Stronger governance key to public trust

OVER the past month, Malaysian institutions came under the spotlight as both Lembaga Tabung Haji (TH) and Kumpulan Wang Persaraan (Diperbadankan) (KWAP) were in the news for the wrong reasons.

In TH’s case, the Royal Commission of Inquiry (RCI) revealed key shortcomings in the management of its funds, as well as blatant disregard for governance issues that could have helped the pilgrimage fund avoid being a target of political interference.

In the case of KWAP, the public pension fund was at the centre of attention for losses incurred in one of its investments in an Indonesian-based startup, eFishery.

The RCI

As the RCI report has been widely circulated and highlighted, the focus was on lessons learned from the fiasco and what can be done to correct the wrongs and ensure history does not repeat itself.

The key element of the report showed that there was serious disregard for accounting rules.

It also showed governance failures, lack of investment acumen and suspicious transactions that caused billions in losses.

As a pilgrimage fund, the TH board should discharge its stewardship roles responsibly, covering investments and ensuring depositors’ funds are deployed only on merit.

Internal governance

The mismanagement period covered 2014 to 2020, and the findings suggest that one of the biggest issues in TH’s financial scandal involved political appointees at the time.

As we know, the activities of institutional investors like TH or KWAP can range from managing and allocating funds and designing investment policies and strategies to awarding investment mandates and monitoring investment activities.

Good internal governance is a critical prerequisite for effective stewardship.

As such, institutional investors should ensure internal governance policies and practices are put in place to enable them to discharge their duties and responsibilities effectively in the best interest of their beneficiaries.

TH should nominate board members based on their qualifications, and they should not be linked directly to executive powers such as heads of state, heads of government, ministers, or political affiliations.

As with any board appointment, TH should consider factors such as board diversity, background checks, conflicts of interests and even asset declarations.

TH should appoint board members based on core competences such as business acumen, financial literacy and expertise in audit and internal controls, risk management and sustainability.

While advocating corporate governance at institutional level, real governance starts with appointing the right directors in terms of quality, independence and integrity.

Time to act

The RCI has recommended that both the minister in the Prime Minister’s Department (religious affairs) and the finance minister should share oversight of TH’s investments and management.

At the special parliamentary session to discuss the RCI, it was also recommended that the Securities Commission (SC) supervise investments and that setting up Dana Haji would enable investment operations to be run professionally, similar to any asset management company governed by the SC.

Powers granted under the Tabung Haji Act, 1955, are also subject to abuse, as the minister has absolute discretion to replace key TH board members without reason.

This occurred on two separate occasions in 2021, with the removal of a chief executive officer and a chairman.

This should be amended, as any change in key TH personnel should be reviewed by another independent body with clearer oversight of public institutions.

This new independent body should also oversee all appointments at various public institutions to ensure those appointed are people of integrity, accountable, trustworthy and with a strong governance background.

eFishery

The case of eFishery, where KWAP lost a few hundred million, is not out of the ordinary in startup investing.

After all, KWAP was only a minority investor, as other prominent investors, including Temasek Holdings and SoftBank, were also involved as early investors.

This was similar to other startup failures where companies like Theranos concealed key information from investors, as well as the world’s most famous startup at one point, WeWork.

In this case, KWAP was not really at fault for jumping into an opportunity to participate in one of the fundraising exercise rounds. Only much later did investors find that the numbers eFishery was showing did not add up.

To a certain extent, KWAP’s losses are understandable. After all, the key person in the eFishery scandal has already been charged and sentenced to six years of imprisonment, and the actual loss to KWAP is only 0.08% of its total assets under management.

Having said that, KWAP should actively monitor its investee companies, as this is an essential part of stewardship, including financial, sustainability and key person risk.

As an institutional investor, attending and actively participating in general meetings, where practicable, and exercising voting rights is another crucial element of governance.

Institutional investors should develop a clear engagement strategy and process or practices to enable more meaningful and effective dialogues with investee companies and periodically review the effectiveness of the engagement approach taken. The TH and eFishery cases must be distinguished by how the losses occurred, as investment panels at both institutions made decisions based on different approaches.

One involved a blatant disregard for investment rules, while the other was handled responsibly but turned sour due to clear misrepresentation and concealment of facts and financial data.

Having said that, losses on investments in startups like eFishery will face tighter oversight from institutional investors, as this type of investment will now be monitored more closely.

In TH’s case, the RCI findings and recommendations must be carried out to clean up the pilgrimage fund and restore depositors’ confidence.

The RCI recommendations, and how board members are appointed at other institutions of public interest, are also now under scrutiny, as the government should apply stricter rules and regulations not only to TH but to all our public institutions.

Bottom line is that they must be run professionally and out of the hands of politicians.

TH, KWAP and other government-linked investment companies (GLICs) should disclose their governance structures and oversight and monitoring processes to ensure effective stewardship within their organisations.

This would increase transparency about how our GLICs operate, reducing the risk of mismanagement, fraud and shoddy deals.