Industry regulator, the Securities Commission Malaysia (SC) recently released the new Malaysian Code on Corporate Governance (MCCG), a set of best practices aimed at strengthening corporate culture anchored on accountability and transparency.
The new MCCG places greater emphasis on the internalisation of corporate governance culture and best practices, not just among listed companies, but also encourages non-listed entities including state-owned enterprises, small and medium enterprises (SMEs) and licensed intermediaries to embrace the code.
The code has 36 practices to support three principles namely board leadership and effectiveness; effective audit, risk management, and internal controls; and corporate reporting and relationship with stakeholders.
“This new code is an important milestone in Malaysia’s continued journey in promoting good corporate governance to ensure the sustainability and resilience of the capital market. It serves as a compass for boards to steer their companies forward and deepen understanding on the importance of corporate governance,” said SC Chairman Tan Sri Dato’ Seri Ranjit Ajit Singh in his speech to officiate the release of the MCCG.
A key feature of the new code is the introduction of the Comprehend, Apply and Report (CARE) approach, and the shift from “comply or explain” to “apply or explain an alternative”. This is meant to encourage listed companies to put more thought and consideration when adopting and reporting on their corporate governance practices.
Tan Sri Dato’Seri Ranjit added that in drafting the code, inputs were drawn from domestic and international stakeholders, lessons from past and recent governance failures and changes in market structures and business needs. It also took into account the growing need of companies “to address the converging interests of corporate citizenship and social and environmental responsibilities.”
He said that despite progress in corporate governance implementation, there are still a significant number of malpractices and failures which could have been avoided by better corporate governance practices. “Where was the board in Wells Fargo and Volkswagen?” he asked.
“In order for companies and countries to attract long-term, patient capital in today’s globalised market, corporate governance arrangements which are effective and in line with international best practices must be in place. These are increasingly seen as conditions for sound risk management, cost reduction and access to capital.”
He added that regulatory emphasis on investor protection will continue to focus on internal governance, conduct and management of conflicts of interest.
However, he emphasised that while rules and sanctions are important in improving business integrity, they will not on their own deliver productive behaviour in the long term. “A healthy corporate culture anchored on accountability and transparency is key in delivering long-term business and economic success. The responsibility rests on the board.”
“Corporate culture breakdown is not triggered by a sudden reckless or unethical act, it is a gradual erosion of a company’s corporate value which is either ignored or overlooked by the board.
“The essential need for an independent perspective to detect and respond to potential governance lapses underscores the importance of a boardroom environment which values individual contributions and dissenting views.
“Boards that are able to draw upon a wide range of skills, experience and backgrounds and consider different perspectives, make better decisions,” Tan Sri Dato’Seri Ranjit said.
The MCCG adopts a differentiated and proportionate approach in the application of the code taking into account the differing size and complexity of listed companies. The code now identifies certain practices and reporting expectations to only apply to companies in the FTSE Bursa Malaysia Top 100 Index, and those with a market capitalisation of RM2 billion or more.
Another new dimension in the code is the introduction of ‘Step Up’ practices to encourage companies to go further in achieving corporate excellence. This includes the practice which requires the audit committee to comprise only of independent directors and the establishment of a risk management committee.
The new MCCG is the result of a comprehensive review by the SC in 2016 drawing inputs from domestic and international stakeholders, lessons from past and recent corporate governance failures and changes in market structures and business needs. The code, which was first introduced in 2000 following the recommendations made by the High Level Finance Committee in 1999, had been reviewed twice in 2007 and 2012.
Practices outlined in the code are supported by guidance notes to aid implementation and ensure better disclosure. Intended outcomes in the code are placed up-front to provide users with a line of sight towards the ultimate aim.
Practices were enhanced and new ones were introduced through the revised code to:
- Strengthen board composition, independence, accountability and transparency. This includes participation of independent directors, reviewing the tenure of independent directors, gender diversity of boards, greater transparency on remuneration and rigorous board and director evaluations.
- Support effective audit, risk management and internal control. This covers strengthening the independence of and effectiveness of the audit committee, facilitating objective oversight by the board of the audit committee, a dedicated focus on risk management through a risk management committee and ensuring the internal audit function is effective and independent.
- Maintain integrity in corporate reporting and meaningful relationships with stakeholders. This will be done through regular and transparent communication with stakeholders, adopting integrated reporting, ensuring participation of directors at shareholders’ meetings and using technology to facilitate voting and shareholder participation.
Alongside the MCCG, the SC also announced a three-year strategic plan to advance key corporate governance priorities, which includes:
- Strengthening the ecosystem: SC will work with stakeholders to establish the Institute of Corporate Directors Malaysia (ICDM) to provide a professional development pathway for directors. A Corporate Governance Council will be established to coordinate all corporate governance initiatives.
- Leveraging technology: SC will deploy big data and artificial intelligence capabilities to strengthen its corporate surveillance and enforcement capabilities. The SC will work with the fintech community to:
- facilitate electronic voting and remote shareholders participation; and
- develop an online platform for monitoring and reporting of corporate governance practices.
- Promoting gender diversity on boards: SC will collaborate with industry groups and stakeholders to increase women’s participation in boards of the top 100 companies on Bursa Malaysia from 16.8% currently, to 30% by 2020.
- Embedding corporate governance culture early: SC will collaborate with relevant stakeholders to develop a corporate governance toolkit for SMEs to ease them into embracing good governance practices. A similar framework for licensed and registered capital market intermediaries will also be introduced. SC will also collaborate with tertiary institutions to introduce corporate governance in their curriculums to shape future corporate leaders with high ethical standards.
The MCCG took effect from last month and the first batch of companies that are expected to report their application of the practices in the new code will be those with financial year ending 31 December 2017.
Post the announcement of the new code, there was a roundtable discussion on the code where participants focused on the question of whether independent directors are really independent.
Anne Molyneux, a member of the governing board of the International Corporate Governance Network, said that investors look at boards very carefully and what skills they bring to the board.
An independent nomination committee is important and investors look to see whether independent directors are really independent. “We look at business models and the risks involved and watch for whether there could be destruction of value (from lapses in corporate governance). We want to see KPIs and targets.”
She pointed to Volkswagen where value destruction could amount to as much as US$16-18 billion and the Libor scandal where banks may eventually end up paying as much as US$19 billion in settlements.
Tan Sri Zarinah Anwar, Chairman of Malaysia Debt Ventures Bhd and a former SC Chairman said there is a trust in raising funds from the public and that trust should not be abused. The code helps ensure that the trust is not abused.
She added that much depends on the leadership of the company and the ethical tone they set.
Dato’Abdul Rahman Ahmad, President and Group Chief Executive at national unit trust manager Permodalan Nasional Bhd (PNB), which manages some RM178 billion in funds, said that boards are not concerned with total shareholder return and they must be.
He saw one of the key roles of the board as selection of the CEO, pointing out that the Apple board brought back Steve Jobs as CEO, who added great value to the company.