Table of Contents

Background...........................................................................................................................1
Problems and Issues..............................................................................................................1
Corporate Governance Failure..........................................................................................................3
Conclusion.............................................................................................................................7
Reference..............................................................................................................................8
 Background

Malaysia Airlines is the first and oldest carrier of Malaysia and a member of the oneworld®
airline alliance. The company, Malaysia Airlines Berhad (MAB) commenced operations as
the national carrier on 1st of September 2015 when Malaysian Airline System (MAS) was
dissolved from Bursa Malaysia in 2014 and subsequently ceased operations on 31st August
2015.

The airline began as Malayan Airways Limited, and flew its first commercial flight in 1947.
It was then renamed as Malaysian Airways after the formation of the Federation of Malaysia
in 1963. In 1966, the airline was renamed Malaysia Singapore Airlines (MSA) and the
flagship officially started its operations as Malaysia Airlines in 1972.

The airline holds a lengthy record of excellence and has won more than 100 awards in the last
decade from the aviation industry, being crowned 'The World's 5-Star Airline' by
Skytrax multiple times (2009, 2012 and 2013) and recognition from the World Travel
Awards as 'Asia's Leading Airline' (2010, 2011 and 2013).

As a member of oneworld®, Malaysia Airlines offers the best connectivity with seamless
journeys to more than 1000 destinations across 150 plus countries and access to over 650
airport lounges worldwide.

Malaysia Airlines operates flights from its home base, Kuala Lumpur International Airport,
and offers connectivity across the globe, including Europe, the Middle East, Australasia,
North and South Asia, and Southeast Asia. It has two subsidiary airlines, Firefly – the budget
airway and MASwings – the regional airline operating the rural air services in East Malaysia
focusing on internal flights.

Problems and Issues

At the end of 2014, the national carrier has been bought over and privatized by Khazanah
Nasional. Despite the fact that MAS has contributed an estimated MYR6.9 billion towards
Malaysia’s GDP, the company has been in the red for about half of its listed life. It had an
estimated MYR8.4 billion in cumulative net losses from 2001 to June 2014.

In its history, MAS has transformed and rebranded itself a number of times and the
government has helped to pumped in another MYR17.4 billion to ensure that MAS didn’t
fail, but by early 2014, the national carriers business stood on a precipice.
To pinpoint the exact moment where the ground beneath MAS began to crumble is actually
impossible. It can be safely said however that is was a culmination of several factors – poor
management, staff that resembled a Legion and skyrocketing oil prices that ultimately led to
MAS’ fall from grace, but the last straw that broke the camel’s back was the loss of planes
and lives in the disappearance of MH370 and the tragic downing of MH17 over Ukraine.

Corporate Governance Failure

Many agree that corporate governance is the main factor in producing the financial reporting.
The corporate governance became the starting point for preparation of financial reporting.
According to Report on the Observance of Standard and Codes (The World Bank, 2005:2)
“Corporate governance refers to the structures and processes for the direction and control of
companies. Corporate governance concerns the relationships among the management, Board
of Directors, controlling shareholders, minority shareholders and other stakeholders.

Back in Malaysia, The Malaysian High Level Finance Committee on Corporate Governance
(Securities Commission, 2007:52) define it as “the process and structure used to direct
and manage the business and affairs of the company towards enhancing the business
prosperity and corporate accountability with the ultimate objective of realizing long-term
shareholders value, whilst taking into account the interests of other stakeholders”. From all
the definition given, the similarities are that the corporate governance involved the process
of directing the organization. Good corporate governance is aimed at enhancing business
prosperity and at the same time accountability. In each country, the corporate governance
structure has certain characteristics or constituent elements, which distinguish it from
structures in other countries. To date, researchers have identified three models of corporate
governance in developed capital markets. These are the Anglo-US model, the Japanese
model, and the German model.

The Anglo-US model is based on a system of individual or institutional shareholders that are
outsiders of the corporation. The other key players that make up the three sides of the
corporate governance triangle in the Anglo-US model are management and the board of
directors. This model is designed to separate the control and ownership of any corporation.
Therefore the board of most companies contains both insiders (executive directors) and
outsiders (non-executive or independent directors). Traditionally, though, one person holds
the position of CEO and chairman of the board of directors. This concentration of power has
led many companies to include more outside directors now. The Anglo-US system relies on
effective communication between shareholders, management and the board with important
decisions being put to the vote of the shareholders.
In Malaysian Airlines Berhad, Tan Sri Wan Zulkiflee was appointed the Chairman of
Malaysia Aviation Group and Malaysia Airlines Berhad in July 2020. In September 2020, he
was appointed the Chairman of DRB Hicom, a diversified business conglomerate involved in
automotive, services and property businesses. In July 2021, Tan Sri Wan Zulkiflee joined Gas
Malaysia as Chairman of the Board. Tan Sri Wan Zulkiflee had served Petronas, the national
Oil and Gas Company of Malaysia, for 37 years. He was appointed President and Group CEO
in April 2015 and retired from the position in June 2020 after a highly successful 5 years. He
was on the Board of Petronas for more than 12 years, from August 2007 to June 2020. As he
was considered as the non executives director, they needed an inside director. Izham bin
Ismail is an Executive Director of Malaysia Airlines Berhad. He currently holds the position
of Group Chief Executive Officer of the Malaysia Aviation Group and Chief Executive
Officer of Malaysia Airlines Berhad. He has 40 years of experience in the aviation industry,
having started his career with Malaysia Airlines as a pilot in 1979. 

In the twenty-first century, the business world is becoming increasingly concerned with bad
business ethics that arise in a business environment. The world is surprised by both illegal
and unethical business practices in several high-profile corporations. The existing regulatory
appeared to be insufficient to manage those practices such as corruption, fraud,
embezzlement. These problems force global business groups to initiate a solution to
overcome and anticipate it in the future. As a result, they strengthen organizations with the
implementation of corporate governance systems. These are expected to make the company
run effectively based on the integrated system.

Corporate Governance Failure that Leads to Financial Reporting Failure in Malaysia Airlines
(MAS)

The occurrence of governance failure in MAS can be traced back to the time when Tan Sri Tajuddin
Ramli via Naluri Berhad was the head of the airline. Tajuddin Ramli was part of a coterie of
influential businessman close to former Finance Minister Tun Daim Zainuddin. Back in 1994,
Tajuddin took out a MYR1.79 billion loan to buy a 32 percent stake in MAS making him its largest
shareholder in MAS and held both chairman and Chief Executive Officer position, however under his
tenure, there were numerous rumours of misconduct which range from over expansion the flight
destination, moving its cargo hub to an expensive base to allegations of overspending.
According to market talk at the time, MAS actually ramped up its fleet and operations in order
to match the network that was three times the size of what it was at the time. However what
eventually happened was that its network actually shrank and leaving MAS with a very high cost per
unit compared to its peers. The same industry observer also pointed to the speculations that Qantas
was going to buy into MAS following the financial crisis, although nothing came out of it, industry
observers say that the deal came very close but due to certain parties vested in protecting their own
interests, the deal never came into fruition. This shows that there were plans to save MAS even early
on.

One of the decisions Tajuddin made was to relocate MAS’ cargo operations in Amsterdam and
Frankfurt to a single hub in Han Germany. In fact in later years, MAS alleged that the move caused
losses of between MYR10-16 million a month. When the government took over MAS in 2001, the
project was terminated and even then resulted in a MYR300 million arbitration claim against the
national carrier.

Tajuddin’s personal expenditures also raised a lot of eyebrows, evidence from Asia Week’s interview
with Tajuddin revealed that he purchased a MYR93.5 million business jet for MAS, a private
Gulfstream jet for himself, a $12 million yacht and owned the nation’s biggest durian plantation
at Rawang. Eventually in 2002, MAS sued Tajuddin for allegedly causing the flag carrier to suffer
losses in excess of MYR8 billion.

Looking back at the facts, Tajuddin’s exit from MAS was as controversial as his entry, back when he
was first came in he claims his hand were forced by former Prime Minister Tun Dr Mahathir
Mohamad and Daim Zainuddin to buy MAS. Tun Mahathir later rejected this notion saying he wanted
to swap his Malaysian Helicopter shares – a company with two aircraft for MAS shares – a company
with well over 60 aircrafts. The government rejected his plan and asked that he pay in cash instead,
which forced him to borrow MYR1.8 billion. He also said Tajuddin was forced by his own modest
collateral to borrow heavily and was elated over his purchase.

The arrival of the Asian financial crisis laid bare all of MAS’ weaknesses, pushing it further into the
red in 1997, suffering losses of MYR260 million. The company was in accumulated loss from 1998 to
2001. In the financial reporting, it was simply a mismatch between earnings and expenditure whereby
earnings was mostly in Ringgit while expenditure (jet fuel, aircraft maintenance and others) was in
US dollar.

MAS started laying off staff, trimming its fleet and even delaying aircraft deliveries and major
aircrafts up to 3 years in order to get back what was lost. Eventually the government has had
 enough and MAS was the re-purchased by the government for which Tajuddin sold the airline for
MYR1.79 billion or MYR8 per share. This was a premium or MYR4.32 per share or a 117% for
each share which was trading at MYR3.68 when the deal was signed resulting in a public uproar.
This situation shows that corporate governance failure not only occurred at organization level but at
national level as well.

Lack of Transparency in Financial Reporting

Flag carrier Malaysia Airlines Berhad (MAB) lost a staggering MYR812 million (USD196 million)
for the financial year 2017 (see below), adding to the MYR439 million and MYR1.13 billion losses
in 2016 and 2015, respectively.
On March 1, the private company revealed that it finished 2018 with a marginally lower
loss compared to a year ago but it did not disclose the figures. Filings with the Companies
Commission of Malaysia (SSM) show that Malaysia Airlines’ net loss increased by 85%
year on year to RM812.11 million for the financial year ended Dec 31, 2017 (FY2017). It
has lost RM2.35 billion between 2015 and 2017. While it did not disclose its exact revenue
for FY2018 except to say that it grew by 1% y-o-y, back-of-the-envelope calculations
show that revenue rose to RM8.76 billion from RM8.67 billion in FY2017. It has yet to file
its financial statements for FY2018 with SSM.

Transparency is a very important component of financial reporting (Mc Gee & Yuan,
2008). Accounting researchers have concerned themselves with mechanisms of
transparency (particularly financial reporting) which seek to align the interests of
management and shareholders, and with mechanisms of accountability such as audit
committees, internal audit and risk management as assurances of the quality of financial
reporting (Brennan & Solomon, 2008). In addition, delivery of information regarding
company activities and their results to shareholders is the most important factor that
ensures effectiveness of decisions taken by shareholders (Dogan, Coskun & Celik, 2007).
The quantity of information, voluntary items disclosed in the annual reports and the time
the information to be released, are influenced by the board of directors. Thus, when the
board of directors are independent and observe their responsibility to be accountable to the
shareholders or stakeholders, they will be transparent in disclosing all the relevant
information in their financial reporting. The challenging part is to have the sincere
governance. For this we need to develop a human capital with good values.
 Conclusion

The MAS Recovery Plan promised “continuous communications and stakeholder

engagement” by organising public accountability sessions, releasing annual reports, and
keeping a continuous engagement with the press and public. The current CEO Izham
Ismail only announced that MAB suffered a marginally lower loss in 2018, but exact
figures were not revealed. Furthermore, annual reports were not released to the public after
the airline was privatised. Despite the restructuring efforts, MAB was still operating at a
loss based on the latest financials available in January 2020 and reportedly requires
financial assistance of up to RM21 billion to keep its operations going until 2025.

In 2019, the Malaysian government raised the possibility of a MAB buyout deal by private
investors to save the struggling airline. In January 2019, Malaysia’s then Prime Minister
Dr. Mahathir confirmed that MAB had received proposals from five potential airline
carriers, namely AirAsia, Malindo Air, Lion Air, Air France-KLM alliance and Japan
Airlines. Among the potential buyers, home-grown AirAsia was reported to be favoured by
MAB management as Khazanah believed the synergy derived from a merger between
MAB and AirAsia would amount to about RM1.4 billion yearly, which would be sufficient
to cover MAB’s operations of RM1 billion per year. Furthermore, a takeover by a Malaysia
airline would help keep MAB as a national icon that is a part of Malaysia’s identity.

In April 2020, MAB received another takeover proposal from Golden Skies Venture Sdn
Bhd, (GSV), a newly established Malaysia private equity firm set up by former MAS
employees and private individuals. GSV offered RM11 billion in exchange for 100%
equity in MAG. However, the deal was not well received as Khazanah’s managing director
Shahril Ridza Ridzuan expressed scepticism about its financial resources of a new firm,
given the current COVID-19 pandemic-fuelled airline crisis and credit risk aversion.

The current turbulence in the global aviation industry resulting from the COVID-19
pandemic has complicated the sale decision. Aviation consultancy firm Aer Mobi’s CEO,
Michael Walsh, said that a further cash injection from the government would be necessary
prior to any sale. The Malaysian government would have to take into consideration the
survival of all the airlines in Malaysia and might have to come up with further rescue plans
for them as well. The future outlook of MAB is far from certain.
  Reference

Bursa Malaysia. Annual Report Malaysia Airlines Berhad. Retrieved from:

http://www.bursamalaysia.com/market/listed-companies/list-of-companies/
plcprofile.html?stock_code=3786

Chadha, A. A. (2005, October). The Journal of Law & Economics. Retrieved from Corporate
Governance and Accounting Scandals:
https://www.jstor.org/stable/pdf/10.1086/430808.pdf

MAS Website. Background of Malaysia Airlines. Retrieved from:

https://www.academia.edu/30806922/Background_of_Malaysia_Airlines

Noor Afza Amran (2011), Corporate Governance Mechanisms and Company Performance:
Evidence from Malaysian Companies.