is an increase of more than RM 445 million or more than 53% since RM 847 million in 2007.

As far as our state departments and agencies are concerned, 8 or 53.3% were rated as excellent while the other 7 or 46.7% were rated as good. In other words, not a single department or agency reviewed was rated as anything less than good. The State Treasury Department and the Penang Development Corporation was rated Excellent for six years straight from 2008 to 2013.

It is also interesting to note that while the AG report 2013 mentioned that, as of 31 December 2013, only 58.3% of an approved allocation of RM363.39 million was spent, Penang has managed to complete 98.4% from a total of 3,516 planned projects. This indicates that the state government has actually spent less but achieved a lot more. This translates as financial prudence complemented by effective delivery and a reliance of the open competitive tender system that promotes transparency and competence.

For all of our ambitious infrastructure projects, including the proposed RM27 billion Penang Transport Masterplan as well as the undersea tunnel from Georgetown to Butterworth and the related road upgrades, we practiced an open tender to ensure we receive the most competitive bids. And we do not practice selectivity. Even if the winning bids come from entities which are related to or controlled by politicians from the BN parties, we still accept them. The losing UMNO candidate for Permatang Pauh Parliamentary by-election did not dare deny that the company he worked for received Penang state government contracts.

The question which Malaysians must ask ourselves is this: Do we think that we can improve corporate governance in this country by slowly reforming existing practices under the current federal government or do we think that meaningful reform can only take place with a change in government? For those who believe in the internal reform process, I would urge caution and even skepticism. The past record does not give us confidence that significant reforms will come under the present federal government. We have had strings of financial scandals in government owned and government linked companies including Perwaja, Renong, PKFZ and many others. 1MDB took this to a whole new level. It is more than likely than not that more corporate governance best practices will be broken in the process of trying to ‘fix’ the 1MDB problem. With this in mind, how do we expect corporate governance to improve in this country under the present government?

In contrast, the state governments in Penang as well as Selangor have shown that we can manage our resources much more transparently and efficiently. Of course, there is still a lot more room to improve but I think we have shown definite proof that a new government can usher in better corporate governance practices and build a sustainable environment for investors. To me, this is a no brainer. I hope I have convinced you that it is a no brainer as well. The harder challenge is to convince the larger public but it is a challenge which we must accept with open arms.

Thank you.

—-Mandarin —

槟州首席部长林冠英于2015年6月8日在吉隆坡的第七届企业治理峰会上“为投资者推介可持续环境”发表演词,重点如下:

… …可是1MDB PetroSaudi公司在2009年联营时,整个交易在当时值得25亿美元,却在短短10天内就结束了!看上去,整项交易只是通过几个由一马机构首席执行员及Petrosaudi首席财务官及刘德祖之间的电邮便成交,然后便把一马机构的10亿美元转去给一马机构及PetroSaudi的联营公司。我们也可以感到疑惑,一马机构内部是哪种企业管理,让一马机构投资7亿美元到上述联营公司,并把钱转账给刘德祖控制的银行户口。

看来上梁不正下梁歪。首先,首相说他对一马机构内部进行的交易毫不知情,因为他并没有100%完全涉足上述由财政部拥有公司的日常业务。然后,最近却被人揭发,根据一马公司的前身,即登嘉楼投资机构(TIA)的组织章程大纲及章程细则(M&A) 阐明,首相对于一马公司的任何“ 金融承诺“都有最後的决定权。那么首相也是财政部长,怎样可以自称自己没有涉及决策过程,正当一马机构在进行投资项目时,都必须获得他的书面批准 ?这引发巨大的问号,包括一马机构内是否缺乏正当的程序及报告过程,更不用说适当的企业管理结构。

为什么像刘德祖这样的“顾问”,在一马机构内没有任何职位,却有权力为公司的首要投资决定拍板?他说一马机构的决定最终必须落在决策者包括管理层、董事会及首相,这到底是不是真的?之后,他在今年初一项访问中曾经说过-“难道你在告诉我首相没有自己做决定?” ,而这恰恰就是我们面对的420亿令吉的问题。

问题还包括利益冲突,最近朝圣基金局以1亿9000万令吉,向一马机构购买一块位于敦拉萨国际贸易中心(TRX)的地皮。这块地导致前巫统高等教育副部长拿督赛夫丁提出疑问,这当中是否有利益冲突?因为朝圣基金局执行董事丹斯里伊斯美也是一马机构的董事。再加上朝圣基金局的副集团执行董事拿督约翰阿都闰也是一马机构能源子公司Edra Global的主席,他在朝圣基金局向一马机构购地的交易中主导谈判。

一些人企图合理化一马机构的财务状况良好,指它的资产值500亿令吉,超过了它的负债420亿令吉。还没有解释清楚的是,那些“可出售”的134亿令吉的投资可能不值得那个价。这134亿令吉当中,有价值11亿美元的资产存放在新加坡瑞士瑞意银行(BSI)银行户头银行,或者说是一些“单位”存放在这家银行。起初说是现金,之后说是资产,现在第二财长说是“单位”,他还没有说清楚到底是什么“单位”

就连会计同行也受以牵连。八打灵再也北区国会议员潘俭伟向马来西亚会计协会提呈投诉信,彻查一马发展公司(1MDB)前审计公司,即安永(Ernst & Young)和毕马威(KPMG),因为作为独立的审计公司,他们发现涉及一马机构及PetroSaudi联营公司、以及De在2009年的可疑交易及欺骗时,并没有向有关当局报告。另一家会计公司Deloitte Malaysia也没有尽职调查,在一马机构在2014年面对现金周转及流动资金风险后没有投报。看来,唯一没有涉及一马机构的稽查公司就是PriceWaterhouse Coopers!

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