Code of corporate governanace in Malaysia
Malaysia Code of Corporate Governance (2000)
Malaysia first issued its Code of Corporate Governance in 2000. It was released by the High Level Finance Committee of Corporate Governance. The model that Malaysia adopts is a single tier model which originated from Cadbury Committee. A single tier model means a unitary Board who monitors, oversees and supervises the corporation in the governance of a corporation. This is in contrast with a dual Board model, a non-AngloSaxon model adopted by European Continental countries and Japan. A dual Board has a monitoring Board above the supervisory overseer Board.
Malaysia adopts and applies the UK Hampel prescriptive approach for two reasons; first, that best practice prescriptions are necessary as standards of corporate governance in Malaysia are lacking. Secondly, in that there is a need to raise these standards by prescribing it to be disclosed in Annual Reports that it has been so adhered to with regard to Principles of Corporate Governance. This prescriptive approach has raise it from ethical to sanction based self regulatory approach so as to raise the standards of corporate governance in Malaysia.
Adoption of the code in 2000 by Bursa Malaysia
Subsequent to the Code Bursa incorporated the recommendations of the High Level Finance Committee Report. By virtue of paragraph 15.26 of the KLSE Listing Requirements, all listed companies should state in their annual report how they have applied the principles set out in Part 1 of the Code and the extent to which they have complied with the best practices set out in Part 2 and identify and give reasons for any areas of non-compliance, and where applicable, state the alternative practice(s) adopted.
Where a company fails to disclose the matters set out in its annual report, it is open to the Exchange to take any action against the listed entity or its directors as set out in the listing requirements.
In respect of Parts 1 and 2, boards are not expected to comment separately on each item of the Code with which they are complying, but areas of noncompliance will have to be dealt with respectively with regard to each item that is not in compliance.
Where most jurisdictions has adopted a Code which is non-sanction based, Malaysia has raised its standards by not only prescibing the adoption of the Code but also embedded it into a sanction based principles by incorporating the requirements into KLSE Listing Requirements. Furthermore, in mid 2000, KLSE Listing Requirements has consolidated and revamped its Listing Requirements and dedicates a new Chapter 15 specifically for Corporate Governance in its adoption of the Malaysia Code of Corporate Governance. Formerly it was a “blue and yellow book of separate listing requirements for Main and Second Board, and it is now consolidated into a white book. You would appreciate the change and revamp in it as there are many loopholes and concerns of poor corporate governance that have partly attributed to financial crisis in 1998/1999 have been addressed in line with corporate governance initiatives in Malaysia.
Malaysian Code on Corporate Governance (Revised 2007)
Corporate governance is an evolutionary effort. Malaysia as an emerging market seeking to be competitive in global market has to alighn itself with changing investor expectations to avoid corporate debacles that has happened in other jurisdiction. Post Enron and many other debacles across the globe ,including Malaysia’s new chapter of disclosure based regulation from merit based regulation in its capital market environment has called upon a political will to strengthen the existing Code of Malaysia Corporate Governance. Hence, Malaysian Code on Corporate Governance (Revised 2007) supersedes the existing regulations issued in March 2000.
The revisions codify the eligibility criteria for the appointment of Directors, the composition of the Boards and the role of the Nomination Committee. The new regulations state that Independent non-Executive Directors should continue to make up at least one-third of the members of the Board and that there should be a more meaningful and independent oversight function. Appointments and reappointments to the Board shall have to be made by a separate Nomination Committee which is expected to evaluate the professionalism and integrity of each Director. The Committee should also make sure that Board members possess basic skills, knowledge, expertise and experience to discharge their duties and responsibilities.
Previously, the Nomination of the Board was left to the Board itself. The presence of a Committee facilitates and imbues extensity in the degree of independence and obejctive oversight.
Previously, there has been flexibility as to whom the Audit Committee should report to. The practices is left to corporations. There were several announcments of mistatements and adjustment in Quarterly Financial announcements. Hence, the revised Code strengthens the regulations on the role of Audit Committees to ensure that they provide an effective check on company managers. The new rules cover the composition of Audit Committees, the frequency of meetings and the need for audit committee members to attend continuous training to keep abreast with developments in relevant financial and other related developments.
In order to ensure the independence of the Audit Committee, Executive Directors are excluded from membership.
With regards to the liability of a corporation in a disclosure based regulation; recent corporate accounting irregularities have highlighted the importance of an effective and independent internal audit function. The revised Code emphasises this by requiring all public-listed companies to carry out their own internal audit functions. The reporting line has also been clarified so that the Board of Directors will now be held accountable for ensuring adherence to best practice standards for internal audit functions.
The report of the Code states four forms of recommendations:
Part 1 sets out broad principles of good corporate governance for Malaysia.
The objective of principles is to allow companies to apply these flexibly and with common sense to the varying circumstances of individual companies.
Companies will be required by the Listing Requirements of Bursa Malaysia to include in their narrative statements, have applied the relevant principles
in the annual report.
The brief broad principles in Part 1 are as follows:
Every listed company should be headed by an effective board which should lead and control the company. The board should include a balance of executive directors and non-executive directors (including independent non-executives) such that no individual or small group of individuals can dominate the board’s decision making. The board should be supplied in a timely fashion with information in a form and of a quality appropriate to enable it to discharge its duties. There should be a formal and transparent procedure for the appointment of new directors to the board. All directors should be required to submit themselves for re-election at regular intervals and at least every three years.
b. Directors’ remuneration
Levels of remuneration should be sufficient to attract and retain the directors needed to run the company successfully. The component parts of remuneration should be structured so as to link rewards to corporate and individual performance, in the case of executive directors. In the case of non-executive directors, the level of remuneration should reflect the experience and level of responsibilities undertaken by the particular non-executive concerned. Companies should establish a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. The company’s annual report should contain details of the remuneration of each director.
Companies and institutional shareholders should each be ready, where practicable, to enter into a dialogue based on the mutual understanding of objectives. Companies should use the AGM to communicate with private investors and encourage their participation.
d. Accountability and audit
The board should present a balanced and understandable assessment of the company’s position and prospects. The board should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets. The board should establish formal and transparent arrangements for maintaining an appropriate relationship with the company’s auditors.
2. Best practices in corporate governance
Part 2 sets out best practices for companies. It identifies a set of guidelines or practices intended to assist companies in designing their approach to corporate governance. While compliance with best practices is voluntary, companies are required as a provision of the Listing Requirements of Bursa Malaysia to state in their annual reports, the extent to which they have complied with the best practices set out in Part 2 and explain the circumstances justifying departure from such best practices.
3. Exhortations to other participants
Part 3 is not addressed to listed companies but to investors and auditors to enhance their role in corporate governance. These principles are voluntary.
The characteristics of good corporate governance are as follows:
a. The board and its directors are to be properly structured with sufficiently experienced, skilled and knowledgeable members;
b. The board should be balanced by executive, non-executive and independent directors;
c. Committees of the board should be established to carry out review and recommend important matters concerning auditing, remuneration and nomination, among others;
d. The should be reasonable systems to evaluate and access risks and internal control, so as to form risk management;
e. Sufficient care should be devoted in financial reporting and disclosure; and
f. Constructive communication and dialogue with shareholders and individual directors should be encouraged.