Good governance as a lever for growth

Petronas has gained international recognition for its good governance practices.

Petronas has gained international recognition for its good governance practices.

By Shahjanaz Kamaruddin

The average Malaysian nowadays is grappling over the rising cost of living as government policies of fiscal consolidation see the rolling back of subsidies and the eventual introduction of consumption-based tax. In an environment where everyone is tightening his/her belt, there is heightened awareness of the need to know how taxes and public monies are spent for the general good of the community. Similarly investors are increasingly prudent and seeking value for their money by investing in businesses with a sound governance culture.

Malaysia’s national oil company, Petrolium Nasional Berhad (Petronas), leads the way in many respects in terms of profitability and applying high standards of governance, transparency and ethical conduct. In an email interview its spokesperson commented: “In ensuring and cultivating high standards of governance, transparency and ethical conduct in an organisation, in my opinion, a company must ensure that their current policies and procedures; the system and processes in the company, are resilient to corruption. This includes the code of conduct, detailed systems and procedures that support the anti-corruption programmes, and the communication strategies to educate on anti-corruption knowledge and awareness to their employees as well as the external stakeholders.”

Petronas’ commitment to such exacting standards has drawn international recognition. It was ranked 5th among emerging market multinationals in the overall index for its organisational transparency, reporting on anti-corruption programmes and country-by-country reporting  in research conducted by Transparency International published in late 2013. This was the best score of an unlisted company among the 100 emerging market companies surveyed, a clear indication of Petronas’ respectable standing among its peers on the world stage and the level of confidence it has among its business peers and industry players alike.

According to the Petronas spokesperson, its business integrity framework is continuously reviewed and enhanced from time to time. This framework includes the implementation of a comprehensive and dynamic anti-bribery and corruption programme. Its management supports and encourages a high business integrity culture among its customers, business partners and suppliers by requiring them to adhere to rigorous standards and best practices.

Petronas’ good governance practices are matched by its financial results. Its net profit for the third quarter ended Sept 30, 2013 jumped up by 16.1 % to RM14.47 billion from RM12.47 billion the previous year. It expects to make a pre-tax profit of RM95 billion to RM96 billion in 2013, contributed partly by a strengthening US dollar and ramping up of production.

As a nation Malaysia is taking measures to ensure its regulatory environment allows for trade to thrive. Based on its performance, the World Bank in its 2014 Ease of Doing Business Index ranked Malaysia in 6th position compared to 18th in 2012 and 12th in 2013. Malaysia is also ranked first in “Getting Credit” and fourth in “Protecting Investors”.

This independent assessment clearly reflects investor confidence in the country’s political and economic stewardship. Added to these achievements is Malaysia’s improvement in the Corruption Perception Index ranking in 2012 from 60th spot to 54th out of 174 countries. Using Transparency International as a benchmark Malaysia is ranked 50th out of 180 countries in terms of corruption and transparency.

Inevitable costs of doing business

Whilst the world recognises and acknowledges the successes of Petronas and those of the nation as  whole in addressing  graft,  the KPMG Fraud, Bribery and Corruption Survey Report 2013 launched earlier this year show that a large number of public-listed companies view fraud, corruption and bribery as inevitable costs of doing business. The Report even goes as far as to suggest that doing business in Malaysia can never be absolutely corruption-free. A majority of the respondents actually perceive corruption as having increased over the last three years. In Ernst & Young’s Asia-Pacific Fraud Survey Report Series released in September 2013, it was found that Malaysia together with China are ranked as among the most corrupt nations.

These findings appear to call into question the credibility of the other surveys or at the very least highlight the urgency with which corporate governance issues must be addressed in Malaysia’s private sector. If corruption were allowed to go beyond the tipping point, the ecosystem would deteriorate to such a degree that improvement from then on would be particularly arduous. Malaysia’s competitiveness would be jeopardised as cost of business and inflation rise.

Many Malaysian companies have an ethics and code of conduct policy in place. The real challenge lies in effectively enforcing and implementing those policies. Those who engage in unethical conduct should be made to face the legal consequences of their actions.

The next six years will be critical for Malaysia as it strives to break from the middle-income rank to become what the World Bank categorises as a high-income nation. The reforms being implemented are meant to address myriad challenges, and this would require both the public and private sectors to play their part in tandem by pledging a more accountable and transparent administration with a focus on improving efficiency and productivity. Business integrity therefore has to be developed through greater accountability and transparency and ethical practices internalised.

Malaysia’s successes, including those of Petronas, are to be appreciated and emulated. However there is more to be done for the country to attain steady-state growth. Sound governance practices where rigorously implemented can be the levers to ensure sustainable and enduring socio-economic development, bettering the nation’s chances of becoming a high-income nation by 2020.

Leave a Comment