Malaysia – Emphasis On Good Governance Vital In Plans For Post Pandemic Recovery.

 

25 August 2021

 

 

In years to come, when the trials and tribulations of the pandemic era are relegated to the history books, when we have together turned the page and regained some semblance of normalcy, it would be reasonable to anticipate that historians and economists alike will look at these turn of events as a social and economical reset button.
 

The strains imposed by COVID-19 have re-emphasised the need for corporations to focus on long term resilience and ensure a forward thinking and progressive outlook in terms of practices.
 

Corporations that are resistant to change are at risk of ‘biting the dust’. Recalcitrant corporations may be unable to survive and prosper in a harsh economic environment on the verge of entering the post pandemic recovery phase.
 

Enter the recent updates by the Malaysian Securities Commission (“SC”) on the Malaysian Code on Corporate Governance (“MCCG 2021”).
 

The updates introduce new and enhanced best practices to fortify the corporate governance of public-listed companies (“PLCs”). The aim is to drive corporate Malaysia towards developing long term sustainable best practices that not only inoculate PLCs from the negative impact of external factors, such as pandemics and economic down turns, but also aid corporations in maximising their capabilities during the crucial post pandemic recovery period.
 

The updates at a glance
 

The updates came into effect on 28 April 2021. The MCCG 2021 were last updated in 2017. The 2021 updates are in keeping with global standards and best practices. Whilst developed with PLCs in mind, these practices can also serve as a bellwether for non-listed entities seeking to improve in governance and develop in a sustainable and progressive manner. In summary the updates address the following key areas:
 

• policies and practices relating to board selection and the nomination of directors;

• emphasising the role of the board in terms of oversight and the incorporation of sustainability in operations; and

• general practices for companies with low levels of compliance.
   

Whilst the updates hone in on these three specific areas, the practices have a far reaching effect and target not just individual practices of corporations in Malaysia but aim as well to change corporate culture in the nation for the better.
 

A shake-up to the composition of corporate Malaysia
 

A major element of the updates focuses on the composition and regulations relating to boards and directors in PLCs. Perhaps the most noticeable change is in relation to the requirement for two-tier voting when re-appointing independent directors with a tenure of more than nine years. As reported by the SC, there were 434 independent directors serving on boards of PLCs for more than 12 years as of March 2021, with 49 of these independent directors having served on the same board for over 20 years.
 

These prolonged tenures have long since been considered a sore point for minority shareholders. Justifiably, they believe that a prolonged tenure is counterproductive to the ‘independence’ of these appointees and ultimately, may affect their ability to exercise judgment in an objective and unrestrained manner.
 

The requirement of two-tier voting for the reappointment of long serving independent directors attempts to address this potential shortcoming. The process involves the casting of votes during the annual shareholders meeting by both large shareholders (those holding more than 33% of shares) in Tier 1 and general shareholders (other than large shareholders) in Tier 2. A reappointment will be passed only upon the acquiescence of those in the former and a simple majority in the latter. Where there is more than one large shareholder, a simple majority vote will determine the Tier 1 vote.
 

The two-tier voting process is also in line with Bursa Malaysia’s proposed amendments to the Listing Requirements which will introduce a 12-year cap on the tenure of independent directors. These amendments are expected to be issued in the fourth quarter of the year.  Coupled with the update by the SC, this will hopefully encourage greater oversight and critical assessment on the appointment of long term independent directors and provide more room for new, ‘fresher’ appointments to the boards of PLCs.
 

Notwithstanding the option to re-appoint independent directors via the two-tier voting process, PLCs are still encouraged to adopt a policy which limits the tenure of independent directors to nine years without further extension.
 

To further enhance board accountability and transparency, MCCG 2021 also discourages the appointment of individuals who are deemed ‘politically active’ to the board of PLCs as well as the appointment of a board chairman who is part of a corporation’s Audit Committee, Nomination Committee or Remuneration Committee. These measures whilst being at this stage recommendations and not binding requirements, are clearly indicative of the SC’s growing awareness on the necessity of an independent, accountable and transparent board of directors.
 

The makeover of board composition however doesn’t end here. With gender diversity and inclusivity being an increasingly important cornerstone of good corporate practice, the updates to MCCG 2021 also hone in on the participation of women on boards of PLCs in Malaysia. Vide its 2017 update, the SC advocated for having 30% women directors on the board of large PLCs with the objective of reaching 30% women on boards across all PLCs by 2020.
 

Whilst great strides have been made in this respect in recent years (an 82% increase since 2015), women still only make up only 25.3% of board of directors in the top 100 PLCs in the nation with the involvement of women directors plateauing at 17.2% across all PLCs.  Disappointingly, there remains 255 PLCs in the country with all male board of directors.
 

Consequentially, MCCG 2021 aims to further spur the participation of women directors by recommending 30% of women directors for all PLCs in Malaysia. This recommendation also extends to senior management with PLCs now required to disclose the gender diversity of senior management in their annual reports, in addition to reporting the same with regards to their board composition.
 

Building towards sustainability as a tenement of Malaysian PLCs
 

As mentioned at the start of this piece, MCCG 2021 places great importance on PLCs addressing sustainability opportunities and risks as part of its long term planning and strategy. Undoubtedly, such an approach has become all the more crucial as corporations navigate these challenging times.
 

PLCs would be well advised to take note of these best practices in developing their roadmap for post pandemic recovery:
 

• The board of directors and senior management are expected to be accountable for the governance of sustainability in a corporation. This includes not only being aware of potential sustainability issues that may arise, but also to ensure that such initiatives, including the performance of such initiatives, are regularly communicated to key stakeholders.

• This notion of accountability of board members and senior management is further fortified by the introduction of governance of sustainability as a key factor in performance evaluations.

• The board of a PLC shall also designate a dedicated individual within senior management who will focus on managing the sustainability of the corporation in a strategic and integrated manner.
   

By placing sustainability on a pedestal, MCCG 2021 aims to drive PLCs towards better managing Environmental, Social and Governance (ESG) risks and opportunities and it is hoped that the above best practices will be a catalyst for corporations to do so in an effective and holistic manner.
 

Encouraging adoption across the Board
 

MCCG 2021 also introduces several key measures aimed at encouraging adoption of good corporate governance for corporations that are currently at low levels of compliance.
 

Notably on the matter of board remuneration, controlling shareholders with a connection to a board member or director should refrain from voting on resolutions to approve such directors’ fees. In addition, any resolution on the fees of non-executive directors should also be tabled separately instead of being bundled into a single resolution. This aims to empower minority shareholders to provide greater input and supervision into director’s fees and in turn provide for remuneration to be based purely upon merit and quality of performance. It is also recommended that Remuneration Committees be made up of only non-executive directors, a majority of whom must be independent directors, in order to aid the aforementioned objectives.
 

The 2021 updates further examine the requirements relating to general meetings, particularly relating to the adoption of technology as a means to conduct such meetings. With virtual meetings taking greater prominence during the spread of the pandemic (and with such practices likely to remain in place for some time to come), the MCCG 2021 introduces measures relating to the effective conduct of such meetings, voting rights, cyber friendly practices and the increased responsibility of the company, chairman and board.
 

MCCG 2021 also recommends that meeting minutes are circulated to shareholders within 30 business days after the conclusion of a general meeting. These practices are expected to help iron out any issues and negate any challenges posed by leveraging on technology as a means to remain connected and to ensure that there is meaningful engagement between the board, senior management and shareholders during instances of imposed isolation and separation.
 

In line with the SC’s own Guidelines on Conduct of Directors of Listed Corporations and Their Subsidiaries, MCCG 2021 also further reiterates the need for PLCs to encourage subsidiaries to adopt the above practices in their respective codes of governance to ensure a group wide standardisation of practices.
 

What’s next for listed entities in Malaysia
 

MCCG 2021 represents another key step forward by the SC towards promoting a more accountable, sustainable and effective corporate Malaysia. For corporations seeking to incorporate these practices into their planning and strategy, it is important to take note of the following key dates:
 

• 28 April 2021: Effective Date of MGCC 2021

• 31 December 2021: Reporting on the adoption of MCCG 2021 for PLCs with financial year ending by this date.

• 1 January 2022: PLCs to table the resolution for the updated two-tier voting process to shareholders at general meetings held after this date.
   

As before, the practices introduced by MCCG 2021 are done so on an ‘apply or explain an alternative’ basis.
 

As such, the board of any listed entity which finds itself unable to adopt any of these revised corporate governance practices can apply a suitable alternative that ultimately achieves the same ‘Intended Outcome’ of MCCG 2021.
 

This ability to depart and provide alternative measures are however prefaced by certain requirements for large PLCs in particular. Such large organisations will have to disclose the measures taken (or the measures that are intended to be taken) along with the timeline for the implementation of such practices. MCCG 2021 defines a reasonable timeline for implementation as a period of three years or less.
 

Whilst any measure of change can at times come across as daunting, PLCs would be wise to understand that the updated practices have been made largely with the intention to embolden the resilience of corporate Malaysia, and to encourage PLCs to thrive from a position of strength.
 

In efforts to implement these updated practices, we do recommend that PLCs begin to take the following first steps:
 

• Assess and appraise the governance practices of your board and of its composition. The measures to introduce greater diversity should be welcomed as it ultimately provides for fresh perspectives to be introduced into your corporate planning and strategic execution.

• Sustainability and ESG as a whole should be paramount considerations in your strategic planning. Recent measures introduced by regulators in both Hong Kong and Japan further emphasises the growing global appreciation of ESG as key considerations especially in maintaining the confidence of stakeholders and investors. In order to maintain a competitive edge, PLCs in Malaysia need to accelerate their commitment towards such measures and be proactive in anticipating and tackling ESG opportunities and risks as and when they arise.

• Develop a holistic forward thinking approach that embraces technology as well as the promotion and development of internal talent and resources. Whilst the pandemic has inevitably put many initiatives on the back burner, progressive organisations would be well advised to look towards adopting leading edge technology and robust talent retention and development programmes that will aid in long term sustainability and success.
   

Overall, MCCG 2021 is a timely and much needed reminder to corporate Malaysia that effective and proper governance remains of paramount importance in the long term planning and ultimately survival on any listed entity.
 

As mentioned above, whilst aimed at PLCs, privately owned organisations would be wise to adopt many of these measures as well in order to increase their own levels of resilience.
 

While even the most optimistic among us would anticipate the difficulties and challenges that lay ahead in the post pandemic period, it is hoped that these practices will serve as a vital launch pad for our recovery and ultimately renewal.