GLIC Control

Abstract

This chapter analyses the control mechanisms employed by the government when dealing with the seven GLICs. The primary control mechanisms used are legislation, public policies, business groups and pyramiding, and directorships and investment panels. The chapter reviews each of these control mechanisms carefully, tracing how they are employed by the government to control the GLICs and the GLCs it owns.

Since five of these GLICs are statutory bodies—PNB and Khazanah are companies—this chapter examines the legislation that governs how they operate. In these pieces of legislation, attention is also paid to the authority that the Minister of Finance has over the GLICs, to determine their investment patterns as well as approve senior appointments, specifically members of the board of directors. The legislation overseeing LTAT and LTH accords with the fact that other federal ministers have jurisdiction over these GLICs. This chapters analyses in depth the backgrounds of the directors of these GLICs as well as the members of their investment panels.

A thorough analysis of board members and investment panel members reveals a clear decline of UMNO presence in the corporate sector. A major finding is that a new breed of corporate professionals has taken over the management of the GLICs, occupying positions on both the boards of directors and the investment panels. Crucially, the important posts of managing directors of the GLICs and GLCs are occupied by a group from the professional elite. This professional elite ensures that the GLICs and GLCs are able to perform well, though they remain subservient to Minister of Finance.

The GLICs function primarily as investment holding companies, with a business group control structure that serves as an important mechanism for one institution to control a large number of enterprises. For this reason, the corporate holdings structures of the seven GLICs as they stood in 2013 are presented and analysed in this chapter. These figures indicate that a number of quoted GLCs come under the umbrella of each GLIC. These quoted GLCs, in turn, function as business groups, involving the use of a holding company—and, in some cases, cross-holdings—reflecting that this is an extremely important corporate control mechanism. The GLICs, collectively, have common shareholdings of a range of publicly listed firms, though in numerous cases one of them has majority ownership. Block shareholding of listed enterprises, including through obscure private firms, is common among the GLICs. Block shareholdings help safeguard the collective majority ownership that GLICs have over major quoted companies.

Appendices

Appendices

Appendix 4.1 Total number of companies owned by GLCs among the top 100 ranked by market capitalization going down ten levels

Appendix 4.1 lists the total number of firms associated with the 35 publicly listed GLCs controlled by the seven GLICs, going down ten levels. What do levels mean? Subsidiaries (50% and above), associate companies (20–49%) and minority interests (19% down to 0.01%) of the 35 GLCs are captured at the first level. At the second level, the subsidiaries, associate companies and minority interests of all companies in the first level are captured. This mode of tabulation carries on for all ten levels. The Osiris search programme provides data up to ten levels.

As Appendix 4.1 indicates, the total market capitalization of the 35 GLCs in 2013 was approximately RM720 billion. Since the total market capitalization of the bourse that year was RM1.702 trillion, the GLICs had, through these 35 GLCs, 42% ownership of the total bourse. In this GLIC-GLC network, there are a total of 68,327 companies (excluding KLCCP Holdings’ subsidiaries and associate firms). A majority of these firms are owned indirectly by the GLCs, under the control of the GLICs, through subsidiaries, associate companies and minority interests.

The presence of several levels of companies within this GLIC-GLC network highlights the business group system that is employed, with the presence of a pyramiding structure. This pyramiding happens at various shareholding levels, with the GLIC at the top, down to the GLCs and their subsidiaries and associate companies. Appendix 4.1 stresses the point that not all GLCs have subsidiaries, associate companies and minority interests going down ten levels, an indication also that the size of these business groups varies significantly. For example, among business groups with ten levels, such as Malayan Banking, this GLC owns an unlisted subsidiary, Maybank Kim Eng Securities Pte Ltd., which itself functions as a business group that goes down many levels. Moreover, for this same reason, the Malayan Banking group, through huge subsidiaries such as Maybank Kim Eng Securities, has the largest number of companies linked to it. This pyramiding structure with many layers, including of business groups within business groups, is most obvious in the IJM Corp group, which has two listed subsidiaries, IJM Plantations and IJM Land, each major enterprises in their own right. ³⁰ Both these quoted companies have a large number of subsidiaries, associate companies and minority interest firms.

The various levels occupied by the subsidiaries of the GLCs indicate that some business groups are more pyramidal than others, a trend most obvious in the financial sector. Bank-based GLCs such as Malayan Banking, CIMB, RHB Capital and Affin Holdings have the largest number of companies, going down to ten levels. ³¹ However, among the top four quoted companies, Tenaga and Axiata have a high market capitalization, but also significantly fewer companies under them than Malayan Banking and CIMB. This is may well be because financial institutions operate in a decentralized way. Centralized models have “free flow of intra-group capital and liquidity with integrated organisational and risk management”, while decentralized models are “independently managed affiliates that are financially and operationally self-sufficient” (Fiechter et al. 2011).

What this table indicates is the significant number of ownership and control networks that prevail within large GLIC-based business groups. This table also draws important attention to the business networks that exist between the seven business groups of these GLICs. The networks between and within these business groups all ultimately come under the domain of the Minister of Finance, reinforcing the point about his enormous influence over the corporate sector. Of particular importance is this minister’s significant influence over the financial sector, including his control over Malaysia’s leading banking institutions.

Appendix 4.2

Directors of GLICs, 2013

Source: 2013 GLIC annual reports

Notes

• 1. The Listing Rules (LR) of Bursa Malaysia limit what the GLICs can do. Chapter 10 of the LR has strict stipulations about related party transactions (RPTs). The LR states that persons with an interest in a transaction cannot vote in an RPT exercise. For example, when it was proposed that three major GLC-based financial institutions, MBSB, CIMB and RHB be merged, this segment of the LR was the reason why EPF was prevented from using its rights as majority shareholder to vote in favour of this consolidation exercise. EPF applied to Bursa for exemption from this rule but their application was not approved and the proposed merger was scuttled.

• 2. According to the Statutory Bodies (Accounts and Annual Reports) Act, GLICs that function in this form must submit to the Auditor General their annual reports, in accordance with general accounting standards.

• 3. See the Statutory Bodies (Discipline and Surcharge) Act.

• 4. Khazanah Nasional Berhad Annual Report 2013.

• 5. Amanah Saham Nasional Annual Report 2013.

• 6. Lembaga Tabung Haji Annual Report 2013.

• 7. The MDs of LTH and LTAT, Ismee Ismail and Lodin Kamaruddin, were board members of the controversial GLC, 1MDB, whose advisory board chairman was Prime Minister Najib.

• 8. Nazir Razak and Abdul Farid Alias are the CEOs of CIMB Group and Malayan Banking respectively.

• 9. See Appendix 2.1 for a list of corporate controversies involving LTH.

• 10. MoF Inc.’s one share in PNB functions as a golden share.

• 11. In 2015, MoF Inc. divested its entire equity in Bursa to another GLIC, KWAP. Following this acquisition,

  KWAP’s stake in Bursa rose to 19.8% (The Star 29 July 2015).

• 12. Khazanah owns Malaysia Airline System and UEM Group as a result of bailouts following the 1997 currency crisis.

• 13. For further information about these unlisted companies, see Chap. 2, which deals with Khazanah’s

  history.

• 14. The use of network analysis here is to illustrate the extensive nature of GLIC–GLC interactions. Although this network analysis tool has exceptional mathematical application, it is not the focus of this study. In this book, we employ this tool only for visualization purposes, though some details about this graph are provided in Box 4.1.

• 15. Strictly speaking, in this mode of analysis, the word “power” refers to the mathematical definition of this

  concept, used as a measure of the influence of one set of actors or institutions over the rest of the actors and institutions within a network.

• 16. The studies by Lim (1981), Tan (1982) and Sieh (1982) revealed that interlocking ownership and directorships were important in ownership and control patterns of the corporate sector during the 1970s. However, by 2002, there was considerably less interlocking stock ownership and fewer directorships among Malaysia’s leading publicly listed companies. Interlocking stock ownership patterns that existed were those within one group of companies, primarily among Chinese-owned firms (see Gomez 1999).

• 17. See Appendix 4.2 for details about these directors.

• 18. For a complete list of 2013 GLIC directors, see Appendix 4.2.

• 19. Details about the backgrounds of Nor Mohamed Yakcop an Ahmad Husni are provided below.

• 20. See Appendix 4.2 for details about these directors.

• 21. Ahmad Husni worked in financial institutions (Bumiputera Merchant Bankers, Asiavest Merchant Bankers, Chase Manhattan Bank), state-level GLCs (Syarikat Majuperak Berhad, Perak Islamic Economic Corporation) and Bumiputera Commerce Bank Bhd. See Sinar Project (2017).

• 22. See: http://www.umno-online.my/2009/02/24/pemilihan-2008-senarai-nombor-calon/

• 23. During the 2008 UMNO divisional elections, Beruas UMNO Vice-Chief Azman Noh was charged in court for allegedly offering a bribe in exchange for a vote for him as vice-chief, as well as a vote for Abdul Manaf

  as division chief (The Sun 23 January 2009).

• 24. For details about controversies involving LTH, see Appendix 2.1.

• 25. For details about this scandal, see Wain (2009: 166–172). According to Wain (2009: 166), the volume of funds lost was much higher because between 1992 and 1994, Bank Negara had “gambled away between RM16 billion and RM31 billion in the biggest Malaysian scandal of all”. Wain (2009: 167) further noted that Bank Negara was speculating so heavily in the forex market in late 1989 that the “U.S. central bank, the Federal Reserve Board, privately asked the Malaysians to cool it. The Bank of England offered similar unsolicited advice.”

• 26. Mahathir’s version of this event was: “I tried to understand currency trading. The only person who had experience trading currencies was Tan Sri Nor Mohamed Yakcop” (quoted in Business Times (S) 15

  January 2003).

• 27. Nor Mohamed (2016: xvii) claims that he was also responsible for the creation of ValueCap Bhd, an idea he suggested to Mahathir as a means to deal with the prime minister’s concern “that the domestic stock market was being manipulated by foreign punters” (Wong 2011: 41–42). ValueCap had an initial fund size of RM5 billion and its primary goal was to add liquidity to the stock market. On this point, one foreign press stated: “Cynics say that is a euphemism for propping up companies like infrastructure giant Renong Bhd and property to power combine Malaysian Resources Corp Bhd, which – despite restructuring – have trouble attracting private investors” (Business Times (S) 15 January 2003). Nor Mohamed (2016: xvii), however, would later claim that ValueCap “made a profit of RM250 million for its first year of operations in 2003 and RM8.5 billion for the period 2003 to 2014”.

• 28. For details about these appointments, including personal accounts by these men of their ties to GLICs and GLCs, see Nor Mohamed (2016).

• 29. MoF Inc. has no board of directors.

• 30. For the pyramid-style ownership pattern involving IJM Corp, IJM Land and IJM Plantations, see Figs. 3.5 and 3.6.

• 31. BIMB Holdings is the only bank-based GLC that does not have links with firms going down ten levels,

  though it still has eight levels. BIMB Holdings’ smaller number of companies may be because, unlike the other

  banks, its expansion abroad is not as extensive.