the journey of corporate governance in malaysia, so far

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


• ‘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


• 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


• 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


• 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.


• 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


• Viewed favourably:

• New Companies Act

• Board training details

• Senior independent directors


• 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


• 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