PURE CORRUPTION: NAJIB & 1MDB DRAGS MALAYSIA DOWN IN CORPORATE GOVERNANCE RANKING

KUALA LUMPUR – Malaysia fell two notches to sixth place in the biennial Corporate Governance (CG) Watch 2016 ranking of 11 Asia-Pacific countries, undermined by the 1Malaysia Development Bhd (1MDB) saga, which “cast a pall over [the] country and key government institutions”.

Malaysia, with 56 points, came behind Singapore (67), Hong Kong (65), Japan (63), Taiwan (60) and Thailand (58), according to data released by investment banking group CLSA and the Asian Corporate Governance Association (ACGA) in Hong Kong yesterday morning. Australia, which was included as a benchmark but not in the final ranking, scored 78 points.

“In 2014, we noted that Malaysia was unique in consistently improving in score across each of our four CG Watch surveys since 2007. Unfortunately, this trend has now come to an end.

“While we upgrade Malaysia this year for enforcement of capital market offences and several favourable regulatory and policy changes, the fallout from the 1MDB crisis has had an adverse effect on the political and regulatory environment for public and corporate governance. This has resulted, on balance, in a modest decline in the overall score,” Benjamin McCarron, ACGA specialist consultant wrote in the biennial report resulting from a 95-question survey covering five pillars: CG rules and practices, enforcement, political and regulatory environment, accounting and auditing, and CG culture.

Malaysia’s 56 points placed it just ahead of India (55), South Korea (52), China (43), the Philippines (38) and Indonesia (36).

Malaysia would have scored 58 points, the same as Thailand, had its score under the “political and regulatory” pillar been the same as that in the 2014 survey, ACGA secretary-general Jamie Allen told The Edge Financial Daily in a phone interview. Malaysia’s score rose from 55 to 58 in 2014.

Malaysia would have done “much better” had there been no 1MDB, Allen said. “1MDB has affected capital markets’ perception of Malaysia. People are concerned about what’s going on. When public governance standards drop, over the medium-to-long term, it does have an impact on [investment] decisions.”

It is learnt that Malaysia’s overall score was dragged lower by a sharp 11-point fall under the “political and regulatory” pillar, under which public governance-related questions were asked — cancelling out a commendable seven-point climb under “enforcement”, which covers listing rules and security laws.

“Notwithstanding the trouble at the top, regulators in Malaysia managed a strong showing on new reforms and a number of wins in enforcement,” McCarron wrote in the report, referring to new regulation and improvements on disclosure requirements and sustainability reporting as among notable positives.

“The enforcement score for Malaysia increased significantly as we took a more positive view of efforts by the Securities Commission Malaysia and Bursa Malaysia in a number of areas, including insider trading, market manipulation and audit oversight, and to a lesser extent market enforcement from institutional investors. A broader interpretation of enforcement would include accountability at non-listed companies such as 1MDB, and the role of banks in facilitating payments. However, we have covered this in the political and the regulatory section,” McCarron said.

“Frankly, it has been a shame to see the fallout from the 1MDB crisis in Malaysia. There has been a stark difference in findings and approach between international and domestic investigations into the organisation, with many leadership changes at the organisations responsible for domestic investigations. It is worth noting that the direct financial impact of these incidents appears to have been contained.

“And they have not tarnished the entire Malaysian capital market: There remain many listed companies both under family and state control that are well removed from the issues. However, the 1MDB saga carries implications for the integrity of some key government institutions,” he wrote, adding that the suspension of The Edge weekly and The Edge Financial Daily in 2015 “also led to concerns of a reduction in press freedom in Malaysia”.

The report went on to say that Malaysia’s score under the “political and regulatory” pillar fell on “the lack of a clear, consistent and credible government policy on CG, a perception of reduced effectiveness on the part of the central bank in exercising its powers, the depth of media skill and freedom in reporting on CG, the independence of anti-corruption commission, and whether [the] government was making progress in improving standards of public governance”.

Factors that could force Malaysia’s score to fall in the next survey in 2018 include a lack of improvement in public governance, a slowdown in the pace of regulatory reforms and “continued slow adoption of stewardship practices at the leading funds”, the report read.

“A lot of markets are moving forward. If you don’t improve, scores would be lower next time,” Allen said.

– THE EDGE