This article first appeared in Forum, The Edge Malaysia Weekly on June 25, 2018 - July 1, 2018

Stewardship” means the careful and responsible supervision and management of something entrusted to one’s care. It is a relationship of trust, to which the highest standards of fiduciary duty apply. It entails standing in the shoes of someone else, exercising prudent judgement and taking actions on that person’s behalf for his benefit or the benefit of others.

Fiduciary duty is an ancient concept but it holds to this day. For us, it has taken on a new importance when we consider the state of governance in our institutions and the low public regard in which they are held.

Fiduciary duty is the overriding concept that regulates the relationship between a trustee and the beneficiaries. The object is to promote careful, responsible decision-making and action in pursuit of the interests of the beneficiaries, while preventing behaviour that frustrates those interests.

However, is fiduciary duty a false hope? Can the concept be relied upon to produce the desired results? Especially in the context of our institutions, I believe that fiduciary duty must be supported by properly designed and implemented governance policies and practices. Only in this way can institutions be protected from the weakening effects of third-party interference and influence, which can leave the reputation of an institution in tatters.

Our institutions entrusted with securing the benefit of others, be they individuals or the wider community, are powerful economic forces, which have a great impact on society. They must be seen to serve their purpose.

From an institutional perspective, fiduciary duties are largely behavioural. They affect those with a stewardship role and focus on five key areas:

• Compliance with provisions of the foundation document and applicable laws. This is a key consideration for the institution’s directors, to whom all the normal duty of care considerations for a director in a corporate environment should apply.

• Loyalty, meaning being faithful to the interests of beneficiaries and the purpose of the trust, while being impartial when considering the range of interests of different beneficiaries.

• Prudence and care and the exercise of due diligence in managing the trust, its port-folio of investments and assets, especially in evaluating risks and ensuring appropriate diversification while avoiding undue influence from external parties.

• Controlling administrative and management costs and the management of conflicts of interest.

• Transparency and public accountability in dealing with and reporting to beneficiaries.

Although these behaviours do not directly affect the performance of a trust or its investment outcomes, failure to adhere to these duties will certainly do so. It is vital, therefore, that behaviour and governance processes are combined.

Fiduciary duty in respect of assets entrusted to an institution flows through the legal system with the help of a foundation document. Different regulators may be involved, depending on the nature of the institution and the assets entrusted to it. Obvious examples include pension funds (the Employees Provident Fund, Lembaga Tabung Angkatan Tentera), public savings bodies and mutual funds (Permodalan Nasional Bhd), sovereign wealth funds (1Malaysia Development Bhd) and special-purpose investment entities.

Sometimes, regulated external agents, such as banks, private investment managers and insurance companies, may be engaged. There may be a variety of legal relationships but the overall consideration of applicable fiduciary duty will apply in every instance.

To secure the implementation of prudent and appropriate management and investment practices, institutions must not simply state they have adopted the principles of good governance. That is open to being lip service. They must have the necessary organisational structures in place with written terms of reference and a docu-mented system of process for decision-making and internal control.

The purpose is always delivering to the beneficiaries the outcomes envisaged in the foundation documents.

Responsibility and governance must go hand in hand if society is to be protected from poor stewardship and fiduciary misconduct or irresponsibility. Our institutions are too central to the well-being of the nation as a whole, and thus should be held to the highest standards of stewardship and governance.

Datuk Yusli Mohd Yusoff is president of the Malaysian Institute of Corporate Governance

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