Peninsular Insurance (A)*)

Patrick Wale stood in the conference room staring in amazement at the chairman, Tan Sri Ibrahim Nassan. Ibrahim Nassan, the titular head of Peninsular Insurance, had just taken charge of Wale's planning meeting with an interruption that Wale saw as an attempt to subvert his authority with his managers. By the looks on their faces, Wale surmised that his managers were just as surprised as he by such an overt power play. With the 1985 Malaysian economy in recession, and company revenues sliding, now was not the time to play politics. As his adrenalin began to flow, Wale was at a loss as to how to regain control of the meeting and, by implication, of his Malaysian insurance organization. As his mind raced, he thought, "All I know is that, whatever I do next, it's going to have to be played by the Malay rules: respect for elders and saving face. The question is whether I can show one without losing the other."

BACKGROUND
Patrick Wale had arrived in Kuala Lumpur ("KL," capital of Malaysia) almost three years previously to oversee the merger of the wholly owned Malaysian subsidiary of New Zealand Insurance Corporation (NZI) with the Malaysian-majority-owned Peninsular Insurance. He should have been finished within the first 12 months. In fact, however, after the first two years, he had barely scratched the surface of a project that was becoming more Byzantine by the week. Wale considered himself good at adapting and working with other cultures. His work for NZI had taken him to Nigeria, South Africa, India, and, in his last position as branch manager, to Hong Kong, NZI's largest branch in Asia ($8 million in annual sales). (See Exhibit 1 for a profile of Wale and other key executives.)

EXHIBIT 1 Central Characters

Patrick Wale
Age 42 After dropping out of high school in New Zealand, 16-year-old Patrick Wale began work in 1961 as an office boy with NZI. He studied in night school for three years to complete the insurance exams, and began to move up the corporate hierarchy. In 1966, he was offered a position with the overseas staff. A self-described "adventurer," Wale accepted transfers to offices around the world, including Nigeria, India, South Africa, and Hong Kong. Each move improved his position within the corporation and finally led to his present appointment as CEO of the NZI joint venture with a Malaysian partner. Married in 1969, Wale met his wife in Calcutta, where she was working for the British High Commission. Their two children, a 14-year-old son and 13-year-old daughter, had been recently sent to boarding schools in England.

Nigel Fisher
Age 57 Fisher had been employed by NZI since 1942; he was appointed to a senior position with the Home Office in 1960 after a series of international transfers. His progress within the company appeared stalled after the 1981 merger produced a surfeit of middle managers, but he was appointed general manager of the International group in 1985 after its previous two years of results fell well below corporate expectations for the Asian operations. Fisher was due to retire in June of 1986.
*)

This case was prepared by James M. Berger, Darden '92, under the supervision of Professor L. J. Bourgeois. Copyright 1992 Darden Graduate Business School Foundation, Charlottesville, VA. Rev. 2/98.

Fisher was described by a colleague as possessing strong analytical but weak interpersonal skills and having a "dour" personality.

Tan Sri Haji Ibrahim Nassan

Age 73 Tan Sri Haji Ibrahim Nassan Bin Haji Ibrahim Siddiqa (his full name) had had a prominent civil-servant career with the Malaysian government culminating as Secretary General of Internal Affairs, responsible for the Police, Justice; and Immigration. Retired at age 55, he was quickly invited to sit on several company boards and had been Peninsular Insurance's chairman since 1967. He was required to retire from all but Peninsular's board at age 70. Nassan was known as a man who paid strong attention to detail and required a high level of protocol at all times. He was married with five sons.

Wale had felt at home in the free-wheeling, business-first culture of Hong Kong. The absence of political barriers allowed him to concentrate on "getting on with business" without the worry of government regulations. But when the NZI general manager of International Operations called to offer him the position of chief executive officer of the Malaysian joint venture, Wale jumped at the opportunity. The combination of NZI's $12 million subsidiary with its 49 percent owned, $4 million Peninsular would be double the size of the Hong Kong division in staff and sales. The task was an unusual one, because Wale would actually be wearing two hats-as the head of the NZI subsidiary reporting to the home office in New Zealand, and as general manager of Peninsular reporting to the local board. That situation would change, however, when the merger went through and the combined ($16 million) entity would be 74% owned by NZI and working under a single management.

NZI, LTD
"New Zealanders pride themselves on their self-reliance ... it's called kiwi ingenuity. "1 NZI was a diversified financial-services company based in Auckland, New Zealand. One of the country's largest companies, NZI was formed in 1981 from the merger of New Zealand Insurance (founded 1859) and South British Insurance Company (founded 1872). The result was a multinational corporation operating in 24 countries through hundreds of offices. Revenues of the merged company had reached $630 million in 1982, with a reported net-income of $28 million. The international divisions of NZI's General Insurance Group contributed 35 percent of divisional income. (See Exhibit 2 on organization of NZI) Each of the seven divisions of the company was run as a profit center.

A convention in Malaysian names and titles conveyed social and political rank, lineage, and Muslim pilgrimage: "Datuk" was a title conveyed on men of accomplishment. "Tan Sri" was a higher honor, fewer in number. It was given by the Sultan, usually for public servants of high rank. "Tun" was the highest honor possible in Malaysia, short of royalty. "Haji" indicated that the individual had made the pilgrimage to Mecca. "Bin" meant "son of."
1

Annemarie Orange, Darden 1992, native of New Zealand.

EXHIBIT 2 NZI Organization in 1985

NZI Corporation, Ltd.

General Insurance (68.4%)a

Life Insurance (10.1%)

Finance Companies (11.0%)

Trustee Services (1.1%)

Information Services (8.3%)

Investment Services (0.6%)

Reinsurance (0.5%)a

Harry J. Kember Chief General Managers

New Zealand (25%)b

Australia (40%)

International Group (35%) Nigel Fisher General Managers

Hong Kong Singapore Malaysia Indonesia Japan Philippines Thailand

Papua New Guinea Fiji Cook Island

Pakistan Middle East United Kongdom Zimbabwe Kenya Argentina North Korea

a Percent of total NZI revenues. b Percent of total General Insurance revenues.

NZI had concentrated its foreign business in the Pacific Rim and Africa and adopted a strategy of growth through local offices in order to gain a balance in both operations and the product mix offered by the company. NZI had recently been riding a tremendous wave of new business brought about by booming regional economies and an aggressive new corporate style of management that expanded the company's business into previously unconventional areas. NZI had also concentrated on shifting power to the local offices in order to encourage growth, and the new strategy called for equally aggressive management by NZI's field managers, who were afforded a large degree of autonomy by the "Home Office." Within the Pacific and Asian regions' financial-services industry, NZI was considered to be one of the most aggressive in its mix of markets, products, and technologies. NZI held interests in two key Malaysian operations. VZI Malaysia was a branch network offering the full range of insurance services and accounting for $12 million in revenues. Peninsular Insurance Company, with $4 million in revenues, was 49 percent owned by NZI, with the remainder owned by Malaysian nationals. Peninsular had been formed by NZI in 1967 with the ultimate aim of controlling all its business interests in Malaysia, in line with government policy of local incorporation of foreign branches. Weak profits in an otherwise growing economy had led to a decision in 1982 to consolidate all Malaysian operations in order to reduce costs and provide for a more coherent strategy. An agreement was reached that Peninsular Insurance would merge with NZI Malaysia in a pooling-of-interests transaction.

MALAYSIA
The Federation of Malaysia was a peninsular country located at the southern tip of Thailand, with two Malaysian states located several hundred miles across the South China Sea on the island of Borneo. Following independence from the United Kingdom in 1957, the federation was established in 1963. Malaysia was a constitutional monarchy

with a parliament and prime minister. The king (the Yang di Pertuan Agong) was elected for a five-year period by a council of nine ruling sultans from nine of the 13 federated states. (Federally appointed governors headed the four other states and the federal territory.) Natural Resources and the Economy Malaysia had a population of 14.8 million people, with the capital of Kuala Lumpur housing 938,000. The country held a dominant world position in rubber, palm oil, pepper, tin, and tropical hardwoods; these and other abundant natural resources had given Malaysia one of the highest annual growth rates per capita in the world: growth at 4.5% per year since 1965 and per capita gross national product over $1,555 by 1985. The government had been aggressively pushing the economy toward a manufacturing base since the 1970s. Emphasis was on building the travel and communication infrastructure necessary for industrial growth, and the government maintained a policy of encouraging rapid population growth in order to stimulate domestic demand. The policy appeared to be working: manufacturing began to overtake agriculture as a percentage of gross domestic product and, by the 1980s, was the main source of economic growth. The unemployment rate was 5.6 percent in 1985 and the inflation rate 3.7 percent. Political Aspects and the "NEP" It's not a law, it's a government policy, and it is really like shadow boxing because you never really know quite where the target is. 2 Because Malaysia was a multiracial society, friction generated by the different cultures was the most important aspect of Malaysian politics. Political parties were based primarily on racial lines; the United Malays National Organization was the largest, but shared power in a broad-based coalition with the Malaysian Chinese Association, the Malaysian Indian Congress, and several other, smaller parties. Malays made up about 50 percent of the population, Chinese about 35 percent, and Indians about 10 percent. The three ethnic groups spoke different languages and followed different religions. While Malays were the most powerful politically, the Chinese controlled most of the nation's economy and owned a large proportion of Malaysia's businesses. After a violent race riot in 1969, the Malaysian government established the "mitigation of inequity between races" as the overriding goal for the government. As a response to this goal P the New Economic Policy (NEP) was established in 1970. NEP was established to help the "bumiputra" (Malay for "son of the soil"), which refers to native Malays, who were considered the main beneficiaries of the policies. One way the NEP attempted to reach its goals was through increased spending on education and basic services. Public enterprises such as the Trust Council for Indigenous Peoples were chartered to finance native Malay businesses and to provide advice to prospective Malay businesspeople. The government had also set a goal of increasing native Malay ownership in the corporate sector to 30 percent by 1990. All other Malaysians were designated 40 percent corporate ownership, and foreign owned stakes were to have access to the remaining 30 percent. In addition, foreign-owned companies were required to restructure equity so at least 70 percent was held by Malaysian investors. According to Wale, at the time of his arrival in 1982 the government was putting extra pressure on foreign firms to "domesticate" their firms and to increase their local share holdings. One way of applying this pressure was to grant very limited-term work permits. Government regulations in 1982 required all foreign nationals to apply for a Visitor's Work Visa, usually for 12 months. But when pressure on a company was desired, only 3 or 6 months were given, and the threat was always present that a visa would not be renewed. As Wale described this threat, "I had no idea whether I would be here for the full five years of my assignment or I would be on the plane in a month's
2

Patrick Wale.

time. They were playing the game with all insurance companies here that the best way to make foreign companies take on local partners was to mess around with their work permits." Another important factor in the Malaysian political structure was the presence of the military. In the early years of the federation, in a period known locally as "the emergency," the country was plagued by civil war. Not until the middle 1970s did the threat from the communist insurgents greatly lessen. The product of the civil war was a virulently anti-communist government that retained full constitutional control of the professional military force.

THE NZI MALAYSIAN STAFF

"Well it's all very much tied into the Asian face thing, that you don't just say what's on your mind to the guy in case You offend him. 3 Not long after taking over as General Manager of Peninsular, Wale established good working relationships with the management and board. (Wale was appointed to the board in March, 1983, as an alternate for Harry Rember, a board member based in New Zealand.) The foremost figure of the company was the local chairman of the board, Tan Sri Ibrahim Nassan, a prominent citizen in Malaysia who had once served as a high-level government official in the Interior Department (see Exhibit 1). Wale soon realized that the chairman was remote from any real decision making for Peninsular; he served in mostly a ceremonial role. The chairman would show up at board meetings, start the occasion with a brief speech (usually written for him), and then leave management to discuss the mundane operational issues. Wale found the chairman to be a supportive gentleman; he allowed Wale to go about the business of modernizing the company's operation and organizing the mechanics of the merger, and he was particularly helpful in the area of smoothing over potential problems with the government. Immigration had been one of the departments under the chairman's supervision, and he several times expedited Wale's reapplication for a work permit. The 73-year-old chairman, at 5'7", was quite a contrast with Wale who, at 42, was 6'4" and 250 lbs. Recently, Nassan had been forced to leave most of his other board positions because of the mandatory retirement age written into most public companies' bylaws. Peninsular, as a private company, did not have such a rule. The chairman was thought to be quite well off financially, although Wale had also heard that he had recently been involved in some rather unfortunate investments, probably in the volatile Malaysian stock market. Since the early, supportive days, Wale had found himself on occasion becoming annoyed by the chairman's tendency to bypass Wale and call the corporate secretary Gob Lai King, when he wished to check on the business or consult with a manager. King had been with Peninsular for almost 15 years, and the chairman had formed a separate line of communication with him. Wale believed that, as a matter of protocol, the CEO should be the first to be consulted for advice or questions, but he had also recognized how petty it would be to try to cut off this communication. (See Exhibit 3 for Peninsular organization.)

Patrick Wale.

EXHIBIT 3 Peninsular Organization in 1985

Tan Sri Ibrahim Nassan Chairman of the Board Patrick Wale General Manager

Tan Peng Soo Operations Manager

Goh Lai King Secretary

Steven Wong (Kuala Lumpur Branch) Oei Siew Fah (Broker Division) Roger Yap (Kuantan) Y.W. Woo (Penang)

G. Low Yin (Ipoh Branch) Pao Lan (Sandakan) Lin Hai Chen (Tawau) L.M. Lau (Penang)

Lee Kar Soon (Johor Baru) Lim Swee Peng (Kota Kinabalu) S.D. Liang (Kuching)

Wale had also quickly formed a close working relationship with the Malaysian operations manager, Tan Peng Soo. Tan was particularly knowledgeable about the daily workings of Peninsular, and Wale relied on his judgment about how best to implement the new training and computerization programs that would bring Peninsular's operations up with the rest of the NZI organization. Because Wale expected to move on when the merger was consummated, he began grooming Tan Peng for the CEO position. Wale understood that Tan's strong business acumen and Malaysian nationality would make him a natural choice to run the merged company.

MEETING WITH THE CHAIRMAN

The question was whether the merger would ever come to fruition. Wale had become increasingly frustrated by the tortuously slow nature of Malaysian business dealings, particularly those with the vast government bureaucracy. Two years had already passed, and almost nothing had been accomplished. He spent most of his time waiting months for written replies from government officials, replies that would have taken days in Hong Kong. During this first two years in Malaysia, Wale occasionally visited the chairman at his home in a wealthy KL neighborhood to update him on the progress of the merger and discuss how the business was doing in general. Wale had arranged such a meeting to discuss the slow replies of the government and an upcoming board meeting with the visiting directors from New Zealand. As a courtesy, Wale had always visited the chairman at home, but he was becoming increasingly uncomfortable with the practice. He had noticed that, while they were seated in the chairman's sitting room discussing business, the chairman's wife would be sitting in the adjacent room apparently listening in on their conversation. She would often make an excuse to come in and interrupt, and would then linger on during the discussion. The chairman's wife was quite a bit younger than he, probably 15 or 20 years. Wale recognized that she was a strong-willed woman, and perhaps this trait, combined with her ability to make her presence felt and known, was what made Wale uncomfortable.

On this humid day in July, 1984, the chairman seemed to have little to offer in regard to the government delays. Wale then asked, "Well, sir, do you have any suggestions on where we may want to host the dinner for our visiting board members? I thought that your club did a superior job on the last occasion." The chairman leaned forward, "Yes, well, I believe . . ." "The club? Certainly not the club!" His wife suddenly emerged into the room. "Why don't we try the Rasa Sayang for a change? I think the gentlemen from the home office would much prefer that." Wale observed the chairman as his wife continued telling them where the meeting should be and what should be on the menu. The chairman was obviously a bit taken aback, and Wale realized that he probably had the same expression on his own face. Driving back to his office that afternoon, Wale decided to discontinue the practice of going to the chairman's house to talk business. Perhaps he was being silly, but the wife's interference was bothersome.

NIGEL FISHER VISITS

Several months later (February 1985), Wale received a call from Nigel Fisher in the New Zealand office telling him that Fisher would be visiting the Malaysia office in two weeks. Fisher was the newly appointed general manager in charge of International Operations, the third general manager in as many years. Fisher had worked with Wale before, and Wale looked forward to being able to discuss with him the reasons for the merger's slow going. Wale hoped to receive the level of support from the Home Office necessary to accelerate the merger. A few days before Fisher's arrival, the chairman called Wale to his office. He requested that Wale arrange for King, the company secretary, to be present at Nassan's meeting with Fisher "just in case there is anything that I would like to put on the record." Wale checked with King later that day to arrange for him to attend the meeting. The day before the meeting, King approached Wale and asked whether it was really necessary for him to attend. King said, "I am very sorry, but I realized that I have a prior appointment with the Tax Department and think that it oughtn't be broken." Wale readily agreed that the appointment was important and promised that, if necessary, he would take notes. Wale assured King that the chairman would not mind. "Well, the chairman did bloody well mind," Wale recounted later. Before the meeting with Fisher, Wale went to the chairman's office and asked whether he would like for Wale to sit in and take notes on the meeting. "No, I would prefer this meeting to be one on one," the chairman responded. The meeting lasted almost an hour, and immediately afterward, the chairman called Wale into his office. "Where was Mr. King?" he asked as Wale took a seat. "I instructed you to have him here to take notes." "Yes, he came to me yesterday and informed me that he had a previous engagement with the Tax Office. I told him to carry on with his meeting and that I would take any notes if you wanted. But obviously you. . ." "This is very upsetting, Patrick. Why did you countermand my specific instructions for the secretary?" Wale had never heard this kind of tone from the chairman, who was always scrupulously polite. "I must apologize if it seems that way. It was a genuine misunderstanding on my part. I had thought that under the circumstances he should carry on with his meeting and I could take notes." "The circumstances were that I gave specific orders and you saw fit to ignore them. If you ever countermand my instructions again, I will call the Home Office to have you removed from Malaysia."

Wale left the office feeling confused and a bit angry at the chairman's behavior. It was becoming apparent that he would have to start keeping his eyes open to what was a changing situation at Peninsular. Soon thereafter, Wale asked Fisher about what had transpired during the meeting. Although Wale had never particularly got on with Fisher, finding Fisher's style too aloof for his tastes, he was confident that Fisher was sufficiently loyal to him not to discuss things with a local chairman behind Wale's back. Fisher said, "Oh, we mostly discussed the mechanics of the merger, the pricing of the shares, and that sort of thing. I told Tan Sri Nassan that NZI believes in keeping an arms-length relationship with our foreign offices. Said we would act as corporate advisors and assured him that we wouldn't steamroll the minority stockholders." When Wale brought up the timing of the merger and his troubles with the bureaucracy, however, he was frustrated by Fisher's lack of support. "I'm sure you will get things moving along. You're just going to have to stop spending so much time dealing with the politics," Fisher said, smiling weakly. Wale understood that his point was not getting through. If he had learned one thing from his two and a half years in Malaysia, it was that business was politics here.

THE ANNUAL PLANNING MEETING

I guess I was fairly stunned. "4 In the next six months, the two companies made some real progress toward merger. Wale met with the corporate attorneys, who calculated that, at the negotiated pricing, NZI should control 76 percent of the new entity, which would afford the company similar representation on the board. The company planned to keep the present 4-to-4 ratio of NZI representative and local board members, however, to keep up the appearance of a joint venture. For the moment, Wale was concerned with the annual planning meeting scheduled for the end of September. During the meeting, the managers of each of Peninsular's 12 regional branches would present their individual financial plans and their strategies, staffing, and support needs for the coming year. As Wale described it, "We would put all these into the melting pot at this workshop and then come back about a month later with a finalized plan on a countrywide basis. This was the start of that cycle asking each territory to stand up for 15 to 20 minutes and give a rundown on their major objectives for the year, their strategies, and where their strengths and weaknesses were. Normally, it would be the practice of two or three of us at the KL office to ask probing questions of the branch manager." The managers were encouraged to try out new ideas and to question each other or Wale about operational practices. Wale saw this open forum as serving two purposes: it encouraged branch managers to think beyond their own office's needs, and it could anticipate many of the questions that would come from the Home Office when budget requests were reviewed. This year, Wale was particularly concerned about the downturn in the Malaysian economy and wanted to keep the next year's costs to a minimum. (Peninsular was projecting a small loss for the year-see Exhibit 4.) As he always did, Wale asked the chairman if he would like to address the meeting before morning tea. The Chairman agreed and accepted Wale's offer to write a brief speech on the state of the company.

Patrick Wale.

EXHIBIT 4 Financial History

New Zealand Insurance, Ltd (NZ$ millions) 1982 1983 1984 630 752 805 28 18 49 Peninsular Insurance (NZ$ millions)a 1982 1983 1984 5.6 4.9 4.8 0.3 0.6 0.4

Revenue Net Income Revenue Net Income

a

1985(e) 4.2 (0.04)

Converted at NZ$1.00 = 1.17 Malaysian Ringgit. In 1985, NZ$1.00 = US$0.468

The meeting was held in the boardroom; the large, adjustable table was that day configured in an open square, at which sat the 12 branch managers, the corporate secretary, the technology manager, Operations Manager Tan, and Wale and the chairman (seated next to each other): The morning started normally enough. The chairman offered his welcome to the branch managers and read Wale's opening statement. After the morning tea, Wale called the meeting to order. To his surprise, the chairman had not slipped out as he normally did but had come back to his seat next to Wale. During the second presentation by the Sandakan branch manager, Wale interrupted to question the manager's figures: Wale: "Mr. Pao, I'm not sure I see the basis for your staffing requirements. What are the growth projections that you are using for your figures?" Branch Manager: "We are forecasting a 15 percent growth in sales and revenues." Wale: "From what I have seen of your present operations, I would say that you already have the excess staffing necessary to support even a 15 percent growth, which is certainly aggressive. From a cost basis, I do not see how you can justify that many more people. Do you suppose. . ." Chairman: "Hold on, Patrick. It is very easy for you managers in the central office to look at numbers and question them. But this man is dealing with the reality of working in the field and seems to have very good reasons for his staffing numbers. You always expect these poor chaps in the branch to meet the targets, but then they never get the proper support from you. Now they cannot even get the staff they require to do their job correctly." Wale: (After pausing for a moment) "Mr. Chairman, perhaps we should take a look at this situation after the meeting. I'm sure we can discuss this and have it sorted out very quickly." Chairman: "The issue is certainly an important one. I believe that all of the branch managers would like clarity about the signals they are getting from the central office in Kuala Lumpur. Mr. Pao's projections seem perfectly reasonable, and I know from my long association with Peninsular Insurance that his office is one of the finest in this organization. Mr. Pao, please continue with your excellent presentation. And Patrick, I will be happy to discuss this with yourself and Mr. Tan at the end of these proceedings." The chairman waved his hand at Mr. Pao as a signal for him to continue. The branch manager stammered to a start and quickly moved on to a new topic. Wale did not hear a word of it. The chairman's outburst had come as a complete shock, and Wale was trying to gather his wits and consider what his next move should be. He scanned the faces around the table as the managers quickly switched their eyes from him and back to the speaker. Tan returned his gaze with a look that was both stunned and quizzical, and Wale knew that they were thinking the same thing: "What is the old bugger up to?"

Wale was not about to stand aside. For the rest of the day, he continued to facilitate the meeting, but there was almost no free exchange of ideas from the managers from that point on. Everyone seemed to be concerned about saying something that might lead to another controversy. Meanwhile, the chairman continued to chime in, making it perfectly clear who he thought was in charge of the proceedings. Wale wondered what his next move should be. He wondered what the chairman's next move would be. The man did have connections, and the merger was six months, at least, from completion. Having a retired bureaucrat who knew nothing about business attempting to run the show certainly was not going to help things along. And what about the other managers? Wale had never considered questioning their loyalty, but this episode put everything in a new light.

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