CHAPTER 7

Good Governance

Learning Objectives:
At the end of this chapter, students should be able
to understand and discover:

1. Concept of good governance

2. Pillars of good governance
3. Public and private governance issues in
Malaysia
4. Importance of good governance
5. Challenges to good governance

1. CONCEPT OF GOOD GOVERNANCE

*Governance:
The process of decision-making and the process by which decisions are
implemented (or not implemented). Governance can be used in several
contexts such as corporate governance, international governance,
national governance and local governance
An analysis of governance focuses on the formal and informal actors
involved in decision-making and implementing the decisions made and
the formal and informal structures that have been set in place to arrive
at and implement the decision.

Government is one of the actors in governance. Other

actors involved in governance vary depending on the

level of government that is under discussion.
In rural areas, for example, other actors may include
influential land lords, associations of peasant farmers,
cooperatives, NGOs, research institutes, religious
leaders, finance institutions political parties, the military
etc. The situation in urban areas is much more complex.
At the national level, in addition to the above actors,
media, lobbyists, international donors, multi-national
corporations, etc. may play a role in decision-making or
in influencing the decision-making process.
* Retrieved November 10 2013 from
http://www.unescap.org/pdd/prs/ProjectActivities/Ongoing/gg/governance.asp

2. Pillars of good governance

8 major characteristics of good governance
(Retrieved November 10 2013 from http://www.unescap.org/pdd/prs/ProjectActivities/Ongoing/gg/governance.asp)

CORPORATE GOVERNANCE
DEFINITION
CG is part of the governments business (affairs) and
partially liable to governments regulations. By
regulation, it is meant that CG should have a proper
system in compliance with applicable laws regulations /
rules and directives.
A good example is the CGs responsibility in handling
publics money when accepting Governments business.
Publics money should be managed properly based on
ethical grounds comprising accountability, fairness,
responsibility and transparency - Nadrawina Isnin
(2005)

Implications

i)
ii)

Has wider implication and is critical to economic

and social well-being.
Providing incentives and performance
measures to achieve business success
Providing accountability and transparency to
ensure the equitable distribution of the resulting
wealth

Governance vs. Management

Governance

Management

It

concerns with the intrinsic

nature, purpose, integrity, and
identity of the institution with
primary focus on the entitys
relevance, continuity aspects.

Is

a hands-on activity.
It is a conducting or supervising
action with judicious use of means
to accomplish certain ends
Focuses primarily on specific goal
attainment in prescribed
organization

CORPORATE GOVERNANCE

CORPORATE MANAGEMENT

External focus

Internal focus

Open system

Closed system

Strategy oriented

Task oriented

WHERE COMPANY IS GOING

GETTING THE COMPANY THERE

Process, structures, relationships BOD

oversee what its executives do

What the executives do to define and

achieve the objectives of the company

Job of BOD

Job of executives

08/12/16

azlyn/2009

CORE COMPONENTS OF CG
1. Fairness protection of shareholder rights (i.e. rights of
minority and foreign shareholders). Rights can
be strengthened by ensuring the enforceability of
contracts made by the providers of capital

CORE COMPONENTS OF CG
2. Transparency
by the timely disclosure of adequate, clear
and comparable information concerning
corporate performance, governance and
ownership

3. Accountability
by clarifying governance roles and
responsibilities and by means of voluntary
efforts to ensure the meeting of managerial
and shareholder interests as monitored by
the board of directors
4. Responsibility
by ensuring corporate compliance with
other laws and regulations reflecting the
existing societys values

3 Broad Approaches
A Prescriptive
Approach

A Non-Prescriptive
Approach

The Hybrid
Approach

standard of
corporate Governance
is set by specifying
desirable practices
coupled with the
requirement to disclose
compliance with them.

approach that simply

requires CG practices
in a company to be
disclosed without
specifying any standard

Combination of the
first two

Standard best practice

benchmark for all
listed companies
azlyn/2009

Each companys CG need

may be different and
directors of companies
should apply their minds
to address these needs

Need for the

prescribing particular
principles & structure
and should then apply
these flexibly
Broad principles and
apply these flexibility
with common sense to the
varying circumstances of
08/12/16
individual companies

3. Public and private governance issues in Malaysia

Despite the fact that the general public seldom link the governance of the private

sector with the public sector, governance in both sectors has been moving closer
(Armstrong et al, 2008). As acknowledged by the Uhrig Review (Uhrig, 2003, p.
26):

There are benefits in looking to developments and lessons learnt in the private sector
when considering appropriate governance frameworks for the public sector. The
environment in which the private sector operates creates significant challenges
for companies. The consequences of failure and threat of takeover provide
incentives for the private sector to constantly strive to improve governance
practices. In dealing with the challenges of the market, the private sector has
gained considerable experience in applying the core elements of governance. The
experience of the private sector has provided the review with valuable insights
into the full spectrum of governance arrangements and the corresponding impact
on outcome
There is an opposing view (for example, Wettenhall, 2004) that suggests that
governance experience in the public sector is long standing and that many of the
criteria applied in the private sector are unsuitable for the public sector (Armstrong
et al, 2008)

Some differences in governance between the public and private sectors

(Armstrong et al, 2008)

 The similarities are: in the private sector, managers acting as the agents for

shareholders oversee the day-to-day management of the listed company.

In parallel, in the public sector, the officials of the public sector (the public
servants) acting as the agent of tax payers manage the public organisation
for the purpose of serving the best interest of the general public
In terms of managing the interests of various stakeholders, in the case of
the private sector, there is an increasing consensus among controllers of
publicly listed companies that the company should not only serve the best
interest of the shareholders, it should also consider the interest of other
stakeholders of the company such as the interest of employees, customers,
suppliers as well as the interest of the local community where the
corporation is operating.
In the case of the public sector, various levels of governments will have
different stakeholders but the ultimate aim is to serve the public interest
and provide services to the community on behalf of the government (Uhrig,
2003, p.30), and at the same time to provide adequate solutions when
market failure is likely to happen (Uhrig, 2003, p.32).

 Differences between the public sector and the private sector

governance are also obvious: they serves different interest groups

and the public sector is subject to much greater scrutiny.
(Armstrong et al, 2008)
The independence is a major difference. All public sector entities are
subject to Ministerial control and auditing by an Auditor-General;
they must meet performance targets and they are constrained by
political reality. (Armstrong et al, 2008)
In addition, usually the appointment and removal of chair and CEO
is at the discretion of the Minister.
Another related difference is that should an enterprise fail, it goes
out of business and the owners lose their investment. (Armstrong et
al, 2008)
Government enterprises are more likely to be rescued and losses
absorbed even if the enterprise is closed down (Armstrong et al,
2008)

Issues of ethics and governance in Malaysia

There is widespread view that the privatization
policy in Malaysia has favoured the vested interests
and many beneficiaries were chosen based on
political and personal connections and incurring
losses and liabilities on many occasions.
Audit reports reveal high incidence of failures on
part of the federal, state, and local governments to
comply with relevant rules and regulations, loss and
misuse of public funds, improper monitoring and
supervision.

 Privatization programmes and Government procurement in

Malaysia are conducted through non-transparent processes.

Only notifications of tenders are made public. There is also
avenue for negotiation.
A greater cause of concern is the fact that concessions
agreements are considered official secrets. Due to a nontransparent selection process, the concession agreements and
Government procurement lead to sub-optimal outcomes.
This has also led to allegations of corruption. The Public
Works Department is under siege for the multi-billion Ringgit
fiascos involving the MRR2, the Matrade Building and the
Navy Recruit Training Centre.

A recent issue of corporate governance is that of air cargo

firm Transmile that revealed net losses of RM126 million

for 2006 instead of a profit of RM156 million.
It also booked losses of RM370 million for 2005 instead
of a profit of RM86 million.
In May 2007, the firm announced it was unable to
finalise its 2006 financial accounts after its external
auditor Deloitte & Touche said it was dissatisfied with the
fairness and validity of some transactions.
Overstated revenues were among false financial
statements that the company had been filing.

It is very clear that at both Megan Media Holdings Bhd

and Transmile Group Bhd in Malaysia, there have been

serious transgressions with accounts being falsified and
profits overstated by hundreds of millions of Ringgit.
And there are perhaps another half a dozen companies at
least where similar things have happened and there is
serious doubt whether their accounting records can be
relied upon by investors to give the correct information.
The important factor is that when such corporate crimes
are committed, especially when it involves listed
companies, it is imperative to get the persons responsible
under the law, otherwise there is no disincentive to
corporate crime.

Every nation with no exception needs to establish a

government of integrity by restraining bureaucratic

corruption and to curb unethical bureaucratic
behaviour.
Malaysian economic and political landscape has too
many vested interests seeking involvement and
control.
For instance, the fallout of a deal between Jebel Ali
Free Zone (Dubai) and Port Klang Free Zone was
because of red tape, political meddling, inaccurate
minutes and attempted tax avoidance.

The situation is completed by the lack of enforcement

from every single government body, from the town

councils, to the ministries, to the law enforcement
agencies.
Examples include illegally clearing forests, forging
official documents, destroying public property, illegally
operating gaming machines, ignoring traffic regulations,
stealing metal installations, pirating CDs and software,
giving and taking bribes, misusing public office, illegally
occupying government land, under-declaring income,
dumping rubbish and toxic waste, poaching protected
animals, and etc.

 Another most recent notable case in Malaysia is that of an

assemblyman, Zakaria Mat Deros who was acquitted of charges.

The Companies Commission of Malaysia (CCM) withdrew all the
charges against Zakaria and six other directors of Titi Steel Sdn Bhd
and Harvest Court Industries Sdn Bhd in the Klang magistrates
court for, among others, not holdings AGMs, not submitting
financial statements and not submitting profit-and-loss accounts.
No reasons were given to the court but CCM officials and lawyers for
Zakaria had said the charges dropped after representations were
made to the CCM.
This can lead to the questions of reliability and fairness of the
governance
Beh, L. S (2007). The Politics of Administrative Reform: Malaysia and China in Perspective.

4. Importance of good governance

1. Promotes community confidence
People are more likely to have confidence in their
government if decisions are made in a transparent and
accountable way.
This helps people feel that government will act in the
communitys overall interest, regardless of differing
opinions.
It also encourages local governments to remember that
they are acting on behalf of their community and helps
them to understand the importance of having open and
ethical processes which adhere to the law and stand up to
scrutiny
Retrieved November 10, 2013 at http://www.goodgovernance.org.au/about-good-governance/why-is-goodgovernance-important/#sthash.BTy0DrTe.dpuf

2. Leads to better decisions

Decisions that are informed by good information and
data, by stakeholder views, and by open and honest
debate will generally reflect the broad interests of the
community.
Retrieved November 10, 2013 at http://www.goodgovernance.org.au/about-good-governance/why-is-goodgovernance-important/#sthash.BTy0DrTe.dpuf

3. Supports ethical decision making

Good governance creates an environment where
elected members and council officers ask themselves
what is the right thing to do? when making
decisions.
Retrieved November 10, 2013 at http://www.goodgovernance.org.au/about-good-governance/why-is-goodgovernance-important/#sthash.BTy0DrTe.dpuf

4. Leads to peoples participation in governments

decision making
The government has a responsibility to ensure that all
people, in particular the poor and needy, are able to
participate actively in the political process and setting
policy objectives.
Inclusiveness and equity encompass political processes
(inclusion in the process of decision-making on
development) and policy objectives (recognition of
contributions by the people to development and their
sharing in the benefits of development).
Retrieved November 10, 2013 from
http://www.unescap.org/pdd/publications/MDG-access2basic-service/MDG-access-to-basic-services.pdf

5. Challenges to Good Governance

(Retrieved November 9, 2013 from The Good Governance Challenge: Egypt, Lebanon, Morocco and Palestine by
Transparency International, 2010)

1. Entrenched/well established nature of

corruption
Especially in developing countries.
According to Transparency International, in their
research on Egypt, Morocco, Lebanon and Palestine,
the officials in these countries have poor
understanding on anti corruption concepts such as
integrity, transparency and accountability
Moreover, there are certain corrupt practices such as
nepotism that are deeply embedded in the social and
political culture of these countries

2. Lack of cooperation among the main actors

There is a need for greater cooperation among the
main governance stakeholders in order to strengthen
the national integrity system to facilitate good
governenace

3. Incomplete integrity system-absence of

strong public watchdog agencies
Good governance can be hampered by the absence of
an agency that overlooks at the countrys integrity
issues. However, where an agency do exist, it may
also obstruct good governance when they have
limited powers and resources to play an effective role
in combating corruption

4. Political interference in the work of public

and private watchdog agencies
Both public and private watchdogs are not always
free from political interference in their work, which
comes most often from the executive branch
The interference can sometimes influence the way
they operate, especially if it concerns with sensitive
issues

5. Implementation gap between legal reform

and institutional practice
There are many legislative anti corruption reforms
implemented which can be seen as evidence of
increased attention to the issue of fighting
corruption
However, a closer look reveals that many of these
legislative reforms lack of proven mechanisms to
ensure accountability and transparency

Malaysian Code on Corporate Governance

Developed by the Working Group on Best Practices in
CG (JPK1) and approved by the high level Finance
Committee on CG.

JPK1 chaired by the Chairman of the Federation of

Public Listed Companies

Members of JPK1 comprise a mix of private and

public sector participation, example of KL Stock
Exchange, The Malaysian Assoc. of the Inst. Of Chartered
Secretaries and Administrators, International Movement
for a Just World, Bar Council

Significance of a Code on Corporate Governance for

Malaysia
Aims set out principles and best practices on

structures and processes that companies may use in their

operations towards achieving the best possible governance
framework composition of the board, procedure for recruiting
new directors, remuneration of directors, the use of board
committees, their mandates and their activities

Allows for a more constructive and flexible response

to raise standards in corporate governance opposed to

more black and white response produce by regulation not
only comply statutory regulation but necessary for self-regulation
which is preferable and standard developed more enduring

Cont
Greater awareness on CG issues to lead good CG
Market oriented economies, companies less protected by

prescriptive legal rules and regulation thus, need for

companies to be more efficient and well-managed than
before to meet existing and anticipated world wide
competition thats why role of directors increases &
critical & importance hiring the right management,

compensating, monitoring, replacing & planning the succession of

senior management is crucial

Thus, role of the Code is to guide boards by clarifying their

responsibilities