After the recent political coup which has dealt a severe blow to investors’ confidence, our Prime Minister wasted no time dishing out the chairmanship of government-linked companies (GLC) and government agencies to certain politicians. This is undeniably the easiest way to shore up his political support in order to prevent another similar coup. Other than the ethical considerations, such action is perfectly legal and honestly speaking, I probably would do the same thing if I’m in his shoes. That leads me to ponder over some of the corporate governance issues in the market which have been haunting us since decades ago.

When I look at some of our GLCs like TNB, TM, MAHB etc, I can’t help salivating over the solid moat surrounding them due to the their monopolistic position. Take TNB for example, there is no way you can form another electricity provider in Malaysia even if you have RM10bil cash to on hand. I can also safely predict that we will continue to use electricity for the next 100 years. However, we still observe the subpar performance and embarrassing scandals among them. To me, the single biggest factor contributing to this scenario is the fact that the management has very little skin in the game. Some of the directors don’t even hold any shares in the companies and the chairpersons are usually parachuted from the political arena. How would this setup prioritise shareholder value?

Just look at the disgusting scandals that wipe out more than RM10bil of the market capitalisation of Felda Global Ventures Holdings Bhd (FGV). Imagine if you have invested in the IPO of FGV at RM4.55 per share and seen it plunge to the current price of RM0.85. That’s a whopping 80% of permanent loss of capital which you most probably will never recover at all. When the company has undertaken acquisitions at ridiculously inflated price, we all know where the money goes. As usual, those in charge are none other than political elites.

Another one of my favourites is Malaysia Airports Holding Bhd (MAHB) which has famously delayed the opening of KLIA2 by 2.5 years with RM2.3bil of cost overrun. If I remember correctly, the company has been headed by four different CEOs in the past ten years. I honestly cannot imagine how can a company being run efficiently if there is no alignment of interests at the management level. Capitalism can never run away from incentive and that’s the most powerful ideology I believe in. The corporate chieftains have essentially been playing the corporate coin-tossing game that says “head I win; tail you lose”. How many people have been prosecuted over corporate scandals among the GLCs? I honestly cannot remember.

Most of the GLCs are involved in capital intensive industry with strategic importance to the country, such as telecommunication, utility, infrastructure etc. Therefore they usually have large capital expenditure to maintain their existing assets. For example, TNB has allocated RM9.5bil for its FY19 capital expenditure budget and there are a lot of contracts to be given out in the process. When there is so much money and opportunities available, who cares about shareholders?

We have this thing called corporate governance that usually occupy 20-50 pages of the annual reports of all public listed companies. I usually don’t even bother to print out these pages just to save the trees. Well, the idea of having independent directors on the board is a very noble idea that serves as check-and-balance. It’s like having a pack of fearsome Rottweilers guarding your interest that would instantly wag their tails upon seeing a sausage. If you probe further, it’s not uncommon to find that a lot of independent directors are actually friendly parties with the management and their relationships goes all the way back. Please let me know if you have heard of any cases of corporate misdeeds being flagged by independent directors because I really don’t know any. Do you really think we can rely on independent directors on the GLCs to protect investors’ interest? Try to think about how they get elected in the first place.

I’m in no way suggesting that all GLCs are rubbish, in fact, some are genuinely run by competent management (Petronas for example). It’s just that in my quest for investment return, the number one rule I emphasise is to avoid permanent loss of capital rather than chasing high returns. What’s the relevance here? Well, companies generally are exposed to market risks and operational issues which require the full dedication of the management. How can we expect them to fight at all cost if they are often subject to the change in political wind? What will happen if there is always a hidden hand at play when it comes to major decisions? GLCs may have all the natural advantage in the short-term but the political baggage is what worries me. What’s the point of being a 300-pound gorilla with its hands tied?

When it comes to investing in GLCs, I may miss out on some fantastic opportunities but I rather err on the side of omission instead of commission.