Impacts of Proposed MCCG 2016

(A) Roles and responsibilities 2.1 Effective management oversight The oversight role of the board of directors is an important component of corporate governance and we will pay particular attention to it. The board of directors is presumed to carry out the oversight function on behalf of shareholders, because the shareholders themselves would find it difficult to exercise control. A company needs a strong leadership from the boards those in discharging

responsibilities

particularly

in

relation

to

sustainability, risk

management and ethics. The board has to carry out effective management oversight on the executives running the company to prevent any deteriorates in governance and ethics. This is crucial as the shareholders rely heavily on the board in helping the company to achieve sustainability and financial soundness. The board effectiveness in its exercising the management oversight is highly depends on the independent of the board (John and Senbet, 1998).The MCCG and Concept Paper laid down that the board must consists of independent directors and the chairman of the board must be an independent director with tenure only range up to 9 years. This is to uphold integrity in the executive oversight on the executive directors in order to protect the interest of shareholders

and

stakeholders.

Furthermore,

Bursa

Malaysia

Listing

Requirements through provision 15.02 regulate that all listed issuer must ensure that at least two directors or one third of the board members, whichever is greater, are independent director. The efforts of Securities Commission and Bank Negara Malaysia seem to be successfully implemented as according to the Bursa Malaysia analysis, 87% companies disclosed that the positions of chairman and chief executive officer are held by different individuals while 78% revealed that they have undertaken assessments on their independent directors annually (Mahalingam, 2015). However, MCCG 2012 and 2016 do not outline the criteria of an independent director as compared to Concept Paper. This is essentially a critical issue for Securities Commission to consider outlining the criteria of an independent director as the companies might hide the interest of the appointed independent director which will deteriorate the oversight role of the board hence lead to

ineffective in decision making and stewardship. Securities Commission should benchmark themselves with the Concept Paper as the Concept Paper clearly laid down the criteria for an individual to be disqualified as independent directors in provision 11.7. The Concept Paper suggests that an individual will be disqualified as independent directors if he has been an executive for 2 years, being substantial shareholders in the financial institutes or has had significant business or other contractual relationship with the financial institutes. The Concept Paper also require the board of financial institutes to define clearly what constitute significant business or other contractual relationship which is very useful in upholding the integrity of independent directors. Securities Commission should also benchmark themselves with Practice Note 13 of the Bursa Malaysia Listing requirement which laid down the minimum criteria list for independence. By adopting those practices into MCCG 2016, it will make the code to be more comprehensive and prevent companies from box ticking. Disclosure of the protocol in appointing independent director should be another concern for Securities Commission and Bank Negara Malaysia to include in MCCG and Concept Paper as it was lacking. Recommended by the chief regulatory officer of Bursa Malaysia Selvarany Rasiah, companies need to provide more information as to how candidates were assessed and the final number of candidates the nomination committee proposed to the board for approval (Ngui, 2016). By doing so, the appointment of independent directors will be more transparent and the stakeholders would be able to serve as the watchdogs in upholding the independency of the appointed independent directors. John, K. and Senbet, L.W., 1998. Corporate governance and board effectiveness. Journal of Banking & Finance, 22(4), pp.371-403. 2.2 Establish clear roles through board charter Board charters have become a popular tool for boards to first discuss and then document the policies and guidelines that guide governance for the company. There are many aspects of modern governance which are important for the board to have considered and agreed how they will act, hence a document that

documenting these governance arrangements is the role of a board charter (Australian Institute of Company Directors, 2011). The essence of broad charter is mentioned in the MCCG 2012 as well as MCCG 2016, stating that all companies must adopt a board charter outlining information such as the roles and responsibilities of directors and strategic intent. By comparing MCCG 2012 with MCCG 2016, there are some add on in the required information to be outlined in the board charter such as term of reference, time commitment of members and the protocol of accepting new directorship. The present of term of reference is crucial for board committee to uphold their duties and responsibilities so that the authority is clearly outlined in order to prevent overlapping of powers and conflict of interest between the 2 legally required board committee, namely nomination committee and auditing committee. Next, it is vital to include the protocol of accepting new directorship in the board charter which clearly states out what to do when there is a new director take over the board. However, the MCCG 2012& 2016 together with the concept paper silent on what is the protocol needed in order to let the newly appointed director to fit into the company in fast pace as the director will steward the company. Perhaps they should consider including some guidance on it such as an induction should be made available to the director as part of the protocol. Bursa Malaysia in its analysis of corporate governance disclosures of annual reports found that not all companies make their board charter publicly available although it is required as per MCCG 2012 and 2016. “Some listed issuers disclosed the charter on their website but most listed issuers did not make it publicly available”, said Mahalingam. Worst, a small number listed company still excusing that they are in the mist of developing their board charter after 3 years of implementation of MCCG 2012. Thus, Securities Commission had made it apply or explain an alternative in Practice 1.3 of the MCCG 2016 which requires the listed companies to publish the board charter on the company’s website. By making the board charter

available on the company’s website, the stakeholder can have some guidance on the roles and responsibilities of the board and assess the board accordingly. That was a good initiative as they are moving towards quality disclosure through the use of technology. 2.3 Role of Institutional investors In this emerging business environment, the stakes of institutional investors in listen companies are getting more significant and the key roles of them in corporate governance cannot be underestimated. Institutional investors are in the unique position to exercise their influence over companies to enhance the quality of corporate governance. They can demand for meetings and question the board on issues relating to sustainability of the companies and assess the effectiveness of the board. The institutional investors hence play a vital role in pushing the companies for a better governance practices, rather than just doing what is requires. In MCCG and Concept Paper, institutional investors had not been mentioned but definitely this is an area for Securities Commission and Bank Negara Malaysia to consider about it. They can benchmark some of the practices from the Malaysian Code for Institutional Investors to be adopted into the codes particular the role of institutional investors. By involving them in the oversight process, the governance of the company can be improved as the management oversight become more diverse. In South Africa, the King Code of Governance also values the role of institutional investors in enhancing the best practices of governance principles. Institutional investors should be encouraged to vote and engage with companies, or have their proxy through directives to vote and engage. This will ensure that governance best practice principles are more consistently applied. The King III report was written from the perspective of the board as the focal point of corporate governance. However, the King Committee believes that a code should be drafted to specifically set out the expectations on institutional investors in ensuring companies apply the principles and recommended practices effectively.

Hence, there is a serious need for Securities Commission and Bank Negara Malaysia to consider including guidance on the role of institutional investors particularly in relation to management oversight in order to prevent domination of power by the executives running the company. (B) Sustainability 3.1 Environmental, social and corporate governance (ESG) If we look at the comprehensive performance of the company, it is often defined as the company's ability to show the best results from various possible points of view. But this does not necessarily mean that only the company that shows good financial results has high performance. Embedding ESG within a company requires boards to widen their perception of a company’s boundaries when considering strategy. In essence, an ESG report seeks to provide shareholders and other stakeholders with an insight into the company’s long-term material environmental and social sustainability in terms of triple bottom line. The MCCG 12 clearly stated that the board should ensure the companies’ strategy promote sustainability and further in MCCG 16, the document suggests that the company need to review and adopt strategies on environmental, social and governance underpinning sustainability. Constantly reviewing best practices is crucial as it serves as a benchmark to the international standards. In Corporate Governance Guide published by Bursa Malaysia, it emphasis that company should creating sustainable competitive advantage for the longer term requires companies to be flexible and responsive. It also suggests that ESG will impact the company in Malaysia in term of economic vitality, social relationship with stakeholders and environmental compliance with integrity. Thus, the board should adopt strategies in accordance to ESG specifically address to not just emphasizing on revenue, but also take into consideration of community involvement, equal opportunity, workforce diversity and transparency. In Malaysia context, most of the companies listed in Bursa Malaysia still lack of disclosure of their ESG practices as most of them still sticking to Corporate

Social Responsibility (CSR) and there are nor much disclosure on it. Most of the listed companies will just disclose the charitable activities undertaken throughout the years and did not disclose on the positive and negative impacts of their policy toward the social and environment integration. Hence there is a need for Securities Commission to include a comprehensive guidance on ESG practices to guide listed companies in benchmarking themselves to the best practices. 3.2 Board continuity Sustainability of the board is very important in ensuring the sustainability of the firm as the firm is run by the board and the board having discrete decision making power. In MCCG 12 and MCCG16, it was clearly stated that the board carry out succession planning for the senior management positions. The sudden loss of a key officer without a suitable replacement may disrupt the operations of a company and hinder its future growth in the event of a wide gap in the experience of the remaining personnel. The board should ensure that all candidates appointed to senior management positions are of sufficient caliber. The board should also be satisfied that there are programmes in place to provide for the orderly succession of senior management. However, the MCCG and Concept paper do not provide many guidelines in succession planning and this will lead to hasty promotion of individuals who may be unsuitable or not ready for the position, or in simple term nepotism. In chapter 1.9 of Bursa Malaysia Corporate Governance Guide, there is a comprehensive guidance in succession planning Securities Commission should benchmark it into MCCG to mitigate the risk associated with the sudden loss of director. It suggests that the board should work closely with the nominating committee in establishing a clear succession plan by management. In a emerging global environment, where securing talents is a challenge, boards have to give more concerns to the matter of human capital development and management.

Existing director have to attend training to enhance their knowledge and skills in countering the globalization and changing business environment. The MCCG 12 and MCCG 16 silent on the training need for newly appointed director but it’s once stated in the MCCG 2007 under Part 2: AA XIII “Directors’ training” stating that every company should provide orientation and education program to new recruits to the board. Perhaps Securities Commission needs to reinstate this into the MCCG as directors need training to improve them in providing effective stewardship to the company. 3.3 Integrated reporting The rises of ethical concern and shareholder activism have led to a greater demand for more thorough disclosure of non-financial information. The nonfinancial reporting is vital in enhancing the accountability of to a broader base of stakeholders. The emerging changes indicate that companies can no longer depend merely on their financial performance as a pointer of the company overall performance, but need to improve their reporting of non-financial information. However, progress in ensuring more effective disclosure of non-financial information has generally lagged the improvements in the reporting of financial information. Based on the Bursa Malaysia Listing Requirements, companies are only required to disclose the corporate social responsibility (CSR) activities in their annual report and a description for alternatives if there is none. Although companies generally comply with this requirement, there is still a gap in that companies do not provide an assessment of the impact of their business operations on communities. Countries such as Australia and South Africa had taken initiatives in moving towards integrated reporting. In South Africa, the King Code of Governance Provides that investors nowadays not just focus merely on the financial performance of the company, but also take into considerations of the quality of the board and issue pertaining to sustainability. The stakeholders are playing vital roles as they are the indirect contributor of capitals and their concerns on the sustainability of the company cannot be underestimated. The integrated reports prepared by companies should

outline the forward-looking information to the reader rather than just historical events which are not so significant. The Securities Commission had taken up initiatives in dealing with this emerging trend by including the need of integrated reporting in MCCG 2016 under Core + Practices 9.2. This is a good sign as the regulator had start focusing on the emerging area of governance. By issuing integrated reports, companies are able to create a more comprehensive picture of the risks and opportunities the companies will faces in the long run not only on the financial consideration, but also the sustainability of the companies. However, the Securities Commission must consider including more guidance on the integrated reports. The King Code of Governance suggests that the integrated reporting should records how the companies’ strategy affects positively and negatively the welfare of the stakeholder, particularly in relation to environmental, social and governance issues. Considering the triple bottom line and not just focusing on disclosure of financial reports should be concerns for all listed companies in Malaysia for the coming future. By issuing integrated reports, a company increases the trust and confidence of its stakeholders and the legitimacy of its operations. It can increase the company’s business opportunities and improve its risk management. By issuing an integrated report internally, a company evaluates its ethics, fundamental values, and governance, and externally improves the trust and confidence which stakeholders have in it.