This article first appeared in Forum, The Edge Malaysia Weekly on June 11, 2018 - June 17, 2018

1Malaysia Development Bhd is the latest debacle involving a government-linked company. 1MDB is, of course, not the only GLC of concern in this article. Taking a broader perspective, here is an important reason why the Malaysian public should be concerned about the performance of GLCs. GLCs are companies controlled by the government, either directly or indirectly, through state agencies or government-linked investment companies (GLICs). Because a government is a body elected by the public, it is apparently in the best interest of the public to care about whether decisions involving GLCs are consistent with their interests.

The Malaysian public should also monitor GLICs because these investment companies are managing public funds. They are Khazanah Nasional Bhd, the Employees Provident Fund, Kumpulan Wang Persaraan (Diperbadankan), Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji, Minister of Finance Inc and Permodalan Nasional Bhd. The GLICs allocate some or all of the public funds to GLC investments. The stakeholders of these funds are apparently the public. Thus, the performance of the underlying investments will have ramifications for the wealth of the nation.

There are governance issues associated with government-linked entities in general, which should be of interest to the public. The remuneration package of top executives is of the greatest concern here because this has been recognised as an important source of agency cost (conflict of interest) in companies with widely dispersed ownership. GLICs and GLCs fit into this category of companies if we view the ownership of GLCs as effectively dispersed among Malaysians as the ultimate stakeholders. In this ownership scheme, one may argue that the public has little incentive to monitor the behaviour of a company’s management due to a free-riding attitude.

Little monitoring by the public or institutional shareholders could provide a fertile ground for managerial rent-seeking, for example, through inefficient pay schemes. Further, the absence of regulation on the disclosure of top executive pay implies that public scrutiny over executive remuneration is almost impossible. This is exactly what we are currently experiencing in a developing country such as Malaysia, where limited information is disclosed on the GLCs’ executive pay. This limitation has made it impossible for stakeholders to be critical about the efficiency of the remuneration schemes in practice.

There is currently no specific regulation regarding the disclosure of executive remuneration of public-listed companies in Malaysia. Detailed disclosure is encouraged (non-mandatory) through the guidelines specified by the Malaysian Code on Corporate Governance 2017 (hereafter referred to as the Code). The Code states that “companies are encouraged to fully disclose the detailed remuneration of each member of senior management on a named basis”.

However, due to the sensitive nature of the information, my research in the past has found that not all companies had chosen to comply fully with the spirit of the Code. It is common for companies not to disclose the individual executive’s remuneration, with only the aggregate pay of all top executives disclosed.

The lack of detailed disclosure has made it difficult for the public to monitor the efficiency of GLCs’ executive pay schemes. The efficiency of executive pay is of interest because pay should ideally be linked to a company’s performance. According to the Code, “pay policies which do not appropriately link directors’ remuneration to company strategy and performance can diminish shareholders’ returns, weaken corporate governance and reduce public confidence in business”. The link between executive pay and firm performance has indeed been a focus of corporate governance scholars.

It is important to examine the link between executive pay and GLCs’ performance if there is a presumption about inefficient pay practice among GLCs. The diverting of companies’ resources from good investment projects to compensating their executives irrespective of performance does not correspond with efficient resource allocation. If the executives are purely entitled to fixed pay (salaries), they will be more likely to give up good investment projects that require additional effort because they will not get to share the upside potential of the projects.

Also, with fixed remuneration in place, the executives will not be required to share the losses incurred by their companies resulting from their bad investment decisions. The underinvestment and bad investment problems coupled with pay-related misallocation of resources can be detrimental to company performance. To what extent such moral hazard has taken place among GLCs in Malaysia remains largely unknown.

In collaboration with Dr Mazni Abdullah, an academic at Universiti Malaya, I have taken on board inefficient pay hypothesis in an article entitled, “Executive compensation in government-linked companies: evidence from Malaysia”, which was published in a peer-reviewed journal, Applied Economics.

Based on data from the annual reports of 179 companies listed on Bursa Malaysia, we found that executive pay is lower in GLCs. Positive pay-performance relationship is also not evident for this category of companies, which indicates that their executives were largely guaranteed a certain level of pay irrespective of financial performance. Further, the level of equity ownership incentives seem to provide the GLCs’ executives with very little incentive to produce effort that can improve the performance of their firms.

Overall, our findings are consistent with the inefficient pay hypothesis we had introduced in that study. The results seem to suggest that GLCs do not provide sufficient incentives to motivate the executives to enhance performance. Is this an endemic problem among GLCs in Malaysia? To provide a solid answer, we need to perform a thorough investigation of the subject matter. This can be made possible only through access to more detailed information on executive remuneration.

In developed countries such as the UK and the US, disclosure of executive remuneration by public-listed firms is regulated through the Directors’ Remuneration Report Regulations 2002 and the Sarbanes-Oxley Act 2002 respectively. These regulations require the disclosure of detailed remuneration for each executive director of public-listed firms. Consequently, such transparency has allowed the public scrutiny of remuneration of top executives. This good practice is largely absent in the Malaysian context.

Thus, I reckon that enforcing detailed disclosure requirements on GLCs for the remuneration of their senior executives will enable more thorough investigation of the issue, which could then offer robust policy implications for the benefit of the Malaysian public.

Of course, this proposal applies to GLICs as well. Promoting greater transparency is indeed an important governance mechanism if the regulators are keen to observe the interests and rights of the public as the key stakeholders. I hope the new government will make this happen.

Dr M Minhat is a chartered accountant and a member of CA ANZ, MIA, ICAEW and ACCA. She holds a PhD and an MSc in banking and finance. A lecturer in finance, she lives and works in the UK and is currently completing an LLM in financial law and regulation at the London School of Economics and Political Science.

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