Islamic Finance in Australia

The Australian Trade Minister, Simon Crean launched the 40 page report "Islamic Finance" today (2.75mb PDF). This aims to find a role for Australia in the fast growing Shariah-compliant financial services industry.

In 2008 I attended the Malaysian Corporate Governance Conference at the Securities Commission, Kuala Lumpur, the regulator for Islamic capital markets in Malaysia. The Australian government has a long way to go having produced just one report, with the Malaysian government producing a book store full of publications on Islamic capital markets and the free "Quarterly Bulletin of Malaysian Islamic Capital Market".

The Australian Trade Commission (Austrade) clearly have Malaysia in mind, with a photograph of the Petronas Towers featuring in their report.

As noted in the report (and as I noted at the conference in Malaysia), Islamic Banking has much in common with ethical investment by companies such as "Australian Ethical Investment". However, the report downplays the level of infrastructure and regulation which the Australian government would need to put in place to support Islamic finance.

Contents
Executive Summary 5
Global Development of Islamic Finance 7
What is Islamic finance? 7
Historical development 9
The global financial crisis and Islamic finance 9
Demand for Islamic Finance 11
Size of the market 11
Demand for Islamic finance 12
Factors driving future growth of Islamic finance 15
Supply of Islamic Finance 17
Type of Islamic financial institutions 17
Key countries for Islamic capital 17
International Self-Regulation 19
Islamic Financial Services Board (IFSB) 19
Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) 19
Challenges for Islamic Finance Providers 20
Opportunities in Australia 21
Specific opportunities in Australia 21
Wholesale banking and finance 21
Retail banking 27
Insurance 27
Education 28
Facilitating the growth of Islamic finance in Australia 29
Government policies 29
Appendix A: Explanation of key Islamic financial products and services 30
Appendix B: Description of the key countries involved in the Islamic banking and finance industry outside of the Middle East 34
...

Executive Summary

Global development of Islamic finance

Islamic finance is one of the fastest growing segments of the global financial services industry. Shariah-compliant financial assets have been growing at over 10 per cent per annum over the past 10 years.1 Measured by Shariah-compliant assets of financial institutions, the global Islamic finance industry is estimated at US$822 billion in 2009.2

Growth is being driven by the following factors:

• petrodollar liquidity: Foreign investment plays an important role for petrodollar investors, whose domestic economies and financial systems are too small to absorb all capital from oil export revenues. This presents significant opportunities for the Islamic banking and finance industry. Petrodollar liquidity is expected to remain high over the long term due to the finite supply of oil reserves;
• Muslim population: Relatively rapid Muslim population growth worldwide and rising living standards will see increased demand for Islamic finance;
• low penetration levels: In spite of growth in the Islamic banking and finance industry, there remains a lack of depth across asset classes and products, signifying untapped potential. There is considerable scope for further development of Islamic banking and finance in countries such as Indonesia, India and Pakistan, which have the largest Muslim populations in the world; and
• ethical character and financial stability of Islamic financial products: Islamic financial products have an ethical focus (notably excluding investment in alcohol and gambling) and a risk profile that will also appeal to a wider ethical investor pool.
  

Currently, the Middle East and South East Asia are the primary locations for Islamic capital. In particular, the United Arab Emirates, Bahrain and Malaysia are seen as the main centres of Islamic finance, with significant activity also taking place in the United Kingdom and more recently in Europe, Africa and Indonesia.3

The demand for Islamic finance has not been matched by supply despite the rapid growth in the sector in recent years. An increase in supply is necessary to meet current and expected demand.

Opportunities in Australia

Islamic finance has considerable potential to become an important element in Australia’s aspirations to be a global financial services centre in the region. It has the potential to facilitate further innovation and competition in the wholesale and retail banking sectors and to support the Australian Government’s commitment towards credit market diversification.

Australia’s growing trade linkages with Asia reflect the demand for Australian commodities from developing countries such as China and India. Of the top 10 trading partners, eight are in the Asia Pacific Region with China and Japan being the country’s top two-way trading partners.

Continued growth in major Asian economies will result in a need to develop resources-related services and infrastructure, which are ideal assets for some forms of Islamic financing, such as Sukuk, Mudaraba, Murabaha and Ijarah. Australia is well positioned to structure and offer such instruments as part of financing packages for resources-related development.

Australia’s Muslim population of 365,000 (1.7 per cent of the total population),4 exceeds the combined Muslim population of Hong Kong and Japan and is more than half of that of Singapore. Australia’s political stability and geographic position, especially its proximity to the large Muslim populations of the Asia Pacific where 62 per cent or 972.5 million of the world total Muslim population resides,5 present an important base to service this fast growing sector in the global financial services market.

Australia’s attractiveness as a financial centre is supported by a sizeable domestic economy and financial market. The nation has the fourth largest economy in the Asia Pacific (after Japan, China and India). Australia’s finance and insurance industries generate around 8.1 per cent or A$82 billion of real gross value added.6

Australia’s financial sector has remained strong, continuing to develop as a regional and global centre during the global economic downturn. In The Financial Development Report 2009, the World Economic Forum (WEF) ranked Australia the second among 55 of the world’s leading financial systems and capital markets. This is up from 11th place in 2008 and ahead of the US, Singapore and Hong Kong.

Australia’s deep and diverse financial markets have attracted global institutions and service providers to establish operations in Australia.

Access to the nation’s highly skilled and multilingual workforce, advanced business and information technology infrastructure, sound regulation regime and enviable lifestyle, have enabled investors to capture both domestic and regional opportunities in financial markets.

Australia is well placed to take advantage of the Islamic finance opportunity, with widely recognised strengths in retail and commercial banking and experience in infrastructure, property, resources and agricultural financing.

Specific opportunities for Australia include:

• attracting foreign full-fledged Islamic banks and conventional bank Islamic windows to establish operations in Australia;
• attracting investment in Australian assets and businesses from overseas Shariah investors and tapping into new funding sources through Sukuk and other securitised issues;
• Australian-based banks providing from Australia a range of Shariah-compliant investment and financing products and services to Islamic banks, corporations, institutions and high net worth individuals in the Asia Pacific and the Gulf regions;
• fund managers establishing Shariah-compliant funds for Asian and Gulf institutional and high net worth individual investors;
• local exchanges providing an Islamic listings platform for domestic and international issuers of Shariah-compliant instruments;
• provision by Australian-based financial institutions of Shariah-compliant/ethical financial services and products to Muslim and non-Muslim customers in Australia;
• Australian-headquartered banks and insurance companies exporting Islamic financial services through windows as they grow their operations into Asia; and
• Australian-based financial firms, professional services providers and educational institutions exporting their services into Asia and the Gulf.

Australian Federal and state governments recognise that growth of Islamic finance in Australia requires supportive government policies. It is important that there is:

• a level taxation, legal and regulatory playing field for Islamic and non-Islamic finance. Taxation must be responsive and enabling but non-preferential;
• strong promotion and facilitation through government investment attraction and export promotion agencies;
• government engagement with the private sector in achieving Islamic finance objectives, identifying impediments to, and opportunities for growth;
• a focus on deepening Islamic finance skills – education, training, attainment of relevant qualifications – and on access to appropriate Shariah scholars; and
• growth in Islamic finance professional services providers.
  

1 Standard & Poor’s, Islamic Finance Outlook 2009, 12 May 2009, p.5.
2 The Banker, Top 500 Islamic Financial Institutions, November 2009.
3 IFSL, Islamic Finance 2009, February 2009; The Banker, ‘Banker survey shows the growth in Islamic finance,’ 28 October 2009.
4 Australian Bureau of Statistics 2006 Census.
5 Pew Research Centre, Mapping the Global Muslim Population – A Report on the Size and Distribution of the World’s Muslim Population, October 2009.
6 Australian Bureau of Statistics (ABS), cat. no. 5206.0, National Income, Expenditure and Product, March Quarter 2009, Times Series Workbook, Table 6.
...
From: Islamic Finance, Australian Trade Commission (Austrade), January 2010 (released 12 February 2010)

Syariah Banking Protected from Global Financial Crisis

In May I attended the Malaysian Corporate Governance Conference, at the Securities Commission, Kuala Lumpur. In his opening speech, the Managing Director of the Securities Commission pointed out that Malaysia has the fourth largest bond market in the region and the largest Islamic capital market in the world, with Islamic banking. Afterwards I picked up some of the free booklets about Islamic Capital Markets in the commission's bookshop and noted the similarities between Syariah compliant securities and ethical investments, such as Australian Ethical Investments. Interestingly at least one commentator has claimed that "Islamic Banks Unaffected by Global Financial Crisis" (Mohammed Al-Hamzani, Asharq Al-Awsat, 30/09/2008):

A number of experts and officials of Islamic banks and financial institutions have confirmed that Islamic banks have not been affected by the global financial crisis, and that any effects would be limited due to the nature of Islamic banking.

Experts told Asharq Al-Awsat that Islamic banks are untouched by the current crisis due to the nature of Islamic banking especially that it does not deal in debt trading and distances itself from market speculation that takes place in European and American banks. ...

Social Networking for Corporate Governance

Day two of the Malaysian Corporate Governance Conference, 16 May 2008, at the Securities Commission, Kuala Lumpur was opened by by Yang Berbahagia, DatukRanjit Ajit Singh, Managing Director of the Malaysian Securities Commission (where the conference was held).

The MD started by explaining that he had been invited to meet the Queen of Jourdan, who is visiting KL, but decided to keep the appointment to talk to us instead (the very long royal motorcade went past the hotel last night). The MD gave a keynote address on "Malaysian Corporate Governance and Its Impact on the Competitiveness of the Country". The main message was about the need for confidence in companies, in the face of overseas corporate collapses.

Datuk Ranjit Ajit Singh argued that better corporate governance has been shown to increase the value of companies. Not only do large investors look for companies with good government, but also now invest in companies with poor governance with an aim to increase the value of those companies by improving the governance. He said that regulations cannot make companies act ethically; that this is something for corporate culture and ultimately a matter of the individuals in companies. But the auditors are the first line of defence for the company against malpractice. The SC is in the final stages of establishing an audit oversight board (AOB). This will check the auditors who audit major companies.

Also a forensic accounting investigation team is being put in place. One issue which came up in discussions before the event was the role of computer forensics in corporate regulation. However, this is normally only applied after an infringement is suspected. I suggest what is also needed is monitoring of the markets to look for suspicious activity. Data mining software can be used to look for problems. The Australian Taxation Office has a data mining capability, but is choosing a cooperative approach with companies, to agree corporate governance and compliance arrangements.

The MD pointed out that Malaysia has the fourth largest bond market in the region and the largest Islamic capital market in the world, with Islamic banking. In the commission's bookshop, I picked up some of the free booklets about Islamic Capital Markets. The commission issues lists of Syariah compliant securities and guidelines for such companies. It would be interesting to see how much there is in common between Syariah guidelines and environmental/social ethical guidelines used by Australian ethical investment companies, such as Australian Ethical Investments. I suspect they have much in common.

Talking to the MD later, I found he is a graduate of University of Melbourne and he suggested that while there was some in common in assessing companies between Islamic and environmental guidelines, that Islamic capital markets are a different issue and very complex.

SESSION SIX: BUILDING ACCOUNTABILITY & SUSTAINABILITY
THROUGH INVESTOR RELATIONS

• What is the power of investor relations (IRs) function?
• How does a company maintain an effective communication policy with shareholders through IRs?
• How would one draw the line differentiating between Corporate Social Responsibility and IRs? They seem the same, but they are not.
• In order to achieve greater transparency and accountability in financial performance reporting, what would be the best IRs initiatives proposed/practiced by award winning companies?

Whilst limitations on voluntary disclosure do exist as it may facilitate comparison by competitors, too little disclosure will defeat the purpose it serves. Thus, what would be the 'right' amount of disclosure to ensure the desirability of disclosure is achieved?

Moderator: Mr Puvan J. Selvanathan, Executive Director, Caux Round Table Malaysia
Speaker: Mr Justin Leong, Chairman, Malaysian Investor Relations Association (MIRA), Head of Strategic Investments and Corporate Affairs, Genting Bhd

At this point I decided to take a break from the conference and visited the excellent SC library on the first floor. This has an extensive range of business book and periodicals, as well as online access. I found publications on Islamic banking and Islamic insurance. In terms of design of the library, there are semi-circular desks for casual access computers wrapped around the pillars of the building. Each desk can accommodate two computers to be used while standing. This makes good use of space, which otherwise would be unusable near the pillars. However, no computers have yet been installed on these desks. There was also free public WiFi, but I was not able to get it to work.

One useful publication was New Horizon: Global Perspective on Islamic Banking and Insurance, with an article "Malaysia: Leading the Way" (Rajab-Ramadan 1428, July September 2007). One point this made is that Malaysia's rise as an Islamic banking country has occurred since the 1980s. This started out with Tabung Haji, to provide a way to save for a pilgrimage and provide welfare services on the journey. The government introduced legislation in the 1980s for Islamic banks. There are also Islamic insurers (takaful). Islamic banking has 15% of the sector in Malaysia.

The article makes much of the Malaysia International Islamic Financial Centre (MIIFC) and its promotion of "sukuk" government bonds. They point out that Islamic bonds have to be backed by tangible assets, rather than an exercise in interest rate movements. Given the recent problems in global financial markets with financial instruments which turned out to be backed by noting at all, sukuk makes a lot of sense. There are also some government tax exemptions to promote the new market.

The library has an excellent view out to the Science Center opposite. The windows are shaded by the projecting roof of the building and by perforated metal louvers on the bottom third of the windows. As well as shading, the louvers give some reassurance for those with vertigo, such as myself, who are uncomfortable standing next to a floor to ceiling glass wall with a sheer drop below.

I had some difficulty getting into the library as while it is advertises as being open to the public, it has an access card lock on the door. Presumably members are issued with cards elsewhere. But I was able to attract some one's attention and was welcomed in to visit. After the bustle of KL's streets, a library is a calm and familiar space. One aspect of the library which created mixed feelings was censorship of publications. An edition of Newsweek magazine had a photo of some scantly clad young women covered with felt tip pen. The idea of such censorship I find worrying, but in this instance the photo was not essential to the article it was with (about the sexual views of US college students) and I would prefer not to have to look at the photo.

SESSION SEVEN:ICT IN CORPORATE GOVERNANCE -THE AUSTRALIAN EXPERIENCE

The importance of information and communications technologies (ICT) can not be ignored as the world is heading towards this direction for effective sources of information, communications and world-wide connectivity. Thus, this session aims to cover the followings:

• Overview of Standards
• Electronic Reporting
• Fraud and other Threats from ICT
• ICT impact on Corporate Performance
• ICT Corporate Compliance Requirements

Moderator: Mr Puvan J. Selvanathan, Executive Director, Caux Round Table Malaysia
Speaker: Ms Marghanita da Cruz, Principal Consultant & Director, Ramin Communications, Australia

The slides for Ms Marghanita da Cruz's talk are available online. One interesting point which came out is that a new international standard for ICT Corporate Government is being developed, based on the Australian standard. This would appear an excellent opportunity for Australian consultants and trainers to provide services to the world about the new standard. Mr Puvan J. Selvanathan, the moderator entered into a dialog with the speaker on the relevance of code, using architecture as a metaphor. This seemed a very deep and significant discussion, but like most of the audience, I had no idea what they were talking about.

One audience member asked about the legal status of the Australian ICT Corporate Governance standard, which shows a difference in view in different national jurisdictions. Australian standards have no legislative force, being from a non-profit, non-government body. Some standards are given the force of law by federal or state legislation, or are included in regulations, but most are not.

Another question was about "e systems", such as online tax form submission and if the investment in such systems was worthwhile. I commented that take-up of systems such as Australia's eCensus was only about 15%, but this was enough to more than pay for the cost of the system.

SESSION EIGHT: COMMITING TO RESPONSIBLE BUSINESS PRACTICES

• How do responsible business practices contribute to the success of a company in global businesses?
• What kind of value do companies see in committing to responsible business practices in the long run?
• CSR encompasses many different aspects in relation to responsible business practices. The concern is how does a company manage all different aspects of CSR in the global competitive environment?
• What is the art of balancing the social aspect, economic welfare and environmental aspect of CSR?

Moderator: Mr Puvan J. Selvanathan, Executive Director, Caux Round Table Malaysia
Speaker: Dr Geoffrey Williams, Managing Director, OWW Consulting

Dr Williams discussed investor relations. He pointed out that hedge funds are starting to adopt a similar view to other investors, while still having a shorter view of time spans. Large investors expect personal access to senior company staff, possibly at their location overseas. These investors may only want a few investments in Malaysia. Financial analysts are time poor and risk averse and so will tend to favour large companies which are liquid, can be understood easily. They want reports in the morning and easily understood. He also had useful advice on dealing with the financial media. The main message was that Investor Relations information should be suitable for the particular audience. Even statutory information for the stock exchange needs to be well written as it is ultimately read by customers.

At question time I asked how to avoid being seen as devious if you produce different version of the information targeted to different audiences. The answer suggested was continuous disclosure, releasing information as it becomes available. One interesting suggestion was to lodge presentations to conferences with the stock exchange, before the presentation, if there is any price sensitive information in the presentation. Apart from meeting legal requirements, this could be useful marketing, with the stock exchange acting as an additional source of information.

End of Conference

The conference was a worthwhile event. Much of the value is in the informal discussions between participants, allowed for in the generous breaks in this conference. One insight by a delegate was that the Government has an ICT unit to encourage use of systems in government called MAPU (which seems equivalent to the Australian Government's AGIMO).

In may ways the issues of regulation and oversight I am familiar with for ICT systems apply more generally to corporations. ICT professionals could usefully learn about the wider context of business, but also have something to contribute, in terms of being able to build ICT systems to help with governance and also their more rigorous scientific and engineering approaches to governance.

Social Networking for Corporate Governance

An area in which I believe there is considerable scope for development is in the use of social networking technology for corporate governance. On May 12, 2008 Google announced "Google Friend Connect, a service using emerging social networking standards to allow third party web sites to provide social networking services. Currently this service is mostly confined to Google social networking products and aimed at non-business use. However, these show potential for expansion into business use.

The same standards as used for social networking, such as: OpenID, OAuth and OpenSocial, could be applied to corporate systems, using data access APIs as used by Facebook, Google, and MySpace. Management and board discussions could then take place using these tools, in much the same way social discussions now do. This would provide the rapid online communication and tools for group working, but with full audit trails complaint with government standards.

Those corporations and cities, who invest in the research, education and implementation needed for social networking for business may well be the Google, Microsoft and silicon valleys of the 21st Century.

Corporate Governance Leadership

Session two of the Malaysian Corporate Governance Conference at the Securities Commission, Kuala Lumpur, 15 - 16 May 2008, covered the Power of the Board:

LEADERSHIP CALL IN GLOBAL BEST PRACTICES

Moderator: Mr Philip Koh, Senior Partner, Messr Mah-Kamariyah & Philip Koh
Speaker: Mr Jiv Sammanthan, Senior Executive Director, PricewaterhouseCoopers Advisory Services

Some parties have argued that many Malaysian directors do not take corporate governance seriously enough. This does not only hurt the organisations, but the society and nation as a whole. Thus, what role does the board of directors play in ensuring the welfare of the society and the competitiveness of the nation? What are the principal responsibilities of the board?

• What constitute an effective board and what would be the demands and challenges to assume a leadership role in the emerging global environment?
• Having good judgement is a subjective matter, but it is important especially in determining the size of non-executive participation. Thus, what factors are deemed good judgement? Is there a quintessential guide in exercising good judgement for directors?
• Maintaining a successful relationship between the board and management is all about an issue of effective communication. Thus, what are the key elements in ensuring an effective communication between the two parties?

Jiv Sammanthan talked about the need for a culture of governance, governance versus management, short term compliance versus long term planning. PWC have done an analysis of the remuneration of directors in Malaysia in comparison with Australian and the UK, adjusted for the cost of living. The average for Malaysia is RM33K and for the top 100 companies RM35K.

Jiv noted that the average has been increasing each year, whereas the top 100 have been relatively stable. Malaysian remuneration is low compared with Australia and the UK. He suggested that companies had to be prepared to pay to get what is needed. I found the remuneration very high, given that the director effectively only does a few days work a year for their pay.

SESSION THREE:IMPACT OF COMPANIES (AMENDMENT) ACT 2007 AND CAPITAL MARKETS SERVICES ACT ON BOARD DECISION MAKING

Speaker: Mr Philip Koh, Senior Partner, Messr Mah-Kamariyah

Philip went through changes to Malaysian corporate law which make it similar to that in Australia. Examples were explicit laws stating that directors cannot use company assets without approval. and whistle-blower protection. This made me wonder if there could be simply be a set of international laws to make compliance easier.

Leveraging on Technologies to Manage Challenges in Corporate Governance

Ms Michelle Yee, Solution Architect - Governance, Risk & Compliance, SAP (Asia-Pacific Japan)

Michelle was the first speaker to define what Corporate Governance is. She then showed how corporate governance legislation has been introduced in the Asian region in the last ten years. She argued that tools such as SAP's GRC Access Control and "dashboard" can be used to improve governance and risk management. She made a reasonable case, but some of its impact was reduced when someone asked what SAP stood for and that they had never heard of SAP. Michelle understandably found it hard to react to this, as like me, she assumed everyone had heard of SAP. Perhaps the company needs to do more of this awareness raising with senior corporate people.

There could be an opportunity for SAP, or another software company, with the Australian Government tendering for a Permit Management System Software tool for UN Sanction Enforcement law. Presumably this is to help prevent a repeat of the AWB debacle.

Networking Luncheon

Lunch was in one of the function rooms of the Security Commission's new building. This remarkable structure is circular, matching the Malayisia National Science Centre (Pusat Sains Negara) across the road. There is a sunken tropical garden outside the SC builsing, which seems to be used to propagate the pot plants for the offices, as well as providing an outdoor child minding center for children of the staff. The building also has a store selling publications about corporate law, including Islamic capital markets (they produce a free quarterly bulletin: "Malaysian ICM"). Examinations are also held in the building for people working in the securities industry.

Conference Room

The conference was held in a well equipped conference room , but with the most complex video projector mount I have ever seen. The projector is mounted on top of a section of the ceiling tiles which is lowered by an electric motor, with a bellows type mount. But the video screen is on a slight angle to the wall, and to match this the hole cut in the ceiling for the projector is also on an angle. It would have been a lot simpler to make the hole the size and shape of of four ceiling tiles, so no cutting or trim would be required.

During a break I discovered from one of the delegates that the Security Commission's is considered a smart building with computer control of services for energy efficiency. The only evidence I saw of this was automatic taps and flushing in the toilets. This is not a criticism of the building, but high praise. Unfortunately with many such smart buildings the systems become very obvious when then break down after a short while, but the SC systems seem to be working well. One minor problem I saw were touch screen kiosks around the building which were all switched off (and perhaps were being replaced with wall mounted screens).

SESSION FOUR: ACCOUNTABILITY & INTERNAL AUDIT FUNCTION (IAF)

• What are the duties of audit committees in relation to IAF? What are their roles in accountability?
• How do audit committees establish and preserve their independence with the management?
• What would be the expectations and perceptions of internal audit in the continuous engagement with the management?

Moderator: Mr Walter Sandosam, Vice President Audit, Maybank and Vice President, Institute Internal Auditors Malaysia
Speakers Mr Lee Min On, Partner, KPMG Business Advisory and Governor, Institute of Internal Auditors Malaysia

One interesting internal audit issue Lee Min On discussed was compliance versus consulting. He argued that IA had a role in consulting, using the example of an organisation which used two staff to look after petty cash, in excess of what the risk from the loss of the small amount of money involved. He also talked about examples such as system design weakness, breakdown in control and management override.

I was a little uncomfortable with the idea that the internal auditors would also act as consultants, as if they suggest a process for the organisation to use, they then will find it difficult to dispassionately audit the process they recommended. Lee Min On responded that the auditors should only make suggestions for management to decide on and not be involved in the decision or implementation. Some of the most interesting issues, of the relationship between the IAs and the audit committee, were left to last.

SESSION FIVE: SHAREHOLDER ACTIVISM AND PROTECTION OF MINORITY INTEREST - THE MALAYSIAN EXPERIENCE

Moderator: Ms Marghanita da Cruz, Principal Consultant & Director Ramin Communications, Australia
Speaker: Mr Lee Leok Soon, Head, Client Services, The Minority Shareholders WatchDog Group

Mr. Lee Leok Soon has a slightly different point of view to most of the other speakers at the conference, as he effectively works for the small shareholders of companies:

1999 : MSWG recommended.
The creation of a Minority Shareholder Watchdog Group was proposed in the Report on Corporate Governance (Green Book), February 1999 Issue, commissioned by the Ministry of Finance on how to enhance Corporate Governance in Malaysia. The Report recommended the adoption of a Malaysian Code on Corporate Governance. Click here to view the Green Book of February 1999 and the the Code on Corporate Governance of March 2000.

2000 : MSWG incorporated.
In August 2000, MSWG was incorporated as a public company limited by guarantee.

2001 : MSWG established.
“The year 2001 ushered in two further milestones, namely, the incorporation of the Malaysian Code on Corporate Governance into the revamped Listing Rules of the Kuala Lumpur Stock Exchange and the establishment of Badan Pengawas Pemegang Saham Minoriti Berhad, or the Minority Shareholder Watchdog Group Limited. The latter will promote better and more effective corporate governance practices which could set a benchmark for others in the region.”

From: Our History, MSWG

See also Books:
Corporate governance
Technology and Corporate Governance
Leadership in corporate governance
Audit and Corporate Governance
Corporate social responsibility (CSR)
Shareholder Activism

Corporate Governance in Malaysia

This week I attended the Malaysian Corporate Governance Conference at the Securities Commission, Kuala Lumpur, 15 - 16 May 2008. The conference was organized by the Asian Strategy & Leadership Institute. These are some impressions from the first day of the conference, format, topics, venue and business in Malaysia.

Format of a Malaysian Conference

A business conference in Malaysia seems to have much the same format as in Australia, but with some of the elements of the one I attended in China. There was more formality with the opening of the program than usual in Australia, the dignitaries being introduced and presented with gifts. There was a generous amount of time in breaks to meet people and the conference organizers spent a lot of time introducing people to each other, which made for a more interactive event than many Australian conferences.

As well as a lectern on the stage there were two comfy arm chairs and coffee table. Each session started and ended with the moderator and speaker sitting down, which made for a more comfortable atmosphere.

Opening Address: CEO Malaysian stock exchange

The conference keynote address was by Yang Berbahagia Dato' Yusli Mohamed Yusoff, Chief Executive Officer, Bursa Malaysia (the Malaysian Stock Exchange, previously the Kuala Lumpur Stock Exchange, KLSE, or Bursa Saham Kuala Lumpur ). Like Australia, the Malaysian stock exchange is a non-government entity, with some regulatory functions delegated from Parliament. Malaysia introduced new governance rules in late 2007, so governance is topical.

The Bursa Malaysia CEO said there was more room for reform in governance by Malaysian companies and they needed to do more than just comply with the rules. He addressed the need for leadership in companies, with accountable and prudent governance in the interests of shareholders, in response to scandals in companies. The board of directors of listed companies are charged with safeguarding the assets of the company. The primary market focus of the stock exchange is to maintain good governance to encourage investment. He said the most important tool was to create a corporate culture for accountable conduct without reducing the need for risk taking. Investors are looking to invest in companies with ethical business practices.

The CEO also mentioned environmental and sustainability issues as ones which make business sense, with Corporate Social Responsibility (CSR). Two years ago Bursa Malaysia produced a CSR Framework for Malaysian PLCs, at the time the government included a requirement for CSR reporting by companies.

This year the role of auditors is being reviewed. The stock exchange has its own guidelines for audit oversight.

The CEO also addressed the need for global standards. In January 2007 corporate governance requirements were changed to require a corporate audit committee.

Having the stock exchange chief at the conference was a high honour for the conference delegates. After his address there was a media scrum with the CEO outside the door.

The Venue: Securities Commission Building

The conference was held in the headquarters of the Malaysian Securities Commission. This is a showcase high technology building by Hijjas Kasturi Associates (construction management by Bovis Lend Lease) is a parkland setting.

One feature of the building is underfloor air distribution, using Cementitious Infill Steel Access Flooring. A false floor is used for the air conditioning and also cables for power and data.

One logistical problem I had was the lack of espresso coffee. I wandered downstairs to the Securities Commission cafeteria, but they did not have any. On the way I noticed that as well as impressive conference rooms, the SC also had a fully equipped video conference facility, called the "Dialogue Room" (there is a video of the room online):

The Dialogue Room situated at the Lower Ground Level 1(LG1) has a seating capacity of 44. The room set-up is ideal for press conferences, small group training, board meetings as well as discussions. The room has a U-shape seating arrangement and each seat is equipped with a touch-panel console for a microphone and a voting system.

From: SC BUILDING Conference Facilities, Malaysia Securities Commission, 2007

One interesting inclusion in the building are day rooms, in the lower level:

Guest Day Rooms These air-conditioned rooms situated at the Lower Ground Level 2 (LG2) are specially built for guests and are supplied with double beds, bathrooms with showers, as well as telephones. These facilities are for guests to freshen-up before their sessions.

Conference sessions for day one

SESSION ONE: CREATING SUSTAINABLE GROWTH IN THE GLOBAL
BUSINESS ENVIRONMENT

Moderator: Mr Puvan J. Selvanathan, Executive Director, Caux Round Table Malaysia
Speaker: Yang Mulia Tunku Abdul Aziz, President, Caux Round Table Malaysia, Former Special Advisor on Ethics to the UN Secretary General

• What are the growing trends in corporate governance in global economies?
• What are the detrimental factors to the sustainability of businesses in global emerging economies?
• What do companies in developed economies do to create sustainability? What can Malaysian companies learn from them?
• Does size matter? Does sustainability differ from a large multinational company to a small company?
• What do Malaysian companies need to leverage on to create sustainable growth in global businesses?

The Caux Round Table is a body I had not previously heard of. My understanding is that it is a non-government body formed in response to problems of corruption in business, to foster more ethical practices internationally with moral and responsible capitalism. Caux Round Table currently do not have an Australian branch, although there are some Australians involved internationally.

Yang Mulia Tunku Abdul Aziz reminded the audience that is is ten years since the 1997 Asian financial crisis. He criticized the misuse of "Asian values" as a cover for corruption, saying that values such as respect for elders should not prevent questions being asked about the actions of corporations.

Puvan J. Selvanathan looked at the details as used in Caux Round Table projects, concentrating on sustainability. Unfortunately he did not define what he meant by "sustainability" (nor did other speakers at the conference). In Australia, this term is currently used almost exclusively to refer to environmental sustainability, but in Malaysia seemed to be referring to social and business issues as well.

Puvan argued that corporations needed to move to an "involve me" model, with shareholders actively involved, not just observers. He then mentioned Corporate social responsibility (CSR), which seems to be a hot topic in Malaysia. He argued that lack of CSR can result in very negative publicity and good corporate governance is a risk mitigation strategy.

Jay Bragdon's 2007 book "Profit for Life", was cited emphasizing companies stewardship of resources. He argued that this "hyppie" language was coming back into vogue for business. He then quoted Porter in the Harvard Business review on companies needing a healthy society. Cannon was given as an example of the Japanese concept of "Kyosei" with companies acting responsibly.

However following the new Australian Prime Minister, Kevin Rudd's emphasis on evidence-based policy , is there evidence to support these claims for CSR? While it might be good in the long term for socially for companies to act ethically, doesn't the evidence show that in the sort term they can make such large profits by acting unethically that this outweighs the risks?

In response to a question about this Tunku argued that there was a need to ask hard questions about the actions of senior people, even if this causes some embarrassment. He used the example of the former Secretary General of the UN setting up a foundation for humanitarian purposes, with prizes given. Even though the funds were given for, and to be used for, humanitarian purposes there were ethical issues as the funds were not to be used through the UN. Puvan advocated using a code of ethics, using the example of that for architects (he is by training an architect). This seems to be essentially the same issue as ethics for ICT professionals. The Malaysian 2020 plan also got a mention from one of the questioners at question time (an interesting comparison could be drawn with the Australian 2020 Summit).

See also Books:
Corporate governance
Technology and Corporate Governance
Leadership in corporate governance
Audit and Corporate Governance
Corporate social responsibility (CSR)
Shareholder Activism