On Wednesday (Feb 20), it was announced that the California Public Employees' Retirement System, or Calpers, would pull out of the Philippines, Indonesia, Thailand and Malaysia because these countries did not meet its new investment guidelines.

Calpers is the largest pension fund in the US with some US$151 billion (RM573.8 billion) under its management making it the third largest fund in the world. But only US$1 billion (RM3.8 billion) of this amount is invested in emerging markets in Asia with approximately US$200 million (RM760 million) invested in Malaysia.

With a current market capitalisation of slightly less than RM500 billion or approximately US$130 billion, the effect on the Kuala Lumpur Stock Exchange (KLSE) due to the pullout of Calpers from Malaysia seems minimal.

But one should look into what Calpers stands for and why they chose to pull out just when the outlook of the region was improving.

What does Calpers stand for?

Calpers stands for a strong and transparent corporate financial reporting system and as such, have been an active supporter for greater shareholder activism, the independence of audit committees, greater involvement of and power to company directors and accountability of managers, just to name a few.

It believes that companies which demonstrate these principles are able to deliver better long term growth and profits and hence a better share price performance. And naturally these are the companies in which Calpers will invest their money in.

Investor confidence

Calpers pulling its funds out will act as a signal to other international fund managers especially pension funds that the markets in these countries fall short of the required corporate governance standards of Calpers.

Investor confidence both local and foreign will be affected prompted by fears that others will follow suit.

In fact, the factors considered by Calpers 'looks beyond traditional economic factors and considers basic democratic principles'.

Besides taking into account broad financial factors, issues of transparency, political stability and labor practices/standards are considered as well.

The authorities in Malaysia, from the KLSE to the Securities Commission to the Ministry of Finance, should take note of the concerns of Calpers especially since the trend of 'ethical' investing is on the rise among funds in developed countries.

Some might say that Calpers is not representative of most, if not all, foreign fund managers or that this was a knee jerk reaction prompted by its own losses in investments in Enron.

There is some truth to this. Losses in Enron stocks and bonds totaled slightly over US$100 million (RM380 million). The revelation of audit cover-ups would have put some doubt in the audit practices of other companies and countries including those in emerging Asia.

Most of Calpers' portfolio in emerging Asian markets are managed by third parties and because of its largely passive stance in these markets, they might have felt that it was not worth taking a risk in placing long term investments in these countries.

As such, the performance potential of these markets including Malaysia is in no way reflected by the pullout of Calpers.

Indeed this was emphasised by William D Crist, President of Calpers Board of Administration - "This model is not intended to evaluate the current attractiveness of any individual market; that decision will be left up to our investment managers."

Higher standards

Indeed some might even argue that Malaysia will benefit from the pullout of destabilising foreign funds.

But these arguments miss the point that there are still huge strides to be made in the area of corporate governance in Malaysia such as the rights of minority shareholders, aligning the interests of managers and shareholders, greater power for the board of directors, among others.

The pullout of Calpers should act as a reminder for us in Malaysia to continue to push towards higher standards in the area of corporate governance.

It should remind us of the increasing concerns of foreign fund managers towards other 'democratic measures' such as labor practices in choosing countries to invest in.

It is an unfortunate coincidence that on the day of Calpers' announcement, the KLSE announced that the trading of new TRI (Technology Resources Industries) shares would be delayed even though proper procedures seems to have been followed and the necessary approvals obtained.

But this episode only further strengthens the need for more transparent regulation and corporate governance in Malaysia.

By improving corporate governance in Malaysia, we can distinguish ourselves from other countries with less established regulatory records.

We can improve the returns to shareholders. We can attract foreign funds that see the long-term potentials of investing in this country.

The pullout of Calpers funds will not lead to a disintegration of the KLSE, that must is obvious. But to ignore the reminders that have arisen from this episode is to delay much needed improvements in corporate governance in Malaysia.

ONG KIAN MING was headed for glorious riches as a management consultant before too much of the good life got to him. He's now working at a think tank focusing on nation building, civil liberties and minority representation issues. He also has a column every Monday in the New Straits Times called 'Chisel and Stone' which he co-writes with his boss.

He can be reached at im_ok_man@yahoo.com. The opinions and content of this article are his alone.