Revisiting the Bumiputera corporate equity issue

Government policies to enhance Malay Bumiputera and other ethnic minority participation in commerce and industry are better achieved through capacity building efforts such as investment in human resource development and skills training rather than through forced equity restructuring.

Written by Dr. Lim Teck Ghee, CPI   

More than five years have passed since the Asli corporate study report revealed that Bumiputera ownership of corporate equity in the Kuala Lumpur Stock Exchange had exceeded the 30 percent target.   

The study’s findings of a 45 percent Bumiputera share were based on a different method of measurement compared with the official one. Using market value as opposed to the par value valuation official method, and allocating the equity of GLCs according to racial share, the study noted that it was time to do away with the policy which had been implemented since the 1970s.  

The study’s findings raised a hue and cry not only because it challenged the official data on the share equity attained by the Malay community but more importantly because it challenged the official orthodoxy.  

Strong reactions from various Umno leaders at that time indicated their fury — and perhaps fear — that the Asli study negated a long-held belief on how the Bumiputera corporate equity strategy was necessary for Bumiputera economic advancement and synonymous with the interests of the Malays.

Lost in the firestorm were the study’s recommendations that encompassed a wide spectrum of issues. Those recommendations are reproduced below.

I hope they will be read more carefully by the present crop of policymakers and politicians that are trying to find their way out of what has correctly been referred to as the “bastardization of the NEP” – an assessment made by one of the nation’s foremost bankers, Nazir Razak.

Corporate equity findings (from Centre for Public Policy Studies’ Report)

    *  GLCs are leading shareholders of corporate equity. The GLCs’ pattern of operation reflects little entrepreneurial and manufacturing capacity.
    * Regulatory agencies ensure that 30% of the equity of quoted firms are owned by Bumiputera. These agencies do not, however, ensure that individual Bumputera allocated large volumes of publicly-listed equity, especially during IPOs, retain their ownership of this equity.
    * Publicly-listed shares distributed to Bumiputera minority shareholders during IPOs should be done in a more equitable and transparent manner. Currently, an elite benefits from such IPOs, and these shares are quickly divested for huge profits.
    * The continuous divestment by Bumiputera shareholders (partly as a means of asset diversification) has been mainly responsible for the so-called “under achievement” by Bumiputera in relation to the NEP corporate equity targets based on the official definition.
    * Even if this divestment is not taken into account, Bumiputera share of corporate equity presently is well in excess of the target of 30 percent, if more objective methodologies of measurement are used.
    * There is little intra-ethnic business cooperation among leading Chinese businessmen. There is growing evidence of inter-ethnic partnerships forged on a basis where the partners contribute equally to the development of an enterprise.
    * Government regulation and policies, principally in the form of NEP measures, are stymieing entrepreneurial development and hindering domestic and foreign investment.
Corporate equity recommendations

    * Enterprises owned by the GLCs must be managed by competent professionals with expertise in the business of the company under their charge. Senior management positions should not be determined on the basis of ethnic background but on merit and professional achievement.

    * The government should cease allocating equity to individual Bumiputera during IPOs. The allocation of shares to Bumiputera before IPOs tend to promote Ali-Baba relationships that only serve to undermine investor confidence and foster ill-will.

    * Bumiputera trust agencies, such as the ASN and ASB, should be the primary beneficiaries of IPOs allocated to this community. At the same time, there should be equal determination by the government to increase the share participation of the Indian and East Malaysian Bumiputera communities through similar community-based trust agencies.

    * Government initiatives to promote enterprise development on the basis of affirmative action will undermine entrepreneurial endeavours, which have emerged primarily among SMEs, without state support.

    * The government should focus its attention on promoting key economic sectors and SMEs as a means to develop Malaysia’s economic potential. The government should particularly tap into the potential of the new middle class to create thriving enterprises and find means to support such endeavours.
    * Racially oriented affirmative action and the promotion of Malay-owned businesses have created serious intra-ethnic Malay cleavages while also hindering the creation of a competitive economic environment. The government should not continue with the continued promotion of such policies.

    * In calculating the respective ethnic shares of the corporate equity, there is need to apportion the share of GLCs as well as nominee companies according to the ethnic composition of the country.  This will provide a fairer and more objective computation of the respective ethnic shares as compared with the current methodology.

    * Government policies to enhance Malay Bumiputera and other ethnic minority participation in commerce and industry are better achieved through capacity building efforts such as investment in human resource development and skills training rather than through forced equity restructuring.