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Autumn 1999 cover

National Observer Home > No. 40 - Autumn 1999 > Article

Malaysia Incorporated: Ethics on Trial

It is logical to begin by considering briefly the influence of Malaysia's post-1957 social, economic and political factors in the evolution and development of the close and intimate relationships between government and business that have become the hallmark of the Malaysian economic equation.

In 1957 when Malaya achieved independence from Britain, it inherited a form of government based on the Westminster model which, with a few local adaptations, remains very much in place. (Malaya was re-named Malaysia in 1963, following amalgamation with Sabah, Sarawak and Singapore. Singapore withdrew in 1965.) Of equal significance is the inheritance of an economy based on the traditional British colonial mercantile interests centred on the export of rubber and tin. The nation boasted the most efficient plantation economy in the world, so efficient, in fact, that Malayan foreign exchange earnings helped Britain enormously to repay much of its war debt to the United States. It was not for nothing that Malaya was known as Britain's Dollar Arsenal. Economic prosperity, by the standards of Asia, was not new to the country. It was, however, commodity based, and opportunities for corruption were nothing quite like those that presented themselves in the 1970s.

New Economic Policy Corruption Rears Its Ugly Head

Following the race riots in 1969, the government, recognising that economic disparity between the Malays and the Chinese was at the heart of the problem, decided that unless the politically dominant, but economically deprived, Malays were brought into the mainstream of the nation's economic life, prospects for lasting peace and prosperity would continue to be elusive. The prescribed solution came in the form of massive social and economic engineering, going under the somewhat grand name of the New Economic Policy.

In brief, the New Economic Policy was part of a series of measures that were intended to redress the economic balance, with the aim of enabling the Malays to own at least thirty percent of the nation's corporate share capital within a twenty-year time frame. The creation of dozens of institutions, cobbled in haste, to support a socio-economic experiment of this order of magnitude created enormous regulatory and coordination problems, with the result that the vast majority of them, operating in splendid isolation, became veritable hotbeds of the corruption that was to take such a firm hold on the life of the nation.

An important feature of the New Economic Policy was the extent to which the government attempted to regulate and control every conceivable aspect of the economy. The absence of an effective central coordinating mechanism and the unlimited discretionary powers these institutions were allowed to exercise led, inevitably, to widespread corruption. To make matters worse, each of the state governments competed to set up its own state economic development corporation with literally hundreds of subsidiaries, accountable to no one but themselves, and all money losers to boot. Although some attempts were made subsequently to monitor and coordinate their activities, they were feeble at best, and unethical business practices continued unhindered. The Bank Rakyat (People's Bank) episode perhaps best illustrates the environment which quickly spawned a new greed-driven business culture that was eagerly embraced by these government subsidised enterprises.

Established under another name in 1954, Bank Rukyat began life as a financial cooperative society. It had a primary responsibility of helping poor farmers and fishermen. As a cooperative bank it was not subject to the control and regulation of Bank Negara, the Malaysian Central Bank. The first intimation that something had gone drastically wrong was when its 1973 and 1974 accounts were tabled without the approval of the registrar of cooperatives at its 1985 annual general meeting. The authorities appointed Price Waterhouse to investigate and report on the operational procedures adopted by the bank and its subsidiaries. The report revealed a staggering catalogue of financial mismanagement excesses that served to confirm the nation's worst fears.

Some of the more bizarre ethical aberrations highlighted in the Price Waterhouse report included the fact that a senior officer of the bank transacted business entirely on his own authority and held the bank's investments in his custody. He also helped himself to the bank's funds to purchase investments for himself. He had, on at least one occasion, pocketed the proceeds arising from the disposal of the bank's assets. All of the bank's directors, their families and friends benefited in one way or another from the bank's open door loans for cronies policy. Politicians, as always, were quick to take full advantage of their position and influence. By the time the directors were called to render an account of their conduct in this, the most disgraceful banking scandal in Malaysian history, the bank's vaults were empty.

Malaysian Business, the monthly economic publication, concluded that the Bank Rakyat story was a "compendium of how a few sophisticated individuals could twist and outwit all the checks and balances and regulatory mechanisms in the Bank Rakyat and the Cooperative Societies Ordinance".

The Star newspaper, commenting on this and other similar developments, went so far as to say that politicians should be barred from holding office in government and semi-government bodies. These positions should be filled by professional managers who were less likely to abuse their powers. The newspaper also called for public accountability of statutory bodies such as PETRONAS (the National Petroleum Corporation), the Urban Development Authority and MARA (Council of Trust for the Indigenous People) among others, as a means of stamping out corrupt practices in government-sponsored businesses and ensuring that the objectives of the New Economic Policy were not derailed by incompetence and greed.

The New Straits Times, the region's oldest English language newspaper, in a "more in sorrow than anger" editorial, commented, "There was once a time when a Malaysian could indulge in a little smile of condescension when stories about corruption in developing countries other countries of course were detailed. That pride was entirely justified: virtually every aspect of administration was clean, abuse of power unheard of, departmental morale was high, public confidence was vibrant. For whatever reason, the present conditions have called forth a litany of exhortation against corruption." The nostalgic "there was once a time," was a reference to the administration of the first prime minister, Tunku Abdul Rahman, to whom service before self was an abiding personal creed.

We have seen how, in the wake of the New Economic Policy, Malays in positions of power and authority perverted the banking system to an extent that was not thought possible in a country that had put in place apparently sophisticated corporate legal systems for dealing with just such ethical lapses. The problems, however, were compounded by an administration that was, in many instances, responsible for perpetrating some of the worst financial excesses and scams. In these circumstances, it would have been totally unrealistic to expect a commitment to transparency and accountability in either government or corporate sector business transactions.

The Bank Rakyat scandal, horrendous as it was, paled by comparison with that which engulfed the Bank Bumiputra, touted as the "flagship" of the New Economic Policy. Established in 1978, it had by 1988 assets worth more than US$15 billion. It moved aggressively into new territories, lending recklessly to politically well-connected companies and individuals, many of whom possessed neither the capacity nor the intention to make good the loans. The bank shifted large sums of money to its wholly-owned subsidiary in Hong Kong, Bumiputra Malaysia Finance Limited, or BMF, which in turn lent in total more than US$1 billion to a Hong Kong $2 company called Plessey Investment Limited and another called Carrian Investments Limited.

Carrian went on a shopping spree, picking up a US$350 million investment in California and a 328 hectare real estate development in Florida. Within months of the BMF money going through his books, George Tan, the man who boasted that his Carrian conglomerate would last centuries, saw his empire reduced to ashes. A few decades earlier, Adolf Hitler had said much the same thing about his Third Reich. Bank Bumiputra's catastrophic financial loss caused irreparable damage to Malay pride and prestige.

In Malaysia, a committee of inquiry was constituted, headed by an incorruptible auditor-general whose report stopped just short of naming senior members of government who had profited from the loan disbursements. The committee described how in the course of the inquiry they had come across "several instances of irregularities, frauds, criminal breach of trust, theft, actions in complete disregard of honest commercial practice and contravention of several laws, in Malaysia and in Hong Kong, in respect of the administration and operations of the BMF". The committee report recommended that criminal proceedings be instituted against those involved, but no such action was taken in Malaysia notwithstanding Dr. Mahathir's much publicised outburst proclaiming that the BMF affair was a "betrayal of trust and a heinous crime". The Hong Kong authorities, on the other hand, began criminal action against the perpetrators as soon as the scandal broke out.

Dr. Mahathir's studied indifference served to reinforce the suspicion of high level complicity. Perhaps the most damning indictment was the claim made by a Hong Kong lawyer, retained to defend one of the bank's offficers on charges of fraud and bribery, that BMF and its parent, Bank Bumiputra Malaysia, had accepted an arrangement based on incestuous relations between senior politicians and bank officers, and that his client simply carried out Dr. Mahathir's orders.

The Blurring of Ethical Lines and the Birth of Malaysia Incorporated

In the early and mid eighties, the Malaysian government went on a binge, ethically speaking, on a scale that easily dwarfed its earlier efforts. Ever resourceful, and with an eye to filling the party coffers and the pockets of the politically well-connected, the government decided on privatisation, arguing rather persuasively that there was an opportunity to dispose of its very considerable fixed and other assets and to strengthen the nation's finances. The rhetoric, sadly, fell far short of achievement. In the event, the nation was cynically short changed. The real beneficiaries were the prime minister's associates and other close party friends.

While Dr. Mahathir may have been the architect of privatisation ala Malaysia, it was Daim, his old crony and minister of finance, who masterminded its practical implementation. As an accomplished market player who had amassed a considerable personal fortune, he turned privatisation, in no time at all, into an art form that was unmatched in its blatant disregard for transparency and accountability an operating model that has found ready acceptance by the country's political masters and is well and truly entrenched despite their soothing noises about good governance.

Privatisation was a party plaything as far as UMNO (United Malay National Organisation), the dominant component of the ruling coalition, was concerned. With Daim assuming the role of economic czar, Malaysia Incorporated as postulated by Dr. Mahathir, Malaysia's very own economic heretic and occasional visionary, really came into its own. One of Daim's first acts as minister of finance was to undermine the power and influence of the Central Bank by hijacking the Capital Issues Committee. He, with one stroke of the pen, effectively had the Kuala Lumpur Stock Exchange dancing to his tune. In his excellent book, Behind the Myth: Business, Money and Power In Southeast Asia ( Grafton Books, 1989 ), James Clad told how Daim put all new listings on hold, and thereby created a demand for existing shares that was to benefit him, and others like him, enormously. The size and extent of his own shareholding in all manner of companies was not lost on the Malaysian public.

Daim's various measures to increase trading, given his very considerable personal shareholding, raised many eyebrows. According to James Clad, "He was nothing if not determined. He lengthened scrip delivery time and gave preferential credit lines to banks lending to share investors." The banking system was systematically politicised and manipulated to serve party interests as well as those of the country's leadership and their henchmen. The use of nominees to disguise the real movers and shakers was widespread: an abuse that has only just now been stopped by a new rule adopted by the Securities Commission and the Kuala Lumpur Stock Exchange.

Party interests dominated, as they still do, government business decisions. Since the mid-eighties, major privatised projects have invariably been awarded to friends of the ruling party, and speculation is rife about the party's involvement, directly or indirectly, in many of these mega public works and other infrastructure projects. Large numbers of contracts have been awarded on the basis of closed door negotiations. And the rationale? According to Dr. Mahathir, there was no time to waste by observing the niceties of an open tender system. And, Malaysia was a country in a hurry.

Although the public was not fooled by these disingenuous machinations, given the gradual emasculation of many of the national institutions (which had been specifically established under the constitution to protect citizens' rights) the government was able to treat widespread concerns about the impropriety of many of its actions with complete disdain. Often resorting to the draconian Internal Security Act, which allows for indefinite detention without trial in the name of national security, the government has ensured that sustained dissent or objection to its ethically reprehensible actions is quickly nipped in the bud.

In the closing years of the 1980s, a most extraordinary political-business deal was concluded when United Engineers Berhad, a firm which according to the Asian Wall Street Journal was "financially beleaguered" and with practically no experience in large and complex civil engineering works, was awarded the contract for South-East Asia's largest highway project, a four-lane motorway from the Thai border to Singapore, worth US$1.5 billion. United Engineers' majority shareholder was an investment company called Hartibudi, formed in 1984 and subsequently acquired by a Malay businessman who had the full support of Daim, the finance minister. The highway privatisation scheme was a windfall for all concerned. In retrospect, it represented the most disgraceful behaviour by an administration that had long ago lost the moral high ground and was poised to take the first eager steps on the slippery slope of ethical degradation and national shame.

The project was put together in a way that would not only guarantee a profit (to the lucky recipient of Dr. Mahathir's munificence) for the construction of the road but also revenue from toll gate collections for decades to come. During this period the company would enjoy a monopolistic advantage. The losers, as always, in a case of ethical subversion such as this, would be the long suffering members of the public.

The leader of the parliamentary opposition who challenged the award of the contract was rewarded with indefinite detention under the Internal Security Act for his trouble. The judge who decided that the opposition challenge be allowed to proceed in a court of law soon found out that under Dr. Mahathir, a noted exponent of the Asian Values, an independent judiciary was not a tenable proposition. What is more, according to Dr. Mahathir, who had a view on every imaginable subject, a judiciary that is too independent would forget its place, and might be tempted to challenge the supremacy of parliament itself.

Soon after, Dr. Mahathir, not one to take lightly slights, imagined or otherwise, deployed his considerable street fighter instincts. He orchestrated the dismissal of the highest law officer of the land, the Lord President, on an inadequate basis. Five other Supreme Court judges met a similar fate. Their crime? At various times in the past they had handed down judgments which enraged the prime minister. At about the same time he mounted what amounted to a "search and destroy" mission and, predictably, invoked the Internal Security Act to detain more than a hundred of his fellow citizens who merely happened to disagree with his plans and ideas.

Ten years on, in 1998, by a strange twist of fate, the ghosts of the Renong-United Engineers North-South Highway scam returned on the heels of the Asian crisis to haunt Dr. Mahathir. Renong, together with other companies which he had helped bring into this world through privatisation, were in much the same condition, all requiring massive transfusions of public funds to bail them out of the disastrous positions in which they found themselves.

As he had done before when he attempted and failed, at enormous cost to the country, to corner the international tin market, Dr. Mahathir thought he could again raid the cash-rich Employees Provident Fund with impunity. He ignored completely the fact that the savings really belonged to millions of workers and were held in trust for their retirement. Such was his total disregard for accountability and stewardship that he thought nothing about putting the funds at risk in order to save a few well-connected crony-owned companies who through sheer mismanagement and disregard for normal prudence had contributed, in no small measure, to their own financial downfall. Fortunately for the country, this time round, members of the Malaysian Trades Union Congress stood up for their rights and put their foot down. Dr. Mahathir may have been forced to accept that the mood of the country had changed unalterably, but he remained unrepentant.

Dr. Mahathir put together a bailout scheme by using the Petronas-owned Malaysian International Shipping Corporation to take over his eldest son's shipping interests. According to Anwar Ibrahim, who was put on trial for various offences, and who was then finance minister, "Mahathir was advised to follow procedure. Petronas and I asked that the assessment (the net worth of the assets) be made by an international company. He got angry because he thought the price should be higher. But the cost was 2 billion ringgit. That's the people's money. We just had to be realistic. But he was not satisfied with our argument. This whole unsavoury exercise was hawked around as a strictly commercial deal when, in fact, it was concluded on the basis of a 'suggestion' from above." It is obvious that "best practice" is an alien concept for those determined to use entrusted power for personal profit.

Petronas once again was used as a personal cash cow. When challenged, Dr. Mahathir, never at a loss for words, tried to explain when a bailout was not a bailout.

Ethics and Economic Recovery

Integrity has an important bearing on the economic well-being of a nation. This may seem a sweeping generalisation, but one does not have to look farther than the current crisis afflicting many countries in our region to see the connection. Each year, Transparency International, the global coalition against corruption, publishes its Corruption Perceptions Index. It is based on the perceptions of the international business community about the levels of corruption in the countries in which they operate.

In the 1998 Corruption Perceptions Index, out of the 85 countries included in the survey, Singapore is placed at number 7, Malaysia 29, South Korea 43, the Philippines 55, Thailand 61 and Indonesia 80. The bigger the numbers, the more corrupt a country is perceived to be.

While many critics are quick to dismiss the Index as being of no real significance, it is interesting to note that the countries which are facing the greatest turmoil are among those perceived by the international business community to be the most corrupt. Indonesia, Korea and Thailand are on the IMF life support system while the Philippines has been kept afloat by the IMF and the World Bank, on and off, mostly on, for the last 35 years or so. On the other hand, little Singapore, perceived consistently to be among the top ten cleanest in the world, has survived this current crisis relatively unscathed. One may draw one's own conclusions.

While many countries may not like to be thought of, particularly by the international business community, as lacking in integrity and accountability in the conduct of their activities, the fact of the matter is that perceptions are, nevertheless, real. Their effects on the regional economies have been devastating. The perception was that government and business leaders were mismanaging the economy in a way that did not give the foreign, or, for that matter, the domestic investor, the level of comfort or the degree of confidence required for the protection of his investments.

Integrity and Accountability

The countries in this region, with few exceptions, consign integrity and transparency to the back seat. Take Malaysia, for example. The lack of transparency in the disposal of public assets through privatisation was a matter of real concern, as was the practice of awarding multi-million dollar infrastructure contracts on the basis of closed door negotiations rather than fairer and more democratic open bids. And what of access to information and the indiscriminate use of the Official Secrets Act? All this arose in a country that is promoting information technology as an article of faith. The root of so many of the current economic and financial problems lies in ignoring the vital need of incorporating transparency and accountability in the government and business policy equations.

In discussing ethical issues in the context of government and business, it is a matter of regret that even enlightened governments tend to forget that the legitimacy they enjoy and proclaim ever so noisily at the slightest hint of a dissenting view is derived, in the main, from an unspoken social contract with the people. In return for the right to govern, an elected government is bound to honour and defend the constitution, and to be prepared to subject its official behaviour to public scrutiny. It goes without saying that it must be fully accountable for all of its actions to the public.

By implication, the mandate given must be applied to achieving one object only to put, in the words of James Wolfensohn, President of the World Bank, "the interests of the many over those of the few". Each government is under an obligation, no less, in carrying out its functions and duties, to adopt universally recognised and accepted "best practices," consistent with the economic, social and ethical needs of a moral and caring society. In other words, good governance is a price that a responsible government is expected to pay for the sacred privilege and trust it enjoys. It must recognise that in all of this, the principle of trusteeship is central to the whole concept of stewardship, both in the governance of a nation, as well as, in the case of the business sector, the management of public companies.

It is appropriate to turn now specifically to the role of the private sector in promoting corporate integrity and accountability. There is absolutely no doubt, according to Peter Eigen, President of Transparency International, that while governments have a formal responsibility to reform national and international integrity systems, "[T]he private sector has a unique input to make. It is the dominant engine of the economy, and an effective anti-corruption campaign can hardly be sustained against the opposition of the corporate community." It is encouraging to note that the private sector in much of the economically troubled region is beginning to be concerned about the colossal damage done to national economies and prestige by unethical business practices.

In the current economic climate, the private sector, known the world over to react opportunistically, in Malaysia, at any rate, has been quick to put its house in order. Institutionally, the wide-ranging reforms being put in train by the Securities Commission and the banking sector emphasise the desirability of developing a corporate disclosure policy, the importance of adopting best practices in corporate financial reporting and the need to protect minority share-holder interests, as well as the need to ensure that there is a clear understanding of what international institutional investors expect from the companies in which they invest.

This coming to terms with reality should help forge a new business culture in such a way that both foreign and local investors might reasonably expect to find that, at the least, the playing field on which they would be invited to play the money game would not only be level, but also guaranteed to be free of hidden traps, and that the goal posts would not be shifted while the game was in progress. The globalisation of the economy has meant that the rules are no longer ours to lay down and manipulate. The private sector must now play by the new ground rules which demand greater integrity and accountability than in the past. Failure to comply will result in countries and companies playing the role of mere spectators, on the sidelines.

It is a sad commentary on the culture of business in Malaysia, both in government and the private sector, that an economic catastrophe of this order of magnitude has been necessary to shake its complacency and indifference to the benefits of doing business with integrity and accountability. The Asian crisis has been a cruel blow to the proponents of the Asian Values, touted as the cutting edge of the tiger economic miracle. In reality they turned out to be nothing more than a sinister conspiracy to prop up a morally indefensible and decadent heritage.

To conclude, let me again return to James Wolfensohn, who in a major speech not so long ago said, "We see in today's global economy that countries can move towards a market economy, can privatise, can break up state monopolies, can reduce state subsidies, but that if they do not fight corruption and put in place good governance, if they do not introduce social safety nets, if they do not have the social and political consensus for reform, if they do not bring their people with them, their development is endangered and will not last."

Could he have been referring to the region of the world that I come from? I often wonder.

National Observer No. 40 - Autumn 1999