Dr. Terence Gomez, in his latest book, “Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia”, traces the government’s role in the corporate sector. He provides an assessment of Malaysia’s new political economy, with a focus on ownership and control of the corporate sector.
Gomez, who is a Professor of Political Economy at Universiti Malaya, is also the author of “Politics in Business: UMNO’s Corporate Investments”, a pioneering publication in 1990, which traced how UMNO secured a huge equity interest in Malaysia’s corporate sector.
In “Minister of Finance Incorporated”, Gomez (photo above) and his team of researchers offer another pioneering assessment of Malaysia’s corporate sector, though their focus is now government-linked investment companies (GLICs), a type of state enterprise that has long prevailed in the economy but has not been analysed.
Gomez argues that corporate power is now concentrated in these GLICs that are ultimately controlled by the Minister of Finance. Interestingly, Gomez admits that these GLICs are well-managed by highly qualified professionals, though these people can be subservient to the dictates of the Minister of Finance.
By focusing on the GLICs, “Minister of Finance Incorporated” ignites interesting debates about the role of the government in the economy, an issue that requires thoughtful consideration given their dominant presence in the corporate sector. Through in-depth research, novel insights are provided into this question of government ownership and control of corporate Malaysia.
This review is presented as a question-and-answer dialogue with the author, to draw attention to this study’s major findings. Much of what is outlined below is from this book.
Professor Gomez, in your latest book, “Minister of Finance Incorporated”, what are your major findings?
Malaysia’s political economy has undergone a major transition since the 1990s that has escaped public attention.
Corporate power has shifted from UMNO and well-connected businessmen to the government. Huge business groups controlled by the government have emerged, seen in the dominance that a mere seven GLICs have over the corporate sector.
During this transition, one extraordinary outcome was the removal of UMNO, its members and the business associates of party leaders as owners of publicly-listed government-linked companies (GLCs).
UMNO now has direct equity ownership of only one quoted company, the media-based Utusan Melayu, while no UMNO member figures as a major corporate player.
UMNO’s absence from the corporate sector has major implications. The power nexus involving politics and business has fundamentally shifted at the federal level.
If this political-business nexus once involved numerous powerful UMNO politicians who had enormous influence over the corporate sector, economic power is now concentrated in the Office of the Minister of Finance.
Who are the GLICs?
Seven institutions have been classified by the government as GLICs. These are the Minister of Finance Incorporated (MoF Inc), the government’s holding company, which participates actively in corporate manoeuvres and owns a diverse range of firms known as government-linked companies (GLCs).
The sovereign wealth fund, Khazanah Nasional Berhad, is policy-based and implements major plans, including venturing abroad to support the government’s business internationalisation effort.
The investment trust fund, Permodalan Nasional (PNB, or National Equity Corporation), is portfolio-oriented, though with a policy agenda to redistribute wealth more equitably between the nation’s ethnic groups.
Two savings-cum-pension-based funds, the Employees’ Provident Fund (EPF) and the Kumpulan Wang Persaraan Diperbadankan (KWAP, or Retirement Fund Incorporated), are portfolio-based with an equity interest in a vast number of companies.
Lembaga Tabung Angkatan Tentera (LTAT, or Armed Forces Fund Board) is also a savings-cum-pension-based fund but is active in the management and development of large businesses in various sectors.
Lembaga Tabung Haji (LTH, or Pilgrims Fund Board), though portfolio-based, has an organic form of enterprise development, active in the development of Islamic-based products and services.
How are these GLICs owned and controlled?
The Ministry of Finance sits at the apex of a complex business group structure comprising its holding company, MoF Inc, as well as other GLICs, quoted GLCs and a huge number of unquoted private firms.
MoF Inc is the “super-entity”, given its enormous influence over the corporate sector through its substantial ownership and control of the other GLICs and the financial sector, comprising Malaysia’s leading commercial banks. Through its ownership of these commercial banks, the government can control the economy indirectly by acting as a lender to private firms.
However, MoF Inc’s vast network of business interactions constitutes only one part of the government’s complex system of control over the corporate sector. State governments have a similarly sizeable interest in the corporate sector.
In this system, the Board of Directors are important. Directorships function as a primary avenue through which the government can dictate decision-making within GLICs and GLCs.
Our comparison of ownership and directorate patterns in 1996 (prior to the 1997 currency crisis) and 2013 revealed a new phenomenon.
Only a small number of UMNO members remain as directors of these government-owned enterprises. These findings are particularly astonishing as Umno remains a party riddled with money politics, patronage and rent-seeking.
How did Malaysia get to this point?
Three major events have contributed to these transitions where the Prime Minister and GLICs have emerged as economic powerhouses. The first was the implementation of the New Economic Policy (NEP) in 1971, which allowed these enterprises to gradually acquire a major presence in the corporate sector.
The involvement of the GLICs in the corporate sector diminished with the active promotion of privatisation from the mid-1980s. With this spate of privatisations, major enterprises fell under the ownership and control of UMNO and well-connected businesspeople.
The second defining event was the 1997 currency crisis and the momentous intra-elite political feuding that ensued the following year. The GLICs’ bailout of ailing well-connected companies and their takeover of firms associated with ousted Umno leaders led to their re-emergence as major actors in the corporate sector.
The third defining moment was when reform of the GLICs and GLCs was initiated by Dr. Mahathir Mohamad in the late 1990s, though actively implemented by Abdullah Ahmad Badawi (photo) from 2003. Najib Abdul Razak continued these reforms when he took office in 2009 as Prime Minister.
The current concentration of economic power in the office of the Prime Minister is particularly salient because when Najib took office in 2009 he voiced his intention to transfer GLCs to the private sector, arguing that the private sector should function as the primary engine of growth.
Unlike Mahathir, Najib appeared personally uninterested in business as a government tool for economic and corporate development when he came to power. Najib, however, soon came to realise the significant economic influence that the GLICs have over the corporate sector.
Why was this type of corporate control structure created?
This complex system of ownership and control of the corporate sector is not one that was designed or envisioned by ruling elites.
In fact, since the 1980s, all Prime Ministers – Mahathir, Abdullah and Najib – have persistently advocated privatisation of the GLCs on the assumption that these enterprises would function far more effectively and productively if under private ownership.
Even when the NEP was conceived, the plan was to transfer corporate equity acquired by the GLICs to bumiputeras, in order to redistribute wealth more equitably among the ethnic groups.
When Mahathir’s vision of creating business groups led by corporate captains was dismantled by the 1997 currency crisis, the GLICs and GLCs were deployed to bail out well-connected ailing, debt-ridden enterprises.
When a bitter feud ensued between Mahathir and his Minister of Finance, Anwar Ibrahim, over these bailouts, Anwar was ousted from public office and his business allies lost control of their corporate assets.
When a similar feud ensued between Mahathir and Daim Zainuddin, Anwar’s replacement as minister of finance, companies controlled by his allies and UMNO were channelled to the GLICs. Having had persistent feuds with his trusted allies who he had appointed as Minister of Finance, prime minister Mahathir then took charge of this ministry.
The new structure of Malaysia’s political economy has also arisen out of the need for the UMNO President to reduce the influence of party warlords.
UMNO’s major businesses now under the GLICs include media companies that own the major newspapers, The New Straits Times and Berita Harian, as well as TV3, the party’s cooperative KUB, the huge construction-based UEM Group, the hotel-based Faber Group (now UEM Adgenta) and the Bank of Commerce, now a part of Malaysia’s third largest banking enterprise, CIMB Group. Control of these companies ultimately falls under MoF Inc.
If UMNO members once had many sources of patronage, what is the situation now?
UMNO members now have only one source if they wish to obtain access to federal government-generated economic concessions. This is profoundly problematic in terms of public governance as the minister of finance concurrently holds the position of prime minister, a situation that does not prevail in democracies.
In this governance structure, there is the possibility of checks and balances being deeply undermined, opening space for abuse of power that can have serious implications on the economy and the corporate sector.
Who is accountable for the running of the companies?
The board of directors of these companies are accountable. While most of these directors are professionals who manage the GLCs in a productive manner, since they are appointed by the minister of finance, they can be compelled to follow his dictates.
There are also serious concerns in some GLICs. In LTH, a number of its directors, including its chairperson, are UMNO members who are elected representatives but hold no position in government. LTAT is led by Lodin Kamaruddin (photo), a longstanding close business associate of Prime Minister Najib.
There is sufficient evidence that these GLICs could be vulnerable to political interference unless sufficient oversight measures and institutional reforms are introduced to ensure they are well-insulated from such abuse.
In the boards of directors of the GLICs and GLCs, what has also increased is the number of former bureaucrats. These ex-civil servants, like the professional elite, have no political influence. However, they also appear to function as mere figureheads.
The most influential decision-makers are the chairpersons of these boards and the managing directors who, when necessary, take the cue from the Minister of Finance, further indicating his overwhelming influence over the corporate sector.
There is evidence of “inner circles” among the GLICs. One inner circle revolves around Nor Mohamad Yakcop, until recently the deputy chairperson of Khazanah. Professional managers groomed by him lead the GLICs and GLCs.
An inner circle is also evident in the media sector. An obscure private firm, Gabungan Kesturi, controls the leading media enterprise, Media Prima, along with PNB.
The directors and shareholders of Gabungan Kesturi are Shahril Ridza Ridzuan and Abdul Rahman Ahmad, both groomed by Nor Mohamad. Shahril is the CEO of EPF, which also owns a huge interest in Media Prima. Rahman was appointed the CEO of PNB in 2016.
The use of private companies like Gabungan Kesturi obscures the identity of the ultimate shareholder, the Minister of Finance, as well as the extent of the state’s control over major media companies.
Did our leaders “groom and place” executives in GLICs for their vested interests?
Daim Zainuddin (photo) groomed and placed professionals he had trained as executives and owners of companies associated with UMNO.
A similar practice of grooming young professionals as executives and CEOs emerged in the late 1990s after well-connected firms came under the control of the GLICs. Professionals trained by Nor Mohamed took over the management of these enterprises.
However, while Nor Mohamad and Daim groomed and placed professionals in control of major quoted enterprises, their reasons for doing so differed.
As Minister of Finance, Daim, also UMNO’s Treasurer and a longstanding businessperson, appeared intent on securing enormous control over the corporate sector to serve his vested business interests. The professional-managerial team groomed by Nor Mohamed was not necessarily trained to manage the GLICs and GLCs.
What are the possible repercussions of this ownership and control mechanism?
Through this pyramiding system, with the Minister of Finance at the apex, the GLICs and GLCs can be subjected to considerable abuse. This pyramiding system allows the minister to secure numerous political and business benefits from the GLICs and GLCs, as well as abuse them.
It is noteworthy that MoF Inc has ownership and control of controversial companies such as 1MDB and the National Feedlot Corporation (NFC).
The GLIC-based business groups have control over companies through majority equity ownership, which accords them significant voting rights. This has serious implications for minority shareholders, and the economy, in the event of abuse of the companies.
Our study noted that the EPF appears to have been forced to take control of RHB Capital from a firm linked with the former Chief Minister (and now Governor) of Sarawak, Abdul Taib Mahmud (photo above ). This financial institution has long been an enterprise that has come under the control of a number of well-connected people and GLCs.
Politics evidently matters, influencing how these enterprises are run. Policies also matter as they shape the different ways in which these institutions are managed.
There can be a link to between politics and policies, especially redistributive policies and enterprise development strategies when determining how these enterprises are employed.
After his party fared badly in the 2013 General Election, Najib announced that contracts and other concessions would be channeled through GLICs and GLCs to bumiputeras, justified by his new ethnically-based affirmative action policy that targeted this ethnic group. This was evidently to consolidate the political support of this ethnic community.
What reforms are required to deal with this issue?
These powerful GLICs are a clear manifestation of high concentration of corporate ownership in the state. This concentration of corporate wealth is justifiable only if GLICs are managed in an accountable and transparent manner.
Inevitably, to inspire confidence among private investors, political reforms are imperative to enforce stringent institutional checks and balances by independent oversight institutions.
The technocratic professional elite at the epicentre of this GLIC-GLC network can remain, but must be subjected to close scrutiny by parliamentary action committees led by the Opposition. And the Prime Minister cannot also serve as the Finance Minister since it is an obvious case of conflict of interest.