Corporate Governance: The Curious Case of 1MDB

When a board of directors of a company have failed to maintain a system of checks and balances, that could possibly result in an abuse of powers or/and a significant decline in fortune. Our Managing Director, Goh Keng Haw, shares his views on good corporate governance in this article by TFA below.

 

1MDB was set up in 2009 to drive strategic initiatives for long-term sustainable economic development and promote inflow of FDI into Malaysia. The Sovereign Wealth Fund is 100% owned by the Government of Malaysia.

The fund had a Board of Directors and was managed by a senior management team. And it boasted a Board of Advisors comprising of eminent persons from around the globe. The three-tier check and balance system of 1MDB were designed to be robust and appeared to be of the highest standards.

How did 1MDB then end up having to defend vigorously against accusations that billions of dollars in transactions were unaccounted for and that they were implicated in fraudulent practices?

How was it possible that with such a seemingly world class check and balance system came to naught? And that it appears to suggest that none in the management knew what was happening at 1MDB?

While we currently do not have the full picture as the 1MDB scandal is still under investigation, we are skewed by the barrage of opinions and findings which overwhelmingly seem to suggest that there is a high likelihood that “1MDB wrongdoing is greater than what is already publicly known” (quoted from Prime Minister Mahathir Mohamad).

As an accountant, I like to analyze internal controls and examine the root cause of issues. Is the 1MDB governance structure flawed from the start?

If we look at the governance structure of 1MDB, the Prime Minister of the country, who also was the Finance Minister, holds the chairmanship off the advisory board. The Finance Ministry has the power to appoint members of the Board of Directors. The Board of Directors has the power to appoint members to the Management.

In terms of corporate governance, how independent and neutral are the Board of Advisors, the Board of Directors and the Management? In reality, does the Board of Directors hold real power, and is the Board of Advisors able to provide checks and balances in 1MDB?

While some has argued that the “Prime Minister’s signature on 1MDB documents is a formality, it doesn’t mean he decides or knows all.” Basically, this means that the Prime Minister is just signing off, but he doesn’t know what is happening. The polemicist continues to assert that “it’s not the Prime Minister who made the decisions, it’s the board of directors of 1MDB.”

I don’t expect the Prime Minister or Chairman to “know all” or make every decision, but I do think he has the responsibility to check and ask the right questions if he is signing off. Otherwise, what is the purpose of putting his signature on paper?

Learning points on good corporate governance

The verdict on 1MDB is not out yet, as it is still pending investigations, but I think there are good learning points about controls and governance that we can take away from the whole saga.

Goh Keng Haw, Director, Foxwood LLC shares his view that “it is usually a fine line to balance, the needs of doing business in an agile manner against that of clear corporate governance. Processes should be implemented and adhered to but the complexity of such processes will vary according to the size and needs of each individual company. One common process is setting a maximum fixed limit that allows a manager to exercise his own discretion. This eliminates the risk of an unacceptable loss whilst still not creating excess bureaucracy. “

So, next time when you complain about the additional layers of approvals or signatories in your work, remember that these checks and balances are necessary for good governance. However, if the signatories are just a “formality” like in the case of 1MDB, then it will be a different story altogether of course!

 

Original link to the article can be found here