There is an urgent need for greater transparency in the disclosure of pay levels and practices for the directors of government-linked entities (GLEs), stresses a new book published by the Consumers Association of Penang (CAP).
The book, How Much Is Hidden?: Pay for Elites in Government-Linked Entities, issues this call amid public concern over the substandard performance of some GLEs and recognition of the need for proper use of government resources in the current challenging economic environment.
GLEs include government-linked investment companies (GLICs) and government-linked companies (GLCs) as well as statutory bodies, foundations, special purpose vehicles, development financial institutions and various state-level agencies.
Well-documented cases of underperformance at some prominent GLEs have raised questions on the competency of their boards of directors and the appropriateness of their remuneration practices. There is thus a need to ensure that the performance of GLE directors in governing and managing these entities is commensurate with their pay levels. Towards this end, there should be clarity not only on how performance is measured but also on the board pay amounts awarded.
The book finds that, in 2017, each GLE executive director (including the CEOs) earned on average as much as the total minimum wages of 308 employees. Further, the median of GLE non-executive directors’ pay grew by 19.9% from 2016 to 2017, while the growth rate of median salaries and wages of employees was only 7.7%.
These figures give rise, among others, to questions about pay disparity. For example, does a GLE executive director work 308 times harder than the lowest-paid employee? Is this wide top-bottom pay gap justifiable from the standpoints of equity and efficiency? And how does this square with the recently unveiled Shared Prosperity Vision that calls for fairer distribution of resources?
According to the book, the payment of bonuses, which unlike salaries are not fixed in amount, can be subject to abuse. Therefore, huge bonus sums may also need to come under scrutiny. The highest estimated bonus-to-salary ratios uncovered in the book are: 618% (in financial year 2015) for the Acting President and CEO of S P Setia Bhd; 600% (FY 2017) for the Managing Director and CEO of IHH Healthcare Berhad; and 433% (FY 2017) for the CEO of Telekom Malaysia Berhad.
The authors of How Much Is Hidden?, UK-based accounting and finance academics Marizah Minhat and Nazam Dzolkarnaini, caution however that the book’s findings, which cover the 2013-2017 financial period, are based on a limited amount of information and exercise of judgement by the data collector. This is precisely due to inadequate and inconsistent reporting of GLE directors’ pay, which only underlines the need for more transparency in this area.
For instance, as the book notes, leading GLEs like Khazanah Nasional Berhad, Permodalan Nasional Berhad (PNB) and Malaysia Airlines Berhad do not publicly report their directors’ remuneration. For some GLEs such as PETRONAS and the Employees Provident Fund (EPF) which do report this, the disclosure falls short of adequate detail. Disclosure practices are also inconsistent among different GLEs; e.g., some GLEs lump together several pay components in a single figure. On top of this, complex pay components like share options awarded to directors are often insufficiently disclosed and their fair value hidden or omitted.
In light of its findings, the book flags a number of key concerns. Firstly, unlisted GLEs are not subject to disclosure requirements despite the fact they have benefited from and are entrusted to manage public resources. Secondly, for many listed GLEs, more reliable estimates of each board pay component (salaries, fees, allowances, bonuses, share options/grants, postretirement pay, benefits-in-kind) and of variable-to-fixed pay ratios are not available due to pay disclosures being made on an aggregated basis across several components. In addition, the book also reveals some instances of seemingly extravagant perks and benefits granted to GLE directors, questioning whether such awards are justified from an economic perspective.
To remove the opacity surrounding GLE directors’ remuneration, Marizah and Nazam propose a standardised pay disclosure format for all GLEs, which could be modelled along the lines of the UK’s Directors’ Remuneration Report Regulations. Greater transparency will allow for more informed and effective scrutiny by the public, who are the ultimate stakeholders of GLEs. This would be in line with the public’s interest in improving GLE governance and ensuring resources are managed efficiently on their behalf.
PRESS RELEASE, 17th October 2019