This article first appeared in The Edge Malaysia Weekly on July 8, 2024 - July 14, 2024

The Human Resources Development Corp (HRD Corp) has come under scrutiny for questionable investments in the equity market and purchases of property, all the result of bad corporate governance. These were the findings and conclusions of both the Auditor-General as well as the Public Accounts Committee (PAC) of parliament, which released their reports separately last week.

HRD Corp, which collected more than RM2 billion in levy from employers last year, had investments in various kinds of capital market instruments amounting to RM1.45 billion at end-2023. It had invested RM918.6 million in instruments linked to quoted securities while RM527.7 million was in fixed income.

Closer scrutiny reveals that of the RM918.6 million, some RM612.8 million was in stocks, RM170.3 million in redeemable cumulative convertible preference shares (RCCPS) and RM135.5 million placed with unit trusts.

The investments in quoted securities came with put and call options. The amount that HRD Corp has invested in the stock market via put and call options has grown annually since 2020. For instance, the figure was RM352 million in 2022, which means the increase was a staggering 75% in the last one year.

What’s perplexing is that put and call options are risky instruments. The options are only financially feasible if HRD Corp’s counterparty has the financial resources to fulfil their obligations. Otherwise, the government agency would be left holding the shares and would need to face a lengthy legal battle to recover its money.

In 1998, when Corporate Malaysia was recovering from the Asian financial crisis, one of the recommendations to improve the state of affairs was to do away with put and call options. This was on the account that options contracts were worthless when there was an upheaval in the stock market.

HRD Corp has also invested RM170.3 million in RCCPS. Which company issued the RCCPS and why the instruments come with a “cumulative” element, which means the government agency may not get a yearly dividend, has not been revealed.

Also, HRD Corp purchased a building in 2017 without board approval. According to the PAC report, it was suspected that a RM10 million bribe was paid in connection with the purchase. There were a few other dubious property deals as well.

The PAC report also revealed that many things were withheld from HRD Corp’s board of directors by the CEO and the chairman of its investment panel — a clear breach of governance. And when directors asked for information, they were ignored. Worse, there has been no representative from Bank Negara Malaysia on its board since 2017, which is required by the Act under which HRD Corp was set up.

There were also fictitious claims of RM52 million related to training programmes that were paid out to external parties.

The Auditor-General’s report recommended that its damning findings be referred to other agencies for action. Minister of Human Resources Steven Sim immediately directed that a report be lodged with the Malaysian Anti-Corruption Commission, which has opened investigation papers.

That aside, HRD Corp’s board of directors should on its own volition commission an investigative audit by an external auditor into what had transpired these past several years. An investigative audit would also help to determine the true financial position of HRD Corp’s investments.

It is shocking that this total breach of governance at HRD Corp can happen after the 1MDB debacle and fraud. Sim, as the current minister, must not shy away from uncovering the shenanigans that took place before his time, and it is good that he ordered the report that was lodged with the MACC.

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