The New Malaysian Code On Corporate Governance.

 

2 November, 2017

 

On 26 April 2017, the Securities Commission Malaysia (“SCM”) released a new version of the Malaysian Code on Corporate Governance (“Code”) which supersedes the previous version released in 2012.
 
In its introductory remarks to the Code, the SCM said:
 
“Malaysian Code on Corporate Governance (MCCG) is a set of best practices to strengthen corporate culture anchored on accountability and transparency.
 
The new MCCG places greater emphasis on the internalisation of corporate governance culture, not just among listed companies, but also encourages non-listed entities including state-owned enterprises, small and medium enterprises (SMEs) and licensed intermediaries to embrace the code.
 
The code has 36 practices to support three principles namely board leadership and effectiveness; effective audit, risk management, and internal controls; corporate reporting and relationship with stakeholders.
 
The MCCG also adopts a differentiated and proportionality approach in the application of the code taking into account the differing sizes and complexity of listed companies. The code now identifies certain practices and reporting expectations to only apply to companies on the FTSE Bursa Top 100 Index and those with market capitalization of RM 2 billion or more.”
 
As mentioned above, the Code comprises three principles, namely: 

 

Board Leadership and Effectiveness: this in turn comprises three sub-principles, that is, Board Responsibilities, Board Composition and Remuneration. 

 

Effective Audit and Risk Management: this in turn also comprises three sub-principles, that is, Audit Committee, Risk Management and Internal Control Framework.  

 

Integrity in Corporate Reporting and Meaningful Relationship with Stakeholders: this comprises two sub-principles, that is, Communication with Stakeholders and Conduct of General Meetings. 

 

Key features of the Code
 
One of the requirements in the Code is that at least half of the board should comprise independent directors. For large companies (companies on the FTSE Bursa Malaysia Top 100 Index or with a market capitalisation of RM2 billion and above at the start of the companies’ financial year), the majority of the board should comprise independent directors. It is interesting to note that this sets a higher threshold compared to Bursa’s Main Market Listing Requirements[1] (“MMLR”) where a listed issuer only needs to ensure that at least two of its directors or one-third of its board of directors, whichever is higher, are independent.
 
Another interesting feature in the Code is the tenure of independent directors. The Code says that the tenure of an independent director should not exceed a cumulative term of nine years. Upon completion of the nine years, an independent director may continue to serve on the board as a non-independent director. If the board intends to retain an independent director beyond nine years, it should justify this decision and seek annual approval for it. If the board continues to retain the independent director after the 12th year, the board should seek shareholders’ approval annually through a two-tier voting process. Under the two-tier voting process, shareholders’ votes will be cast in the following manner at the same shareholders’ meeting: 

 

• Tier 1: Only the large shareholder(s) of the company vote; and  
• Tier 2: Shareholders other than large shareholders vote. 

 

A “large shareholder” is defined in the Code as a person who is entitled to exercise, or control the exercise of, not less than 33% of the voting shares in the company, is the largest shareholder of voting shares in the company, has the power to appoint or cause to be appointed a majority of the directors of the company or has the power to make or cause to be made, decisions in respect of the business or administration of the company, and to give effect to such decisions or cause them to be given effect to.
 
The decision for the above resolution is determined based on the vote of Tier 1 and a simple majority of Tier 2. If there is more than one large shareholder, a simple majority of votes determines the outcome of the Tier 1 vote. The resolution is deemed successful if both Tier 1 and Tier 2 votes support the resolution. However, the resolution is deemed to be defeated where the votes of the two tiers differs or where Tier 1 voter(s) abstain from voting.
 
The Code further says that large companies are not encouraged to retain an independent director for a period of more than 12 years. To justify retaining an independent director beyond the cumulative term limit of nine years, the board should undertake a rigorous review to determine whether the independence of the director has been impaired. Findings from the review should be disclosed to the shareholders for them to make an informed decision.
 
In respect of women directors, large companies must have at least 30% women directors. The Code goes on to add that other companies should also work towards achieving this target.
 
The Code prescribes that listed companies with a large number of shareholders or which have meetings in remote locations should use technology to facilitate voting including voting in absentia and remote shareholders’ participation at general meetings. This is a reinforcement of the position under the Companies Act 2016[2] which allows a company to convene a meeting of members at more than one venue using any technology or method that enables the members of the company to participate and to exercise the members’ rights to speak and vote at the meeting.
 
Legal effect of the Code 
 
One critical point is that the Code does not have force of law and, strictly speaking, there are no legal consequences per se for non-compliance. This is notwithstanding that the MMLR[3] provides that a listed issuer must ensure that its board of directors provides a narrative statement of its corporate governance practices with reference to the Code in its annual report. In making such a statement, the listed issuer must include the following information: 

 

• how the listed issuer has applied the principles set out in the Code to its particular circumstances, having regard to the recommendations stated under each principle; and  
• any recommendation which the listed issuer has not followed, together with the reasons for not following it, and the alternatives adopted by the listed issuer, if any. 

 

Significance of corporate governance 
 
The question that is likely to arise amongst companies and investors is whether corporate governance really matters. Can a company get away by paying mere lip service to the Code or “corporate governance” generally? In addition, is it reasonable to say that the business world is too complex to be summarised in a corporate governance index and there is no consistent relationship between the academic and related commercial governance indices and measures of corporate performance[4]?
 
Empirical studies have apparently concluded that the quality of a particular company’s governance practices and procedures (whether generally or specifically) positively correlates with both good corporate financial performance and stockholder value[5]. This includes a review of 5,200 US companies where the conclusion was that there is a very strong positive relationship between firm value and corporate governance[6].
 
Hence, companies would be well advised to do more than pay mere lip service in complying with the Code or generally demonstrating good corporate governance.

[1] Paragraph 15.02 of the MMLR.
[2] Section 327 of the Companies Act 2016.
[3] Paragraph 15.25 of the MMLR.
[4] “Does Corporate Governance Matter to Investment Returns?”, Jay W Eisenhofer, Grant & Eisenhofer PA (www.gelaw.com/wp-content/uploads/2015/02/Does_Corp_Gov_Matter.pdf).
[5] ibid.
[6] ibid.

 

 

For further information, please contact:

 

Datin Grace C G Yeoh, Partner, Shearn Delamore & Co​

gcgyeoh@shearndelamore.com