By Chan Hoi Leong,
Researcher
Topic: Education
Area of
discussion: Corporate Governance
Chapter/Keyword(s):
Malaysian Code on Corporate Governance 2012 (“MCCG 2012”)
Question
Discuss how the Malaysian Code on Corporate Governance
2012 would help to strengthen governance in listed companies in Malaysia
including the roles and responsibilities of the board and management; reinforce
independence, risk and financial reporting.
Introduction
Essentially,
Malaysian Code on Corporate Governance 2012 (“MCCG 2012”) lists down wide
principles of good governance and detailed recommendations on structures and
processes as well as commentaries to aid understanding by giving out guidelines
and examples. Ideally, companies are advised to follow its best practices which
are flexible, as it will lead to the creation of sound corporate governance
culture, besides promoting ethical and sustainable values. It encourages
companies to put extra efforts on their governance needs instead of merely
fulfilling the minimum requirements or “box ticking”. This is beneficial as
Mallin (2013, p.291) highlights that many listed companies in Malaysia are
still family-controlled; at such shareholders’ rights are often being ignored
while transparency and independence are relatively weak. It is indeed the keys
for efficiency, market confidence and investor protection. Below is the careful
analysis of each principle including their impacts, advantages and
effectiveness:
Content
Under
the first principle of establishing clear roles and responsibilities, the board
shall formalise ethical standards through a code of conduct. For example: trade
practices, ethics guidelines and working standards. Organisations should view
codes as a great tool to inculcate its employees with sound principles besides
regulating their behaviour only (Steger & Amann 2013, p.149). At such,
codes can add value to firms by creating an ethical and positive work culture
throughout the entire company. Ideally, well-administered and properly executed
codes can offer numerous benefits such as provide guidelines to assist
employees whenever they face ethical dilemmas in finding the proper course of
action; minimise the risk of having too many subjective and inconsistent
management standards; build public trust and improve business reputation; and
ultimately, promote market efficiency. PricewaterhouseCoopers (PwC) and
Deloitte are some of the industrial examples that are having a strict code of
conduct.
Next,
the board should also assure that the organisation’s strategies promote
sustainability especially in the area of environmental, social and governance
(ESG) whereby their respective policies and implementation need to be disclosed
in the company’s annual reports and website. Such disclosures are important for
long-term growth and profitability. For instance: the ways on how an organisation
operates, measurement of progress towards achieving their sustainability
targets, identification of new market opportunities for sustainability-related
products and services, mitigation of sustainability-related risks and so on. It
is apparent that sustainability initiatives can aid in boosting a company’s
competitiveness, employees’ morale and ability in getting more capital (Main
& Konigsburg 2011, p.3).
Then,
the board ought to formalise and make public of its board charter, which point
out the board’s strategic aims, roles and responsibilities. This is vital
especially for the area that concerns with the division and separation of
authorities and responsibilities between the board and the management, the
chairman and the CEO, and all the board sub-committees; all roles should be
clear-cut, non-ambiguous and preferably be split. By doing so, it will give a better
insight to the person in charge whereby they can discharge their duties
delegated to them more effectively in their own area of control as well as
increasing their understanding ability on what needs to be done so that they
can do the right things correctly. Tasks if possible should not be overlapping
to avoid confusion. This is to prevent ‘pointing finger attitude’ when
something went wrong and indirectly, it will boost their seriousness in doing
work too. This is because everyone is held accountable or liable for what he or
she did while the others can know who to refer or blame when they identify work
errors and mistakes. As a consequence, it will promote efficiency in each
individual, team and division. Performance evaluation and assessment can also
be done more accurately and fairly. It is noted that Sime Darby already doing
this.
Meanwhile,
it is undoubtedly that the nominating committee’s responsibilities have been
increased tremendously under Principle 2:
Strengthen Composition. Since they are in charge to supervise the
director’s selection and assessment, it is strongly advisable that the
nominating committee should comprise exclusively of NEDs of which majority of
them must be independent. Besides, the nominating committee’s chairman should
also be a senior independent director. The benefits of this move are it gives
additional independence and increase objectivity in the director appointment
process (Azmi 2012, p.13). Thus, avoids the directors from being appointed on
the basis of personal connections or networking (Mallin 2013, p.171).
Subsequently,
nominating committee shall develop, maintain and review a set of criteria to be
used in director’s recruitment process and annual assessment. By doing this, it
could help in identifying the best director, preferably who is balance in all
aspects and can add value to the board as a whole (Azmi 2012, p.13). Logical
thinking suggests a person’s performance will vary from time to time, that is
why yearly assessment is essential. When assessing the suitability and quality
of directors, nominating committee shall check, monitor and appraise each
individual whereby considerations should be emphasize on performance,
competencies, commitment (time spent in company and number of meetings
attended), contribution, behaviour and et cetera vigorously and regularly
(Mallin 2013, p.172). If necessary, remove incompetent or unsuitable directors.
Not only that, the board should set a policy related to boardroom diversity and
take proactive steps to ensure that women candidates are included in its
recruitment exercise. Research suggests that mixed-gender teams are superior in
solving complicated problems and examining more aspects of a problem (Gladman & Lamb 2013).
At
the same time, the board should create a remuneration committee to develop
official and transparent remuneration policies and procedures as well as to
design fair remuneration packages which are align with the company’s long-term
aims and business strategies in order to attract, retain and motivate
directors. This move is critical as it can reduce the possibility of quality
directors from being headhunted easily, encourage directors to strive harder
and avoid companies from paying more than necessary. Remuneration committee
needs to ensure that the design of contracts exclude ‘rewards for failure’, to
prevent rewarding poor performing directors (Mnzava 2012, p.45). In addition,
companies are highly encouraged to disclose board remuneration policies and
procedures in their annual reports. In connection with that, previously Zakaria
(2011) highlights that many company directors in Malaysia were still unwilling
to reveal their remuneration details whereby only 8.3% of directors have
declared their remuneration fees in 2011.
Hopefully, this situation can be improved further in the future.
Another
principle would be reinforcing independence. Undeniably, independent directors
could help in mitigating risks arising from conflict of interest or unduly influence
given by interested parties to control board’s decisions. Therefore, assessment
of independent directors needs to be done yearly to evaluate whether they are
still capable to provide independent and objective judgement as well as
unbiased opinion during the board discussion. In this case, it is recommended
that the nominating committee should set out the independence assessment’s
criteria. For example: check whether they got received additional remuneration
(apart from director’s fee) from the company; check whether they have any
family or close relationship with other directors or advisers of the company
(if any), level of commitment (time devoted and meetings’ attendance) and et
cetera (Mallin 2013, p.175).
Besides,
companies are discouraged to retain an independent director for more than nine
years (Oh 2012); the reason behind this is long tenure might jeopardise independence
because independent director has been receiving benefits for quite a long
duration and started to feel attached with the company already. Hence, the
danger is they might become biased and side the internal people. Anyway, they
still can opt to serve the company in the capacity of a non-independent
director. Furthermore, shareholders’ approval must be sought and board must give
reasonable justification also before an independent director who has served for
more than nine year can continue to remain independent (Law 2012, p.1). Another
recommendation is the CEO and chairman shall not be the same person, and the
chairman must be a non-executive director. This is extremely important to
promote accountability and also to ensure that the CEO cannot easily influence
the board. Thus, the risk of CEO abuses power to do something that are not
beneficial to the shareholders and company can be potentially be reduced
(Mallin 2013, p.167). If the chairman is non-independent, the board must
consist of a majority of independent directors to “neutralise” the board. This
is truly useful and helpful for corporation that are dominated by families like
Berjaya Corporation.
As
per the fourth principle: foster
commitment, the board shall come out with its expectations on its members’
time commitment and set new directorship acceptance protocols. Ideally,
directors should allocate enough time to run their duties. This recommendation
is vital especially for those individuals that hold multiple directorships as
they are more prone to distraction, easily lost focus and usually cannot
provide sound advices as compared to the person that hold only one directorship
(Hashim & Rahman 2011, p.137). This move encourages directors to at least
notify the chairman about how much time that they could spend on the new
appointment, before they accept any new directorships. Moreover, board also
need to ensure that its member will frequently update their knowledge and
refine their skills via suitable continuing education courses and long-term
learning. This is because as time passed by, knowledge and skills will become
irrelevant and obsolete due to globalisation and changing market dynamics. This
move promotes sustainability whereby it enables directors to engage actively in
board deliberations.
According
to the fifth principle to uphold integrity, audit committee should ensure that
the preparation of financial statements is in line with applicable financial
reporting standards to promote reliability, besides having policies and
procedures to evaluate the appropriateness and independence of external
auditors. This includes a review of the audit fee and fees paid for non-audit
work (Mallin 2013, p169). The external auditors’ independence would be
threatened if they provide non-audit services to client without adequate
safeguards and control as they might grow closer to the company (ICAEW 2013).
This is even could be worst if the non-audit fees are higher than the audit
fees as it is open to suspicion. That is why it is recommended that the audit
committee shall establish policies to govern those non-audit services issues
and procedures for external auditors to follow. In addition, external auditors’
written assurance should be obtained by the audit committee to confirm that
they have been independent throughout the whole audit engagement.
For
the sixth principle, the board should set up a good risk management framework
and disclose in the annual report the primary features of the company’s risk
management framework and internal controls system. All risks must be clearly
identified, assessed and monitored as they can affect the bottom line, company
and employees. For example: liquidity risk, political risk and reputation risk.
Company ought to take appropriate measures to reduce and minimise risk such as
diversification and transfer of risk; whilst to ensure that internal controls
system is always practicable and robust, periodic testing of the effectiveness
and efficiency of its procedures and processes must be carried out
consistently. Such moves will safeguard shareholders’ investments and the
company’s assets. Besides, an internal audit function that reports directly to
the Audit Committee should also be established. Internal auditors shall have
relevant qualifications and experiences to run their duties smoothly including
review and appraise the governance, risk management and internal controls
processes.
Meanwhile,
the new additions under the seventh principle stress drastically on the
importance of well-timed and sound disclosure. Firstly, organisations are
required to have proper corporate disclosure policies and procedures, which
include the reconsideration on the need for non-financial information data’s
disclosure. Basically, it encourages companies to move away from merely
satisfying the minimum reporting requirements to high quality and comprehensive
disclosures. Ideally, more disclosures generally mean that the shareholders can
have a clearer view about the company and indirectly, improve shareholders’
decision making as well as erase doubt. This will surely heighten transparency
and shareholders’ confidence. Secondly, it promotes better and extensive use of
technology; so that timely information can be communicated and circulated to
all the shareholders (Pasricha 2012). For instance: setting up a platform
exclusively for corporate governance in company website to display information
like board charter, shareholders’ right and the annual report. As compared to
traditional snail mail or postal system which is slow, costly and need a lot of
effort, such technology-based dissemination methods are more effective, fast
and convenient. Plus, it promotes higher accessibility, no delay and it is
capable to reach wider audiences including foreign investors. The advantage is
shareholders will not received out-dated information which is irrelevant in
decision making.
Finally,
the eighth principle defends and enhances shareholders’ rights as well as
foster closer ties between company and shareholders. Sensible actions shall be
taken by the board to encourage shareholders to take part in general meetings.
Although the current minimum notice period is 21 days (OECD 2011, p.17),
companies are allowed to give notices earlier than that to show their
commitment. The board needs to think carefully whether they wish to utilise
advanced electronic voting since it can potentially increase shareholder
participation as physical attendance is not needed. Plus, shareholders are able
to vote from remote computer terminals conveniently. Nonetheless, security and
cost issues remain a challenge. Likewise, the board needs to move towards poll
voting too. Shareholders need to be informed about their right to request a
poll vote at the beginning of the general meeting. Pasricha (2012) voice out
that the normal practice of show of hands voting is unfair because it does not
take into account the shareholders’ percentage of shareholding. Since each
shareholder who present physically has one vote, it empowers minority
shareholders unequally. Fortunately, poll voting supports ‘one share one vote’
principle and the display of detailed results regarding the number of votes cast
for and against each resolution will improve transparency significantly. In
addition, electronic poll voting is also recommended as it can eliminate human
error in counting votes and hence, recounts are unnecessary. Besides, the board
needs to promote fine communication and actively engage with their shareholders.
At such, they can consider to carry out regular meet ups, conference meetings,
dialogue sessions and corporate visits to boost mutual understanding.
Conclusion
All
in all, as the fulfillment of those principles and recommendations are
voluntary, the adoption will heavily depend on a company’s willingness. Most
importantly, if companies have decided to follow and execute majority of all
those recommendation, it will certainly help them in strengthening their
governance and create a win-win situation which is beneficial to the companies
as well as to the shareholders. Profit aside, at least such code will push the
board and sub-committee to perform their duties efficiently. Hence, companies
should view it as a great opportunity to increase their corporate governance’s
rating. A pleasant rating attracts new investments, gives a good impression to
shareholders and indirectly increases their confidence. The adoption will
improve overall performance, reduce fraud and help to gain better reputation.
Not only that, core values such as transparency, independence, integrity,
accountability, fairness and so on can be further improved too.
References
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