Shareholders' Activism in Malaysia & USA more

Shareholders’ Activism in Malaysia and USA Jinea Akhtar ( 2008) University of Birmingham Abstract The report analyses the shareholders activism in a country where institutional investors dominate i.e. US and another country where institutional investors concedes i.e. Malaysia. The similarities between the countries are their ownership structure and substantial presence of institutional investors. However, the approach of handling investors between the countries is quiet different at the board room. The report ends up with some suggestions to both countries that would keep the investors base at a satisfactory level. Introduction The world is ablaze with the cries of corporate governance and perhaps the growing trend of corporate governance is heading into institutional investors market. The largest 300 institutional investors owned $120 trillion assets; US become the biggest contributor to the fund1. As the ownership structure of the companies across the world (developing nation and newly developed nation) is changing from individuals to corporations, the need for shareholders activism is vital to ensure accountability of investment. The engagement of shareholders in corporate governance is measured to what extent they get opportunity to hold dialogue with directors, how do they vote, and as Myners emphasizes how proactive investors are in making a focus list of underperforming firms2. The report critically analyzes the institutional shareholders activism in corporate governance USA where they are more influential and Malaysia where they are less influential. 1 2 Pension & Investment, 2008 Mallin, 2004 2 Engagement of Institutional Investors in Corporate Governance, USA Most of the traditional businesses of US are family-owned. As the businesses expanded companies opt for external funding and this has raised the country’s market for institutional investors and demand for better corporate governance. US total institutional investors owned 42.9%3 assets of the world. Such achievement has been possible due to the country’s historical structure of providing fair treatment to investors. Without having a definitive corporate governance code, the country is counted as a strong example of shareholders activism in board room. Institutional Investors Growth in USA In 1950, institutional investors accounted for only about 12% of all shares on New York Stock Exchange4. By 1992, institutions controlled an estimated 8.3 trillion dollars worth of corporate assets and accounted for more than 47% of all outstanding equities5. As in 2007, the aggregate ownership of institutional investors accounted for 76.4% of the 1000 largest US firms6. The leading institutional investors are pension funds, trustees, venture capital, insurance, mutual funds, and hedge funds. California Public Employee’s Retirement System (CalPERS) is the fourth biggest state back institutional investor that is highly concerned about the investment made by the institution. CalPERS actively works in the board of investee whether it is big or small, disclose voting results and processes, and report all the matter related to corporate 3 4 Pension & Investment, 2008 Taylor, 1990 5 Brancato, 1995 6 Pension & Investment, 2008 3 governance. This institution forms a focus list of underperforming firms and suggests ways of overcoming difficulties. Among the institutional investors, pension fund is strong and leading pension funds are government-owned. Review of Corporate Governance Code of USA In State, there is no well defined code of corporate governance (like for UK Combined Code) to be practiced by firms. However, there are many state and fiduciary guidelines which have become the fashion of companies to adopt in. It is common to find companies whether public or private do have different committees responsible for auditing, remunerating directors, nominating and appointing board of directors, and executing strategies for long term survivability of the business. Forming such committees does ensure compliance to standard corporate governance. However, too much flexibility is not always good and the result is what has happened to Enron and WorldCom. The experience of these giants companies created pressure for the whole Corporate America to provide assurance of neutral or no internal relation between external auditor and management. The mandatory compliance of SarbanesOxley (SOX) Act 2002 of listed companies in New York Stock Exchange (NYSE) is helping investors to pledge their investment as the act guided companies to become Good Corporation. The summaries of US Acts that reflect corporate governance are discussed below: Delaware Corporate Law: The law provides flexibility to board of directors to take decision for the betterment of the business which is usually what shareholders demand for. This company friendly approach is increased among the companies listed in New 4 York Stock Exchange. This law might work well for the individual state but it cannot work as a basis for the nation at large that is considered to be a melting pot of institutional investors. Besides, the bust occurred in late 1990s creates the question to what extent friendliness or flexibility are desirable to institutional investors? Employee Retirement Income Security Act: The act is established for trustees and managers of pension funds (both local and international investors) to ensure they vote for their shares. As the country has good amount of strong public pension funds and trustees who posses voting power too even they are minority for some cases, the act does not benefit remarkably in real. Institutional Investors Engagement Process in USA The country’s institutional investor’s engagement in corporate governance is primarily emphasized on voting of shareholders of investee company’s business operation. As annual general meeting (AGM) is the place to meet with shareholders to get their approval of newly made decisions, AGM agendas are sent 28days before AGM and the deadline of submitting the vote is on the AGM. However, proxy voting has to be sent two weeks prior to AGM. Votes are received through telephone (functioning machine) and email. The average turnout of votes is 83% and the review of result is mandatory7. The committee meetings (when shareholders are nonexecutive director) and AGM hold dialogue between shareholders and directors. Shareholders are allowed to make a focus list of underperforming firms and guide action for further development. 7 Davis Global Advisors/NAPF Inquiry (1999) 5 Case Study 1: CalPERS focus listed Cheesecake Factory Incorporated CalPERS holds 0.04% share in Chesecake Factory listed in Russell 3000, an index (based in Tacoma) preferred by institutional investors in US. Being the family owned business the company holds 80% shares and dominates the board. CalPERS identified the cake manufacturer seriously underperformed compare to its peer and Russell 3000 index during last couple of years. Some of the issues addressed by CalPERS needed to alter are board accountability, concern over shareowners rights, and broad entrenchment concerned. However, as the company is undergoing financial difficulties, CalPERS recognized Chesecake does not disclose any Clawback Policy (a policy that states how incentive payment of executive directors will be balanced if company is in loss). [Detail Analysis posted on appendix] Case Study 2: Connecticut withdrawal from Walt Disney Like CalPERS, Connecticut is one of the leading institutional investors in US. This institution ensures its investee companies practice standard corporate governance and values all types of shareholders opinion. Walt Disney, one of the investee of Connecticut is listed to the institution’s focus list. During 2004, Connecticut withdrawal from Walt Disney as the company did not resolve the issue of separating CEO and chairman. Disney credited State Treasurer Nappier’s efforts as central to its decision. Years earlier, Disney agreed to separate audit and consulting services, which previously had been handled for Disney by the same accounting firm. Disney Chairman Michael Eisner reversed his previously stated position, and agreed. 6 Treasurer Nappier urged other companies to follow Disney’s lead, and more than a dozen prominent companies have done so8. Thus, shareholders activism in corporate governance of US is vigorous and mechanisms exercised to monitor investee companies are efficient to pledge the assets of the investors and adds more value to investors’ account. 8 Connecticut, 2005 7 Engagement of Institutional Investors in Corporate Governance Malaysia Inadequate practice of corporate governance sought to be the underlying reason of economic downturn in Asia during 1997. Malaysia, being listed to be one of the tiger economies during the period could not escape from financial crisis for its weak corporate governance structure. The country made significant improvements in adopting standard corporate governance principles by establishing High Level Finance Committee on corporate governance in 1998 who successfully developed the Malaysian Code of Corporate Governance. Bursa Malaysia (stock exchange based in Kuala Lumpur) in 2002 mandated the “comply or explain” mechanism for its listed companies to practice the Malaysian Code on Corporate Governance9. As the transition period of corporate governance continued World Bank procured the country assessment Report on the Observance of Standards and Codes (ROSC) of corporate governance in Malaysia in 2001. The updated version of the report in 2005 draws the conclusion with the challenge that the role of institutional investors and shareholders activism in the corporate governance framework needs to be strengthened in Malaysia. The report addressed as the country’s capital market is dominated by institutional investors; it has to focus on increasing such investors’ attention in corporate governance areas to uphold the growing trend of investment of institutions. The ignorance of minority shareholders interests before the formation of Minority Shareholder Watchdog Group (MSWG) institutional investors were willing to pay 22% premium for well-governed firms10. 9 10 Mallin, 2004 Wahab, et al., 2007 8 Institutional Investors Growth in Malaysia Malaysia is a multiracial and Islam-dominated nation where native Malays, known as Bumiputera (children of the land), account for 50.4%11 per cent of the population. During last century, the country successfully implemented poverty eradication program and achieved higher recognition in the early 1990s for economic development. Though the country’s main business structure is public limited company (Berhad), the ownership of majority of the companies is family-owned, mostly belongs to the group of Bumiputera, (the native Malays)12. The Malaysian economy is dominated by institutional investors comprises of government-linked corporation (GLCs), state-owned investment firm, pension fund and trustees owned by Bumiputera, venture capital firms, asset management firm, and growing percentage of foreign institutional investors. Malaysian institutional investors comprise of 13% of total market capitalization of Bursa Malaysia. The five largest public institutional investors, all members of MSWG, are two pension funds (the Employee Provident Fund (EPF) and Lembaga Tabung Angkatan Tangtera (LTAT)); an investment firm (Permodalan Nasional Berhad (PNB); a pilgrim fund (Lembaga Tabung Haji)); and an insurance company (National Social Security13 Organization of Malaysia). Collectively, their shareholdings represent about 70% of total shareholdings in firms listed on Bursa Malaysia’s Main Board.14. The Board and Investment Panel of Malaysia’s major institutional investors are appointed by and directly report to Ministry of Finance, with Bumiputeras typically holding the chair of the Board15. The public institutional investors suffer from the current government setting that drives 11 12 World Fact Book, 2008 Mallin, 2004 13 The 23rd largest pension fund of the world according to Watson Wyatt Worldwide 14 Wahab, et al., 2004 15 Asher, 2001 and Norhashim and Aziz, 2005 9 companies to meet the development goals of nation. Moreover, Khazanah Nasional, which is the largest governed-linked investment corporation (GLC) incorporated by Ministry of Finance Incorporated and the state prime minister of Malaysia is the chairman of the institution. Since 1980s, the government is using this institution as strategic vehicle to control investee companies by holding equity issues arising from the privatization of government enterprises and to support equity financing of growth sectors. The portfolio companies of Khazanah Nasional are growing businesses of Malaysia and as part of the fiduciary duty the investment institution employs its people as directors/members/chairman of nominating and strategic committee to actively monitor and control the businesses of investees. Alternatively, small and medium enterprises and majority of plc are ethnic ownership driven; management is at stake in the hands of family members who are CEOs and board members of their respected business. Such ownership mechanism created the problem of information asymmetry to minority (yet long-term) shareholders which were a noticeable issue in the Green Book prepared by Ministry of Finance, Malaysia. As there are narrow opportunities of investment, the public institutional investors cannot discontinue their investment. Later, the incorporation of Minority Shareholder Watchdog Group16 in 2000 as a government institution to ensure better treatment of minority interests is considered to be a way to offset the problems discussed above. 16 Minority Shareholder Watchdog Group, Malaysia 10 Review of Corporate Governance Code of Malaysia Bursa Malaysia is the regulator of corporate governance in Malaysia. It ensures all the companies listed into its index must comply or explain the Malaysian Code of Corporate Governance (or ‘the code’). The developed code follows the principles of UK Combined Code. Some of the important aspects that impinged institutional investors are as follows: • Directors: There should be one-third independent directors in board who would neutrally monitor and take action if required for the long term success of the company and increase shareholders wealth. Instead of person duality the focus on CEO and chairman separation is based on the duties and responsibilities of each position. The observation of some of the listed companies in this regard showed there is a tendency of firms to appoint independent directors from their own ethnic group, for example Chinese owners appoint Chinese IDs. Thus to what extent external institutional investors benefited from the decision of independent directors is in question! • Director’s Remuneration: According to the code, there should be a remuneration committee who would decide payment of directors and the company has to disclose the expense of remuneration in the annual report. However, the code does not explain on which attributes directors will be appointed and paid as well as how the competency of the directors will be evaluated? Director training is an integral part of good governance in Malaysia as defined in the code. 11 • Accountability and Audit: Being a family dominated nation, Malaysian companies are found to be quiet transparent in auditing. As the code guides, companies do appoint external auditor and do regular inter auditing. • Shareholders: The code emphasizes that there should be a construct communication system in between shareholders and directors to convey the dialogue of both parties. Annual General Meeting pointed to be the event of holding such dialogue. As discussed earlier, Malaysian business ownership consists of many corporations and the propensity of family supremacy still avoid active participation of such investors. Shareholders votes are not cast on major business or company related issues. The company mutually decides all decisions with its independent and non-independent directors (appointed by the internal management and existing board members). Moreover, the treatment towards minority shareholders is still behind the curtain17. Case Study 1: British American Tobacco Berhad (A multinational organization) The company’s majority (50%) shares belong to the firm itself. Besides, Amanah Raya Nominees and Employees Provident Fund hold 8.46% and 4% shares respectively. The company’s board of directors consists of seven members (three independent and four non-independent directors). The company defined that it communicates with its managing and finance director as part of shareholders communication! No reporting was made in the annual report regarding the fact that the company delivers meeting agendas to its shareholders prior to meeting. Likewise, no information was found how shareholders votes are exercised and there was no illustration of voting outcomes in the annual report or any other documents. The 17 Mallin, 2004 and author’s review of various companies annual report 12 above mentioned institutional investors do not participate in any areas of corporate governance even though they are the majority external investors in the company!18 Case Study 2: Asas Dunia Berhad (Local family-owned real estate company) Asas Dunia was formed in 1982 by the non-Malays (Chinese). The company’s top thirty equity holders consist of banks, financial institutions, and pension fund holders. The leading Malaysian pension funds such as Employees Provident Fund and Lembaga Tabung Haji occupy 3.57% and 0.47% shares and thus can be categorized minority shareholders of the company. The company’s majority shares belong to another subsidiary named Tony Chan Holdings Sendirian Berhad i.e. in the hand of family members. While reviewing their annual report no such information regarding distribution of annual general meeting agenda, voting policies, voting result declaration could be found. Institutional investors do not hold any position in the company and thus their role as monitoring investee is absent. Though the company said it holds dialogue with shareholders throughout the year, it was not specified how many times they sat. Moreover, the information of how regularly the different committees hold meetings was absent19. Case Study 3: Malaysian Airlines (Different Picture!) The airline’s majority (52%) shares owned by Penebbangan Malaysia, which is a wholly owned subsidiary incorporated by Ministry of Finance in 2002. Khazanah Nasional accounts for 14.33% shares and being a state back institution leads the 18 19 British American Tobacco Berhad Annual Report 2007 Asas Dunia Berhad Annual Report 2007 13 management decision-making system. It has been stated in the annual report all the directors of the company have to receive a training delivered by Khazanah. The institution also actively works on each of the committee other than audit to ensure all sorts of decisions are made for company’s growth and add value to shareholders’ wealth. During 2005 the airline faced an undesirable loss of RM1.26 billion (GBP 192,249,744). Khazanah’s intervention into all areas especially in strategic management help to overcome the losses and the company made history in 2007 with a profit figure of RM851 million (GBP 159,458,608)20. Figure 1 demonstrates the rise of investment exits made by Employees Provident Fund (fund of private employees) during the last three years. Being the most successful public institutional investors and the biggest minority shareholder, EPF often received subjugation from the investee firms by not getting a role in the board which fostered the institution to be listed in MNWG. Figure 1: Employees Provident Fund’s withdrawals of investment21 Rm. In m 20 21 Malaysian Airlines Berhad Annual Report 2007 Employee Provident Fund, 2008 14 Though the firm did not express the reasons of their increasing withdrawal figures any assumption would come to the conclusion that proper governance is absent in exit firms. For example, if we consider the withdrawals were made due to underperformance of the firms then the question arise why did they underperformed given EPF mainly invests in listed plc who are supposed to maintain corporate governance principles? Alternatively, if those firms are governed by family members or Khazanah who claim they make decisions for the long term prospect of the company and shareholders benefit, how come shareholders withdraw from businesses this way? The institutional institutors do not make focus list of underperforming firms as the code as the country’s current setting of practicing such mechanism is unsupportive. Moreover, institutional investors do not disclose how they exercise their voting power on invetees. 15 Conclusion A nation cannot expect investment in its capital market without ensuring equal treatment of all types of investors. In addition, the benefits of good corporate governance can only be drawn if the all the codes effectively practiced. Both USA and Malaysian established businesses are family owned and currently both companies are heading into the elimination of the role duality of CEO and chairman. This has particularly created agency problems for both the countries. Moreover, institutional investors are major driver of the countries economy. Among the Asian countries, Malaysia made remarkable progress in implementation of good corporate governance. However, the country’s economic structure is now compared with developed nations and thus investors both foreign and local demand for more fair practice of corporate governance that would provide the opportunity to take part on management system of investee companies. It is time for Malaysia to engage institutional investors in corporate governance area so that firms can be better managed and held accountable in conducting its business activities, which would uplift more local and foreign investors into the nation. Similarly for US, to uphold the current account of institutional investors and future growth of this market more active institutions like CalPERS is required. To avoid any misfortune in economy in future, the country can develop definitive code particular to institutional investors segment. 16 References and Bibliography Anon, 2008. Malaysian Code on Corporate Governance (Revised 2007) s.l. s.n. [Online] Available at: http://www.sc.com.my/eng/html/cg/cg2007.pdf [Accessed 10 November 2008]. Asas Dunia Berhad, 2008 Corporate (Updated 30 May 2008) Available at: http://www.asasdunia.com.my/AsasDunia%20AR2006%20.pdf [Accessed November 2008]. 11 Aser, M. G., 2001, Pension reform, capital markets, and corporate governance in Malaysia, Journal of Financial Reform and Compliance 9, 30-37 Brancato, C. 1993. The Brancato report on institutional investors. Riverside Economic Research Burr, B.B., 2008. Institutional investors increase ownership of U.S. companies to alltime high, Pension & Investment [Online] (Updated 05 Sep 2008) Available at: http://www.pionline.com/apps/pbcs.dll/article? AID=/20080905/REG/809049969/1030 [Accessed 13 November 2008]. CalPers, 2008. Corporate Governance Focus List [Online] (Updated 26 Mar 2008) Available at: http://www.calpers.ca.gov/eip-docs/about/press/news/invest-corp/cakefactsheet.pdf [Accessed 29 November 2008]. CalPers, 2008. Corporate Governance Focus List [Online] (Updated 26 Mar 2008) Available at: http://www.calpers.ca.gov/eip-docs/about/press/news/invest-corp/hrhfactsheet.pdf [Accessed 29 November 2008]. CalPers, 2008. Facts at a glance: corporate governance [Online] (Updated 26 Mar 2008) Available at: http://www.calpers.ca.gov/eip-docs/about/facts/corpgov.pdf [Accessed 27 November 2008]. Carter, D., 2008. World's largest pension funds: Global assets boom, Pension & Investment [Online] (Updated 01 Sep 2008) Available at: http://www.pionline.com/apps/pbcs.dll/article? AID=/20080901/PRINTSUB/309019996/-1/WWTOPFUNDS [Accessed 13 November 2008]. Central Intelligence Agency, 2008 World Fact Book [Online] (Updated 04 Dec 2008) Available at: https://www.cia.gov/library/publications/the-worldfactbook/geos/my.html [Accessed 05 December 2008]. Employees Provident Fund, 2008 Financial Statistics (Updated 30 Sep 2008) Available at: http://www.kwsp.gov.my/index.php? ch=p2reports&pg=en_p2reports_statistic&ac=1007&tpt=32enenenenbmeneenenen [Accessed 18 November 2008]. Employees Provident Fund, 2008 Financial Statistics (Updated 30 May 2008) 17 Available at: http://www.kwsp.gov.my/index.php? ch=p2reports&pg=en_p2reports_annual [Accessed 18 November 2008]. Khazanah, 2008. Portfolio Companies [Online] (Updated 31 Oct 2008) Available at: http://www.khazanah.com.my/portfolio.htm [Accessed 11 November 2008]. Liew, P. K., 2007. Corporate Governance Reforms in Malaysia: the key leading players’ perspectives [Online] Oxford: Blackwell Publishing Available at: http://web.ebscohost.com/ehost/pdf?vid=8&hid=117&sid=5bd71bd8-f2c2-439dbb03-77f37b4c3a79%40sessionmgr104 [Accessed 11 November 2008]. Malaysia Airlines, 2008. Shareholdings. [Online] (Updated 30 Jun 2008) Available at: http://www.malaysiaairlines.com/th/en/corp/corp/relations/info/shareholdings/shareho ldings.aspx [Accessed 10 November 2008]. Malaysia Airlines, 2008. Investors Relation, Annual Report. [Online] (Updated 30 Jun 2008) Available at: http://malaysiaairlines.listedcompany.com/misc/AR2007.pdf [Accessed 10 November 2008]. Mallin, C. A., 2004. Corporate Governance. Oxford, Oxford University Press Minority Shareholder Watchdog Group, 2000 About us [Online] Available at: http://www.mswg.org.my/history.html [Accessed 05 November 2008]. Norhashim, M. and Aziz, K. A., 2005. Smart partnership or cronyism? A Malysian Perspective, The Institutional Journal of Sociology and Social Policy, 258, 31-48. Office of State Treasurer Denise L. Nappier, 2008 Corporate Governance Overview [Online] Available at: http://www.state.ct.us/ott/corpgovoverview.htm [Accessed 10 November 2008]. Pension & Investment, 2008. The big players [Online] (Updated 01 Sep 2008) Available at: http://www.pionline.com/apps/pbcs.dll/article? AID=/20080901/CHART/23723099/-1/WWTOPFUNDS [Accessed 13 November 2008]. Pension & Investment, 2008. P&I/Watson Wyatt World 300: The largest pension funds [Online] (Updated 01 Sep 2008) Available at: http://www.pionline.com/apps/pbcs.dll/article?AID=/20080901/CHART2/23723097/1/WWTOPFUNDS [Accessed 13 November 2008]. Suto, M., 2003. Capital Structure and Investment Behaviour of Malaysian Firms in the 1990s: a study of corporate governance before the crisis [Online] Oxford: Blackwell Publishing Available at: http://web.ebscohost.com/ehost/pdf?vid=4&hid=113&sid=a66489c2-e3da-4ece-99a0c08d886d31b2%40sessionmgr102 [Accessed 11 November 2008]. 18 Tam, O. T., and Tan, M. G., 2007. Ownership, Governance and Firm Performance in Malaysia [Online] Oxford: Blackwell Publishing Available at: http://web.ebscohost.com/ehost/pdf?vid=4&hid=107&sid=5bd71bd8-f2c2-439dbb03-77f37b4c3a79%40sessionmgr104 [Accessed 11 November 2008]. Taylor, W., 1990. Can big owners make a big difference, Harvard Business Review, September-October, pp. 70-82 TMI, 2008. Investors Relations. [Online] (Updated 17 Apr 2008) Available at: http://tmi.listedcompany.com/misc/AR2007.pdf [Accessed 10 November 2008]. Wahab, E. A. A., How, C. Y. J., and Verhoeven, P., 2007. The Impact of Malaysian Code on Corporate Governance: Compliance, Institutional Investors, and Stock Performance Social Science Research Network Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1058421 [Accessed 11 November 2008]. World Bank, 2005. Reports on the Observance of Standards & Code: Malaysia Available at: http://www.worldbank.org/ifa/rosc_cg_malaysia.pdf [Accessed 01 November 2008]. Yong, K. O., and Guan, C. K., 2000. Corporate Governance Codes: a comparison between Malaysia and the UK [Online] Oxford: Blackwell Publishing Available at: http://web.ebscohost.com/ehost/pdf?vid=9&hid=117&sid=5bd71bd8-f2c2-439dbb03-77f37b4c3a79%40sessionmgr104 [Accessed 11 November 2008]. Zulkafli, A. H. B., Samad, M. F. A., and Ismail, M. D., (2002). Corporate Governance in Malaysia [Online] Available at: http://www.micg.net/research/CORPORATE%20GOVERNANCE%20IN %20MALAYSIA%20-%20MICG.pdf [Accessed 11 November 2008]. 19