UPDATE 2-Chairman at Malaysia's FGV steps down after initiating probe into management


* Chairman had spearheaded probes into CEO, other executives

* CEO has called on anti-graft body to investigate

* FGV shareholders are important voting bloc for PM Najib

* PM's office says corporate governance, controls issues at FGV (Adds comment from PM's office, settlers group)

KUALA LUMPUR, June 19 (Reuters) - The chairman of Felda Global Ventures Holdings Bhd (FGV) stepped down on Monday, which Malaysia's government said would preserve the integrity of investigations into the firm's CEO and other executives that he had initiated.

In a rare public reprimand, the prime minister's office also said there were bigger corporate governance and control issues that FGV needed to address urgently.

FGV, the world's third-largest palm plantation group, was plunged into turmoil when Chairman Mohamad Isa Abdul Samad asked Chief Executive Zakaria Arshad to quit.

Zakaria refused to leave but he and three other executives were later suspended by FGV's board as it investigates transactions at its Delima Oil Products subsidiary.

The crisis at FGV - whose biggest shareholder is the state-owned Federal Land Development Authority (Felda) - could hurt Prime Minister Najib Razak, who government sources have said is expected to call elections this year.

FGV's shareholders, many of them small landowners called "settlers," form a key vote bank for Najib's ruling alliance in battleground states. Some settlers have expressed concern about the management battle and called for the chairman to step down.

CEO Zakaria has denied wrongdoing and called on the country's anti-graft body to conduct its own investigation into FGV.

In addition to FGV's own internal investigation and one by the Malaysian Anti-Corruption Commission (MACC), the government appointed a former cabinet minister to look into the suspensions.

The prime minister's office said that based on the former minister's findings, it had decided to transfer Isa to a government agency to uphold the integrity and impartiality of the inquiry.

The board had reasonable grounds to initiate disciplinary proceedings against the four executives, but no one was guilty of any wrongdoing at this juncture, it said.

Isa will be replaced by Sulaiman Mahbob, who will be acting chairman effective immediately. Sulaiman has previously served on the boards of state energy firm Petroliam Nasional Berhad and Felda.


A settlers group called National Felda Settlers' Children Society welcomed the appointment of Sulaiman, but called for the review of Zakaria's suspension and urged Isa to step down as chairman of FGV units.

Felda settlers have long complained about delayed payments from the state-run firm, which buys the palm fruit the settlers produce. They have also taken a hit from a 70 percent drop in FGV share prices since its initial public offering in 2012.

Zakaria was perceived by FGV shareholders as someone who was focused on restructuring efforts and improving share value.

Since taking over as CEO in April 2016, Zakaria has said FGV would rationalize its operations to address "structural and financial issues."

In the statement from the prime minister's office, the government acknowledged that there were issues at FGV.

"The (Delima) case highlights the immediate need for FGV to radically improve its corporate governance and business controls at the group and subsidiary levels," the office said, adding that the decline in the financial performance of FGV and Felda in the last few years "warrants a comprehensive business review."

Such a review has already started late last year and it should be completed with urgency, the PM's office said, though it did not give any details of the review.

Shares of FGV closed up 4.6 percent at 1.84 ringgit per share on Monday.

(Reporting by Emily Chow, A. Ananthalakshmi; Editing by Edwina Gibbs)