Keynote address by

YAB Dato’ Seri Abdullah Ahmad Badawi
Deputy Prime Minister of Malaysia

at the
“Shareholder Activism in Malaysia – The Way Forward” seminar
Conference Hall, Securities Commission
17th June 2002 9.00 am

1. It gives me great pleasure to address such a distinguished audience at this seminar on shareholder activism this morning. I would also like to congratulate Badan Pengawas Pemegang Saham Minoriti and the Securities Industry Development Centre- for their joint effort in organising this event. I hope the deliberations that will take place can contribute effectively to the advancement of shareholder activism specifically and the maturity of Malaysia’s capital markets generally.
2. Ladies and gentlemen,
The 1997 Asian financial crisis and the recent global economic slowdown posed significant challenges to Malaysia’s economic health. Currency speculation and the volatility caused by short-term capital flows caused havoc in Malaysia’s financial markets as well as on the real economy. As a result, many businesses that had been thriving prior to the crisis faced bankruptcy proceedings. Billions of ringgit of the Kuala Lumpur Stock Exchange’s market capitalisation were lost in the metaphorical blink of an eye. The financial sector was put under immense pressure due to mounting non-performing loans.
3. The government responded by introducing a fixed exchange rate to the US dollar and temporarily locking in short-term capital for one year. These measures, while unpopular with some investors, were necessary to shield the economy from external shocks. The measures also provided much-needed breathing space for restructuring efforts to take place.
4. Although this rationale was met with scepticism from some quarters, Malaysia has proven its critics wrong. The national asset management agency, danaharta acquired and managed more than RM47 billion in bad loans and expects a recovery rate of 56%. It has become a model for asset management companies worldwide. Danamodal provided RM7.6 billion in funds to recapitalise financial institutions reeling under the effects of the crisis and over 70% of these funds have been recovered. Corporate restructuring has also been tackled wholeheartedly and the corporate debt restructuring committee expects to wind down by July this year.
5. These policies have borne fruit. The economy is recovering, with growth of 0.8% registered last year and expected growth of over 4.0% this year. In fact, it should be noted with interest that the forecasts of many private economists and think tanks are higher than the government’s figures. The capital market has also recovered and stabllised to the extent that the government has been able to lift the temporary curbs on short-term capital flows. The KLSE composite index has risen from a low of 262 points in September 1998 to its current level, hovering arqund 750 points. Listing and trading activity has increased substantially, reinforcing the stock market as an important platform for Malaysian companies to mobilise capital for growth and expansion. These achievements have not gone unnoticed. International financial institutions such as the International Monetary Fund and the World Bank, Rating Agencies and International Investors have all acknowledged the effectiveness of Malaysia’s unorthodox recipe for recovery.
6. Ladies and gentlemen
Although our success is a source of satisfaction, we should not be blinded by triumphalism. There is still much work to be done. The crisis provided an opportunity to re-examine, and where appropriate, strengthen our practices. Although there is general consensus that Malaysia’s economic fundamentals were sound at the time of the crisis, many Fund Managers, particularly international ones were critical of the level of corporate governance in Malaysia.
7. In response, I would say that corporate governance has always existed in Malaysia. Unfortunately, the irresponsible actions of a few have tarnished the reputations of the whole market. However, we acknowledge that, as a developing market, there is always room for improvement. In that sense, corporate governance frameworks will always be works in progress, because people seeking to profit at the expense of minority shareholders will ceaselessly find ways to beat the system. Thus, authorities will have to continuously refine rules and regulations to protect the investing public. Even the United States, which has a market system that is considered the best developed in the world, is not immune from bad corporate governance as Enron has so spectacularly proven. In fact, Enron is merely the most high profile case of corporate misconduct. Numerous other cases are emerging, where companies are found to have made misleading disclosures or employed questionable accounting practices.
8. In Malaysia, the authorities have been busy strengthening the governance framework. I am aware of the efforts of the Securities Commission to step up its enforcement activities to ensure breaches of securities laws are brought to book. The KLSE issued new listing requirements last year with a chapter dedicated to corporate governance with provisions among other, placing more responsibilities on boards of directors and giving more power to audit committees. Training and accreditation of directors was made mandatory to underline their importance in ensuring good governance. In addition, financial reporting is now done on a quarterly basis, enhancing transparency and the flow of information to the investing public. I would venture to say that Malaysia’s corporate governance framework compares favourably with international best practice.
9. However, rules and regulations can only achieve so much. The most effective discipline comes from the market itself. Shareholders should not sit meekly in silence and watch irresponsible owners or managers drive companies in which they invest into the ground. If they are unhappy with the way companies are run, they should make their feelings known -either through forums such as general meetings or via direct communications to management. If still nothing is done, then they should vote with their feet and sell down their holdings. Share prices will fall and other market participants will know that the promoters of these companies are not to be trusted. As we all know, an illiquid investment loses much of its value. Thus, in many respects, the court of public opinion is a very effective mechanism to keep promoters of companies on their toes.
10. In this regard, I call on Institutional Investors, local and foreign, to play an active and leading role. They have the know-how, expertise and resources to monitor the performance of their investments. They must be alert to possible occurrences of negligence or malfeasance. If they are not receiving adequate returns, they should take the necessary steps to rectify the situation. Indeed, it is their duty to do so, since they have been employed to manage funds on behalf of others. Failure to act in these circumstances shows a lack of professionalism. Ignorance is not an acceptable excuse.
11. It should be noted that the influence of Institutional Investors is limited compared with more developed markets. Malaysia has over 840 publicly traded companies, many of which are either led by entrepreneurs or are family owned. I believe that the vast majority of these gompanies are well managed and comply with good governance practices. However, conflicts can arise if a chief executive is also the controlling shareholder, especially if adequate institutional checks and balances are lacking. At times, the temptation of acting in one’s own interest at the expense of other shareholders is overpowering, particularly in times of crisis. On its part, the government promotes institutionalisation of shareholding and to this end, has adopted a policy of separating ownership from management for companies in which it has an interest. The government hopes that the various new management teams appointed to helm these companies will be focused in their pursuit to create value for all shareholders.
12. Nonetheless, this is not to say that only Institutional Investors should practice shareholder activism. The relative low levels of institutional ownership means that retail investors too have an important part to play. Agencies such as the Securities Commission have allocated substantial resources to educate the investing public of their rights and privileges as shareholders. As such, minority shareholders should not hesitate to exercise their influence if these rights are infringed. The government advocated the establishment of the Badan Pengawas for this very purpose: to act as an effective watchdog group acting on behalf of disaffected small investors. The Badan Pengawas should therefore take a strong stand on issues that transgress minority shareholder interests. It should work hard to prove its value as a champion for the ordinary investor. I am confident that they will do so, and in the process, contribute to the creation of a corporate culture premised on the elements of fairness, transparency responsibility and accountability.
13. I understand that the Badan Pengawas is currently funded by its founding members, namely PNB, EPF, SOCSO, LTAT and LEMBAGA TABUNG HAJI. I would like to thank these organisations for their commitments and hope that they will continue to provide resources for the watchdog group. The government certainly supports the efforts of the Badan Pengawas to make the Malaysian capital market more efficient and participatory.

Ladies and gentlemen:
As you may know, the Securities Commission’s capital market masterplan that was launched last year is an indication of Malaysia’s desire to develop a market that can
effectively support national growth and aspirations. This is not an easy task and our success depends on the input and contributions of all parties. On that note, I wish you much success in your discussions today. It is my hope that this seminar will unveil new and innovative ideas on shareholder activism. In doing so, it will represent a further step towards developing the Malaysian capital market into an attractive, vibrant, world class platform for investors, corporations, intermediaries and all other market participants.

Thank you.