CORPORATE GOVERNANCE IN MALAYSIA | OCTOBER 2017 CORPORATE GOVERNANCE IN MALAYSIA Family ties and government control heighten governance risks. October 2017 Contents Ownership Snapshot 2 Tight family control and convoluted conglomerate structures preclude thorough investor analysis. Family Ownership 3 Uncertainty is compounded by looming succession questions surrounding aging patriarchs. Concerns Family Control 4 related to board entrenchment and infrequent board meetings leave minority investors at family firms Family Generational Succession 6 exposed to risks of decisions which heavily favor family groups. Financial Institutions 10 As a response to the Asian and global financial crises, enhanced banking regulations have strengthened Strong Board Oversight 11 independent oversight and ensured increased executive pay disclosure at Malaysian banks. Grandfathered Institutions 12 State Participation 13 Government-linked Companies (GLCs) are fundamental to Malaysia’s economy but we have identified Poor GLC Performance 14 concerns about poor performance, weak leadership structures and government intervention placing the Weak Leadership 16 national interest ahead of minority shareholders. Appendices Regulatory Developments 19 The MSCI Malaysia Index constituents underperform on corporate governance relative to both the MSCI Corporate Overview 21 Emerging Markets and MSCI ACWI Indexes as a whole. Board Overview 22 Gender Diversity 23 CORPORATE GOVERNANCE SCORE DISTRIBUTION Key Metric Overview 24 Best & Worst Scores 25 Ownership Diagrams 26 Top 5 Scores Bottom 5 Scores CIMB Group 7.6/10 IHH Healthcare 2.7/10 Laggards Leaders Alliance Financial Group 7.5/10 Genting Malaysia 2.4/10 Hong Leong Bank 7.4/10 Genting Plantations 1.7/10 Malayan Banking (Maybank) 7.3/10 YTL Power 1.4/10 0 1 2 3 4 5 6 7 8 9 10 RHB Bank 7.1/10 YTL Corporation 0.4/10 MSCI Malaysia Index MSCI Emerging Markets Index MSCI ACWI Index This report is based on the 41 constituents of the MSCI Malaysia ACWI Index as at 11 September AUTHORS 2017. Some references are made to other Malaysian companies in coverage. Damion Rallis and Zanele Mtshali | Senior Associates OCTOBER 2017 © 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI.COM | PAGE 1 OF 30 CORPORATE GOVERNANCE IN MALAYSIA | OCTOBER 2017 OWNERSHIP SNAPSHOT Governance risks vary widely depending on the nature of the company’s ownership, the separation of ownership and management, and the design of the capital structure and its impact on shareholders’ voting rights. In 2016, Bursa Malaysia reported that foreign institutions held 27% of the Malaysian market on average, 53% was held by domestic institutions and 20% by retail investors. Largest Owner Classification Key Owner Types Complex Ownership Structures Control Enhancing Structures Controlled ownership dominates in State-owned and family firms are most Pyramid structures are relatively common Multiple share classes with unequal voting rights are Malaysia. 80.5% of MSCI Malaysia common, with each present in 34.1% of at Malaysian family conglomerates to not permitted in Malaysia. On the other hand, foreign Index constituents include a MSCI Malaysia Index constituents. At 31.7%, help preserve family control at the ownership limits are common, particularly in strategic shareholder or shareholder group who subsidiaries are the next most significant various listed entities. There are no sectors including telecommunications, banking and control 30% or more of the voting group. recorded incidents of cross transportation. In addition, golden shares are still in rights. No companies are widely held. shareholdings. effect at several state-owned firms. 87.8% 80.5% MSCI Malaysia Index MSCI Malaysia Index MSCI Malaysia Index MSCI Malaysia Index MSCI Emerging Markets Index MSCI Emerging Markets Index MSCI Emerging Markets Index 68.3% MSCI ACWI Index MSCI ACWI Index MSCI ACWI Index MSCI ACWI Index MSCI Emerging Markets Index 37.3% 28.2% 34.5% 34.1% 34.1% 31.7% 24.2% 16.0% 24.4% 12.2% 19.5% 18.6% 15.1% 9.7% 9.2% 11.8% 14.6% 1.8% 12.1% 10.5% 4.2% 2.3% 10.4% 7.2% 6.3% 0.0% 0.0% 1.2% 7.5% 5.4% 8.9% 3.5% 0.0% 1.7% 0.0% 0.0% Multiple Share Voting Rights Extra Voting Golden Shares Classes w/ Limits Rights - Controlling Principal Widely Held Founder Family State Corporate Cross Pyramid Unequal Voting Ownership Parent Shareholdings Structure Rights Duration Controlling – Largest shareholder or Founder – Founder serves as Chairman or CEO. Pyramids – Control is exercised through a Multiple share classes with unequal voting rights (or no shareholder group holds 30% or more of chain of non-controlled companies that voting rights for one class) or classes which carry different Family – Family hold 10% or more of the voting the voting rights. rights and maintain at least one board seat. ultimately results in a shareholder gaining rights to vote on director appointments. voting power which is misaligned with their Principal – Largest shareholder or Voting rights mechanisms include ceilings on ownership or State – State directly or indirectly controls 10% economic interests. shareholder group holds between 10% of the voting rights. voting rights, voting rights limits based on nationality, or and 30% of the voting rights. Cross shareholdings – Two or more entities additional voting rights accruing depending on ownership Corporate Parent – Issuer is a subsidiary (30% or Widely Held – No shareholder or hold at least 0.5% of shares in each other, or duration. more) of a corporate, which itself may be listed. shareholder group holds greater than 10% via a circular or more complex cross- Golden shares – Government veto rights for transactions or shareholding arrangement. of the voting rights. *Owner types may overlap or separate owners owner changes to governing documents. may be of different types at a company © 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. OCTOBER 2017 MSCI.COM | PAGE 2 OF 30 CORPORATE GOVERNANCE IN MALAYSIA | OCTOBER 2017 MARKET CHARACTERISTIC | FAMILY OWNERSHIP NOTABLE DEVELOPMENTS | HONG Controlled companies form the dominant ownership group in Malaysia (31 of 41 companies). Family firms, where the LEONG GROUP dominant shareholder group includes more than one family member and at least one family member is a current 1 Changes afoot at Hong Leong include a possible director, are a defining subset of the MSCI Malaysia Index. There are 14 family firms , more than one-third of the market, generational shift in power. Will the empire lean that hold 23% of the total market capitalization. Out of the 14 family firms, nine companies are representatives of family on external leadership to aid the succession? 2 conglomerates , family-led groups consisting of at least two listed companies, with at least one of these constituent of Quek Leng Chan stepped down as Gouco Group the MSCI Malaysia Index. chair, one of the key firms of the family’s Hong Leong empire, handing the reins to his younger Figure 1 | TSR Performance of MSCI Malaysia Index Family Ownership versus Peers (Average 5-Year TSR %) brother. A reconsolidation of the empire may be 3000 in effect, splitting it up by region among various 2717 younger brothers and sons. Outsider Grant Kelley replaced Kwek Leng Joo as CEO at City 2500 Developments, will the trend continue as Quek Leng Chan continues to hand over the reins? 2000 BIGGEST CONCERN | IOI CORP In April 2016, for the second time in five years, 1500 the certification for IOI’s sustainable palm oil was suspended by RSPO, an industry-backed TSR (%) TSR 1000 standards organization. The suspension led 609 several major clients (including Kellogg’s, Nestle and Unilever) to terminate their supply contract 500 306 with IOI. While the suspension was lifted in 83 August, several contracts may be lost 147 0 39 50 57 permanently. -10 -22 -63 -70 MSCI Malaysia Index Family MSCI Malaysia Index Family MSCI Malaysia Index (ex. MSCI ACWI Index Family Firms A closer look at the board reveals low Conglomerates Firms Family Firms) (ex. Malaysia) independent oversight: four of eight directors -500 are Lee family members, including the CEO and 5 Yr TSR High 5 Yr TSR Low 5 Yr TSR Average Chair. Despite pressures in the market, there are n. MSCI Malaysia Index Family Conglomerates = 9; n. MSCI Malaysia Index Family Firms = 14; n. MSCI Malaysia Index (ex. Family Firms) = 27; n. no female directors at IOI and the board met MSCI ACWI Index Family Firms (ex. Malaysia) = 445 only five times in 2016. Source: MSCI ESG Research. Data as at 11 September 2017. 1 Herein referred to as “family firms”: Genting, Genting Malaysia, Genting Plantations, Hong Leong Bank, Hong Leong Financial, Hartalega, IOI, IOI Properties, PPB, RHB Bank, Sapura Energy, Westports, YTL and YTL Power. 2 Herein referred to as “family conglomerates”: Kwek/Quek family (Hong Leong Group); the Lee family (IOI Group); the Lim family (Genting Group); and the Yeoh family (YTL Group). © 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. OCTOBER 2017 MSCI.COM | PAGE 3 OF 30 CORPORATE GOVERNANCE IN MALAYSIA | OCTOBER 2017 RISK – FAMILY CONTROL & LACK OF INDEPENDENT OVERSIGHT Tight family control and potentially convoluted family conglomerate Shareholder returns for family firms in the MSCI Malaysia Index underperform structures preclude thorough investor analysis. both the rest of the constituents of the MSCI Malaysia Index and MSCI ACWI Index family firms (ex-Malaysia). One of the main negative drivers is the TSR Board entrenchment and infrequent board meetings leave minority underperformance of family conglomerates (see Figure 1). investors exposed to risks of being shut out of decision-making. Overall, the center of power at these firms is too tightly wound around family As family firms move through generations and founders’ original stakes are control, leading to diminished independent oversight and leadership.