Ethics in Governance: The dethroning of our value system


Ethics in Governance: The dethroning of our value system

by Firoz Abdul Hamid

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“So I have just one wish for you – the good luck to be somewhere where you are free to maintain the kind of integrity I have described, and where you do not feel forced by a need to maintain your position in the organization, or financial support, or so on, to lose your integrity. May you have that freedom.” 

Richard P. Feynman, a Nobel Prize winner for Physics in 1965

faffTrust. Integrity. Honour. Lexicons or Values? The month of November 2018 witnessed many boardroom dramas. Revelations of Facebook in the New York Times spoke of an unbecoming culture of ‘Delay, Deny and Deflect’ allegedly practised by the most senior people in one of the largest corporations ruling this world today: People who we idolise, our children want to emulate, those who frequent talk shows and international business forums. These are people we trust as exemplars for our companies, yet in a public listed company that necessitates high levels of governance, we hear reports of culture that promotes the contrary.

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And then we saw Carlos Ghosn, the Chairman and CEO of Renault who allegedly used company funds for personal purposes. Another case of a public listed company that missed its mark on governance, it would seem. We had German police raiding Deutsche Bank’s headquarters in Frankfurt as part of an investigation into whether the lender helped criminals launder money through offshore tax havens when it was not long back HSBC was fined for money laundering offences in Mexico.

These cases and companies are by no stretch of the imagination small feat adventures. These companies are and have been emulative models of case studies for management schools, its leaders receive invites to Davos and we in the ‘developing world’ are made to believe that they are who we should model our market success on.

 

Now – zooming into my own country, Malaysia. It is heart breaking to read day in day out, of late, how the house of cards is crumbling in its own weight in some of our companies with long legacies and national agendas, like Felda Corporation where its entire former board has been sued for losses and bad investment decisions. As if this was not heart wrenching enough this week, we then read Malaysia’s 64 billion ringgit ($21 billion) Muslim pilgrimage saving fund, Tabung Haji (TH), is said to be short of  four billion ringgit of deposits. The story which broke in the Singapore Sunday Times alleges that TH faked its 2016 accounts to justify its dividends. This in the same month we were told the movie-bound 1MDB Auditor General Report was tampered with. Having had several books written after it, made into documentaries and now waiting for its casts to be selected so they can film an all-Hollywood movie with all its trappings for more Malaysians to go watch how we were lied to and how our hard earned monies misused – these escapades are no longer amusing.

Added to this, we are witnessing politicians being hauled up for alleged corruption, the existing government (Pakatan Harapan) being questioned for their said promises in their election manifesto and their intent in honouring the promises. Yes in a glass half full scenario one can argue, we are witnessing transparency and rule of law taking its course. But the bigger question really is – how did we get here 61 years since our independence. Shouldn’t the systems, processes and institutions be solid enough to avert such malfeasances? Shouldn’t we have a civil service and/or leaders of government-linked companies who know that political campaigning is just wrong – yet we had very highly educated leaders, not least highly respected ones who ignored this basic ethics.

So my questions are: How did these people get to these positions? Who selected the company boards and its management teams for these companies? What were the criteria of these selection processes and what are their performance measures – or is it arbitrarily done by a few (in the corridors of power) peoples’ likes/dislikes as was suggested in a recent article in The Star?

Shouldn’t the criteria of selection be made public, for after all they are being paid by the public? Shouldn’t they (i.e. those who selected these leaders – CEOs and boards) too be hauled up for accountability when those they selected or appointed fail the country and its people?

Shouldn’t the criteria of selection be made public, for after all they are being paid by the public? Shouldn’t they (i.e. those who selected these leaders – CEOs and boards) too be hauled up for accountability when those they selected or appointed fail the country and its people?

We have CEOs in this country leading companies on behalf of the government who themselves are struggling with words like vision, mission and governance. They simply cannot understand the concept of business judgement and sustainability. Yet these candidates make the cut. I have sadly come face to face with one too many.

We have CEOs in this country leading companies on behalf of the government who themselves are struggling with words like vision, mission and governance. They simply cannot understand the concept of business judgement and sustainability. Yet these candidates make the cut. I have sadly come face to face with one too many.

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When I interviewed the current Prime Minister of Malaysia, Mahathir Mohamad, in July 2018, he spoke of his total frustration and exasperation in the breakdown of governance in our public sector and government-linked companies. He stressed on the rule of law being the way forward. This sentiment I am certain is shared by many in the country – from housewives to fishermen, from the jobless graduate to a janitor, from an underpaid and overworked teacher to a well-paid executive in a leather office.

Yet my gut keeps nagging the one question – the ones leading these companies and departments in government are no fools. They ARE well educated, they are sent to programmes (after programmes) and courses by their companies and the regulators regularly here and abroad (all paid for I might add) – yet we find these missteps, these blunders and these blood boiling news of blatant failure in public trust.

Who exactly is in charge one can’t help but wonder? Who is checking and monitoring these boards and CEOs and their management teams? In a 2014 debate at the Oxford Union, Christopher Hedges, a journalist and writer, argued that often we really do not know who is covering up for who. The committees know they are being lied to. The whole system is designed to cover up each other and this right to the door of parliamentary committees or its equivalent.

 

A friend of mine in his recent fit of frustration of this barrage of government-linked companies news argued that maybe they (the public sector and government-linked companies) have no sense of accountability because they know these funds are government-guaranteed. At the most they would be suspended or demoted within the public sector (unless clear proof of corruption). He also said that the infamous ‘passing of the buck’ rotates from the board to the CEO, to the audits (internal and external), back to the umpteen committees we have in an organisation as a feel-good factor, never mind our love for taskforces as soon as we hit a wall of problems yet no one is really in charge. No clear accountabilities. No clear indication where the buck stops.

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The well-known historian Arnold J. Toynbee, who famously wrote the nine-volume book A Study of History said that civilizations start to decay when they lose their moral fibre and the cultural elite turns parasitic, exploiting the masses and creating an internal and external proletariat.

He emphasized the importance of spiritual dimension in shaping civilisations. Toynbee studied the rise and fall of 21 civilisations and amongst others concluded civilisations fail when pride and hubris kicks in. Standard. We all know this. But he also speaks of the importance of the creative minority. This is the group of people who are able to challenge the status quo. Able to unfix and fix problems. Most of the time we have people who create a problem and then have no clue how to fix them. We also have those who give solutions to a problem but have no clue how it should then work.

The creative minority, Toynbee argue are those able to decipher what ails the society, and produce solutions that works in  order that society/civilisation moves to its next echelon of dignity – or growth as we call it today. These people are beyond your standard technocrats. They understand human dimension, sociology, culture and, in essence, they build the very fundamentals and the fabric of a strong society. When a society loses this creative minority, and when hubris and arrogance kicks in, the all famous ‘yes man’ syndrome will be its default setting. That’s when you start witnessing the house of cards fall right before your eyes.

The Roman Empire rose because of its greatness in structure and discipline. Its ultimate demise happened when lawlessness crept in, similar to the Ottomans. Hubris ruled and a sense of conceit and arrogance became honourable to embrace. The entire Abrahamic depiction of Pharaoh (the master) and Moses (the slave) plays out in every aspect of society even now in the 21st century. Today we can safely say the story of Pharaoh and Moses is well and truly alive in many parts of our own society, waiting to be destroyed by the parting of the Red Sea. In his recent essay, Terence Fernandez, a Malaysian journalist,  for instance wrote of the culture of sabotage in the public service and how it is affecting the new government operating and this after walking into a post-election (GE14) with such hope for change.

The entire governance system in Malaysian institutions needs to see a deep overhaul and the leadership at the very top has to own this problem and set it right. For if we do not, no amount of measures, programmes, talks, committees, task forces or retreats will save the day. It is a fundamental change of value system and culture necessary -one that takes time — one that isn’t always popular with politicians who by and large work towards the next election, and certainly not a top priority for three-to-five-years contract chief executives whose key performance measure is bottom line.

Malaysia needs to expand and grow its creative minority. We need many more who are able to stand up in the crowd and say: this is wrong and, no, this will not work. We need people who speak truth to power in our public sector and government-linked companies. We really are in desperate need of more people with moral courage in our boardrooms and the corridors of power, people who are able to rationally articulate wrong when it simply is wrong. This does not require an Ivy League degree. It does not require scores of titles. It requires a culture that incentivises moral courage. For this to happen throughout the entire value system, its incentives and remuneration system and culture must change. This has to be led by the CEO of the country (our Prime Minister), not a task force.

In the wake of the brutal Washington Post columnist, Jamal Khashoggi’s, murder in Istanbul on October 2, 2018, US President Donald Trump was faced with making a call on his stand on the case and he said (and I paraphrase) – the front and center is American interest and that is jobs and money. When interests are aligned to parameters that change with the next stock market cycle and speculative traits, a company really is doomed to fail. A country on its way to destruction. A civilisation on its journey to ruins.

If we do not exert values, by that, good values, on our core interests to growth, for fear of losing our jobs, titles and status, we are literally opening the doors for our children to bear the burden of our own self-interests. To put it simply if not bluntly, if we do not stand apart with moral courage and are willing to take the bullet for speaking the truth today in highlighting wrongs in our companies and institutions, what we are essentially doing is diverting that bullet for our kids and grandchildren to take, for our sins.

That really is the simple truth. This is why Feynman’s quote above is so poignant for our times.

(Firoz Abdul Hamid is an Investvine contributor. The opinions expressed are her own.)

 

 

 

 

The Malays in Business–Summing Up


October 21, 2018

The Malays in Business–Summing Up    

by  Dr. M.Bakri Musa, Morgan-Hill, California

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Dr. The many soft barriers to Malay participation in commerce such as our poor quality of human capital and inadequate financial capital are at least correctable. Build better schools and have credit facilities a la Grameen’s micro-credit, for example.

Others are more problematic. The World Bank’s 2014 Report places Malaysia among the top ten in terms of ease of starting a business. However, ask a Malay would-be (or any small) businessman on the obstacles he faces, and you get a different picture.

The Bank studied only major corporations with their lawyers, accountants, and consultants. If you are a hawker dealing with City Hall, Kuala Lumpur, be prepared for the “hassle” factors. Witness the annual circus for its Ramadan stalls. The government is doing everything to discourge Malays at this most basic level.

I cringe whenever I see overzealous Bandaraya enforcers evict hawkers and destroy their stalls. We should be nurturing their enterprising spirit. If they are blocking traffic, provide alternate spaces. If their standard of hygiene is appalling and poses significant public health dangers, then supply portable water, cheap power, and help improve the physical facilities.

If they are successful, the government would save in not having to pay for their welfare. They would also not be tempted to protest on the streets. Their would then employ their teenage sons, reducing the Mat Rempit menace. Most of all they would gain self-respect.

Another elemental enterprise is driving taxis. Malaysian taxi drivers are at the bottom of capitalism’s food chain. In addition to high operating costs, he has to lease the license from a politician, pay usurious interest rates to buy his vehicle, and pay retail for its maintainence. Imagine if taxi licenses were given only to owner-operators and they have a co-op and could enjoy fleet discounts for their cars and servicing. You would remove or reduce two or three layers of costs, thus enhancing their income.

When Malaysian policymakers think of grooming entrepreneurs, they aspire producing a local Jeff Bezos, Bill Gates, or Jack Ma. Those are outlyers, the black swans of entrepreneurs. You cannot groom them; they are in their own class. Focus on simple hawkers and taxi drivers. Begin at this most elemental level where mistakes would be less costly and the consequences less damaging. If you begin with multibillion-dollar GLCs, you are courting disaster. Witness the still evolving 1MDB saga.

This urge to start or think big right away when you are ill equipped with respect to talent, skills, experience, or social structure comes in the way of grooming Malay entrepreneurs. There are others.

 

One is exemplified by a recent video clip going viral on social media of a Malay salesgirl at a convenience store refusing to scan a beer bought by her customer. Her excuse? Alcohol is haram. Her personal salvation was more important than doing what she was paid to do–attend to her customers. What a misguided interpretation of our religion. More startling, her superior, also a Malay, defended her! I had expected him to at least apologize to their customer.

When these obstacles are cited, they elicit smug smiles from non-Malays, confirming for them the many presumed deficiencies of Malay culture. This apparent cultural aversion to commerce is not unique unto Malays. In ancient China and Japan, traders and merchants were in the lowest social class. They did not produce anything, unlike farmers who were held second only to scholars.

Expectations too are important. Make it too rosy and you set yourself up for failure. Be too pessimistic and you discourage many from even trying.

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Malay leaders endlessly exhort their followers to emulate the Chinese tycoons. “Be like them!” is the endless nauseating line. If Malays were to be reminded not of the Robert Kuoks and Vincent Tans, but those Chinese who early in the last century idled their time smoking opium, frolicking with prostitutes, and endlessly dreaming of Balik Tongsan, then Malays would have a more realistic appreciation of the hard work needed to be successful. Better yet, translate Robert Kuok’s biography into Malay!

Many Malay entrepreneurs failed because they assumed that securing the contracts, permits, and loans was all they needed. They were under the misguided impression that the hard part was over, when in reality it had just begun.

The crucial question arises. How did this negative mindset get embedded among Malays? Current “successful” Malay entrepreneurs and their policymaker enablers bear much of the responsibility for this virulent socioeconomic malignancy.

It afflicts not just small-time village entrepreneurs. In the early 1980s I was involved with a group of bright young Malay doctors in starting a group practice in Malaysia. They already had a thriving practice, and one of its leaders was high up in UMNO. He was the rainmaker, and a very productive one, securing major contracts from federal agencies, GLCs, and other big corporations.

I visited their facilities and was impressed. Their waiting rooms were packed. The government too was eager to support the group as it was among the few made up of mostly Malay doctors.

Beyond that favorable first impression I was stunned to discover that they had no formal agreement. Their working relationship was:  “We trust each other; we are Malays!” To make matters worse, the rainmaker was busy with his political aspirations.

To make a long story short, I did not join. That proved prescient. Shortly thereafter the key players left to set up competing practices across the street. Incredibly, they had no “non-compete” clause preventing them from doing so. As for the rainmaker’s political career, that too went downhill. He thought that running a group practice was simple–just get the doctors and the contracts!

Those bright young doctors were no different from the simple villagers as far as their business acumen or expectations were concerned. This is what I mean by the soft obstacles being much more formidable.

When we will ever learn to do things on our own,nothing is gained from giveaways


August 23, 2018

When we will ever learn to do things on our own, not depend on others for help. Face it, nothing is gained from giveaways

By T K Chua

http://www.freemalaysiatoday.com.my

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“If the new government is to be any better than the old, we must find reasons and justifications before making decisions, not make decisions first and then find reasons and justifications to support them.”–T K Chua

As a nation, why do we always expect that others will help us?

We want others to give us technology without quid pro quo. We want others to give us favourable terms in trade and investment. We want others to concede and suffer with us because of our follies. We want others to teach us how to govern and manage our country.

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This man is the very antithesis of the rugged individual. He ended up selling Malaysia on the cheap.

Unless we are a war-torn nation in utter poverty and destitution, I don’t think we’re going to get any meaningful help from others. Let’s ditch the idea that a foreign nation would help another be strong and competitive. To compete and prosper, each nation must do it on its own.

We can see the success and failures of many nations around us. We can’t complain that others are not teaching us. They can’t and won’t. We have to learn from them on our own.

Learning from other countries means doing what they do, not just talking. We can’t keep condemning the subsidy mentality and “free lunches” but keep doing the same as we have for the last half a century.

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A Miracle is Discipline, Innovation, Entrepreneurship

We can’t keep saying meritocracy is good but keep doing the opposite.We can’t keep saying it’s good to be hardworking, conscientious and thrifty but reward incompetency and irresponsibility with easy money.

We can’t keep saying corruption and cronyism is bad if our fight against these comes only in dribs and drabs depending on the “convenience” of the day.

Malaysia has always had great ambitions – the “Malaysia Boleh” attitude, so to speak. We started Proton around the same time that Korea embarked on its auto industry. We started the multimedia super corridor much earlier than many others. We have InventQjaya, Biovalley and numerous other development corridors littering the whole country.

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Proton Saga–Malaysia’s Success Story. And so another of the same in Pro-3

But what did we get in the end? Sadly, we are now talking about starting another national car project. We are talking about learning basic things like online marketing from Alibaba. We are talking about revolutionising agriculture when at one time we were the world champion in rubber and palm oil research.

We should not carry our “handicapped” mentality to the international level. When we trade, invest and conduct business dealings with others, we mustn’t expect favours or help from others. We should extract what we can from others and defend and protect our interests based on our faculties and abilities.

At the international level, no one is going to feel sorry for us and our follies. We must have people with faculties holding strategic and important positions in the country.

If the new government is to be any better than the old, we must find reasons and justifications before making decisions, not make decisions first and then find reasons and justifications to support them.

TK Chua is an FMT reader.

The views expressed are those of the author and do not necessarily reflect those of FMT.

 

New York Times : Malaysia pushes back against China’s Vision


August 24, 2018

New York Times :Malaysia pushes back against China’s Vision on account of Najib Razak’s stupidity

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Malaysia’s Sunway City: Thank You, Dr. Jeffery Cheah


August 21, 2018

Malaysia’s Sunway City: A Model in Sustainable Development

By: Lexie Ma, Tom Tsui and FY Lung

https://www.asiasentinel.com/econ-business/malaysia-sunway-city-sustainability-standout/

 

In a region where little attention is paid to sustainability and the environment, Sunway City, built on an abandoned tin mine on the outskirts of Kuala Lumpur, is a standout, more aligned with Singapore, whose Building Construction Authority aims for 80 percent of buildings to be Green Mark-certified by 2030, than Malaysia.

Wasteland-Turned Wonderland”

Called a “wasteland-turned wonderland,” this onetime township now boasts world-class resorts, hotels, shopping malls, schools and medical centers, and is home to 200,000 residents. It is the brainchild of developer Jeffrey Cheah Fook Ling, Malaysia’s 13th richest man. The  rehabilitation and transformation of the landscape has led to recognition as the country’s first integrated green township.

Thriving on a balance between sustainability and profitability, Sunway City has stayed on a course of sustainable development while remaining robust financially.  The conglomerate reportedly accrued RM137.5 million  (US$33.51 million) in first-quarter 2018 profit, a 11 percent rise year on year.

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Around Sunway City, posters and billboards of 17 United Nations Sustainable Development Goals (UNSDGs) are hanging everywhere, making clear Cheah’s determination to construct an integrated township and sustainable community. Unlike many companies which view green initiatives as a means to fulfill their corporate social responsibility, Sunway Group appears to set sustainability as the core value of the township.

The heart of the development is Sunway University, fully accredited both in Malaysia and by the Education Committee of the Institute and Faculty of Actuaries (IFoA) of United Kingdom. But Sunway City didn’t always have college campuses, theme parks and a pyramid-shaped mall. When Malaysia was under British rule, Cheah bought an 800-acre tin mine from the British and developed his tin mining company which later diversified into sand mining, quarrying and construction.

The business came to a halt when the late 1980s brought a recession, causing tin prices to collapse. “It nearly bankrupted me,” said Cheah, now a Tan Sri, one of Malaysia’s highest-ranking honorifics. What he had built became a “mined-out wasteland,” as he would put it. He ended up selling quarries, one of his most profitable assets at the time, as well as laying off the unit’s employees.

“One incident that made me respect Tan Sri is that he promised not to abandon his quarry workers during the financial crisis,” said Dr. Elizabeth Lee. She joined Sunway Group’s education arm 20 years ago and is now its senior executive director. “He promised to employ them when he had earned back the money. And he did.”

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Malaysia was the world’s largest tin producer until the price collapse some three decades ago. Following that particularly difficult time in the country’s tin mining history, the private sector sought to rehabilitate deserted mining sites for more productive land use.

Cheah was among the first entrepreneurs in the country to grant a second lease of life to a mining wasteland. As he turned his vision of an integrated green township into reality while further diversifying his business interests, Sunway City supports 12 different business units, ranging from property development and hospitality to education and healthcare.

Cheah was not the only one transforming ex-mines into resorts either. In 1988, property tycoon Lee Kim Yew was tasked by the government to convert Hong Fatt Mines, the world’s biggest open-cast mine back then, into Mines Resort City, a tourist destination with a five-star hotel, man-made beach and golf course.

Sustainability and Profitability Hand-in-Hand

Today, Sunway Group has three publicly listed companies in Malaysia with a combined market capitalization of RM17 billion and 15,000 employees across 50 locations internationally, testament to how sustainability and profitability can go hand-in-hand.

“A lot of times, people think sustainability is a cost to what you do,” commented Chew Chee Kin, Sunway’s Group President since 1999 and long-time friend of Cheah. “What you have to do is to minimize the damage you do to the environment.”

To achieve this, the company strives to be as scientific as it can. Producing clay pipe used to require 48 hours of burning, but Sunway Group has managed to reduce that to 20 hours, saving more than 60 percent of energy, according to Chew. “If it is something we can save energy, it’s very good for profitability,” said Chew.

Environmental and economic sustainability aside, Cheah also tries to facilitate sustainable cultivation of talent through the group’s education arm and philanthropic channels. Established in 2010 to continue the mandate of Sunway Education Trust Fund, Jeffrey Cheah Foundation has awarded RM270 million in scholarships to thousands of individuals for their tertiary education, making it a leading education-focused social enterprise in the country.

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Managing the highly lucrative education business in the form of a foundation and running Sunway University as a nonprofit, Cheah effectively ensures that his realm is free from any shareholder control. “Surpluses can be plowed back for scholarships, for research and improvement in facilities,” he explained.

The foundation also dedicated US$10 million for sustainable development education in 2016, one of the most generous amounts gifted towards the cause in recent years. “Our strategy and our long-term thinking is through education, education, education,” said Cheah. “I know education is the best way out of poverty.”

Success or Gimmick?

Education is not the only way in which Sunway City pushes forward its sustainable development agenda. Little remained of the tin mine’s original biodiversity when Cheah acquired the site.  A lot of work had to be done to rebuild the entire ecosystem. Even earthworms had to be re-introduced for soil revitalization.

“Of course, I had to do a lot of transplantation of trees and shrubs and all these, and today the ecosystem is back,” he said. “This mother earth is so important to us, if we continue to damage it, … our future generation will have a big headache.”

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A quarter of Sunway City is designated as green space. The city offers free Wi-Fi coverage in public areas and provides free internet access for all students and residents.  A 4-km “Canopy Walkway” footbridge connects the city’s two universities and major facilities. Electric buses run on a flyover not shared with other vehicles. The group is urging the government to lower the bus fare, currently RM5.4 for a complete 5.4-km ride.

Attempts to promote sustainability in urban planning have won Sunway City multiple awards both within and beyond the borders. In 2017, it was recognized as an Integrated Smart and Low-Carbon Township by International Data Corporation Government Insights, a global market intelligence firm.

At first glance, Sunway City is nothing short of a perfect role model championing sustainable development without compromising economic viability. Nevertheless, things are always easier said than done, even more so on such a city-wide scale.

First of all, one questions if rules on sustainability are thoroughly implemented. Caterers at Sunway University continue to pack food in disposable plastic containers. Central air-conditioning on campus renders room-specific adjustments impossible. And recycling bins are yet to become common fixtures around the township. There seems to remain much room for improvement for Sunway City to translate the grand idea of sustainable development into the nitty-gritty of everyday life.

Regardless, with Sunway Group’s aggressive promotion on the notion, sustainability has over the years become a buzzword among city residents. Many are indeed mindful of sustainable living and serious about making positive changes on the environmental protection front through real-life practices. For instrance, there is Maslisa Zainuddin, a Sunway University design communications and interior architecture lecturer.

 

“[Sustainability is] something that I’ve decided to take onboard myself,” she said. A poster child for what has become known as “upcycling,”, Zainuddin proudly wears clothes refashioned from discarded garments on a daily basis. “Today’s top I’m wearing, it was a romper, which I refashioned into a high-low top,” she said, referring to her fitted ivory sleeveless blouse with embroidery details. “[The bottom part] is actually being transformed into a bow that sits on top of my shoulder of a tote bag that I’m making from an old skirt. Because as a designer, I still am a practicing designer, I just don’t believe in teaching and not practicing what you preach.”

“Walk the Talk”

While individuals like Zainuddin are making sustainability-conscious lifestyle choices and influencing others to follow suit, Sunway City is exploring new ways to closely align modern city life with the UNSDGs. Cheah hopes that a new government will steer things in the right direction.

The business mogul used to feel taken advantage of as he executed many urban renewal projects on his own which technically fell under government responsibilities. “We walk the talk. They don’t walk the talk,” said Cheah, frustrated with the former government’s inefficiency. “Hopefully, with the new government, people will listen, rather than they hear you, but they don’t listen.”

Learning from past mistakes, the conglomerate is already replicating the Sunway model elsewhere in Malaysia. Sunway City Ipoh in Perak and Sunway Iskandar in Johor are both set to promise the same sustainability-backed prosperity. The story of a flourishing integrated green township built from scratch even offers urban planning inspirations worldwide.

Yet, resources, policies and cultures do place restraints onto cross-national endeavors. “We’re doing a small project, ecocity project in Tianjin,” added Chew, as Sunway Group got invited by provinces in China to recreate the miracle. “But we probably don’t have the resources to build so many townships overseas.”

Lexie Ma, Tom Tsui and FY Lung  are students at the Hong Kong University Journalism and Media Studies Center

Demonizing State-Owned Enterprises


August 14, 2018

Demonizing State-Owned Enterprises

 

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Historically, the private sector has been unable or unwilling to affordably provide needed services. Hence, meeting such needs could not be left to the market or private interests. Thus, state-owned enterprises (SOEs) emerged, often under colonial rule, due to such ‘market failure’ as the private sector could not meet the needs of colonial capitalist expansion.

Thus, the establishment of government departments, statutory bodies or even government-owned private companies were deemed essential for maintaining the status quo and to advance state and private, particularly powerful and influential commercial interests.

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SOEs have also been established to advance national public policy priorities. Again, these emerged owing to ‘market failures’ to those who believe that markets would serve the national interest or purpose.However, neoliberal or libertarian economists do not recognize the existence of national or public interests, characterizing all associated policies as mere subterfuges for advancing particular interests under such guises.

Nevertheless, regardless of their original rationale or intent, many SOEs have undoubtedly become problematic and often inefficient. Yet, privatization is not, and has never been a universal panacea for the myriad problems faced by SOEs.

Causes of inefficiency

Undoubtedly, the track records of SOEs are very mixed and often vary by sector, activity and performance, with different governance and accountability arrangements. While many SOEs may have been quite inefficient, it is crucial to recognize the causes of and address such inefficiencies, rather than simply expect improvements from privatization.

First, SOEs often suffer from unclear, or sometimes even contradictory objectives. Some SOEs may be expected to deliver services to the entire population or to reduce geographical imbalances. Other SOEs may be expected to enhance growth, promote technological progress or generate jobs. Over-regulation may worsen such problems by imposing contradictory rules.

Privatization has never been a universal panacea. One has to understand the specific nature of a problem; sustainable solutions can only come from careful understanding of the specific problems to be addressed. To be sure, unclear and contradictory objectives – e.g., to simultaneously maximize sales revenue, address disparities and generate employment — often mean ambiguous performance criteria, open to abuse.

Typically, SOE failure by one criterion (such as cost efficiency) could be excused by citing fulfillment of other objectives (such as employment generation). Importantly, such ambiguity of objectives is not due to public or state ownership per se.

Second, performance criteria for evaluating SOEs — and privatization — are often ambiguous. SOE inefficiencies have often been justified by public policy objectives, such as employment generation, industrial or agricultural development, accelerating technological progress, regional development, affirmative action, or other considerations.

Ineffective monitoring, poor transparency and ambiguous accountability typically compromise SOE performance. Inadequate accountability requirements were a major problem as some public sectors grew rapidly, with policy objectives very loosely and broadly interpreted.

Third, coordination problems have often been exacerbated by inter-ministerial, inter-agency or inter-departmental rivalries. Some consequences included ineffective monitoring, inadequate accountability, or alternatively, over-regulation.

Hazard

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Moral hazard has also been a problem as many SOE managements expected sustained financial support from the government due to weak fiscal discipline or ‘soft budget constraints’. In many former state-socialist countries, such as the Soviet Union and Yugoslavia, SOEs continued to be financed regardless of performance.

Excessive regulation has not helped as it generally proves counter-productive and ultimately ineffective. The powers of SOEs are widely acknowledged to have been abused, but privatization would simply transfer such powers to private hands.

Very often, inadequate managerial and technical skills and experience have weakened SOE performance, especially in developing countries, where the problem has sometimes been exacerbated by efforts to ‘nationalize’ managerial personnel.

Often, SOE managements have lacked adequate or relevant skills, but have also been constrained from addressing them expeditiously. Privatization, however, does not automatically overcome poor managerial capacities and capabilities.

Similarly, the privatization of SOEs which are natural monopolies (such as public utilities) will not overcome inefficiencies due to the monopolistic or monopsonistic nature of the industry or market. The key remaining question is whether privatization is an adequate or appropriate response to address SOE problems.

Throwing baby out with bathwater

SOEs often enjoy monopolistic powers, which can be abused, and hence require appropriate checks and balances. In this regard, there are instances where privatization may well be best. Two examples from Britain and Hungary may be helpful.

The most successful case of privatization in the United Kingdom during the Thatcher period involved National Freight, through a successful Employee Stock Ownership Plan (ESOP). Thus, truck drivers and other staff co-owned National Freight and developed personal stakes in ensuring its success.

Image result for state owned enterprises

In Hungary, the state became involved in running small stores. Many were poorly run due to over-centralized control. After privatization, most were more successfully run by the new owners who were previously store managers. Hence, there are circumstances when privatization can result in desirable outcomes, but a few such examples do not mean that privatization is the answer to all SOE problems.

Privatization has never been a universal panacea. One has to understand the specific nature of a problem; sustainable solutions can only come from careful understanding of the specific problems to be addressed.

 

Dr. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.