The Journey of Corporate Governance
in Malaysia, So Far
Nik Mohd Hasyudeen Yusoff27 October 2016
Agenda
• Business and governance
• Corporate governance in practice
• The journey of corporate governance in Malaysia
• Reality check - ACGA recent observations
• The way forward
YourBusiness
YourCustomers
YourCustomers
YourCustomers
YourSuppliers
YourNetworkPartners
YourCompetitors
YourCompetitors
Business and Governance:The ever-changing marketplace and complex business relationships
Relevant public institutions
Economy
Environment
Technology
Politics
Society
RegulatorsShareholders Lenders
Stakeholders
Corporate governance Business governance
Internal control
Assurance
Strategy
People
Process
Finance
SustainableEnterprise
Board and management
Conscience Competence
Role and structure
Risk management
Customers
Compliance
Stewardship
Board sets tone and oversees management with division of
responsibilities based on the delegation made by the board
Culture
Business development
Business and Governance: A snapshot of the views from the boardroom
Definition
• The process and structure used to direct and manage the business and affairs of the company towards business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value, while taking into account the interest of other stakeholders
• Principle-based which allows the principles and best practices to be applied based on the situations and circumstances faced by companies
Corporate Governance in Practice
Board
Corporate Governance in practice: Setting up an effective board
Nomination and remuneration
committeeAudit
committee
Nomination and
successionRemunerati
onPerformanc
eEvaluation
Riskmanageme
ntInternalcontrol
Financialreporting
and audit
Purpose, values and
risk appetite
Strategy and
business models
Disclosure and
communication
Performance targets
and assessment
s
Conduct and
compliance
Human potential
development
Capital structure
and dividend
policy
Delegation, key policies
and procedures
Performance is driven by having the right balance of competent and conscientious members who lead and
make decisions based on quality information in compliance with robust process and having adequate
check and balance
Role in financial reporting
Role in financial reporting
Assess control
Engage auditors
Apply policyControl effectiveness
Prepare financial statementsFacilitate audit process
Set policy
Review financial statements
Audit Committee Management
Set the tone on financial reportingApproves financial statements based on the recommendations of audit committee
Clear division of responsibilitiesbased on delegation by the board
Board
Corporate Governance in practice: Getting Financial Reporting Right
Role in performance assessment
Role in performance assessment
Set performance targets
Engage experts
Cascade policy into action plans
Meet performance expectations
Prepare performance reports
Facilitate assessments
Set policy
Review performance
Nomination and Remuneration
CommitteeManagement
Set the general policy on remunerationApproves remuneration and bonus based on the recommendations of NRC
Clear division of responsibilitiesbased on delegation by the board
Board
Corporate Governance in practice: Dealing with Remuneration and Rewards
Role in acquisition of business
Role in acquisition of business
Assess conflicts
Prepare business case
Identify source of finance
Ensure compliance with regulation
Assess risks
Review disclosure
Audit Committee
Management
Set the general policy on acquisitionApproves acquisition after considering and challenging recommendation of management
Board
Within strategy and risk appetite
Viability of financingBusiness case proven
Perform due diligence
Prepare disclosure
Corporate Governance in practice: Dealing with Business Acquisitions
Corporate Governance in Practice:Giving attention to the Human Dimension
Purpose, vision, objectives, plan, values, risks, control
Organisations are merely collection of people
supposedly working forsingle purpose
The hearts and mindshould not be
forgotten
History of corporate governance in Malaysia:From crisis to competitiveness
1997 2000 2007 2011 2012 2014 2016Asian
FinancialCrisis
MCCG2000
issuedMCCG2007
issuedCG
Blueprint2011 -2020
issued
MCCG2012
issuedMCII2014
issuedConsultation
on MCCG2016
issued
AseanCG
scorecard BNM PolicyDocument on
CG of FIs
MCCG 2000
• Principles • Best practices• Principles and best practices for shareholders and external
auditors• Explanatory notes• Fairly detailed and prescriptive given this was the first time
CG was introduced• Enforced on listed companies through listing requirements;
disclose application of principles and disclose extent of application of best practices and explain any departure - “comply and explain” approach
MCCG 2000• Principles
• Effective board which leads and control• Balanced board, executive and non-executive directors• Supplied with quality and timely information• Formal appointment process and re-election• Remuneration must be competitive to attract the required talent to be on
the board with formal process and disclosure• Dialogue between the board and institutional shareholders in annual
general meeting• Financial statement should present balanced and understandable
assessment of companies position and prospects• Effective internal control system maintained• Maintain appropriate relationship with external auditors
MCCG 2000
• Best practices
• Board’s stewardship responsibilities regarding strategy, overseeing business, risk management, succession planning, investor relation and internal control
• Constituting an effective board including balance of power, non-executive participation, appointment process, assessment of board effectiveness, quality of information and expert advice to the board.
• Accountability and audit - role of audit committee (majority independent) and how they deal with external and internal auditors
• Communication with shareholders
MCCG 2007
• Introduced qualifying criteria for directors i.e. must consider skills, knowledge, expertise and experience; professionalism; integrity and in the case of independent directors, their ability to act appropriately
• Explicitly requiring nominating committee to be established and its role in assessing board effectiveness and independence of independent directors
• All members of audit committee must be independent directors
• Making internal audit function mandatory
MCCG 2012
• Sets out broad principles and specific recommendations on structures and process in making good corporate governance an integral part of business dealings and corporate culture
• Apart from recommendations to strengthen the board it also encourages companies to have disclosure policies and to commit to respect shareholders’ rights
• It has 8 principles and 26 recommendations to strengthen board and committees, promote timely and balanced disclosure, safeguards integrity of financial reporting, emphasise importance of internal control dan risk management and encourage shareholders’ participation in general meetings
MCCG 2012
• P1 - Board to establish clear role and responsibilities (establish ethical standards and publish and review board charter)
• P2 - Strengthen composition of the board (nomination committee must only consist of non-executive directors, majority must be independent)
• P3 - Reinforce independence of directors (independent director cannot serve more than 9 years, splitting the Chairmanship and CEO, majority of the board must be independent of the chairman is non-independent)
• P4 - Foster commitment (time and training)
MCCG 2012
• P5 - Uphold integrity in financial reporting
• P6 - Recognise and manage risk
• P7 - Ensure timely and high quality disclosure
• P8 - Strengthen relationship between company and shareholders
MCCG 2016 - The Proposal
• Streams CG practices into 2 categories, Core and Core Plus
• Practices are actions, procedures, or processes which companies are expected to adopt in order to support long term success of the company, market confidence and business integrity
• Companies are required to disclose their adherence to the Core practices on an ‘apply or explain an alternative’ basis
• Core Plus category consists of exemplary practices that companies should aspire to achieve
• While these practices are voluntary, companies are strongly encouraged to adopt them and disclose in the annual report how these practices are being undertaken or implemented
MCCG 2016 - The Proposal
• ‘apply or explain an alternative’ - to provide clear and meaningful explanation on how they have adopted the Core practices and achieve the Intended Outcome of each practice
• ‘Apply’ requires greater thought process and consideration in implementing or undertaking the practices, including in disclosing information on these practices
MCCG 2016 - The Proposal
• If the Core practices are not adopted, a clear explanation for the non-adoption of the practice(s) must be made and how an alternative which is able to fulfill the Intended Outcome has been implemented
• The explanation must be reasonably detailed and informative so that the market understands how the alternative meets the Intended Outcome
• An Intended Outcome which provides the intention, rationale and objective of each practice
MCCG 2016 - The Proposal
• The Principles of the MCCG 2016 encapsulate the fundamentals underpinning good governance practices that companies should apply when implementing the Practices. There are four Principles in the MCCG 2016:
• Supporting board leadership and effectiveness;
• Safeguarding the integrity of financial and corporate reporting;
• Managing risks to preserve and create value; and
• Strengthening relationship with shareholders
MCCG 2016 - The Proposal
• Examples:
Practice 5.2
There is detailed disclosure on the remuneration of individual
directors on a named basis
Intended Outcome
There is transparency on the remuneration of directors, and
shareholders are able to form an opinion as to whether the
remuneration of each director is fair, yet attractive enough to retain
the person without leading to short-termism and risky behaviour.
MCCG 2016 - The Proposal
• Examples:
Core Plus
Practice 5.2
The Nominating Committee discloses the relationship between ‘pay and
performance’ for both executive directors and senior management’s
remuneration packages
Intended Outcome
Shareholders are able to form an opinion on the fairness of the
remuneration packages
Reality check - ACGA Recent observations
• Viewed favourably:
• Inclusion of MD&A in annual reports beginning 2016
• Enforcement successes by SC, AOB and Bursa
• Malaysian Code of Institutional Investors
Reality check - ACGA Recent observations
• Viewed favourably:
• New Companies Act
• Board training details
• Senior independent directors
Reality check - ACGA Recent observations
• Viewed unfavourably:
• Period of 4 months for PLCs to produced audited financial statements instead of 3 months
• Strategic sustainability disclosure
• Disclosure of remuneration of directors
• 1MDB
Reality check - ACGA Recent observations
• Viewed unfavourably:
• Companies relying on auditors to finalise financial statements and many chairman of audit committees are former partners of audit firms
• Board assessments provided no information to investors
The Way Forward
• Regulators are looking at strengthening ethics and culture as the mean to enhance corporate governance
• The influence of public governance or the lack of it on corporate governance should not be under estimated
• Whether good governance is valued by our society?
• While enforcement actions would deter potential governance failures, the tone set in boardrooms in ensuring performance would be more sustainable