The following is the speech by First Finance Minister of Malaysia Daim Zainuddin regarding the challenges of corporate governance in the Asian economic crisis at the Asian Institute of Management in Manila, Philippines on 4 March 1999. He was speaking in the Washington SyCip Policy Forum.

1. Allow me to thank the organisers for inviting me to be among the many distinguished personalities, this evening. I like to take this opportunity to acknowledge the commendable role of Mr Washington SyCip as a leader in management education in Asia. The fact that this policy forum is aptly named after him, speaks well of this remarkable man.

2. For many years, the Asia Pacific region enjoyed rapid growth and transformation. The World Bank called this unprecedented economic performance the "Asian Miracle". But the miracle fizzled away when our economies were struck by the currency crisis. Like a raging typhoon, the crisis hit one country after another in quick succession, and brought devastation and chaos in its path.

3. One can go to great lengths describing the damage caused by the East Asian crisis. But if there is any good coming out from the crisis, it is the sense of urgency to address the issues of corporate governance. Throughout the world, corporate governance reforms have arisen from local crises. East Asia is no different. Good macroeconomic polices are essential, but not enough to rectify the problems we face.

4. The weaknesses in East Asia's corporate and financial sectors had been one of the factors contributing to the collapse of the equity and capital markets. When the crisis deepened, investors became worried about the strength and resilience of banks and corporations, which were masked by poor standards of disclosure and accountability. Shares were dumped with the collapse of investor confidence. The massive outflow of funds that ensued fueled the contagion nature of the crisis.

5. However, I do not wish to give the impression that corporate governance is a new issue that has arisen from the crisis because in Malaysia, the government has always advocated good corporate governance even before the crisis. In addition, we should avoid making the simplistic argument that good corporate governance is sufficient to prevent the crisis that took place in Asia. The causes of the Asian crisis are complex. Even now, there is no consensus to what really caused the crisis. To suggest that good corporate governance is the answer to the crisis or the best means for averting an economic crisis is definitely not correct. Some Western countries themselves have their share of economic and financial crises even though they practice coporate governance. Although good corporate governance cannot prevent the occurrence of market panic, it will certainly help reduce the risks of such occurrences. However, good corporate governance is a worthwhile goal, to strive for.

6. I regard corporate governance as the process and structure used to direct and manage the business and affairs of the company that enhance business prosperity and corporate accountability. The ultimate objective is to realize long-term shareholder value, while taking into account the interests of other stakeholders. In essence, corporate governance concerns the responsibility of directors and managers to the other stakeholders of the company. In the large modern corporations, the owners are separated from the managers. The shareholders do not have a direct influence on the day-to-day running of the corporation. The management handles this. They should run the business that maximizes value to the owners or shareholders, while directors are responsible for monitoring the managers so that they do their job well.

7. The board of directors should be independent from the management and accountable to the shareholders. Effective monitoring requires an arm's length relationship with the management. Reliable financial reporting and auditing are important for investors to make informed investment decisions and regulators to act quickly once weaknesses are detected. Good corporate practices are, therefore, necessary to protect the interest of shareholders, including minority shareholders, from corporate insiders abusing their position at the expense of shareholders.

8. Accordingly, among the first steps to revive investor confidence and restore economic stability is reforming the structures of corporate governance. The urgency for reform is clear during the crisis. However, the real challenge is to keep the reform process going, even when the pressures of the crisis recede. Are we as keen to push ahead with new legislation on bankruptcies and adopt higher standards of corporate governance as our economies show signs of turning around? Or would the improved economic sentiments, in fact, cause governments to drag their feet on difficult decisions of corporate reform?

9. The East Asian countries have their own unique problems in corporate governance. But there are some common challenges that face the region as a whole that need to be addressed. They include:

• More efficient allocation of the reduced flows of investment;

• Establishing more stable corporate financing structures that are less prone to future external shocks;

• Re-capitalisation of viable companies and financial institutions;

• Regaining the confidence of international private investors and lenders;

• Deepening domestic equity markets; and

• Improving the management and risk assessment practices among financial and corporate institutions.

Governments must lead the process by implementing appropriate reform measures so that the legal and regulatory framework is consistent with accountable, transparent and equitable corporate governance. High on Asia's list of reform is establishing laws governing the design of contracts and bankruptcy procedures. The regulatory framework should be strengthened so that private sector operations can function more effectively and efficiently. Governments should legislate for higher standards of corporate accounting, auditing, and reporting standards. In addition, there should be measures to prevent the abusive insider behaviour and impose strict discipline with punitive measures without fear or favour in the case of violations and misconduct.

10. In Malaysia, we are taking steps to enhance transparency by improving disclosure by corporations as well as improving the ownership structures with potential abusive conduct by large shareholders at the expense of minority shareholders. Since enhanced standards of corporate governance can boost investor confidence, several measures have been taken, including amending several legislation and rules, to raise the standards of corporate governance in Malaysia.

• The Securities Commission and the Kuala Lumpur Stock Exchange (KLSE) have revised the 118 KLSE Listing Rules, which among others require a company to appoint an independent corporate advisor to advise minority shareholders on whether the transactions of the company are in the their best interest. The board of directors must collectively ensure that the transaction is in the best interest of the company.

• The Securities Industry Act 1983 was also amended to resolve weaknesses in insider trading rules.

• To increase transparency, the Securities Industry Central Depositories Act has been amended to prohibit persons from hiding behind their nominees by introducing the concept of an authorised nominees and prohibiting global accounts.

• The Securities Industry Act has also been amended to strengthen the ability of the regulators to take action against directors and anybody to whom the listing rules of the Exchange are directed at.

• A comprehensive corporate governance reform exercise was undertaken in Malaysia with the establishment of the Finance Committee on Corporate Governance to recommend the best practices on corporate governance to be adopted in the country. The recommendations of this committee are currently under consideration. We hope that, when adopted, the country would have among the best code of corporate governance around, supported by the appropriate reform of laws, regulations and rules.

11. The current problems in East Asia are linked to the activities of the private sector rather than the public sector. The rapid growth of the East Asian economies in the early 1990s was accompanied by rapid credit growth to the private sector and asset price inflation. The public sector has generally been prudent in fiscal matters. The larger role of the private sector came with the shift in thinking on public policy, that is, to keep the public sector trim and expand the role of the private sector. More reliance was placed on the private sector and market forces. The government have no business in business.

12. The last recession in the mid-1980s gave Malaysia the opportunity to adopt this approach in our development strategy. Besides the policies on liberalisation and trimming down the public sector, we adopted the Malaysia Incorporated concept and the privatisation programme. Under Malaysia Incorporated, the public and private sectors are regarded as partners in the growth of our national corporation, which is our country. Instead of acting in dichotomous terms, the public sector had to see itself differently. It should create the conducive environment for the private sector to do business and prosper, alongside providing core public goods, such as macroeconomic management, defence, and a legal and institutional system. Success in private business is good for the economy as well as the government coffers. The corporate taxes collected are given back to the people.

13. Malaysia had also pushed ahead with its privatisation programme. During the first half of the nineties, over 200 projects were privatised. To support the private sector in the privatisation effort, the government provided soft loans, tax incentives and other concessionary terms. These forms of support were given for privatised projects with a high social component, such as sewerage, roads and highways, power, and light rail, to ensure that these services were produced at affordable prices to the end-users after privatisation.

14. There were many benefits accrued from the privatisation programme. It had accelerated corporate and economic growth in the country, while saving the government RM73 billion in capital expenditure, since the start of the programme in 1983. The government had received RM14 billion in revenue from the sale of assets and equity as well as tax revenue that otherwise would not have been collected. Over 97,000 employees or 11.4 per cent of the total public sector workforce were transferred to the private sector. Privatisation had also contributed towards increased efficiency and productivity through improvements of service and management systems. One important role of privatisation in Malaysia was to enhance the participation of Bumiputera in the economy through equity ownership and employment, a key element in Malaysia's development policy.

15. Many of the privatised projects had resulted in high quality facilities that were enjoyed by Malaysians. Some of these facilities were completed in record time, well ahead of schedule. Taking the infrastructure projects as an example, the North-South Expressway was completed 15 months ahead of schedule. The same was true with the North-South Expressway Central Link and the Singapore Second Crossing, both of which were completed seven to nine months ahead of schedule. It is very difficult for government agencies to replicate such performance because they tend to be bogged down by bureaucracy and complex procedures.

16. It cannot be denied that the privatized entities are among the corporations badly affected by the Asian crisis. These corporations were doing very well before the crisis. Now, they are caught in a drastic change in the region-wide economic circumstances, of which they have no control. Saddled with problems, these corporations are taken to task and roundly criticized. There is a prevailing view among the economic pundits that these entities should be allowed to fail because of their debt exposure, and corporate blood should be spilled on the streets before the economy can recover.

17. There is no doubt that businesses that are badly managed should be allowed to fail. However, there may be some grounds for government assistance for troubled industries and companies that fall under the criteria of national and strategic interests. This is also the practice in Western countries. The collapse of these industries and companies would break up the productive capacity and the investments in manpower and facilities that had been built up so painstakingly over the years. Because of their size and importance in the economy, the failure of these industries and companies would have far-reaching economic and social implications. Their problems would then fall back on the banks, which would then need capital support from the government. Meanwhile, confidence in the financial system would suffer as a result of the fallout. Assisting the company directly removes uncertainty and saves time.

18. However, in seeking for a solution, the government is now taking a tougher stance to ensure that a well-considered market approach is adopted. There should be no "bailing out" of these corporations using public funds, while private investors and lenders must take their appropriate "hair-cuts". The decision of the Malaysian government not to issue government guarantees for Renong and the Central Bank's takeover of MBf Finance illustrate this stance.

19. What are some lessons learnt from our privatisation programme? The privatisation in Malaysia is a success. Overall, Malaysia has been very successful in using privatisation to channel private sector funds to develop key infrastructure projects. Despite their privatised status, the government cannot absolve itself from these projects because of its responsibilities, such as loan guarantees. The government would have to manage these contingent liabilities.

20. The major challenge of formulating sound marcoeconomic policies has always been to balance costs against benefits. If an economy is left purely to private interests, this may lead to over-adjustments detrimental to economic development in the long run.

21. The Government has to provide essential services and facilities for a growing economy, as well ensure a sound banking and financial system and an environment of price and asset market stability. Furthermore, the government should continue to promote healthy competition among privatised entities to promote efficiency. It should also ensure that the privatised utilities adopt appropriate pricing so that these projects are viable to the providers, but not too high as to be burdensome to the public. Striking the right balance is not the easiest thing in practice.

22. In an environment of increasing privatisation, the government's role has shifted from being a provider of these services to those of a regulator. Among its major responsibilities are monitoring, negotiating fees, and enforcing standards so that public interests are protected. In the field of education where there is increasing role of the private sector, the government should be involved in quality control through licensing, accreditation procedures and the monitoring of private institutions.

23. Although the standard of efficiency has generally been higher with corporatisation and privatisation, this need not be true in every case. Sometimes, it is best to keep the service under the public sector if the quality of service actually deteriorates after privatisation. The government has to be vigilant at all times. When a service has been privatised, the government has to ensure that the increase in quality and productivity is higher than the rise in the cost of providing it.

24. Sometimes, Malaysia had been said to be a country in a hurry. Well, it is easy to say that if you come from a developed country which had the benefit of time to get to its current status. However, if one is a developing country, then it is like going up a slippery slope: if it's not moving up, it's on its way down. Malaysia is no longer in the comfortable niche of being a low-cost labour intensive producer and is now facing intense competition from emerging countries. It has an expanding educated labour force that can no longer fit into traditional subsistence activities. The privatisation of infrastructure in Malaysia is, to quickly build up its productive base so that it can move up the technology scale and compete in a global market.

25. I would say that people tend to be over-exuberant when the going is good and over-pessimistic when the reverse happens. Market expectations typically overshoot in both directions. However, we should not despair. There is an old saying: "Even the bad times must end." But I must hasten to add, even the good times must end as well. We must be prepared for both outcomes. The current crisis has given East Asia the opportunity to undertake extensive reform of its corporate and financial sectors. With the currency depreciation, the region has become more competitive and should enter the next century with renewed vigor.

Thursday, 4 March 1999

The speech was sourced from the National Economic Action Council.

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