Corporate Governance – Khazanah’s experience

18th May 2011

*Views of the speaker are his; usual caveats apply in that the views may or may not reflect those of Khazanah’s. Contents

A 1. History and evolution of GLCs Government Linked 2. Roles of Government Companies (GLCs) 3. Reporting structure of GLICs and GLCs

B 4. GLC Transformation Programme GLCTransformation 5. Driving shareholder value creation Programme 6. GLCs have brought increasing benefits to all stakeholders

C 7. Roles of Khazanah and GLCs in national transformation Khazanah 8. Equities Portfolio by Sector and Geography

9. Evolution of Corporate Governance in

D 10. Khazanah’s Monitoring & Management Framework Corporate Governance & 11. Berhad (“TNB”) Conclusion 12. Corporate Governance of TNB 13. Conclusion A. Government Linked Companies (GLCs) 1. History and evolution of GLCs

2000 Government takeover of MAS 1972 1979 1992 2002 1969 LTAT is Malaysian Airport and Postal MAS widespread asset established Malaysianised Department privatised unbundling exercise 1987 1999 becomes Jabatan Telekom Bank Bumiputra merger with government owned Corporatised Commerce Bank

1957 1983 1997 2000 2005 CURRENT

Recovery Industrialisation and Rapid economic growth Financial GLCT and moving up the value chain and privatisation Crisis Programme restructuring

1951 1962 1978 1985 1994 EPF LTH PNB Proton launch KNB began 1998 2001 established established established first model operations Danaharta Financial Sector 1994 established Masterplan 1990 announced Lembaga Letrik Negara 1970 1981 Corporatised Launch of New Launch of Heavy 1998-2001 Economic Policy Industrialisation Asian Financial Crisis (NEP) Programme 2000 TM takeover of 2001 Malaysianised GLCs Danasaham takeover of Renong 1 Value adding to Malaysia’s natural resources Corporatised 2 Providing Essential Public Services Recapitalised and 3 Restructured Recovering from the Crisis Financial Institutions 4 Becoming internationally competitive Source: Khazanah 1 A. Government Linked Companies (GLCs) 2. Roles of Government

Developer/ Regulator Financial Public Goods

• Provider of public goods, • Provide level and • Some entities continue to be infrastructure or services conducive playing field controlled by the Government • Provision of law and order • Protection of public for historical reasons • More socio-economic in nature interest • Create sustainable economic • Enforcement value

Khazanah as Government’s strategic investment arm • Focus on shareholder value creation • Careful not to crowd out private sector • Optimal and evolving holdings in companies and sectors • Strengthen management capabilities • Financial returns as principal measure of KPIs

Source: Khazanah analysis 2 A. Government Linked Companies (GLCs) 3. Reporting structure of GLICs and GLCs

PCG • Provide guidance • Finance Minister • Review progress • Finance Minister II • Help resolve road- • Provide input as needed • Prime Minister Office blocks • Share learnings and representative best practices across • GLIC CEOs/MDs organisations

GLC Roundtable

Joint-Working Team (JWT) Secretariat: GLIC representatives

• Oversee and Khazanah Nasional Berhad •Employees Provident Fund (EPF) coordinate activities of Team •National Fund Management Company • Ensure overall quality and •Military Fund Board timeliness of programme •Pilgrimage Fund Board deliverables

• Represent views of different GLICs • Support development and rollout of GLIC = Government Linked Investment Companies PCG = Putrajaya Committee on GLC High Performance Programme Source: Joint Working Team Compilation 3 B. GLC Transformation Programme

4. GLC Transformation Programme

2004 2005 2006 2007 2010 We are here 2015 Phase 1: Mobilisation, Phase 2: Generate Phase 3: Tangible Phase 4: Full Diagnosis & Planning Momentum Results National Benefit

14 months 12-17 months 2-5 years 5-10 years onwards 5/2004 1/2005 PCG formed 2004 Measures 29th July 2005 Transformation Manual . KPI and PLCs Launch . Performance contracts . Policy Guidelines . Board composition reform . Ten 2005/6 Initiatives . Revamp of Khazanah . GLC leadership changes

Targeted outcomes: . Diagnosis of GLCs . 2005/6 Initiatives . Maintain momentum . Several regional champions conducted implemented . Tangible & sustained benefits across GLCs . Most GLCs performing at par with . Determination of Policy . Full roll-out in place . Visible benefits to all stakeholders, e.g., competitors Principles . Key policies endorsed and customers, vendors, employees, etc. . Initial 2004 Initiatives executed upon . Large scale strategic and financial changes launched . Early fruits of sustainable made improvements . Material changes to Boards

NKRAs 4 B. GLC Transformation Programme 7

5. Driving shareholder value creation

GLC Transformation work continues, with strong results from K-9 companies and benefits to multiple stakeholder groups

Source: G-20 Financial Reports; Bloomberg consensus estimates (as of 31 December 2010); PCG analysis 5 B. GLC Transformation Programme

6. GLCs have brought increasing benefits to all stakeholders

• BIMB, Boustead, Proton, UMW received awards for best • GEMS benefited 6,000 participants with 80% products employability rate • , CIMB, MAHB, MAS, Maybank, Pos, TM & TNB • 34 members adopting 213 schools, benefiting received several awards as best service providers over 106,000 students • In 2010, number of students who scored straight As from PINTAR schools was 11.15% versus National Average 10.2%, an increase of 1.53% from 2009 • 2371 families have benefited across the nation Source: PCG, GLCs COMMUNITY AND CSR GLCs CUSTOMERS BENEFIT ALL STAKE- VENDORS AND SUPPLIERS HOLDERS EMPLOYEES & HUMAN CAPITAL

• TM’s vendor IC Microsystem has been awarded Malaysia’s Top Most Innovative SME in 2010 with • Study on impact of GLCT on GLC Employees grand prize worth RM 1 Million indicates that welfare of G20 employees have improved since the programme began in 2004 • TNB organises trade mission to promote its vendors’ products overseas & more than 10 vendors have ventured into foreign markets to-date

• Proton & CIMB collaborated to provide • Pos Malaysia develops partners from their financial assistance to their dealers employees through PETER (Promoting of • More than 130 vendors graduated under Vendor Development Employees to Entrepreneurs) Programmes since 2004 Source: GLCs Source: PCG 6 C. Khazanah 7. Roles of Khazanah and GLCs in national transformation

Khazanah and GLC roles in national transformation

Source: Khazanah 97 C. Khazanah 10 8. Equities Portfolio by Sector and Geography

Malaysian investments make up almost 92% of Khazanah’s equities portfolio

Breakdown of Equities Portfolio by Sector and Geography as at 31 Dec 2010

*Note: Based on unaudited accounts Source: Khazanah analysis 8 D. Corporate Governance & Conclusion 9. Evolution of Corporate Governance in Malaysia

2001 2002 2003 2004 2005 2007 2008 2009 2010

• Major revamp • IIA issues • Securities • Introduction of • Issue • Revised • Capital Market • SC and Bursa • International of KLSE guidance Commision provisions guidelines to Malaysian Code & Services Malaysia Corporate Listing for introduced governing by facilitate shift on CG to Act 2007 introduced the Governance Requirement: internal Merit-demerit Securities to post- strengthen substituted Corporate Consultative new chapter on audit incentives in Commision: vetting of boards, audit Securities Governance Committee corporate function. Guidelines on 1)Whistle- prospectuses. committees and Industry Act Guide. formed. governance. Issues/Offer of blowing; internal audit 1983. Securities. 2)Enhancing • Bank Negara functions. • Bursa Malaysia • Introduction of • Issuance of enforcement/ Malaysia • Establishment launched the Whistleblowers guidance for • Director’s redress issues • Listing of the new unified Protection Act directors on Continuing mechanisms Guidelines requirements Malaysian board (main 2010. statement of Professional for breeches of on Corporate mandate Investor market) and internal Education securities laws. Governance disclosure of Relations the ACE controls. (“CPE”) for Licensed state of Association market. 2012 Program • Launched “Best Financial compliance with (MIRA) and the •The Malaysian • Director’s commences. Practices in Institutions. the Code (above) Institute of • Audit and Competition Act Mandatory Corporate Corporate Assurance 2010 is Accreditation Disclosure”. • Institutional • Amendments to Responsibility Standards expected to be Program Shareholders Companies Act (ICR). Board and the implemented in commences. • High Level Pro-tem 1965, focusing on Ethics January 2012 Committee on Committee directors’ Standards • Minority Corporate formed led by responsibilities. Board Shareholder Governance MSWG. established. Watchdog Enforcement • Public Company Group established. Accounting established. Oversight Board formed. Source: Khazanah 9 D. Corporate Governance & Conclusion 10. Khazanah’s Monitoring & Management Framework

1. Leadership Bench – Board and Management Khazanah’s Five-Pillar Terms of 2. Strategy – Clear strategic direction Engagement

Framework 3. Systems and Controls – Strong processes and good with Its accountability Investee Companies 4. Industry Structure – Right structure & regulation

5. Monitor & Empower – Performance management

Source: Khazanah analysis 10 D. Corporate Governance & Conclusion 11. Tenaga Nasional Berhad (“TNB”)

1949 1965 1978 1990 Renaming CEB National Load Establishment of NEB was 2011 to National Despatch Centre Central Electricity corporatised as TNB today Electricity Board (NLDC) was Board (CEB) TNB (NEB) established

• CEB became the • Grid Control • It was officially • TNB was listed in • Top 10 largest owner of 34 Centre was set up opened by the February 1992. stocks on Bursa power stations to cater for Prime Minister of • TNB Initial Malaysia based on with a generation integration of the Malaysia. Public Offering market capacity of network. • Equipped with a exceeded capitalisation (ex- 40MW. computer based expectations with banks) • CEB award Supervisory share applications • TNB’s market scholarships to Control and Data worth USD3.6 capitalisation young Malayans Acquisition billion. reached USD13.7 to study (SCADA) system. • 1993 – TNB billion. electrical • Completion of entered the • 7 million engineering in National Grid. Power Purchase customers. British technical Agreement with colleges.. the first Independent Power Producer in Malaysia.

Source: Tenaga Nasional Berhad 11 D. Corporate Governance & Conclusion 12. Corporate Governance of TNB

Challenges

Responsibility of TNB Accountability and Board of Directors Shareholders Audit Energy Security and Reliability Roles and Relations between Financial Reporting responsibilities TNB and Investors Energy Efficiency Separation of Audit/Internal Annual General powers between Control Meeting (“AGM”) Chairman and CEO Continuing Human Capital Disclosure of Development Board Review Material Information

Source: TNBSource: Annual Tenaga Report Nasional Berhad 12 TNB make reasonable profits for all D. Corporate Governance & Conclusion 13. Conclusion

 Effective and good governance is absolutely fundamental.

 All parties must play their parts in the eco-system including:

 Employees, shareholders, public, media, government and regulators.

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