29 November, 2019
A. Introduction
Gone are the days where investors and shareholders sit passively whilst allowing directors and the management of a company to steer the company without fear of repercussions. In an age whereby shareholders’ activismvis globally on the rise1, shareholders and investors in Malaysia are keeping up with the trend. Shareholders are more ready now than before to make their voices heard and their opinions known. They know what they want and how to get it; and are more organised now than before. Such consciousness has made the management of the companies and directors to be more cautious and answerable for their activities and as a result, companies have taken measures in order to address this rise.
So, what is shareholder activism?
What is shareholder activism?
For the purpose of this article, we consider two categories of shareholders, i.e., institutional and individual.
Typically, institutional shareholders are large entities, including public and private companies, government agencies and banks, with huge investment capital. On the other hand, individual shareholders are persons who hold shares in a company on a personal account, who typically invest in much smaller amounts as compared to the former.
Regardless of the category, shareholder activism, often linked with shareholder empowerment, can be defined as an act whereby shareholders voice out their concerns and make their dissatisfaction known in order to influence the policy and practice of a company; and to protect their interest and maximise value through the demand for good governance.
Shareholder activism is not limited to certain methods or approaches. It can be done through confrontational and non-confrontational methods, from writing open letters, to speaking out at general meetings of a company and selling-off of shares in the company (also known as the ‘Wall Street Walk’)2.
The History of Shareholder Activism in Malaysia
The concept of shareholder activism is not new in Malaysia3. Historically, the government were expected to take initiative when matters of rights and protection of shareholders were of concern. As an example, in order to address and ensure minority shareholder’s rights were protected, the Companies Act 1965 provided rights to shareholders to invoke legal remedies against a company in the event of oppression against the shareholders4.
Rights were also afforded to shareholders to question the board at general meetings on matters relating to the management of the company.
However, these rights were not fully utilised. Academicians have argued that cultural embedment is one of the reasons why shareholders were slow in taking legal actions. In other words, it is claimed that due to the cultural values in Malaysia, shareholders seldom see criticism as constructive, but more of “personal attacks” and are not comfortable in providing comments to directors5.
After the 1998 financial crisis however, shareholders in Malaysia could no longer afford to stay passive and rely solely on the Government for protection.
This is because, at the time, it was also identified that shareholders’ control and protection were inadequate and that there was a lack of monitoring of boards and management6.
In view of the need for corporate governance reform, in the year 2000, the Securities Commission Malaysia (“SC”) issued the Malaysian Code onCorporate Governance (“MCCG”)7 in order to promote good governance amongst listed companies (which, in part, supports and encourages shareholder activism). In addition, the Minority Shareholder Watchdog Group (“MSWG”) was also established in 2000 with a focus on fostering awareness of minority shareholders’ interests and enhancing corporate governance through shareholder activism8.
The MSWG was set up to create awareness among minority shareholders of their three basic rights, i.e., to seek information, voice opinion and seek redress9.
The mission statement of MSWG is to increase sustainable shareholder value in companies through engagement with relevant stakeholders, with a focus on minority shareholder interests10.
As the consciousness started to grow11 and shareholders became more aware, they have started to recognise the importance of having to depart from traditional mindsets and roles. In consequence of the evolving nature of this understanding, several key changes were made to the legislative framework in Malaysia, including the introduction of the Malaysian Code for Institutional Investors (“MCII”) in 2014 and revisions to the MCCG (in 2007, 2012 and 2017).
The Current Position of Shareholder Activism in Malaysia
Legal framework
Under the current legal framework, various avenues are available to shareholders which encourage shareholder activism. For example, under the Companies Act 2016, not only are shareholders empowered to question and comment on the management of a company, but they are also allowed to give binding recommendations on the management of a company. This is provided that such recommendations are in the best interest of the company, allowed under its constitution and given in the form of a special resolution12.
Further, under the Capital Markets and Services Act 2007 (“CMSA”), shareholders are given the right to initiate civil proceedings if they have suffered losses or damages as a result of others acting in contravention of securities laws, breaches of securities offences such as market rigging, market manipulation, securities fraud and insider trading13.
Proceedings under these provisions may also be commenced by shareholders in the absence of prosecution by the SC.
This was further reinforced in the High Court case of Mak Siew Wei v Dato’ Dr Norbik Bashah bin Idris & Ors14 whereby the plaintiff, a shareholder of the eighth defendant, commenced a writ of action against seven defendants for their failure to undertake a mandatory offer for the shares in the eighth defendant company.
The defendants alleged that the plaintiff did not have the requisite locus standi. The court, in dismissing the defendants claim, held at paragraphs 41 and 57 respectively the following:
“…the existence of the various provisions as legislated in the CMSA…reinforces the regulatory philosophy that promotes shareholder activism which includes encouraging them to initiate various actions directly”
“It is in my view both compelling and irresistible therefore that the intention of Parliament in this regard has been made crystal clear by [the provisions of the CMSA]…that it seeks to promote greater shareholder activism and encourage private litigation as a means to complement the enforcement initiatives of the SC in its regulation of the capital markets in the country” Essentially, the court, in interpreting the intentions of the Parliament held that the provisions of CMSA promote shareholder activism through exercising the right to commence private litigation even in the absence of regulatory enforcements.
ii. Commitment to Shareholder Activism
With the growth of shareholder activism, MCII was introduced. It was a collaborative effort by the SC and MSWG.
It sets out best practices, aimed at setting out broad principles of effective stewardship by institutional investors15 and seeks to enhance the communication between institutional investors and its investee companies listed on Bursa Malaysia to help improve long term returns to shareholders and promote good governance. MCII further outlines the roles of institutional investors and how institutional investors can make their concerns known. To date, there are currently 21 signatories to the MCII16.
As a show of commitment to the MCII’s cause, institutional shareholders like Khazanah Nasional Berhad (“Khazanah”)17 and Employees Provident Fund (“EPF”)18 have released their respective statement of compliance with MCII.
Further, numerous Malaysian institutional shareholders have risen to the challenge and have made known their willingness and openness in exercising their right. For example, Khazanah, one of Malaysia’s largest institutional shareholders released an Investment Policy Statement19 stating, “We believe in creating sustainable value through appropriate engagement with the companies we invest in and the external investment managers and advisors we use.”, hence placing importance on engagement with investee companies, in line with MCII.
iii. Notable Instances of Exercise of Shareholder Activism
In July 2018, displeased with the RM72 million remuneration package received by the CEO of Sapura Energy Berhad (“Sapura”), shareholders of Sapura, backed by EPF, attempted to make known their disapproval by an attempt to oust the CEO20. Despite being unsuccessful, the move in itself illustrates shareholder activism with the willingness of institutional and individual shareholders to be proactive.
In June of this year, the country was rocked by the news that shareholders of FGV Holdings Berhad (“FGV”) voted against several resolutions for the approval of directors’ remunerations21 during their 5-hour-long annual general meeting. Amongst the institutional shareholder who voted against the said approval was the Armed Forces Fund Board (LTAT). This unprecedented move was seen and regarded by many as a sign of shareholders’ activism being on the rise, as shareholders exercised their rights to vote against the resolution to show their disapproval towards the proposed remunerations for directors given the prevailing economic conditions and FGV’s financial standing at the time22.
This further reiterates the point that shareholders, be it institutional or individual, will no longer sit still and will instead be more active in their role of the steering the direction of the company. E. Advantages and Disadvantages of Shareholder Activism In a general sense, shareholder activism seeks to promote good governance.
Theoretically, as an advantage, this would lead to greater transparency, corporate democracy and responsibility23 which may improve the performance of a company. Further, with greater engagement between shareholders and management as a form of check and balance, it may improve their working relationship which would be beneficial for the company as decisions would most likely be in the company’s best interest.
On the other hand, one of the apparent disadvantages of shareholder activism is the excessive interference on the part the shareholders which may jeopardise a company’s operations and can cause friction among various parties. Further, it is difficult to ascertain the true intentions of shareholder activism as it may be masked.
For example, some shareholders may force a company to make an instant positive share-price reaction, with little care for the potential side effects for the wider organization or its employees and extreme pressure of this short-term focus can affect a company’s long-term health or growth. 244
Challenges to Shareholder Activism in Malaysia
The key challenges to shareholder activism in Malaysia do not merely start and end at minority shareholders acting in silo, as highlighted earlier.
Nor does it only have to do with cultural embedment. Instead, there are many underlying and foundational issues that are hindering shareholders activism.
As an example, numerous institutional shareholders in Malaysia and their investees are politically linked and interlinked. Due to this fact, the power and influence politics has on the practice and policies of the companies are great25. As such, resistance and shareholder activism could potentially be futile, and it can be seen as if there is not much minority shareholders could do except to monitor their investments closely and attempt to sell their shares26.
Another matter that warrants highlight is government-linked companies (“GLC”). Naturally, the practices and policies adopted by GLCs are often (or at the very least expected to be) in line with government policies.
When a GLC acts in line with Governmentwishes but contrary to the interests of shareholders, the shareholders, especially individuals, are limited in their methods of affecting and influencing change. Even if bringing about change could be successful, the process would not be speedy and would take time.
An equally important aspect of shareholder activism is collective and synchronised voting. However, in reality, shareholders would have diverse interests and that brings about a variety of opinions and voices.
Regardless of the variety of voices, shareholder activism will be here for the long run.
How Companies Should Respond to Shareholder Activism
With the imminent rise of shareholder activism in Malaysia, it is important that companies embrace shareholder activism27. More often than not, the reason why shareholders become proactive is that they see that the company is going in the wrong direction.
Essentially, they want the best for the company. Hence, it is important for board and management of a company to stay current on activist trends. For example, the current trend right now is the pressing imposition of socially responsible investing to account for environmental, social and governance considerations28.
Further, companies can enhance the communication level between management and shareholders.
One way of doing this is to hire investor relations personnel to engage with shareholders in order to convey information so that they are better informed of how the company is being managed. Moreover, companies can appoint a minority shareholder representative into the board to expand the variety in their representation.
Conclusion
Although it can be seen that shareholder activism is on the rise in Malaysia; and institutional and individual shareholders are more willing to be proactive in their approach to voice their disapproval, there are factors which may hamper the progress.
Nonetheless, with greater awareness put forward by institutional shareholders and institutions like MSWG and the persistence of shareholders to exercise this right, shareholder activism can be said to be on the right track in its objective of protecting shareholders’ interest.
For further information, please contact:
Sharizan Sarif, Partner, Azmi & Associates
sharizan@azmilaw.com
1 Cover Story: The impact of shareholder activism accessible via https://www.theedgemarkets.com/article/cover-story-impact-shareholderactivism
2 Shareholder Activism in Malaysia: Is It Effective? accessible via https://core.ac.uk/download/pdf/82781742.pdf
3 n2
4 Section 181, Companies Act 1965
5 The Consequences of Culture on Shareholder Activism in Malaysia accessible via http://www.austlii.edu.au/au/journals/BondLawRw/2003/13.pdf
https://www.cmawebline.org/images/stories/JAMAR%202006%20
Winter/JAMAR-v4-1-Consequences%20of%20Culture.pdf
6 Corporate Governance in Malaysia, Kamini Singam accessible via http://www.austlii.edu.au/au/journals/BondLawRw/2003/13.pdf
7 The Malaysian Code on Corporate Governance, March 2000 accessible via
https://ecgi.global/sites/default/files//codes/documents/mccg
8 https://www.mswg.org.my/who-we-are
9 The Impact of Minority Shareholder Watchdog Group Activism on the Performance of Targeted Firms in Malaysia accessible via
http://web.usm.my/journal/aamjaf/Vol%205-1-2009/5-1-3.pdf
10 Mission Statement of MSWG accessible via http://www.mswg.org.my/objective-vision-mission
11 Shareholder activism comes to the fore in Malaysia, 20 January 2010 accessible via
12 Section 195, Companies Act 2016
13 Sections 199, 201, 210 & 357 of CMSA 2007
14 [2016] 11 MLJ 772
15 The Malaysian Code for Institutional Investors accessible via http://www.iicm.org.my/wpcontent/uploads/2018/05/MALAYSIAN-CODEFOR-INSTITUTIONAL-INVESTORS-MCII.pdf
16 http://www.iicm.org.my/list-of-signatories/
17 Commitment to institutional good governance accessible via http://www.iicm.org.my/wpcontent/uploads/2018/10/Statement-ofCompliance-Khazanah-2018.pdf
18 Statement of Compliance with the Malaysian Code for Institutional Investors accessible via
http://www.kwsp.gov.my/documents/20126/142907/EPF_Compliance_
Statement_FINAL__ENG__18052017.pdf/75b8d0e4-488f-4b1d-2af0-60abb77bcff3
19 Khazanah Nasional Berhad, Invesment Policy Statement accessible via
20 Sapura's CEO survives ouster move – 19 July
2018 accessible via https://www.thestar.com.my/business/business-news/2018/07/19/shahril-survives-ouster-move-at-agm
21 FGV shareholders voted against directors' remuneration at 5-hour AGM – 25 June 2019
22 LTAT defends decision to reject FGV directors’ fees accessible via https://www.theedgemarkets.com/article/ltat-defends-decisionreject-fgv-directors-fees-0
23 Corporate Governance : Theory and Some Insights into the Malaysian Practices, accessible
via https://pdfs.semanticscholar.org/4572/d9df2f97be614b0b2d3bcdaa
24 The Influence of Shareholder Activism as a Corporate Goevrnance Monitoring Mechanism
in Malaysia accessible via https://www.researchgate.net/publication/327931127_The_Influence_
of_Institutional_Shareholder_Activism_as_a_Corporate_Governance
_Monitoring_Mechanism_in_Malaysia
25 n5
26 n5
27 Best Practices for Shareholder Activism – 7 January 2019 accessible via https://insights.diligent.com/shareholder-activism/bestpractices-for-shareholder-activism/
28 Global Sustainable Investment Review 2018, accessible via http://www.gsi-alliance.org/wpcontent/uploads/2019/03/GSIR_Review2018.3.28.pdf
