Corporate Governance, Leadership and Human Resource - Malaysian Perspective

“Good corporate governance could only happen if the laws were implemented without fear or favour. This matters because corporate governance thrives in an environment in which the rules are clear and robust, and the regulators are firm and consistent” – Tun Musa Hitam, 

Recently, the Security Commission launched the new Code of Corporate Governance (CCG), aimed at strengthening the corporate culture through best practices. I was indeed excited to read, “A healthy corporate culture anchored on accountability and transparency is key in delivering long-term business and economic success. This responsibility rests with the board,” 

Finally, I saw hope in addressing the ubiquitous management conundrum, and management Achilles “culture eats strategy”. Unfortunately, my hopes faded away because the highlight of significant changes were more confined to Board room level, i.e 2 tier voting system in electing directors, disclosure of remuneration and composition of audit committee and achieving 30% women representation.

A key feature of the new code is the introduction of the Comprehend, Apply and Report (CARE) approach, and the shift from “comply or explain” to “apply or explain an alternative”. According to SC chairman Tan Sri Ranjit Singh, the new CCG has 36 practices to support three principles namely:

1.   Board leadership and effectiveness; 

2.   Effective audit, risk management and internal controls; and 

3.   Corporate reporting and relationship with stakeholders.

I am not going to discuss the merits of the new CG code. Read to evaluate, what significant value do the changes bring to the executive table and operational side of the business. sc.com.my/wp. My catch and interest is, how does this alter and impact the entire framework of HRM - role, structure, system, function, competence, performance in elevating it from the current lip service rhetoric of being the most important "asset". 

When it comes to corporate behavior, talk is always cheap. Change a few words here and there, is like bottling old wines. Having comprehensive and detailed regulatory rules is one thing but walking the talk is another. By that I meant following the proactive value based path of COMMITMENT, not the reactive fear based path of COMPLIANCE. But, realistically, I don't mind starting with compliance!

If we want to talk of responsibility, then we can’t run away from talking of accountabilities. One can delegate responsibilities but can’t do the same with accountabilities. Do we agree on that?. Given that fundamental principle or premise, how can a bunch of Directors who meet in a meeting room once a month to listen to the CEO could be held “accountable” over business performance?. As "Directors", wouldn’t that encompass “directing” responsibilities over strategic execution and operational outcomes?. How can they possibly ensure accountability if they are not cognizant of what goes on behind the scenes at the operational shop floor. This is what Tom Peters refers to as BFO - Blinding Flashes of the Obvious. The CEO and CFO can present all the rosy financial data results as much and as best the Board would like to hear, but how do they verify the accuracy of reporting?. Just think of the MAS story. If true accountability was exercised would the Board have allowed the shareholders to suffer this long?. 

The Malaysian CG chapter can be traced to the late 90s, following the great Asian economic crisis and collapse of the financial markets. Paul Krugman (1998) in “What Happened to Asia” and Corsetti et al (1998) in “What Caused the Asian Currency and Financial Crisis”, argued that crisis was due to structural weaknesses in the domestic financial institutions supported by unsound macroeconomic policy and moral hazard. Malaysia needed to re-look and revamp at how the financial, banking, property, public and private sectors conducted it’s operations and business. Measures had to be taken to improve the aspects of fairness, transparency, accountability and responsibility in running the organizations. In march 2000, a committee made up of representatives from Finance, Bank Negara, and Security commission developed the Malaysian Code on CG to provide the principles and best practices for the implementation, covering four areas including: board of directors, director’s remuneration, shareholders and accountability and audit. In typical style, Malaysia opted for a hybrid model, an approach based on adoption and application of “flexibility and common sense” in accordance with the varying circumstances of individual companies.

Now, this is where the lofty ideals depart from the reality. Using weasel words and thinking it will convert into seamless execution. As we know, flexibility can be a double edged weapon, ready to be exploited for wrongful purpose. And, as we all know nowadays, common sense is a very scarce intellectual commodity. So, how do we draw the line between what counts and does not, in CG application and enforcement. Does flexibility mean selective listening and discretionary compliance to mandatory regulations?. 

Although we allude money was the driving factor for it’s birth, we can’t deny the BFO - to eliminate the risk of moral hazard (bluntly put, catch and rid of unscrupulous and immoral leaders). Because of exclusive focus and emphasis at the top (boardroom level), it seems like the GG is all about economic health, financial stability, investor protectionism or banking efficiency. Perhaps, it’s time for regulators to dismount from their high horses and looked at where the real game changing elements for CG rests – CEO and Management. We need a clear framework that transcends the Boards’ responsibility for executive management performance at strategic and operational levels. If they did, then every functional manager will have access to strategic clarity and business plans. They can then dovetail the operational objectives and perform to achieve the company goals. HR function is no different in this boat.

What is Corporate Governance?. A definition by the Finance Committee on Corporate Governance in Malaysia in the Report on Corporate Governance (2002) states: “Corporate governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long term shareholder value, whilst taking account the interests of other stakeholders”. It means, CG should have a radar vision, not a tunnel view. It should zoom across a wider scope of stakeholders, that includes employees, vendors, public, government and other inhabitants of the eco-system. You can't talk of CG in HR without aligning it at the corporate/business unit level.

CG must reflect a holistic concept and designed system must balance between achieving short term goals and sustaining long term needs of stakeholders. In spirit, it is a multi-dimensional philosophy founded on a set of values and beliefs converted into guidelines and practices on how a company should function, operate and conduct it’s business, be it for profit or otherwise. It provides a framework of opportunity for companies to become professionally, ethically and socially responsible in creating a win-win situation for all stakeholders. Hence, it transcends the agenda of merely serving investors/shareholders. It must include all stakeholders in the value chain. And, critically fundamental to CG success is the process (culture) of how people conduct their day to day business affairs in accordance to stated values and standards such as fairness, transparency, equity, integrity, trust and accountability. The board has the duty for making sure that the top managers are behaving in a way that will provide the optimal value for shareholders (Coles et. al, 2001). But, how can “actively dis-engaged” Board of Directors be on the know-how what's really causing poor performance or why employees are disengaged?. Do they have access to this information?. Are they even bothered to know?.

This “remote management by meeting” is realistically and practically ineffective. Relying on external financial auditors to expose toxic or counter productive dysfunctional behavior isn't going to happen. Look at the scope of HR audit I had once experienced.

As a HR practitioner, I had never come across any board member inquiring into HR or people performance. Aside from monthly meetings, they read company prepared quarterly reports and sign off, declaring having discharged their accountability. The mockery is, there are instruments of caveat called "oversights" that protect the board from any likely charges of negligence. This is how boards escaped at Enron, Worldcom, Satyam, BMF, Perwaja, Newscorp, etc. Did you know that 45% Boards in Asia have never had an external review, according to research conducted by Harvey Nash in association with London Business School’s (LBS) Leadership Institute. http://www.hrinasia.com/hr-news/45-boards-in-asia-have-never-had-an-external-review-survey-finds/

What has all this got to do with human resources?. Many HR practitioners, including those in PLCs, will acknowledge that they still function under the “hire and fire” modus operandi. HR are often ridiculed and disappointed with rhetoric, “people are the company’s most important asset”. Little, if at all, lies in evidence to substantiate HR’s legitimacy and effective representation as a strategic business partner. In worst cases, HR is treated like corporate misfit, marginalized and ridiculed as not being a strategic contributor to the business. I looked at CG in providing a platform for HR function to champion the true calling as a certified professional body of work that is indispensable to the company’s long term survival and sustainability. No, I am not talking of sending HR to carry certified qualifications, though it helps. I am talking of invoking CG scope of accountability in making HRM a strategic success factor and measure it’s role contribution to business. If wisdom serves us well, HR is too critical a function to serve as back-end administrator. HR is pivotal to corporate success and has to be at the forefront of human endeavor, be it in business, government or nation building.

According to a paper titled Corporate Governance in Malaysia, “CG, at its core, is about the interaction of human beings - the relationships in a boardroom, or the ability of a non-executive to stand up to a dominant chief executive. Thus, making corporate governance disclosure mandatory may hamper the spirit or the very objective of the code whereby companies disclose not with the aim to strengthen corporate governance principles but more as a compliance effort”. It's an interesting view and statement by the authors, one of whom happens to be the CEO of Malaysian Institute of CG, the non-profit agency mandated to raise the awareness and practice of good corporate governance in Malaysia. Ironically, it seem to impress that CG is a concept that is confined only to the Boardroom domain?. In recent years there has been much debate and criticism on the performance role of the Board in monitoring and regulating CG. This is more glaring in PLCs with specific emphasis on the role of Chairman and Independent Non-Executive directors. According to Hofstede’s findings, Malaysian culture is more “family” styled with strong “power distance and weak uncertainty avoidance”. This explains why there is much apathy and skepticism on effective presence of CG. Further, the rules in the code of CG are only recommendations, favoring the best-practice and/or principle-based approaches compared to rule-based approaches such the US Sarbanes Oxley Act. And, adopting a “flexible” hybrid model raises the controversial debate, “should corporate governance disclosure be made mandatory or voluntary?”.

In the 2005 movie Thank You For Smoking, the lead character Billy Naylor, a lobbyist for the tobacco industry, memorably states, “My job requires a certain moral flexibility.” And indeed that is the image we often hold of corporate lobbyists – individuals who will set aside their personal moral compass for the purpose of corporate and personal gain. Seriously speaking, “is corporate Malaysia ready for such empowered state of conscientiousness in living through the spirit and principles of CG.

Where does corporate Malaysia stand in terms of benchmark on CCG? According to a joint study conducted by investment bank CLSA and Asian Corporate Governance in 2003, Malaysia was ranked number one (9 out of 10) in terms of rules and regulation but only managed to obtain an average score of 5.5 out of 10 for overall corporate governance. It simply implies we are less than satisfactory when it comes to practice and compliance. Sadly, in recent times, we have witnessed an increasing trend of cases, among GLCs and PLCs, implicated for fraud, corruption, abuse and mismanagement. Meanwhile, the debate continues between the different schools of thought, should CG be principle based or rule based. Can we still trustingly depend on “self” regulated mechanism, as we begin to see the failure of the Board members, particularly Independent Directors, in discharging the fiduciary responsibilities in ensuring that a company is run in accordance to the stated goals, values strategy and laws. CG mechanisms are suppose to assure investors that they will receive adequate returns for their investments. How can the external investors expect financial returns when the internal investors compromise and short change the mechanism. 

So, why don’t the SC address the number one challenge and main accountability – formulation of strategic plans and effective execution. IMHO, this is the biggest setback and challenge faced by HRM. Without knowing the strategic direction of the business, how can HR develop it’s objectives and roadmap to support business goals. Without it, HR becomes mere functional administrator, taking care of daily operational fires. If you still can’t get what I am talking about, catch how-corporate-governance-impacts-human-resources. 

Final BFO - People are at the centre of business outcomes. People (leaders and employees) drive the financial outputs. Take care of the people and the money shall flow, either in (profits) or out (loss). Business leaders like Peters, Branson, Fernandez and Nayar comprehend the importance of people factor. Why can’t others make sense of the obvious. 

References:

1. Corporate Governance in Malaysia by Abdul Hadi bin Zulkafli, M.Fazilah bt. Abdul Samad, Md Ishak Ismail 

2. Malaysia, Capital Market Master Plan (2001): Securities Commission. 

3. Malaysia, Financial Sector Master Plan (2001): Bank Negara Malaysia. 
4. Coles, J.W., Mc Williams, V.B. and Sen, N. (2001) “An Examination Of The Relationship Of Governance Mechanisms To Performance”, Journal of Management, Volume 27, pp. 23-50.