By the end of this sub unit, you should be able to:
1. Define corporate governance.
2. Explain the focal basic elements required towards emplacing corporate governance.
3. Explain the single tier model of corporate governance.
4. Describe the principles of corporate governance and how it is applied in Malaysia.
5. Discuss the application of the Malaysian Code of Corporate Governance by listed entities in Malaysia.
Good corporate governance practices are practices that seek to strike a balance between the needs of the corporation, the shareholders and stakeholders, and deal with the questions of proper board structures and systems for accountability to stakeholders and shareholders.
Corporate governance is defined as “the process and structure used to direct and manage the business affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long-term shareholders value, whilst taking into account the interests of other stakeholders” (Malaysia Code of Corporate Governance (2000)).
The definition contains two key elements, namely, objectives of corporate governance, structure and processes involved in corporate governance. With regards to objectives, good corporate governance is aimed at enhancing business prosperity. Accountability is the key to the legitimacy of the entire corporate system. Companies have the power and the exercise of that power must be within a good corporate governance framework. The board and management who are charged with directing and managing the business of their company and as decision-makers are accountable to the owners of the company.
The ultimate objective of directing and managing the business and affairs of the company is to enhance shareholder value. The owners of the company namely the shareholders expect to receive an appropriate return on their investment.
The definition acknowledges that the business and affairs of every company must be directed and managed efficiently.
Direction and management of a company are affected by a set of rules which creates the structure which is affected by a process directed at persons who have the power to direct and manage the business. The structure is created by the legal and administrative framework such as companies legislation, securities legislation, Listing Rules, Memorandum and Articles of Association, resolutions of board and shareholders and laws of general application.
The process refers to the system for decision making by the parties charged with directing and managing the business of a company and for making these decision — they will be accountable.