GOOD GOVERNANCE CHAPTER

7
 LEARNING OBJECTIVES:
At the end of this chapter, students should be able to understand and discover:

1. Concept of good governance

2. Pillars of good governance
3. Public and private governance issues in Malaysia
4. Importance of good governance
5. Challenges to good governance
 1. CONCEPT OF GOOD GOVERNANCE
*Governance:
 The process of decision-making and the process by which
decisions are implemented (or not implemented). Governance
can be used in several contexts such as corporate governance,
international governance, national governance and local
governance
• An analysis of governance focuses on the formal and informal
actors involved in decision-making and implementing the
decisions made and the formal and informal structures that have
been set in place to arrive at and implement the decision.
 Government is one of the actors in governance. Other actors involved in
governance vary depending on the level of government that is under
discussion.
 In rural areas, for example, other actors may include influential land lords,
associations of peasant farmers, cooperatives, NGOs, research institutes,
religious leaders, finance institutions political parties, the military etc. The
situation in urban areas is much more complex.
 At the national level, in addition to the above actors, media, lobbyists,
international donors, multi-national corporations, etc. may play a role in
decision-making or in influencing the decision-making process.

* Retrieved November 10 2013 from

http://www.unescap.org/pdd/prs/ProjectActivities/Ongoing/gg/governance.asp
 2. PILLARS OF GOOD GOVERNANCE
8 major characteristics of good governance
(Retrieved November 10 2013 from http://www.unescap.org/pdd/prs/ProjectActivities/Ongoing/gg/governance.asp)

Participatory
• Participation could be either direct or through legitimate intermediate institutions or representatives, and it needs to be
informed and organized.
Consensus Oriented
• Good governance requires mediation of the different interests in society to reach a broad consensus in society on what is in
the best interest of the whole community and how this can be achieved.
• It also requires a broad and long-term perspective on what is needed for sustainable human development and how to
achieve the goals of such development.
• This can only result from an understanding of the historical, cultural and social contexts of a given society or community
Accountable
• Not only governmental institutions but also the private sector and civil society organizations must be accountable to the
public and to their institutional stakeholders.
• Who is accountable to whom varies depending on whether decisions or actions taken are internal or external to an
organization or institution.
• In general an organization or an institution is accountable to those who will be affected by its decisions or actions.
• Accountability cannot be enforced without transparency and the rule of law.
Transparent
• Transparency means that decisions taken and their enforcement are done in a manner that follows rules and regulations.
• It also means that information is freely available and directly accessible to those who will be affected by such decisions
and their enforcement.
 Responsive Effective & Efficient Equitable & Inclusive Follows the Rule of
Law
• Good governance • Good governance • A society’s well • Good governance
requires that means that being depends on requires fair legal
institutions and processes and ensuring that all its frameworks that
processes try to institutions produce members feel that are enforced
serve all results that meet they have a stake impartially
stakeholders within the needs of in it and do not
a reasonable society while feel excluded from
timeframe. making the best the mainstream of
use of resources at society.
their disposal. • This requires all
groups, but
particularly the
most vulnerable,
have opportunities
to improve or
maintain their well
being.
 CORPORATE GOVERNANCE
DEFINITION

•Is the system of rules, practices and processes by which

a company is directed and controlled
• involves balancing the interests of a company’s
stakeholders
 IMPLICATIONS
Has wider implication and is critical to economic and social
well-being.
i) Providing incentives and performance measures to achieve
business success
ii) Providing accountability and transparency to ensure the
equitable distribution of the resulting wealth
 GOVERNANCE VS. MANAGEMENT
Governance Management
It concerns with the intrinsic nature, purpose, Is a hands-on activity.
integrity, and identity of the institution with It is a conducting or supervising action with
primary focus on the entity’s relevance, judicious use of means to accomplish certain
continuity aspects. ends
Focuses primarily on specific goal
attainment in prescribed organization

CORPORATE GOVERNANCE CORPORATE MANAGEMENT

External focus Internal focus
Open system Closed system
Strategy oriented Task oriented
“WHERE COMPANY IS GOING” “GETTING THE COMPANY THERE”
Process, structures, relationships – BOD What the executives do to define and
oversee what its executives do achieve the objectives of the company
Job of BOD
12/27/2018 JobAZLYN/2009
of executives
 CORE COMPONENTS OF CG

1. Fairness -
protection of shareholder rights (i.e. rights of minority and
foreign shareholders). Rights can be strengthened by
ensuring the enforceability of contracts made by the
providers of capital
 CORE COMPONENTS OF CG
2. Transparency -
by the timely disclosure of adequate, clear and comparable
information concerning corporate performance, governance and
ownership
3. Accountability -
by clarifying governance roles and responsibilities and by means of
voluntary efforts to ensure the meeting of managerial and shareholder
interests as monitored by the board of directors

4. Responsibility -
by ensuring corporate compliance with other laws and regulations
reflecting the existing society’s values
 3 BROAD APPROACHES
A Prescriptive A Non-Prescriptive The Hybrid
Approach Approach Approach

“standard of “approach that simply Combination of the

corporate Governance requires CG practices first two
is set by specifying in a company to be
desirable practices disclosed without “Need for the
coupled with the specifying any standard” prescribing particular
requirement to disclose principles & structure
compliance with them. and should then apply
Each company’s CG need these flexibly”
may be different and
Standard best practice
directors of companies Broad principles and
benchmark for all
should apply their minds apply these flexibility
listed companies
to address these needs with common sense to the
varying circumstances of
12/27/2018 individual companies
AZLYN/2009
3. PUBLIC AND PRIVATE GOVERNANCE ISSUES IN MALAYSIA

 Despite the fact that the general public seldom link the governance of the
private sector with the public sector, governance in both sectors has been
moving closer (Armstrong et al, 2008). As acknowledged by the Uhrig Review
(Uhrig, 2003, p. 26):

“There are benefits in looking to developments and lessons learnt in the private
sector when considering appropriate governance frameworks for the public
sector. The environment in which the private sector operates creates significant
challenges for companies. The consequences of failure and threat of takeover
provide incentives for the private sector to constantly strive to improve
governance practices. In dealing with the challenges of the market, the private
sector has gained considerable experience in applying the core elements of
governance. The experience of the private sector has provided the review with
valuable insights into the full spectrum of governance arrangements and the
corresponding impact on outcome”
 There is an opposing view (for example, Wettenhall, 2004) that suggests that
governance experience in the public sector is long standing and that many of
the criteria applied in the private sector are unsuitable for the public sector
(Armstrong et al, 2008)
SOME DIFFERENCES IN GOVERNANCE BETWEEN THE PUBLIC AND PRIVATE SE CTORS
(ARMSTRONG ET AL, 2008)
 The similarities are: in the private sector, managers acting as the agents for
shareholders oversee the day-to-day management of the listed company.
 In parallel, in the public sector, the officials of the public sector (the public
servants) acting as the agent of tax payers manage the public organisation for
the purpose of serving the best interest of the general public
 In terms of managing the interests of various stakeholders, in the case of the
private sector, there is an increasing consensus among controllers of publicly
listed companies that the company should not only serve the best interest of the
shareholders, it should also consider the interest of other stakeholders of the
company such as the interest of employees, customers, suppliers as well as the
interest of the local community where the corporation is operating.
 In the case of the public sector, various levels of governments will have different
stakeholders but the ultimate aim is to serve the public interest and provide
services to the community on behalf of the government (Uhrig, 2003, p.30), and
at the same time to provide adequate solutions when market failure is likely to
happen (Uhrig, 2003, p.32).
 Differences between the public sector and the private sector
governance are also obvious: they serves different interest groups and
the public sector is subject to much greater scrutiny. (Armstrong et al,
2008)
 The independence is a major difference. All public sector entities are
subject to Ministerial control and auditing by an Auditor-General; they
must meet performance targets and they are constrained by political
reality. (Armstrong et al, 2008)
 In addition, usually the appointment and removal of chair and CEO is at
the discretion of the Minister.
 Another related difference is that should an enterprise fail, it goes out
of business and the owners lose their investment. (Armstrong et al,
2008)
 Government enterprises are more likely to be rescued and losses
absorbed even if the enterprise is closed down (Armstrong et al, 2008)
Issues of ethics and governance in Malaysia
 There is widespread view that the privatization policy in Malaysia
has favoured the vested interests and many beneficiaries were
chosen based on political and personal connections and incurring
losses and liabilities on many occasions.
 Audit reports reveal high incidence of failures on part of the
federal, state, and local governments to comply with relevant rules
and regulations, loss and misuse of public funds, improper monitoring
and supervision.
 Privatization programmes and Government procurement in Malaysia
are conducted through non-transparent processes.
 Only notifications of tenders are made public. There is also avenue
for negotiation.
 A greater cause of concern is the fact that concessions agreements
are considered official secrets. Due to a non-transparent selection
process, the concession agreements and Government procurement
lead to sub-optimal outcomes.
 This has also led to allegations of corruption. The Public Works
Department is under siege for the multi-billion Ringgit fiascos
involving the MRR2, the Matrade Building and the Navy Recruit
Training Centre.
 A recent issue of corporate governance is that of air cargo firm
Transmile that revealed net losses of RM126 million for 2006
instead of a profit of RM156 million.
 It also booked losses of RM370 million for 2005 instead of a profit
of RM86 million.
 In May 2007, the firm announced it was unable to finalise its 2006
financial accounts after its external auditor Deloitte & Touche said it
was dissatisfied with the fairness and validity of some transactions.
 Overstated revenues were among false financial statements that the
company had been filing.
 It is very clear that at both Megan Media Holdings Bhd and
Transmile Group Bhd in Malaysia, there have been serious
transgressions with accounts being falsified and profits overstated
by hundreds of millions of Ringgit.
 And there are perhaps another half a dozen companies at least
where similar things have happened and there is serious doubt
whether their accounting records can be relied upon by investors to
give the correct information.
 The important factor is that when such corporate crimes are
committed, especially when it involves listed companies, it is
imperative to get the persons responsible under the law, otherwise
there is no disincentive to corporate crime.
 Every nation with no exception needs to establish a government of
integrity by restraining bureaucratic corruption and to curb unethical
bureaucratic behaviour.
 Malaysian economic and political landscape has too many vested
interests seeking involvement and control.
 For instance, the fallout of a deal between Jebel Ali Free Zone
(Dubai) and Port Klang Free Zone was because of red tape, political
meddling, inaccurate minutes and attempted tax avoidance.
 The situation is completed by the lack of enforcement from every
single government body, from the town councils, to the ministries, to
the law enforcement agencies.
 Examples include illegally clearing forests, forging official
documents, destroying public property, illegally operating gaming
machines, ignoring traffic regulations, stealing metal installations,
pirating CDs and software, giving and taking bribes, misusing public
office, illegally occupying government land, under-declaring income,
dumping rubbish and toxic waste, poaching protected animals, and
etc.
Another most recent notable case in Malaysia is that of an assemblyman, Zakaria
Mat Deros who was acquitted of charges.
The Companies Commission of Malaysia (CCM) withdrew all the charges against
Zakaria and six other directors of Titi Steel Sdn Bhd and Harvest Court Industries
Sdn Bhd in the Klang magistrate’s court for, among others, not holdings AGMs, not
submitting financial statements and not submitting profit-and-loss accounts.
No reasons were given to the court but CCM officials and lawyers for Zakaria
had said the charges dropped after “representations were made” to the CCM.
This can lead to the questions of reliability and fairness of the governance
Beh, L. S (2007). ‘The Politics of Administrative Reform: Malaysia and China in
Perspective’.
4. IMPORTANCE OF GOOD GOVERNANCE

1. Promotes community confidence

 People are more likely to have confidence in their government if
decisions are made in a transparent and accountable way.
 This helps people feel that government will act in the community’s
overall interest, regardless of differing opinions.
 It also encourages local governments to remember that they are
acting on behalf of their community and helps them to understand
the importance of having open and ethical processes which adhere
to the law and stand up to scrutiny
Retrieved November 10, 2013 at http://www.goodgovernance.org.au/about-good-
governance/why-is-good-governance-important/#sthash.BTy0DrTe.dpuf
2. Leads to better decisions
Decisions that are informed by good information and data, by
stakeholder views, and by open and honest debate will generally
reflect the broad interests of the community.

Retrieved November 10, 2013 at http://www.goodgovernance.org.au/about-good-governance/why-is-good-

governance-important/#sthash.BTy0DrTe.dpuf
3. Supports ethical decision making
Good governance creates an environment where elected members
and council officers ask themselves ‘what is the right thing to do?’ when
making decisions.

Retrieved November 10, 2013 at http://www.goodgovernance.org.au/about-good-governance/why-is-good-

governance-important/#sthash.BTy0DrTe.dpuf
4. Leads to people’s participation in government’s decision making
 The government has a responsibility to ensure that all people, in
particular the poor and needy, are able to participate actively in
the political process and setting policy objectives.
 Inclusiveness and equity encompass political processes (inclusion in
the process of decision-making on development) and policy
objectives (recognition of contributions by the people to
development and their sharing in the benefits of development).
Retrieved November 10, 2013 from http://www.unescap.org/pdd/publications/MDG-access2basic-
service/MDG-access-to-basic-services.pdf
5. CHALLENGES TO GOOD GOVERNANCE
(RETRIEVED NOVEMBER 9, 2013 FROM THE GOOD GOVERNANCE CHALLENGE: EGYPT, LEBANON, MOROCCO AND PALESTINE BY TRANSPARENCY
INTERNATIONAL, 2010)

1. Entrenched/well established nature of

corruption
• Especially in developing countries.
• According to Transparency International, in their
research on Egypt, Morocco, Lebanon and Palestine,
the officials in these countries have poor
understanding on anti corruption concepts such as
integrity, transparency and accountability
• Moreover, there are certain corrupt practices such as
nepotism that are deeply embedded in the social and
political culture of these countries
2. Lack of cooperation among the main actors
There is a need for greater cooperation among the main governance
stakeholders in order to strengthen the national integrity system to
facilitate good governenace
3. Incomplete integrity system-absence of strong public watchdog
agencies
Good governance can be hampered by the absence of an agency
that overlooks at the country’s integrity issues. However, where an
agency do exist, it may also obstruct good governance when they
have limited powers and resources to play an effective role in
combating corruption
4. Political interference in the work of public and private watchdog
agencies
Both public and private watchdogs are not always free from political
interference in their work, which comes most often from the executive
branch
The interference can sometimes influence the way they operate,
especially if it concerns with sensitive issues
5. Implementation gap between legal reform and institutional
practice
There are many legislative anti corruption reforms implemented which
can be seen as evidence of increased attention to the issue of fighting
corruption
However, a closer look reveals that many of these legislative reforms
lack of proven mechanisms to ensure accountability and transparency
MALAYSIAN CODE ON CORPORATE GOVERNANCE

Developed by the Working Group on Best Practices in CG (JPK1)

and approved by the high level Finance Committee on CG.

JPK1 chaired by the Chairman of the Federation of Public Listed

Companies

Members of JPK1 comprise a mix of private and public sector

participation, example of KL Stock Exchange, The Malaysian Assoc.
of the Inst. Of Chartered Secretaries and Administrators,
International Movement for a Just World, Bar Council
SIGNIFICANCE OF A CODE ON CORPORATE GOVERNANCE FOR
MALAYSIA

Aims – set out principles and best practices on structures

and processes that companies may use in their operations
towards achieving the best possible governance
framework – composition of the board, procedure for recruiting new
directors, remuneration of directors, the use of board committees, their
mandates and their activities

Allows for a more constructive and flexible response to

raise standards in corporate governance – opposed to
more black and white response produce by regulation –
not only comply statutory regulation but necessary for self-regulation
which is preferable and standard developed more enduring
 CONT…
 Greater awareness on CG issues – to lead good CG

 Market oriented economies, companies less protected by

prescriptive legal rules and regulation – thus, need for companies
to be more efficient and well-managed than before to meet
existing and anticipated world wide competition – that’s why role
of directors increases & critical & importance – hiring the right
management, compensating, monitoring, replacing & planning the succession of
senior management is crucial

 Thus, role of the Code is to guide boards by clarifying their

responsibilities
 END OF CHAPTER 7
Identify the major actors involved in a university administration,
particularly UiTM. Choose any one of the characteristics identified
earlier, and elaborate on any issue you think should be solved