Malaysia’s Securities Commission has announced a new Code on corporate governance to increase the accountability and transparency of public companies. The code took effect on April 26 and all publicly listed companies will be required to comply with it from their annual reports for the 2017 financial year ending December 31.
More accountability for corporate governance principles
The new code forces companies to come up with concrete policies and action plans if they are not able to meet corporate governance requirements straightaway. Moving away from a comply or explain approach, the new method in the Code comes under the CARE acronym: comprehend, apply and report. The Code has 36 practices based on three principles:
- board leadership and effectiveness;
- audit, risk management and internal controls; and
- corporate reporting and stakeholder relationships.
Other practices, called step up practices, are recommended rather than mandatory, and are designed to encourage companies to further strengthen corporate governance.
“It is no longer sufficient for companies to merely explain the reasons for non-compliance,” says Brian Chia, partner at Wong & Partners. “Companies have to demonstrate that the alternative approach that it adopted achieve the results required under the new Code. Businesses and directors should familiarise themselves with the Core and Core+ principles.”
“Steps have been taken by the Malaysian Institute of Accountants (MIA) to establish an integrated reporting steering committee,” adds Chia. “MIA’s vision is to have 100 Malaysian companies move towards integrated reporting by 2019. Thirty leading businesses have already pledged to adopt integrated reporting.” In addition to reporting on a company’s financial information, integrated reporting draws upon other value relevant information such as governance and environmental sustainability that lead to the company’s creation of value.
While no sanctions are specified for a company that fails to adhere to the requirements under the Code, the Malaysia Securities Commission can withhold its approval for the initial public offering of any company preparing to list on the Bursa Malaysia if it does not comply with the corporate governance code and can’t commit to doing so upon successful listing.
Changes to board appointments
A number of changes in the new code target boards. A two-tier process voting process involving controlling and non-controlling shareholders will be required to approve the appointment of independent directors in position for more than 12 years. Companies will also have to disclose how much they pay their top five executives and board memberships will have to be at least 30% female by 2020.
|Tay Beng Chai|
"The business community is not thrilled with this but then this is not unexpected,” says Tay Beng Chai, managing partner at Tay & Partners. “The requirement of majority independent directors for larger companies and two tier voting for long staying independent directors will, as examples, help improve overall governance expectations. It is a mindset change that is needed and therefore it will move at an almost glacial pace. Nonetheless, things have improved over the years and through the many versions of the Code. To be sure there will be rogue practices and lip service compliance but a rising tide will move things to a higher plane."
"The investing public have started asking relevant and assertive questions,” says Tay. “There will still be the usual door gifts that shareholders come and which is a common motivation for attending AGMs. However, overall, we see a younger generation of shareholders asking and learning of the industries they have put money into.”
Scrutiny by the Securities Commission and shareholders of corporate governance will only increase, so businesses need to step up their compliance. The Code is still in its early days of implementation and more guidance will be required to clarify any uncertainties.