cgreport

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FINANCE COMMITTEE

ON

CORPORATE GOVERNANCE

REPORT ON

CORPORATE GOVERNANCEFEBRUARY 1999

REPORT ON

CORPORATE GOVERNANCEFEBRUARY 1999

CONTENTS

Foreword ii

Membership Of The Committee iv

Abbreviations v

Chapter 1 Introduction To The Report 1

Chapter 2 Executive Summary 7

Chapter 3 Setting The Scene – Corporate Governance In Malaysia 39

Chapter 4 Meaning Of Corporate Governance 49

Chapter 5 Malaysian Code On Corporate Governance 55Part 1 – Principles of Corporate Governance 67Part 2 – Best Practices in Corporate Governance 69Part 3 – Principles and Best Practices for other Corporate Participants 74Part 4 – Explanatory Notes 75

Chapter 6 Reform of Laws, Regulations And Rules 103

ISSUE ONE 106Review of Provisions dealing with Duties,Obligations, Rights and Liabilities of Directors,Company Officers and Controlling Shareholders

ISSUE TWO 143To Review Provisions of Law and Requirements in respect of:– The Adequacy of Disclosures; and– Conflicts of Interests with respect to Transactions

that involve the Waste of Corporate Assets

ISSUE THREE 171Enhancing the Quality of General Meetings

ISSUE FOUR 183Provisions dealing with Shareholders’ Rights and Remedies

ISSUE FIVE 199To develop Effective Governance and EnforcementMechanisms within the Regulatory Framework

Chapter 7 Training And Education 233

Chapter 8 Implementation Programme 249

Appendix I Executive Summary Of The KLSE/Price Waterhouse Joint 255Survey Of The Corporate Governance Practices InPublic-Listed Companies

Appendix II Membership And Terms Of Reference 267• Terms of Reference 269• Finance Committee 272• Working Group I 273• Working Group II 275

HIGH LEVEL FINANCE COMMITTEEREPORT ON CORPORATE GOVERNANCE

FOREWORD

1. I wish to express my heartfelt thanks to members of the High Level Finance Committeeon Corporate Governance and other relevant persons and industry groups for theircontinuous contribution, co-operation, invaluable support and assistance in thepreparation of this Report. The Report on Corporate Governance (the Report), whichsets out the current state of corporate governance in Malaysia and recommendation ofmeasures to raise corporate governance standards, reflects the on-going effort of theGovernment and the private sector to re-establish investor confidence in the Malaysiancapital market.

2. The East Asian economic crisis in 1997/98 has generated a substantial amount of analysisand debate largely focused on macro-economic issues, systemic stability as well as issuespertaining to the regulation of international investors, the role and functions of regulatorsand the need for improved disclosure and good corporate governance. While investmentsare required to generate growth, the interests of stakeholders are to be protected. Themaximisation of benefits to stakeholders is assured by good corporate governance so thatdecisions on investment, lending, and the manner of utilisation of resources are in theinterests of stakeholders, including minority shareholders, and not abused by and for thebenefit of corporate insiders.

3. In recognition of the clear need to enhance standards of corporate governance inMalaysia, the government announced to the Dewan Rakyat on the 24th of March 1998,the establishment of a High Level Finance Committee that would look into establishinga framework for corporate governance and setting best practices for the industry. TheCommittee on Corporate Governance is a partnership effort, between the governmentand the private sector to enhance standards of corporate governance in Malaysia.

4. Briefly, the Report of the Finance Committee covers three broad areas :-

• First, the development of the Malaysian Code on Corporate Governance. The proposedCode sets out a set of principles and best practices for good governance. Therecommendations in the Code are directed principally at boards of listed companies.They are aimed at increasing the efficiency and accountability of boards to ensure thattheir decision-making processes are not only independent but are seen as independent.

• Second, reform of laws, regulations and rules – The recommendations for reform seekto strengthen the overall regulatory framework for public-listed companies. They embracekey aspects of corporate regulation which include:

■ clarifying the responsibilities of key corporate participants;■ enhancing obligations of key corporate participants, especially in related party

transactions;■ improving the accuracy and timeliness of disclosures;■ enhancing the value of general meetings;■ enhancing the efficiency of shareholder redress for grievances; and■ enhancing enforcement of good corporate conduct.

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• Third, training and education – A significant challenge for the corporate sector arisingfrom implementation of the recommendations above is to expand the pool of qualifiedpersons, namely directors to undertake the responsibilities expected of them. Therecommendations, among other things, identify training and education programmes,target participants for these programmes as well the agencies to conduct theseprogrammes.

5. The report was circulated to selected bodies for consultation to elicit the views of thosenot represented on the Committee. The bodies are :-

• Business Council for Sustainable Development Malaysia (BCSDM);• Malaysian Institute of Directors (MID);• Malaysian Institute of Accountants (MIA);• Malaysian Association of Certified Public Accountants (MACPA);• National Chamber of Commerce and Industry of Malaysia (NCCIM);• International Movement for a Just World (JUSTWORLD);• Bar Council Malaysia;• Malaysian Investors Association (MIA);• Malaysian Association of Asset Managers (MAAM); and• Persatuan Ekonomi Malaysia.

A revised report was resubmitted to the Ministers of Finance on the 8th of February, 1999.

6. The Government is committed to raising the standards of corporate governance in thiscountry. The private sector has an important role to play in the development of the nationas it creates wealth, jobs and pays taxes. Since what it does is important for the nation,the Government intends to facilitate the smooth functioning of private enterprise. Asgood corporate governance promotes this objective, the Government will take steps inthis direction. Private sector involvement in promoting good corporate governance iscrucial too. They have the ability to set standards beyond those that can be imposed bystatute, and the business sensitivity to implement standards that are workable andbeneficial.

7. Good corporate governance is a shared vision.

Thank you.

(DATUK DR. ARIS OTHMAN)Secretary General of TreasuryAnd Chairman of the High Level Finance CommitteeOn Corporate Governance9 Mac 1999.

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MEMBERSHIP OF THE COMMITTEE

Y.Bhg. Datuk Dr Aris bin OthmanSecretary General of Treasury, Ministry of Finance – Chairman

Encik Ali bin Abdul KadirChairman, Securities Commission

Y.Bhg. Tan Sri Wan Azmi bin Wan HamzahChairman, Financial Reporting Foundation

Y.M. Dato’ Raja Arshad Tun UdaChairman, Malaysian Accounting Standards Board

Y.Bhg. Dato’ Idrus bin HarunRegistrar of Companies

Y.Bhg. Dato’ Mohd Azlan bin HashimChairman, Kuala Lumpur Stock Exchange

Y.Bhg. Tan Sri Dato’ Seri Ali Abul Hassan bin SulaimanGovernor, Bank Negara Malaysia

Y.Bhg. Tan Sri Azman bin HashimChairman, Association of Merchant Banks, Malaysia

Y.Bhg. Dato’ Megat Najmuddin Megat KhasChairman, Federation of Public-Listed Companies

Ms Wong Suan LyeExecutive Director, Association of Banks, Malaysia

Ms Mohayani bt ShamsudinChairman, Association of Stockbroking Companies, Malaysia

Prof. Abdul Manap SaidImmediate Past PresidentThe Malaysian Association of The Institute of Chartered Secretaries and Administrators

Secretariat – Securities Commission.

Acknowledgment

The Finance Committee would like to acknowledge the outstanding contribution extendedby three invaluable ex-members since the inception of the Committee in March 1998. Wesincerely thank –

Dato’ Dr. Mohd Munir bin Abdul Majid (March 1998 – February 1999)Dato’ Murad bin Khalid (March 1998 – January 1999)Datuk Ramly bin Hj. Ali (March 1998 – September 1999)

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ABBREVIATIONS

ADB Asian Development BankAGM Annual General MeetingASIC Australian Securities and Investment CommissionCA Companies Act, 1965CL Australian Corporations LawCLERP Corporate Law Economic Reform Programme of AustraliaCode Malaysian Code on Corporate GovernanceCommittee Finance Committee on Corporate GovernanceESOS Employee Share Option SchemeFIC Foreign Investment CommitteeFY Financial YearKLSE Kuala Lumpur Stock ExchangeListing Requirements KLSE Main Board Listing RequirementsM&A Mergers and AcquisitionsMICG Malaysian Institute of Corporate GovernanceROC Registrar of CompaniesSC Securities CommissionSCA Securities Commission Act, 1993SEC Securities Exchange CommissionSIA Securities Industry Act, 1983SICDA Securities Industry (Central Depositories) Act, 1991TSE Toronto Stock ExchangeUK United KingdomUS United StatesWB World Bank

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Chapter 1

INTRODUCTION TO THE REPORT

INTRODUCTION TO THE REPORT

1. Background to the Report

1.1 On 24th March 1998, in announcing to the Dewan Rakyat a series of measures to furtherboost and stabilise the Malaysian economy, the Honourable Minister of Financeannounced the establishment of a high level committee that would look into establishinga framework for corporate governance and setting best practices for the industry. Thistimely announcement was clearly made in recognition of the crucial role that enhancedstandards of corporate governance can play in boosting investor confidence. Theeconomic turmoil had, within less than a year, taught corporate Malaysia that corporategovernance or rather the lack thereof, can exact a heavy toll from the markets.

1.2 This Committee is chaired by the Secretary General of Treasury, Ministry of Finance.Its members comprise the Governor of the Central Bank, the Chairman of the SC, theChairman of the KLSE, the Chairman of the Financial Reporting Foundation andrepresentatives of various industry organisations.

1.3 The Committee was asked by the Minister of Finance to submit its findings and proposalsby 30th June 1998.

1.4 The report was subsequently released for consultation on 13th November, 1998 to selectedbodies, namely those bodies not represented on the Committee. The bodies identifiedfor consultation are as follows:-

• Business Council for Sustainable Development Malaysia (BCSDM)• Malaysian Institute of Directors (MID)• Malaysian Institute of Accountants (MIA)• Malaysian Association of Certified Public Accountants• National Chamber of Commerce and Industry of Malaysia (NCCIM)• International Movement for a Just World (JUSTWORLD)• Bar Council Malaysia• Malaysian Investors Association (MIA)• Malaysian Association of Asset Managers (MAAM)• Persatuan Ekonomi Malaysia.

1.5 A revised report incorporating feedback received from consultation, was submitted tothe Minister of Finance on the 5th of February, 1999.

Chapter 1 – Introduction To The Report

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2. The Preparation of the Report

2.1 The Committee at its first meeting on 10th April 1998, agreed that the work of theCommittee is to be carried out through two Working Groups:-

• Working group on best practices in corporate governance and training andeducation (JPK 1). This working group will essentially seek to develop best practicestandards for the industry and identify training programmes for all corporateparticipants. Consistent with approaches adopted internationally where the standardsetting process is led by industry, this working group is chaired by the Chairman ofthe Federation of Public-Listed Companies. Regulators are, however, representedon the working group to ensure that self-interest elements are addressed and thatstandards set do not fall short of international standards1 .

• Working group on law reform issues in corporate governance (JPK 2). This workinggroup is chaired by the SC. The membership of this working group includesrepresentatives from ROC, KLSE, practising accountants, lawyers and members ofthe corporate sector. The task of this working group is to identify and makerecommendations for reform of certain key aspects of corporate regulation forstrengthening the governance structure of companies and to identify effectiveenforcement mechanisms, as a measure to promote investor confidence2 .

2.2 At the request of the Ministry of Finance, it was also agreed at the first meeting, that theSC would also act as the secretariat to the Committee.

2.3 In attempting to put together the recommendations of the 2 Working Groups, theSecretariat has had to make numerous editorial changes and adjustments. Every efforthas however been taken to ensure that the substance of all recommendations remainsintact. For instance, while detailed discussions on the recommendations of WorkingGroup 2 on Reform of Laws, Regulations and Rules are found in Chapter 6, it was feltthat no meaningful examination of any aspect of corporate governance can be madewithout at least a brief attempt to describe the legal landscape against which all of theserecommendations must be viewed. Hence, the need for Chapter 3 which sets the sceneand provides an overview of the legal framework. Similarly, although Training andEducation is part of the mandate of Working Group 1, it was felt that Recommendationson Training and Education can be more meaningfully made after all other aspects ofCorporate Governance have been discussed.

2.4 The report has since received the benefit of wider feedback from bodies identified forconsultation as alluded to in para 1.4 above. Their comments were carefully studiedand in some instances their feedback has resulted in revisions and additions to theoriginal report. In the main, ‘consultees’ agreed with the scope, approach andrecommendations of the report.

1 For full list of members of JPK 1, see Appendix II2 For full list of members of JPK 2, see Appendix II

Chapter 1 – Introduction To The Report

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3. Layout of the Report

3.1 This report comprises eight chapters, inclusive of this chapter. Chapter 2 provides theExecutive Summary of the report. All the key recommendations of the Committee tothe Ministry of Finance are highlighted in this chapter.

3.2 Chapter 3 sets the scene for the entire report. It attempts to provide a brief overview ofthe state of Corporate Governance in Malaysia. While efforts to enhance standards ofcorporate governance may not necessarily or primarily take a legislative route, anunderstanding of the legal historical landscape against which principles, best practicesand standards of corporate governance are to be introduced, is vital to ensure that thesestandards, principles and best practices when introduced, are properly juxtaposed againstthe existing legal framework.

3.3 Corporate Governance is a phrase easily understood but difficult to define. However,no report on Corporate Governance can be complete without at least an attempt atdefining this phrase. Chapter 4 discusses the Meaning of Corporate Governance.

3.4 The Code is in Chapter 5. Explanatory notes and justifications are provided to everysection of the Code.

3.5 In Chapter 6, a detailed study is made on Reform of Laws, Regulations and Rules thataffect Corporate Governance in Malaysia and the issues relating thereto.Recommendations for changes to these laws, regulations and rules together with theirjustifications are found in this Chapter.

3.6 A comprehensive code on Corporate Governance together with ‘state of the art’ legislativeprovisions will not achieve much by way of enhancing standards of corporate governanceunless company directors, shareholders, senior management, members of auditcommittees etc., are aware of their roles and responsibilities. Training and Educationis therefore of paramount importance. Chapter 7 focuses on this.

3.7 A report is only as good as the paper it is written on, until and unless concrete measuresare taken to implement the proposals, and thereafter, to monitor the implementation.Finally, Chapter 8 looks at the Implementation Programme for the Recommendationsin the report.

Chapter 2

EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

Introduction

This Chapter sets out the executive summary of the principal recommendations

of the Committee. It embraces the following -

1 Meaning of Corporate Governance – Chapter 4

2. Code – Chapter 5

3. Reform of Laws, Regulations and Rules – Chapter 6

4. Training and Education – Chapter 7

5. Implementation Programme – Chapter 8

Chapter 2 – Executive Summary

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1. Meaning of Corporate Governance

The definition of corporate governance that we have developed from this exercise is asfollows –

“Corporate governance is the process and structure used to direct and manage thebusiness and affairs of the company towards enhancing business prosperity andcorporate accountability with the ultimate objective of realising long term shareholdervalue, whilst taking into account the interests of other stakeholders.”

2. Code

2.1. The discussion on the Code is divided into two sections.

2.2 In section 1, we stress the importance of the Code as an initiative of the private sector tolead a review and establish reforms of standards of corporate governance at a microlevel. It is based on the belief that in some aspects of corporate regulation, self-regulationis preferable and the standards developed by those involved may be more acceptableand thus more enduring. Additionally, it allows for a more constructive and flexibleresponse to raise standards in corporate governance as opposed to the more black andwhite response engendered by statute or regulation.

2.3 A particularly important feature of codes on corporate governance is the aspirationaland evolutionary way in which codes influence the expectations of society, that areeventually reflected in the law. The attention generated on corporate governance issueshas already had an impact on evolving judicial interpretations of directors’ duties,internationally.

Compliance with the Code

2.4 The recommendations set out in the Code are premised on a prescriptive approach tocorporate governance. The proposed Code sets out four forms of recommendations andthe compliance responsibilities in respect of these recommendations are as follows:-

• Principles – Part 1 sets out broad principles of good corporate governance forMalaysia. The objective of principles is to allow companies to apply these flexiblyand with common sense to the varying circumstances of individual companies.Companies will be required by the Listing Requirements to include in their annualreport a narrative statement of how they apply the relevant principles to theirparticular circumstances. This is to secure sufficient disclosure so that investors andothers can assess companies’ performance and governance practices and respondin an informed way.

• Best practices in corporate governance – Part 2 sets out best practices forcompanies. It identifies a set of guidelines or practices intended to assist companiesin designing their approach to corporate governance. While compliance with theseguidelines is not mandated, companies will be required, as a provision of the ListingRequirements, to explain any circumstances justifying departure from such bestpractices.


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• Exhortations to other participants – Part 3 is not addressed to listed companiesbut to investors and auditors to enhance their role in corporate governance. Theseare purely voluntary.

• Explanatory notes and “mere best practices” - Part 4 provides explanatory notesto the principles and best practices set out in Parts 1 and 2 and exhortations set outin Part 3. Part 4 also sets out best practices directed at listed companies that do notrequire companies to explain circumstances justifying departure from best practices- “mere best practices”.

Rationale for a prescriptive approach

2.5 The Committee considered the Hampel approach to be the most suited for Malaysian.Best practice prescriptions are necessary. The work of the Committee has proceeded onthe basis that standards of corporate governance in Malaysia are lacking and that thereis a need to raise these standards. The statement of best practices is designed to guidecompanies into achieving the necessary high standards of corporate behaviour.

The problem with a prescriptive approach

2.6 To avoid the problems associated with “box ticking”, the Code sets out principles thatrequire companies to include in the annual report, a narrative account of how theyapply the broad principles set out in the Code.

Companies to whom directed

2.7 The Code, set out in Chapter 5 of this Report is primarily directed at boards of all listedcompanies on the KLSE.

Statement of compliance

2.8 It is proposed that all listed companies reporting in respect of years ending after theimplementation date of the report should state in the reports and accounts how theyhave applied the principles set out in Part 1 of the Code and a statement of compliancein respect of the best practices set out in Part 2 and identify or give reasons for any areasof non-compliance. In this respect, boards are not expected to comment separately oneach item of the Code with which they are complying, BUT areas of non-compliancewill have to be dealt with individually.

Principal parties to corporate governance

2.9 The recommendations of the Committee under the Code is premised on the fact thatgood corporate governance rests firmly with the board of directors. Shareholders andauditors necessarily only play secondary roles. This is in recognition of the fact thatthere are limitations to shareholders and auditors taking on a leading role in corporategovernance.

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Principal recommendations in the Code

2.10 Chapter 5 sets out the Code directed principally at boards of public-listed companies.The Code essentially comprises principles for good corporate governance (Part1), bestpractices in corporate governance (Part 2), exhortations to other corporate participants(Part 3) and finally explanatory notes to principles and best practices and exhortations(Part 4).

Principal responsibilities of the board

2.11 The approach we have taken in the Code is to identify what we regard as the principalresponsibilities of the board of directors. These are as follows - reviewing and adoptinga strategic plan for the company; overseeing the conduct of the company’s business toevaluate whether the business is being properly managed; identifying principal risksand ensuring the implementation of appropriate systems to manage these risks; successionplanning, including appointing, training, fixing the compensation of and whereappropriate, replacing senior management; developing and implementing acommunications policy for the company; and reviewing the adequacy and the integrityof the company’s internal controls and management information systems as well asother applicable laws and regulations.

Board constitution

2.12 We then address issues pertaining to the constitution of the board. The composition ofthe board of directors is one of the most important issues in corporate governance. Wepropose that at least 1_

3 of the board should be independent. We accept the definition ofindependence as provided for in the Listing Requirements which broadly set out twoelements of independence - independence from a controlling shareholder andindependence from management. In circumstances where a company is controlled byan significant shareholder (which we define to mean a shareholder who is able to exercisea majority of votes for the election of directors), we recommend a form of proportionalrepresentation by providing that the board should comprise a number of directors whichfairly reflect the investment in the company by the shareholder other than the significantshareholder. We then recommend that boards should disclose its analysis of theapplication of best practices set out above to the circumstances of the board.

2.13 We then make recommendations relating to the board’s process for assessing existingdirectors and identifying, nominating, appointing and orienting new directors. With theexception of the responsibility for orienting new directors, we recommend as a matterof best practice that this function is performed by a nominating committee in recognitionof the need for a formal and transparent procedure for appointments to the board.

2.14 We also recommend that boards conduct an annual review of its required mix of skillsand experience and other qualities including core competencies which non-executivedirectors should bring to the board. This should be disclosed in the annual report. Thisis a crucial pre-requisite to the next recommendation we make and that is, for thenominating committee to annually assess the effectiveness of the board as a whole, thecommittees of the board and the contribution of each individual director to effectivedecision making on the board.


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2.15 We also identify the company secretary as the person who should undertake the task ofhandling all of the preparatory work that has to be completed and information to begathered prior to directors taking up their posts.

2.16 Board processes. We also propose certain governance-related structures and processesof the board that contribute to its effectiveness. The effectiveness of the board is buttressedby its structures and procedures. We respond to concerns emanating from the survey1

about the regularity of board meetings by recommending that boards should meetregularly and requiring boards to disclose the number of board meetings held a year andthe details of attendance of each director. This enables the shareholders to evaluate adirector’s commitment to the company and to satisfy himself as to whether the board isin control of the company.

2.17 We also consider the board process of assessing management which would entail ameeting with management, namely the chief executive officer, to establish the objectivesof the company and meeting independently of management to monitor its progress inrelation to the objectives. We then prescribe a number of governance-related functionsto be carried out via board committees namely the remuneration and audit committees.

Relationship between the board and shareholders

2.18 We then address the relationship between the board and shareholders. Although thisrelationship is less complex than the relationship between the board and management,it is nevertheless important. We identify the AGM as a crucial mechanism in shareholdercommunication and recommend that a best practices guide should be prepared for thespecific purpose of improving the quality of AGMs. We encourage two-waycommunication between the company and the shareholders. We also caution investors,in evaluating the companies’ governance arrangements, particularly those related toboard structure and composition, to give due weight to all relevant matters drawn totheir attention.

3. Law Reform Issues in Corporate Governance

3.1 Issue 1 reviews provisions dealing with the duties, obligations, rights and liabilities ofdirectors, company officers and controlling shareholders.

The Board of Directors

3.1.1 Codification of the functions of the board and clarification of the collectiveduty of the board to “manage” the business and affairs of a company

1 Price Waterhouse/KLSE Joint -Survey of Public-Listed companies, 1998 (See Appendix I)

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Recommendation

There should be a statutory formulation of the minimum functions of boardsof public companies. In this respect, a provision should be introduced toclarify the responsibilities of the board “to oversee the conduct of thecompany’s business to evaluate whether the business is being properlymanaged”. The provision should be sufficiently flexible to allow for widevariations in the structuring of the relationships between the board andmanagement taking into account the various types and sizes of companiesregulated by the CA.

The belief is that codification of the minimum functions of the board will giveclear direction to the courts as well as directors of their minimum collectiveduties. The recommendation also clarifies that boards of large listed companiesdo not manage companies, in the sense of the day-to-day running of the company.This is generally left to management. Their role is to supervise management.

3.1.2 Should the specific duties of executive and non-executive directors withinthe board structure be clarified and in particular, the unique capacity ofindependent non-executives to provide a balanced and independent viewonto the board

Recommendation

That the role of non-executives to bring a balanced and independent viewonto the board should not be legislated.

Regardless of recent emphasis and reliance internationally on the role ofindependent directors to oversee the executive members of the board and abusesby controlling shareholders, this specific aspect of their duty should not becodified. Codification would detract from the fact that the overall responsibilityfor supervision of management lies with the board as a whole and hence everydirector. It may further dissuade persons from taking up non-executivedirectorships. This is an appropriate matter to be dealt with by the Code, for theCode facilitates change in a gradual and incremental manner.

Directors’ Duties

3.1.3 Clarification and codification of the fiduciary obligations of directors

Recommendation

That the duty to act honestly in section 132(2) CA should be re-formulatedto require a director to act “bona fide in the best interests of the company.”The term should not be statutorily defined.


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The reformulation of the duty to act honestly in section 132 to read “the duty toact bona fide in the best interests of the company”, removes the misconceptionthat the duty to act honestly requires some element of wrong doing or dishonesty.Additionally, it addresses to some extent the erroneous belief on the part ofsome directors that they are there to represent the best interests of the shareholderresponsible for their election. The difficulty with clarifying this phrase is that ithas different meanings in different contexts. In some cases it means interests ofthe shareholders as a general body. Where a company is close to insolvency,there is a well-established body of case law that interprets it to include theinterests of creditors. Codification, therefore, is difficult.

3.1.4 Clarification of the position of nominee directors

Recommendation

That there should be statutory clarification of the fact that a nomineedirector’s primary obligation is to act in the best interests of the companyand that his duty to his principal is always subject to his duty to act in thebest interests of the company.

This clarifies the confusion that exists in respect of the duty of a nominee director.The clarification also potentially places a nominee director in a stronger positionvis-à-vis his principal.

3.1.5 Codification of the fiduciary duty of directors to avoid conflicts of interestand the duty to act for a proper purpose

Recommendation

There should be codification of the statutory fiduciary duty to avoid conflictsof interest and the duty to act for a proper purpose.

This is an area of considerable abuse in the Malaysian corporate landscape.While there is some attempt to curb abuses in e.g. sections 132 C, 132E, 132 G,133 CA, there is no clear statement in the law that the director shall not puthimself in conflict with the company. Case law is voluminous but there is difficultyin deriving clear principles because the rules operate in relation to the particularfacts of cases. A bigger problem is enforcement. The power to sue in thecompany’s name rests with the board. Where the board is controlled by thedefaulting director, it is practically very difficult for the board to commenceaction. A minority shareholder can commence action in the company’s nameBUT there are insurmountable procedural and substantive difficulties ininstituting an action under exceptions to the rule in Foss v Harbottle.Codification adds to clarity and aids enforcement. The statutory fiduciary dutyshould embrace conflicts of interests arising from misuse of corporateinformation, property or position, the taking of corporate opportunities andengaging in business in competition with the company. Additionally in the spiritof clarifying the duties and obligations of directors, section 132(1) CA shouldbe amended to state explicitly the duty of directors to act for a proper purpose.

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3.1.6 Codification of the common law duties of care and skill

Recommendation

That section 132(1) CA should be amended to include in addition to theexisting duty to use reasonable diligence, the duties of skill and care. Section132(1) CA should not be amended to clarify that the standard of careimposed is with reference to the particular circumstances of the director.

There is a tendency to lump together the duties of skill, care and diligence. Butthey have separate and distinct meanings under common law. Section 132 (1)CA should be amended to fully reflect the duties required under common law.The decision not to clarify the standard of care required of non-executivedirectors, is not only because it is fairly well settled law in Malaysia already butthat it may impede the development of a higher standard of care being practisedby directors.

Controlling shareholders

3.1.7 Extension of fiduciary duty to embrace controlling shareholders andshareholders with significant influence over the control of the company.

Recommendation

That the proposal to deem significant shareholders of a certain shareholdingthreshold and above as directors is necessary and should be consideredfurther by the relevant authority and upon sufficient consultation with theindustry.

The CA considers persons exerting influence over the board to be directors.The section 4 definition of directors under the CA deems as directors’ persons“in accordance with whose directions or instructions the directors of acorporation are accustomed to act…” i.e. shadow directors. The problem withthis definition is proof. It is almost impossible to establish that a particulardirector is acting under the control of another, and even more so to establishthat he is also accustomed to act in this way. It is suggested that one way aroundthe problem of enforcement is to deem significant shareholders of a certainshareholding threshold and above as directors. The issues that have to be decidedon are the following:-

• What is the appropriate threshold?

• What should be the constituents of this threshold i.e. does it include “interestin shares” defined under section 6 and 6A, CA?

• What should be the ambit of such a provision? Only disclosure and relatedparty transactions or should it also extend to embrace the duties requiredunder section 132?


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3.1.8 Abuses by controlling shareholders in respect of their right to vote

Recommendation

That controlling shareholders should be prohibited from voting in transactionsthat they have an interest in. The relevant regulator should define thecircumstances under which such a prohibition should apply.

This recognises that the right to vote cannot be abusively or capriciously exercisedagainst the company’s interest. Where a controlling shareholder is interested ina transaction he must satisfy the requirement that the transaction is fair to thecompany when entered into and that the transaction was authorised in advanceor ratified by disinterested shareholders.

3.1.9 Extension of the duties under section 132 to officers

Recommendation

That the duty under section 132 and the proposed amendments to section132 should extend to include senior management or principal executiveofficers of companies.

This recognises that there may be persons within a company who are not directorsbut nevertheless occupy principal decision-making positions within a company.This calls for regulation of their conduct.

3.1.10 Statutory clarification of the role of company secretaries

Recommendation

That the advisorial role of company secretaries as set out in the Code, shouldnot be codified nor should directors be required to take the advice of acompany secretary. Rather it should take the form of an indirect requirementof the director informing himself to the extent he deems appropriate aboutthe subject matter in question.

The Committee’s concerns relate to the need to ensure that directors areappropriately advised of their compliance obligations and the company’scompliance obligations. It is not possible to impose an obligation on a companysecretary to advise the board, in recognition of the fact that there may be personsother than the company secretary who may undertake this task. For the samereason, directors should not be required to take advice from a company secretary.A more meaningful approach would be to require the director to inform himselfto the extent he deems appropriate about the subject matter in question.

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Defences

3.1.11 Reliance on others

Recommendation

The ability to rely on others to perform the duties associated with the officeof a director should be included as a defence in the CA, subject tonecessary safeguards, to ensure that this right is not abused.

This is necessary. If directors are unable to rely on others, directors would beforced to make detailed and exhaustive enquiries into every matter thus holdingup the decision-making process. The reliance by the director should, however,be in good faith, and the person relied on should in the directors’ opinion,reasonably merit confidence.

3.1.12 Should a statutory business judgement rule be introduced?

Recommendation

That a statutory safe harbour in the form of a business judgement rule isnecessary in tandem with the extensive codification of fiduciary duties andthe duties of skill and care and the introduction of a statutory derivativeaction. The statutory provision should additionally explicitly preserve theapplication of other common law defences.

The business judgement rule creates a safe harbour for directors who makehonest, informed and rational business judgements, from personal liability forbreach of their duties.

3.2 In Issue 2, the Committee reviewed the provisions of law and other requirements andassessed the adequacy of disclosures and conflicts of interests with respect to transactionsthat involve the waste of corporate assets. In making its recommendations, the Committeehas kept in mind the need to balance the principle of providing the market with adequateinformation, with the need to keep price sensitive information confidential. TheCommittee considered that disclosures and rules with regard to conflicts or potentialconflicts of interests with the interests of the companies are of great importance in orderto maintain integrity and confidence in the Malaysian capital market. Therecommendations of the Committee in relation to Issue 2 are as follows.

3.2.1 Rationalisation of prospectus requirements and enhancement of sanctionsfor disclosure

Recommendation

The regulatory regime for prospectuses should be simplified and rationalised.Statutory powers and duties in relation to prospectuses should also becentralised within one agency.


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A rationalised and simplified regulatory regime will facilitate compliance withits requirements. This, together with the centralisation of powers and duties inrelation to prospectuses will ensure more rigorous and effective regulation.

Recommendation

Legislation should permit damages to be claimed for false or misleadingdissemination of information, as well as for criminal and civil sanctions inrelation to deliberate, reckless or negligent failure to comply with theobligations to disclose under Listing Requirements.

This is to impose greater responsibilities and to provide civil remedies for personswho have suffered damages as a result of misleading and deceptive information,as well as to lend greater weight to the disclosure requirements under the listingrules, where these have been ignored.

3.2.2 Directors’ statements on internal controls, going concern and statement ofresponsibilities

Recommendation

The Listing Requirements should require directors to make a statement aboutthe internal controls. Auditors should be required to review the statementand report results of its review to directors.

This is to ensure that audit committees and boards give more time to theconsideration of both operational and financial risks of the company and theircontrol.

Recommendation

The Listing Requirements should require the directors to state in the reportand accounts that the business is a going concern with supportingassumptions or qualifications. Auditors should be required to report on thisstatement in its report.

This is intended to ensure that the directors focus their minds on whether thecompany can be properly regarded as a going concern.

Recommendation

The Listing Requirements should require the directors to explain theirresponsibility for preparing accounts next to a statement by the auditorsabout their reporting responsibility.

This is to ensure that the respective responsibilities of directors and auditors forpreparing and reporting on financial statements of companies will be madeexplicit and clarified.

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3.2.3 International reporting standards

Recommendation

Measures should be taken to harmonise financial reporting requirementswith international standards by the Malaysian Accounting Standards Board.

The Committee considered that these measures should be dealt with byaccounting authorities, since this does not fall within its terms of reference.

3.2.4 Responsibility for disclosures

Recommendation

The Listing Requirements should require every company to identify a personwithin the company to undertake the responsibility that all relevantdisclosures are made.

This is to encourage strict compliance with the Listing Requirements.

3.2.5 Prohibited transactions in respect of directors, persons connected andsubstantial shareholders.

Recommendation

Directors, substantial shareholders and persons connected with a directoror a substantial shareholder should be prohibited by statute from voting inrespect of particular transactions in which he has an interest.

Allowing directors, and substantial shareholders, to enter into transactions whichmay be to the detriment of the company or in which then have interestsundermines the directors’ or substantial shareholders’ integrity, as well as havingthe potential to subject the company to financial loss. The recommendation isto maintain confidence by ensuring that relevant persons are prohibited by lawand do not vote under such circumstances.

3.2.6 Enhancing company law requirements

Recommendation

The scope of certain provisions of the CA should be widened, namelysections 132C, 133, 133A, 131 and 134.

The proposed amendments would enhance the scope and effectiveness of theseprovisions. Section 132C was found to be impractical in that shareholders


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approval was only required where a relevant acquisition or disposal wouldmaterially and adversely affect the performance or financial position of thecompany. The approval of shareholders was not in most cases obtained, sincedirectors would not be prepared to take the view that any proposals they madewould adversely affect the company in such a manner. Additionally, the scopeof the section is unclear, creating the need for a better defined criteria such asthat set out in Rules 111 to 120 of Part IV of the Listing Requirements.Amendments will resolve this ineffectiveness and give practical effect to thesection. Sections 133 and 133A should be extended to prohibit directors fromobtaining quasi-loans or other financial benefits, arrangements, gifts or quasi-gifts received or receivable, save in exceptional circumstances. The disclosureduties under section 131 and 134 would be extended to require the disclosureof interests of director’s spouses and children.

3.2.7 Related party transactions

Recommendation

The relevant regulator will be amending section 132G of the CA to clarifyambiguities and impose liabilities on errant directors and vendors aware ofthe illegality to indemnify the company for expenses incurred in enteringinto the illegal transaction and will review the necessity for the absoluteprohibition in section 132G.

This will clarify the law and enhance the effectiveness of section 132G whichseeks to prohibit asset shifting between companies by relevant persons, and toensure that innocent parties are able to recover damages suffered as a result ofthe illegal transaction. There is also a strong case for section 132G transactionsto be made subject to prior approval of shareholders, with interested partiesabstaining from voting (instead of the absolute prohibition) in view of the factthat the drafting of the section can sometimes have the effect of capturing genuinetransactions.

Recommendation

The provision in section 132E of the CA that allows for ratification of atransaction falling within the section should be removed. Section 132E shouldbe reformulated to reflect the criteria set out in Rules 111-120 of Part IV ofthe Listing Requirements.

Practically speaking, shareholders may be unwilling to vote against a transactionthat has already been entered into, particularly in view of the difficulties thatwould be involved in unwinding such a transaction. As such, therecommendation is to ensure that the shareholders’ prior approval is obtainedfor such transactions. Additionally, the scope of section 132E CA should bebetter defined.

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Recommendation

The penalties for breach of related party transaction provisions should bemodernised and substantially increased.

This is to amplify the deterrent value of the legislation and to ensure that thepenalty commensurates with the offence and is seen to commensurate with theoffence. An example of modernisation could be the introduction of a provisionallowing the SC to institute civil proceedings to recover up to three times theprofit or loss avoided by the person in breach.

3.2.8 Voluntary suspension of trading in securities

Recommendation

The KLSE should revise its current policy on voluntary suspensions, with theprimary objective of discouraging requests for prolonged periods ofsuspension and for the purpose of maintaining an orderly and fair market.

Requests for voluntary suspensions have been made, for instance, for thepurposes of majority shareholders who wish to avoid the sale of their securitiesheld by other persons as collateral. The revised policies of the Exchange willenable the Exchange to consider each application on its merits, and avoid lengthyand unjustified suspensions which have in the past been requested by somecompanies for improper purposes.

3.3 Under Issue 3, the Committee reviewed and discussed methods of enhancing the qualityof general meetings. The committee recognises the fact that the AGM is an importantmechanism in shareholder communication, as it gives shareholders the opportunity tohave direct public access to the boards. Recommendations are made with a view toenhancing AGMs, so that investors see the value of attending meetings. Some ofrecommendations of the committee in relation to this matter have already beenincorporated under the proposals for the Code.

3.3.1 Notice of AGM

Recommendation

The Listing Requirements should be amended to require companies toensure that the notice calling the meeting contains sufficient informationto enable a reasonably prudent member to decide whether or not he willattend a meeting.

This is a duty of the company at common law. The amendment of the ListingRequirements makes this duty explicit.


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3.3.2 Statement of directors standing for election or re-election

Recommendation

The Listing Requirements should require that the notice of the meetingsstate which directors are standing for election and re-election,accompanied a brief description of the individuals concerned.

This is to enable shareholders to assess the merits of the directors nominatedfor election or re-election.

3.3.3 Notice period for AGM

Recommendation

The CA and the Listing Requirements should be amended so that the periodof notice which should be given to shareholders calling for an AGM will beincreased from 14 to 21 days.

Shareholders who hold shares through nominees may not receive the notice ofthe meeting within the 14-day period, since the address for service will usuallybe their nominee’s address. The proposed extended notice period is to give moretime for nominees to obtain and submit proxy votes and assist in greaterparticipation at such meetings.

3.3.4 Proxy solicitations

Recommendation

The relevant regulator should conduct a study to ascertain the level andbreadth of regulation to be imposed on proxy solicitations.

While the committee considers that there is merit in regulating the quality ofdisclosures accompanying proxy solicitations, the effect of imposing suchregulation may have the effect of imposing excessive costs on companies. Afurther study will therefore be necessary to determine the level and breadth ofsuch regulation.

3.3.5 Shareholder communications

Recommendation

The handling of questions at AGMs is best left out of the statutory provisionsand should be dealt with in the development of best practices by thecompany.

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Recommendation

The CA should allow for voting by mail.

This is to provide a cheaper, more efficient and more practical voting procedurethan currently exists, and to generate greater shareholder involvement in thecompany’s affairs.

3.3.6 Summary of meetings

Recommendation

A resume of discussion to be sent to shareholders upon request should bedealt with as a matter of best practice, as referred to in the Code and notthe law.

3.4 Under Issue 4, the Committee assessed the efficacy of the existing law in providingshareholders remedies. The review encompassed the available remedies to shareholdersand the company both under statute and common law.

3.4.1 Derivative actions

Recommendation

There should be alternative forms of statutory remedies which may beinstituted by regulators on behalf of individuals or companies to provideredress where the individuals have been treated unfairly or where wrongshave been effected on the company.

This is to allow regulators to bring actions for a wrong done to individuals or tothe company, where it is in the public interest to do so. It will provide analternative form of redress for individuals or companies who/which may nototherwise enforce their rights because of the cost implications and other legalimpediments.

Recommendation

In the longer term, it is recommended that a statutory derivative actionmay be introduced to facilitate actions by individuals themselves, with thenecessary safeguards.

This is to overcome the inadequacies of common law and to allow individualsto bring action for a wrong done to themselves, or to the company. Makingremedies more readily available, with the appropriate safeguards against badfaith and improper use of the process, will enhance corporate governance andmaintain investor confidence.


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Recommendation

Statutory provisions should simplify civil procedures and permit shareholdersto undertake representative or class actions to obtain a pro-rata share ofdamages.

Simplification of the civil procedures will assist representative actions, where arepresentative sues on behalf of a class of persons suffering a common wrong.Damages or restitution of profits in a representative action would currently accrueto the company and not the individual shareholders. The recommendation wouldthus remove this existing impediment to the recovery of damages by individualshareholders.

3.4.2 Injunctions to halt breaches of law

Recommendation

There should be statutory provisions to allow shareholders or a regulatorybody to make applications to court to seek injunctions to halt or preventbreaches of company law.

This will allow a member to restrain directors or any other persons from breachingexpress provisions of company law and its regulations.

3.4.3 Access to information

Recommendation

There should be statutory methods to assist shareholders to obtain accessto company records for the purposes of a court action, subject to the courtbeing satisfied that the shareholder is acting in good faith and the inspectionis made for proper purposes.

This is to remove the current difficulty of gaining access to the company recordsfor the purpose of gathering sufficient evidence for an action.

3.4.4 Alternative dispute resolution

Recommendation

A study should be undertaken with the objective of providing a system ofdispute resolution for the corporate and commercial sector, manned byspecialists, who will be able to respond to the needs of the businesscommunity and provide efficient and impartial dispute resolution.

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This is to provide easy access, and quick and decisive resolutions to companylaw disputes. The speed of dispute resolution will reduce costs and encourageshareholders or other persons to enforce their company law rights. Confidencein such a specialist system will also encourage the use of the laws and courts ofMalaysia as the governing law and forum for international financial transactions.

3.4.5 Encouraging shareholder activism – A Minority Shareholder Watchdog Group

Recommendation

The EPF should take the lead to organise a minority shareholder watchdoggroup with technical assistance from the WB or the ADB.

This is to encourage shareholder activism, increase adherence to corporategovernance standards and help to minimise abuses by insiders against minorityshareholders.

3.5 In Issue 5, the Committee seeks to address concerns expressed over enforcement, or itslack thereof in the Malaysian capital markets. We divide the potential “enforcers” ofgood corporate governance into two categories - internal and external enforcers. Theterm “enforcers” is used in the widest possible sense to mean any person who may havea role in encouraging good governance.

Internal enforcers

3.5.1 Internal enforcers of good corporate governance include non-executive directors,audit committees and company secretaries.

Non-executive directors

3.5.2 Grave doubts have been expressed about the ability of non-executive directorsto effectively monitor management and abuse by controlling shareholders. Ourreview involves an examination of the following areas with a view tostrengthening their independence.

3.5.3 Appointment, removals, resignations and re-election of non-executivedirectors

Recommendation

That removal or non-re-elections of directors under the Listing Requirementsshould be made a reportable condition applying to both the listed entityand the director being removed or not re-elected. In cases of resignationsand circumstances where a director declines to stand for re-election, theListing Requirements should allow the resigning director or the directorrefusing to stand for re-election, to bring to the notice of the KLSE,circumstances which such director thinks ought to be made known to theauthorities.


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This amendment essentially ensures that where a director of a listed company isbeing removed or not re-elected, the circumstances surrounding the removalshould be made a reportable condition to the KLSE. In the case of a resigningdirector, or a director refusing to stand for re-election, the Committee consideredit unnecessarily burdensome for a director to be placed under a positive obligationto disclose reasons for his resignation. Instead the Committee recommends thatthe Exchange (through its Listing Requirements) should make the channels forcommunicating reasons for the resignation or refusal to stand for re-election,clear and open.

3.5.4 Remuneration of non-executives

Recommendation

First, that non-executive directors should not be subject to a source ofincome that is independent of the company. One method of incentivisingactive non-executive participation on boards, is through encouraging equityparticipation by the non-executive directors.

In response to suggestions that non-executives should be subject to a source ofincome that is independent of the company, the Committee considered this tobe unwise as it over-emphasises their monitoring role. Boards must not beconfrontational and must be able to work together in a cohesive team. Equityparticipation by non-executive directors provides an incentive for these directorsto take an active interest in the affairs of a company.

3.5.5 Definition of independence

Recommendation

That the KLSE should re-evaluate its proposal to expand the definition of“independence” embodied in rule 9 of the Listing Requirements to excludesubstantial shareholders.

There have been concerns raised that the exclusion of substantial shareholders(who are also minority shareholders) from the definition of “independence”may disenfranchise a significant group of persons that have the incentive (becauseof their large, albeit minority shareholding) to ensure that the rights of theshareholders are not abused by controlling shareholders.

3.5.6 Size of non-executive participation on the board

Recommendation

That the prescriptions in the Code on the size on non-executive participationon the board should be supplemented by the Listing Requirements providingfor a minimum number of independent directors on the board. This figureshould not be fewer than two.

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The prescriptions in the Code should be supplemented with a provision in theListing Requirements requiring every board to have at least two independentdirectors. This recognises that it is practically very difficult for a single voice toform an effective check against non-independent elements on the board.

Recommendation

That the relevant regulator studies further the issue of the introduction ofcumulative voting for directors.

This is to consider the possibility of strengthening the monitoring power of“large” minority shareholders by giving them cumulative voting powers whichentitles shareholders to cast all their votes for one candidate standing for electionon the board of directors (as opposed to casting one vote per candidate).

3.5.7 Access to information by non-executive directors

Recommendation

That a provision should be inserted in the law to the effect that within certainlimits and subject to other applicable laws, every director in dischargingthe duties of his office, has the right to inspect and copy all books, recordsand documents of a company and to inspect the physical properties of acompany. Where he is denied this right, he is able to enforce this right incourt. The provision should allow for such applications to be heardexpeditiously.

All directors have the same right to information. This provision seeks to ensurethat where a director is denied access to the information, he is entitled to enforcethis right in court. The provision must allow for applications to be dealt withexpeditiously, in recognition of the fact that substantial delay in the delivery ofinformation may dilute or drain its significance.

3.5.8 Access to professional advice

Recommendation

That a provision should be inserted in the CA to give the independentdirectors of a company, acting as a body or board committee, the right toretain experts to advise them on problems arising in the exercise of theirfunctions and powers.

Under present law, a full board has all kinds of powers flowing from the powerto manage the business of a company. Occasions may arise, where independentmembers of the board or board committees may need some form of expert adviceto discharge their duties. This provision recognises such a power in a subset ofdirectors.


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Audit committees

3.5.9 In response to the general perception that audit committees are ineffectual, theCommittee makes the following recommendations:-

3.5.10 Membership of the audit committee

Recommendation

That the existing Listing Requirements should be clarified to require:-

• the chairman of the audit committee to be independent; and

• the finance director, the head of internal audit and a representative ofthe external auditors to attend meetings. Other board members shallattend meetings at the invitation of the audit committee. However atleast once a year, the audit committee should meet with the auditorswithout members of the executive present. Additionally, the term ofoffice of each member should be subject to review every three years.

This ensures that the necessary calibre, expertise and accountability are availableat audit committee meetings. However, at least once a year, the audit committeeshould meet with the external auditors without members of the executive presentto ensure that there is a forum for auditors to broach sensitive problems in anuninhibited and private fashion. The 3-year review of the members of the auditcommittee will allow for evaluation of their performance on the audit committee.

3.5.11 Terms of reference and actions open to the audit committee

Recommendation

That the Listing Requirements should be embellished to set out the duty ofthe audit committee to consider, and where it deems necessary, investigateany matter referred to it or that it has come across in respect of a transactionthat raises questions of management integrity, possible conflicts of interestsor abuse by a significant or controlling shareholder. This should besupplemented with a statement as to the possible courses of action opento the committee.

The Committee felt it necessary for this duty to investigate to be a mandatedfunction of the audit committee. It is essential that the duty to investigate issupplemented by a statement as to the possible courses of action open to theaudit committee. Where the audit committee concludes that a questionablepractice has occurred, it should normally report this matter to the board. Wherethe board does not take action, the directors making up the audit committeeshould be required under the Listing Requirements to report the matter directlyto the KLSE.

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3.5.12 Access to information and professional advice

Recommendation

That the recommendations in respect of access to information andprofessional advice in relation to non-executive directors should beextended to board committees.

The discussion in respect of access to information and advice by non-executivedirectors apply here.

Company secretaries

3.5.13 Enhancement of the independence of company secretaries

Recommendation

That the relevant regulator is to consider further whether the notification ofremoval or resignation of a company secretary should set out therequirement for the countersignature of the company secretary beingremoved or resigning, stating that his or her removal or resignation is not for“professional reasons”.

This provision seeks to enhance the existing notification requirement for removalor resignations of company secretaries. The value in this provision is not onlythat regulators are made aware of suspicious removals, but as a result, directorsare conscious of the fact that they cannot abuse their power to remove companysecretaries. However, such a provision may have the negative effect ofundermining the director’s ability to remove incompetent company secretaries.

External enforcers

3.5.14 External enforcers of good corporate governance for the purpose of thisdiscussion are auditors, corporate advisers and regulators.

Auditors

3.5.15 Extension of the basic statutory duty of auditors

Recommendation

First, that the basic statutory duty of auditors should be extended to includereporting on whether the information given in the director’s report isconsistent with the accounts. Second, that the Listing rules of Exchangesshould require auditor agreement of the content of preliminaryannouncements of financial results consistent with the aim of ensuring theintegrity and credibility of publicly reported information.


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The first recommendation is in recognition of the fact that the director’s statementis generally regarded as the most widely read part of the financial report. Theexisting statutory duty only requires reporting on the accounts. The secondrecommendation seeks to ensure the credibility and integrity of all publiclyreported information.

3.5.16 Auditor objectivity and independence

Recommendation

First, that there should be disclosure of fees paid to audit firms for non-auditwork. In this respect, subparagraph 1(q) of the 9th Schedule CA requirementsin respect of disclosures in profit and loss accounts, should be extended toinclude fees paid in respect of non-audit work. Second, that a periodicchange of audit partners should be arranged to bring a fresh approach tothe audit.

The Committee considered various issues such as that of placing a percentagelimit on the total income of an audit firm from a single client, the issue ofquarantining audit from other services, and that of compulsory rotation of auditfirms. However, the Committee found that there would be immense difficultiesin implementing these recommendations which may result in loss of trust andexperience and increased costs to the listed entity. The Committee focused onenhancing the disclosure requirements for fees paid to auditors and called onthe relevant professional bodies to provide guidance to facilitate the periodicchange of audit partners.

3.5.17 Auditors as watchdogs – Duty to report breaches of law or reasonablesuspicions of breaches to the regulatory authority

Recommendation

First, that subsection 174(8) CA should be amended to enable auditors toreport matters that “in his professional opinion” constitute a breach of theCA. A similar provision should be included in the SIA and Listing rules ofExchanges in respect of breaches of securities laws. Second, auditors shouldbe placed under a further obligation to report fraud, dishonesty and otherserious breaches to the relevant authority and should as a consequence,be accorded protection from defamation suits, if acting without malice.Additionally, the relevant professional bodies should develop guidelines inconsultation with the relevant regulator to provide guidance to theirmembers as to the scope of the duty. Finally, following from their increasedresponsibility, the relevant professional organisations should arrive at astandard benchmark fee increase upon consultation with all relevantparties.

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There are several problems associated with the existing duty under section 174(8)CA. First, the term “he is satisfied” introduces a subjective element to the dutyto report. Second, he has to be satisfied that a “breach” has occurred. Thesubjectivity of the test is a disincentive to the auditor to conclude that a breachhas occurred. The advantage to the phrasing “in his professional opinion” isthat auditors are held to a more objective standard against which a decision toor not to report is assessed. Similar provisions should be inserted in the SIAand listing rules to embrace the main sources of corporate law. The duty toreport fraud replicates section 207 (9A) Singapore Companies Act. The relevantprofessional bodies should in consultation with regulators develop guidelineson the scope of the duty. The final recommendation is essentially to ensure thatauditors are remunerated accordingly for their increased responsibilities.

3.5.18 Removals, Resignations and Re-elections of auditors

Recommendation

That all changes of auditors in listed companies should be made areportable condition to the Registrar and the Exchange. Section 172should be amended to require auditors to make representations to theRegistrar on the circumstances surrounding his removal. In the case ofresignations and circumstances where auditors decline to stand for re-election, a provision should be inserted in the Listing rules of the Exchangesrequir ing companies to circulate to shareholders, the auditors’representations in respect of his reasons for resignation or his refusal or tostand for re-election.

Regulatory authorities

3.5.19 This has been the subject of much criticism in recent times. Significant effortsshould be made to strengthen this function. The discussion is divided into twosections:-

• Enforcement of legislation/rules; and

• Indirect enforcement mechanisms - incentives for compliance.


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3.5.20 Enforcement of laws and rules

Recommendation:

• That regulators should have sufficient autonomy to enforce laws withoutinterference or fear or favour;

• That government should take active steps towards the developmentof a coherent, rationalised framework for regulations governingcompanies;

• That efforts should be made to ensure that the right experience andskills exist in enforcement;

• That there should be increased accountability and transparency ofregulators which should include meaningful disclosure of theirenforcement activities for the year;

• That the range of enforcement powers of regulators should bemodernised which should include, among other things, the power toinstitute action on behalf of an aggrieved investor;

• That guidelines should be developed outlining circumstances thatwould justify the appointment of an independent commission as amechanism to preserve investor confidence in times of crisis.

The Committee considers these to be necessary to ensure the will and ability ofthe regulators exists to enforce laws as well as to promote transparency andinvestor protection - the cornerstone of any modern regulatory system.

3.5.21 Incentives for compliance

Recommendation

That the SC’s proposal for the introduction of a merit-demerit scheme, wherelisted companies will be categorised into grades favouring companiespractising higher standards of disclosure and corporate governance, shouldbe supported.

The advantages of receiving a favourable grading may manifest itself in variousforms:-

• Easier access to the capital markets - for example, shorter prospectusesespecially in respect of repeat issues of securities; and

• First-in-line in respect of capital market developments - for example,companies that consistently make accurate and timely disclosures, may bepermitted to move to a full-disclosure regime whilst those that are not willbe held back. This is to ensure that good and compliant companies are notheld back by those that are not.

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The criteria by which companies will be assessed include, the accuracy andtimeliness of disclosures by companies, which will include the level of corporategovernance disclosures of these companies, the compliance history of the entityand the quality of its management.

Other suggested incentives include factoring in the level of governance practisedby companies into credit ratings of companies. It is recommended that therelevant rating agencies examine the feasibility of this proposal. One otherincentive includes joint-ventures with members of the financial press inundertaking evaluations of corporate governance practices of listed companies.

4. Training and Education

This section examines the training and education programmes required to be developedand introduced on corporate governance matters.

Target participants and target areas for training and education

4.1 To whom should training and education be targeted?

Recommendation

The target participants for training and education programmes are directors,company secretaries, members of audit committees and shareholders/investors.

4.2 Which areas should be the focus of training and education?

Recommendation

The focus of training and education of the target participants should be:-

• their respective rights, duties, obligations, responsibilities, and liabilities underlaw, both common law and under statute, rules, regulations and guidelines;

• application of the Code; and

• where necessary, industry and company specific information.


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Directors

4.3 Should directors (both executive and non-executive) be subject to compulsoryeducation and training?

Recommendations

Accreditation should be introduced for all existing and future directors of public-listed companies, requiring them to undergo formal training. This training ismandatory for individuals seeking to serve as directors. The training would cover:-

• directors’ legal rights and responsibilities;

• operation of the board; and

• the Code

Further, that this programme be made a pre-requisite for directors of companiesseeking listing on the Exchange. Directors must also undertake continuing educationin approved courses as a condition of accreditation. In addition, companies mustdevelop in-house orientation programmes for directors to familiarise themselveswith the company.

The reason for the onerous requirement of formal training for directors is as a result ofthe state of corporate governance in Malaysia. Formal training would accelerate themove towards increasing professionalism in directors. Further, in-house orientation isrequired because of the directors’ heavy responsibility to manage or supervise themanagement of the company. This requires them to provide strategic leadership whichis not possible without in-depth knowledge of the company’s business.

Company secretaries

4.4 What training is required for company secretaries to take on their advisorial role oncompliance?

Recommendation

Existing and future company secretaries are to be required to undergo formaltraining on compliance obligations under all the laws relevant to the company,and the Code, as well as ways to assert their independence to properly fulfil theiradvisorial role. In addition, companies must also develop in-house orientationprogrammes for company secretaries, similar to that developed for directors, tofamiliarise company secretaries with the company.

Company secretaries are already duly qualified and are generally well-versed with theroutine filing requirements and other administrative requirements under the CA.However, they now have a crucial role to play in advising the board of its complianceobligations under all laws and rules, particularly securities and banking laws (whererelevant) and Listing rules of the Exchange, as well as compliance with the Code. The

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company secretaries must also be educated on their “independence” which is necessaryfor them to properly perform their role as adviser on compliance matters. All companysecretaries, particularly external ones, should also have an understanding of the workingsof the company, to enable them to advise on compliance.

Audit Committees

4.5 What do audit committees need to perform their duties?

Recommendation

Audit committees are to undergo formal training on the requirements of the Codeand the importance of their independence, as well as continual updates onaccounting and financial matters. In addition, newly appointed members to theaudit committee should undergo in-house orientation to familiarise themselves withthe financial system of the company.

Newly appointed members to the audit committee should be walked through the financialsystem of the company, as well as familiarise themselves with key individuals involvedin accounting and financial matters of the company. They should also be comfortablewith their function of oversight over the board and the importance of their independenceto effectively carry out this function. Consequently, they must keep themselves up-to-date with accounting policies and standards.

Investors

4.6 What do investors need to know to participate more effectively in corporategovernance?

Recommendation

An education programme should be established for investors on the followingmatters:-

• their rights and remedies under law;

• understanding and interpreting financial statements; and

• the Code.

Investors are often ignorant of their rights and remedies in influencing the governanceof companies. In addition, they often do not obtain the full value of annual reportsbecause of their lack of knowledge in interpreting financial statements. Education will,therefore, be focused on giving investors tools with which to increase their participationin the running of companies. Investors must also be informed that the introduction ofthe Code does not allow them to abdicate their duty to analyse each company on itsmerits. The Code should only be used as a guide from which the investor should makehis own evaluation of the company.


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Timing And Performance Evaluation Of The Programmes

4.7 When and how should the training and education programmes be implemented?

Recommendation

Work on the programmes proposed herein should commence immediately upontheir approval. In addition, continual surveys and consultation should be used bythe Committee to evaluate the effectiveness of the programmes and torecommend changes where required.

Training Agencies

4.8 Who should conduct the training and education programmes recommended herein?

Recommendation

Training and education should be both private and public sector driven, usingexisting training facilities, in collaboration with the MICG. In the long term, it isenvisioned that MICG will develop a corporate governance training centre toprovide structured training on matters relating to corporate governance. It isproposed that the Committee oversees the implementation of the programmes,with the content and syllabus of these programmes to be approved by the relevantregulatory bodies.

Using existing training agencies means that we can benefit from existing structures,expertise and experience. It is not only practical but would also prevent duplication ofefforts and waste of resources. The Committee should oversee the implementation ofthe programmes to ensure coherence and focus, in particular, conformity with therecommendations of the Committee, although the details of the programmes can be leftto the relevant regulatory bodies.

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Funding

4.9 What are the potential sources of funding for these training and educationprogrammes?

Recommendations

Training and education programmes should be provided at minimal cost to theparticipants. It is proposed that the Ministry of Finance undertake the central co-ordinating role to apply for funding from external sources, such as the ADB, the WBor the Commonwealth Secretariat, and to disburse such grants to the relevanttraining agencies.

In current times, training and education would be a further imposition on the financialresources of companies, which would, therefore, require subsidisation of theprogrammes.

Centralising the funding of these programmes would ensure proper distribution ofresources.

Chapter 3

SETTING THE SCENE –CORPORATE GOVERNANCE

IN MALAYSIA

SETTING THE SCENE –CORPORATE GOVERNANCE INMALAYSIA

Introduction

This Chapter attempts to provide a brief overview of the state of corporate

governance in Malaysia. It then sets out in brief, the corporate governance

framework, which involves a discussion on the contribution of law and codes

of best practices to corporate governance, and finally sets out the approach

adopted for Malaysia.

Chapter 3 – Setting The Scene – Corporate Governance In Malaysia

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1. Background

1.1 Almost a 100 years after the entry of the first public-listed company in Malaysia, KualaKangsar Plantations Limited, the KLSE has now grown to have more than 700 companieslisted on the Main Board and Second Board.

1.2 While in the early days most of the public-listed companies tended to be trading,plantation or tin companies which had their origins in UK, or were subsidiaries of UKcompanies, in the post-NEP decades, two categories of companies have becamedominant. The first category are the large privatised entities such as Tenaga Nasional,Telekom Malaysia, Petronas Dagangan, etc., while the second category comprises smaller-sized companies which are mainly owner-dominated enterprises, seeking new avenuesfor raising capital.

1.3 The listing of small family-owned enterprises became almost de-rigueur after 1988, whenthe KLSE launched its Second Board to encourage smaller companies with good growthprospects to gain access to the capital market. Overnight, the owner-entrepreneur whoused to be the alter-ego of his private company, now finds himself the director of apublic-listed company subject to a web of regulatory requirements the significance ofwhich, he neither understands nor appreciates.

1.4 Throughout this period, the roles and responsibilities of directors, shareholders andauditors, as well as the relationships between them are governed mainly by companylaw. The statutory framework governing these roles, responsibilities and relationshipswere further strengthened with the subsequent introduction of rules and guidelines suchas the Listing Requirements and SC’s Policies and Guidelines on Issue/Offer of Securities,as well as the introduction of certain relevant provisions in the SCA. The same regulatoryframework governed directors, shareholders, auditors, etc., of all public companies,notwithstanding their origins, size and level of maturity.

1.5 While there are quite a number of public-listed companies which are well-governed andexhibit a relatively high standard of corporate governance, there have been, nevertheless,several instances of corporate abuse and in some cases breakdown, attributable in partto ineffective governance structures. Under difficult economic circumstances, cornerswere ‘cut’ and rules were ‘bent’. Instances of abuse that have been extensively reportedin the media include the following:-

• Related party transactions and incidences of capricious decision making by corporateleaders;

• Asset shifting, as well as blatant and abusive conflict of interest transactions withoutproper disclosure by directors; and

• Poor financial management by directors.

1.6 These problems have been exacerbated in part by ineffectual enforcement, and in partby the presence of significant shareholders, i.e. shareholders whose holdings are suchthat they can exercise or influence the control of the company.


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1.7 Various issues have also been thrown up in the context of enforcement, including issuespertaining to the autonomy of regulators to regulate, confusion over jurisdictionalboundaries and the transparency of regulators in regulating the markets.

1.8 In companies with significant shareholder presence, there is immense scepticism withinthe shareholding community about the ability of boards to represent the interests of allshareholders, especially in the context of related party transactions, as a result of abuseswitnessed in recent times.

1.9 This has resulted in a massive loss of confidence by investors in the Malaysian capitalmarkets. The questions often asked have been – “Where were the directors?”, “Wherewere the regulators?”.

1.10 We have sought to answer these questions by taking a prospective look at corporategovernance of companies, by making recommendations to clarify, and where necessary,strengthen the broad legal framework under which companies operate AND by makingproposals for restructuring Malaysian boards, to strengthen their control over companiesand ensure their accountability.

1.11 In identifying the critical areas for change, the Committee has relied to some extent onfeedback received from the KLSE/Price Waterhouse Joint Survey of CorporateGovernance Practices in Malaysian Public-Listed Companies.1

2. Overview of the legal framework

2.1 Malaysian corporate law is derived primarily from the CA, Companies Regulation 1966,the Listing Requirements, the Malaysian Code on Take-overs and Mergers, 1987 andare supplemented by the following legislation and regulatory directives – the SIA, theSCA, the Guidelines for the Regulation of Acquisition of Assets, Mergers and Take-overs of Companies and Business (FIC Guidelines) and the SC’s Policies and Guidelineson the Issue/Offer of Securities.

2.2 These legislative provisions and regulatory rules co-exist with the provisions of commonlaw and equity emanating from judicial decisions from Malaysian courts as well asSingapore, Australia, Canada, New Zealand and the UK.

2.3 In this respect, almost every rule of corporate law and its practice are related to corporategovernance. Some of the more pertinent areas are laws relating to the duties of directorsand principal officers, shareholder remedies, shareholder participation at AGMs,disclosure obligations and the like.

1 See Appendix I.

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Corporate law contribution to corporate governance

2.4 A consequence of incorporation is that a company is a separate legal entity with anexistence independent of its members. It remains an artificial person; its policies canonly be formulated and decided upon by individual human beings and can only be putto effect and carried out by human agencies. The company in this respect operatesthrough two agencies – the board of directors and shareholders at the general meeting.

2.5 Historically, the primary corporate body for decision-making was the general meeting –an assembly of the members, therefore the “company”- who made decisions. It soonbecame apparent that this form of decision-making was cumbersome and inefficient forroutine administrative matters. The structure of these companies, therefore, evolvedinto a demarcation between the members and directors.

2.6 The CA in recognition of the inconvenience associated with having to assembleshareholders together to debate upon every decision or to conduct business on a dailybasis as well as the necessity for there to be a definite body of individuals upon whomthe law can impose responsibility or enforce compliance with statutory provisions, makesit mandatory for all companies to have at least two directors2 .

2.7 The members in meeting consider major policies and changes, and leave the daily conductof the business to a group selected from amongst their ranks as directors. Directors aregenerally left unfettered in their actions, although they are mindful of the fact that theywere still subject to the members in meeting. Today, despite the formal supremacy of themembers in meeting, directors often prevail through control of the general meetingagendas and the electoral process3 .

2.8 Broadly, there are four means by which powers are divided between the general meetingand the board – common law, the memorandum and articles of association, the CA andin the case of listed entities, the Listing rules of the relevant Exchange.

2.9 Of the four sources, the articles of association play the most significant role in determiningthe extent of powers of the board of directors and shareholders in general meeting4 .Common law provisions have, by and large, been overtaken by provisions of the Actand the articles of association generally, come into play in the absence of provisions inthe CA. Provisions in the Act and to a lesser extent the Listing rules of Exchanges5 ,essentially seek to reserve certain powers exclusively in the hands of shareholdersthemselves or to require shareholder approval6 .

2.10 From the corporate governance view point, two things need to be noted. Between thecompany and the board and the officers, there is a relationship akin to agency, but thereis none between the company and its members. The relationship between the companyand its members is essentially a contractual relationship set out in the articles andmemorandum of the company.

2 (s122 of the CA).

3 Redmond, Paul, Companies and Securities Laws – Commentary and Materials, 2nd ed.,p.229

4 See for example Table A of the CA, reg. 73 which delegates management powers to the board of directors.

5 For example, rule 280 Listing Requirements which requires all issues of shares which has the effect of transfering controlling

interest, to obtain the prior approval of the General meeting.6 Additionally the manner in which certain management powers of directors of listed companies to be exercised is also subject to

some supervision by regulatory bodies such as the KLSE and the SC.


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2.11 In respect of general meetings, the CA requires all companies to hold an AGM7 wherethe profit and loss account, balance sheet, auditors and directors’ report must bepresented. It sets out the requirement to send out a notice of meeting which provides aseries of resolutions for approval by members.

2.12 Bearing in mind that broad powers are conferred by the articles on the board, the lawthen regulates the conduct of directors by imposing on them extensive duties whichinclude “trustee-like” fiduciary duties and the duty to exercise care, skill and diligence.These emanate from legislation8 as well as case law. These provisions carry stiff civiland criminal penalties. In this respect, the director’s basic duty expressly provides that:

“A director shall at all times act honestly and use reasonable diligence in the dischargeof the duties of his office” – Section 132 CA

2.13 The Act does not, however, set out the functions of the board. These are essentiallyprovided for in the articles of a company.

Shareholder rights

2.14 Ownership of shares in a company, confers on shareholders several basic rights, whichare strongly provided for by our laws, consistent with its strong common law background.They include the following key rights:-• The right to secure methods of ownership registration; 9

• The right to freely transfer shares;10

• The right to information;• The right to vote;11

• The right to requisition a general meeting;12

• The right to have assets of the company protected from misuse or misappropriationby directors, managers and controlling shareholders;13 and

• The right to enforce these rights;14

7 Section 143.

8 For example, section 132, 132A CA.

9 The CA sets out a comprehensive body of provisions on how shares are to be registered, the identity of members, the amount, date

of entry and cessation, date of allotment, location of register, etc. With effect from 1st November 1998, it became mandatory forsecurities of companies listed with the KLSE to be deposited with the Malaysian Central Depository. Section 107B CA provides thatany name that appears on the record of depositors, maintained by the Malaysian Central Depository under the SICDA is deemed amember of the company. Crucially, any rectification of the register of depositors must be taken to Court and the Court’s discretion torectify is limited to the circumstances set out in section 107(2) CA.10

See section 98 CA.11

The CA guarantees a shareholder’s right to vote on the election of directors, on amendments to the constitutional documents of thecompany and on key corporate transactions which include transactions where an insider has an interest in the transaction, sale of allor a substantial part of the company’s assets, mergers and liquidations. In this respect, the one-share-one-vote rule is entrenchedand observed strictly in Malaysia. Section 55 CA provides that in the case of public companies and their subsidiaries, each equityshare (and this includes preference shares with voting rights) may carry only one vote, thereby prohibiting the existence of bothmultiple voting and non-voting ordinary shares and does not allow companies to set a maximum number of votes per shareholder inrelation to the number of shares he owns.12

Section 144(3) provides for the right of shareholders holding not less than 10% of the paid up capital of the company to requisitiona general meeting. Any expenses incurred in calling a meeting are to be reimbursed by the company. Shareholders also have anindependent power to convene a general meeting under section 145(1) CA.13

There are a number of provisions in our laws that are designed to curb abusive behaviour by directors, managers and controllingshareholders. These range from provisions requiring disclosure of ownership, shareholder approval of transactions where directors,managers or controlling shareholders have interests in the transactions, absolute prohibition in respect of certain transactions (e.g.loans to directors).14

Private enforcement rights of shareholders emanate from statute (CA i.e section 181- statutory remedy against oppression andsection 218 – the right to petition a winding up order against the company) and common law. There are three forms of action that arecapable of being brought by a shareholder under common law - the personal action, representative action and derivative action.Chapter 6 Issue 4 discusses whether the private enforcement rights of shareholders needs to be strengthened.

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Regulating the conduct of directors

2.15 The efficacy of the governance mechanism depends on whether shareholders can monitordirectors. This is a concern with respect to minority shareholders. Majority shareholderscan always call a meeting to remove directors. The law attempts to impose a check onthe powers of directors by specifically reserving certain powers in the general meetinge.g. the power to alter the company’s constitution, the power to remove directors, andby providing shareholders the avenue to enforce their rights in court.

2.16 There are, nevertheless, limitations on shareholder action. Shareholder remedies throughcommon law and statute are not without problems. Court actions are generally costlyand time consuming. As a result, investors find it easier to cut their losses through salerather than be entangled in court litigation.

2.17 And while there is a discernible trend in Malaysia to increase the range of mattersrequiring the approval of the general meeting, the general meeting is generally regardedas an ineffective way of making directors answerable to the general body of members,who have no wish to play any role in the administration of a company and who in mostcases will not attend general meetings, unless their investment has proved to be sodisappointing that they use that opportunity to tell management what they think of it.

2.18 But aside from the fact that this may operate as a mild deterrent against directorialexcesses (for directors of public-listed companies will not relish the prospect of facingembarrassing questions from shareholders at AGMs), as a means of making the boardanswerable to an informed membership or of ensuring that members have an effectiveveto on major corporate action, it is ineffective.

Regulating the conduct of “controlling shareholders”

2.19 An added dimension to the issue of shareholder action in Malaysia, relates to difficultiesposed by ownership concentration and the issue of fair treatment of minorityshareholders. There are a number of provisions in our laws that are designed to curbabusive behaviour by controlling shareholders. These range from provisions requiringdisclosure of ownership, shareholder approval of transactions in circumstances wherethe controlling shareholders have an interest in the transaction and absolute prohibitionin respect of certain transactions.

2.20 Proposals have been made in Chapter 6 of this report to strengthen controls againstmisuse or misappropriation by controlling shareholders, which include the impositionof a duty of fair dealing on controlling shareholders and some strengthening of the lawson related party transactions.

The contribution of voluntary codes of corporate governance

2.21 The common theme of the various Committees on Corporate Governance internationally,is that they appear to place some confidence in the ability of a code to amelioratedeficiencies in legal structures. The recommendations of the codes are directed principally


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at boards of public-listed companies. In particular, they make best practices prescriptionsrelating to the presence of independent elements on the board, the use of boardcommittees, relationship with management, training of directors, and how boards shouldappraise their own performance. These essentially relate to the composition and workingsof the board.

2.22 In the UK, the mix between self-regulation and formal regulation has in the past leanedmore heavily from government regulation in favour of a modified form of self-regulation.15

Jurisdictions such as Canada, Australia and New Zealand with legal systems influencedby common law have substantially strengthened the duties of company directors andshareholder rights in the law.

The appropriate mix of self-regulation and statutory regulation for Malaysia

2.23 The Committee considered to what extent reforms may be necessary in addressing theappropriate balance and content of regulation. We essentially proceeded on the basisthat there are aspects of corporate governance where statutory regulation is necessaryand effective and others where self-regulation is more appropriate.

2.24 For example, the responsibilities of directors, officers and other corporate participantsneed to be defined in law. The law reform proposals that we propose, essentially seek toclarify their duties in such a way that they are readily understood by these directors,officers and other corporate participants.

2.25 However, the process or system of governance is harder to capture in legal terms. Issuessuch as the presence of independent elements on the board, the use of board committees,relationship with management, training of directors and how boards should appraisetheir own performance, all relate to the composition and workings of the board. Theseare difficult to legislate. The aim of the Code is to encourage disclosure and theprovision of information to investors about board composition and structures, inorder that investors can monitor the way the companies to which they have entrustedtheir funds are being run. Such a provision also affords companies a certain amount offlexibility in implementing the provision of the Code.

2.26 In certain respects, we have chosen to opt for legislation where it was considerednecessary to bring home to a wider public, the significance which the government attachesto preventing such conduct. A specific example, is in relation to the need to regulateabuses by controlling shareholders in respect of their right to vote. The Code’s approachwould have been to ensure that there are sufficient independent elements on the boardto provide an effective check. We have instead, chosen additionally to take a directapproach by prohibiting such shareholders from voting in transactions that they areinterested in.

2.27 Our efforts, therefore, have involved a re-look of the entire regulatory structure - lawsand best practices.

15 The London Stock Exchange has made it a requirement for all listed companies to comply with the Code of Best Practices or

explain reasons for non-compliance.

Chapter 4

MEANING OFCORPORATE GOVERNANCE

MEANING OF CORPORATEGOVERNANCE

Introduction

Corporate governance is a phrase easily understood but difficult to define.

However, the Committee has attempted to formulate a definition of corporate

governance in the Malaysian context, as derived from its findings and as set

out in this Report.

Chapter 4 – Meaning Of Corporate Governance

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52

MEANING OF CORPORATE GOVERNANCE FOR MALAYSIA

1. The definition

1.1 The definition of corporate governance that we propose is as follows:-

“Corporate governance is the process and structure used to direct and manage thebusiness and affairs of the company towards enhancing business prosperity andcorporate accountability with the ultimate objective of realising long term shareholdervalue, whilst taking into account the interests of other stakeholders.”

2. Key ingredients in the definition

The objectives

2.1 Business prosperity – The definition makes clear that corporate governance is not justabout accountability. Its importance lies in its contribution to both business prosperityand accountability. Business prosperity, however, cannot be dictated. To quote theHampel report1 –

“People, teamwork, leadership, enterprise, experience and skill produce prosperity. Thereis no single formula to weld all of these together and it is dangerous to encourage thebelief that rules and regulations about structure will.”

2.2 Accountability – This is key to the legitimacy of the entire corporate system. Companieshave power and the use of that power can only be legitimised through its exercise withinan accepted governance framework. Accountability, by contrast, does require appropriaterules and regulations.

2.3 The ultimate objective of directing and managing the business and affairs of the companyis that of enhancing shareholder value. Ultimately, the owners of the business - theshareholders – expect to receive an appropriate return on their investment.

2.4 Notwithstanding the primary responsibility of the board to shareholders, the longerterm interest of shareholders will not be well served, if the interests of other stakeholdersare not addressed. Creating shareholder wealth in a market economy will usually be inthe best interest of stakeholders generally.

1 Chapter 1, para 1.2 Final report of the Hampel Committee on Corporate Governance (January 1998)

Chapter 4 – Meaning Of Corporate Governance

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Structure and process

2.5 The definition acknowledges that the business and affairs of every company must bedirected and managed. Direction and management are effected through a set of ruleswhich creates the structure and are effected through a process directed at persons whohave the power to direct and manage the business.

2.6 The structure is created by the legal and administrative framework within whichcompanies operate, including companies legislation, securities legislation, listing rules,the companies memorandum and articles of association, resolutions of the board andshareholders, laws of general application and community standards.

2.7 The process refers to the system for decision making by the parties charged with directingand managing the business of a company and for making these decision-makersaccountable.

Chapter 5

THE MALAYSIAN CODE ONCORPORATE GOVERNANCE

THE MALAYSIAN CODE ONCORPORATE GOVERNANCE

Introduction

This Chapter is divided into two sections. The first section identifies the need

for the Code as a self-regulatory approach to raising standards in corporate

governance; sets out the necessary pre-requisites to encourage compliance

with the Code; identifies the principal parties to whom the Code is directed

at; and discusses the approach, form and content of the Code most suited to

the Malaysian corporate landscape. Section 2 sets out the proposed Code

directed principally at boards of public listed companies. The Code essentially

comprises principles for good corporate governance (Part 1), best practices

in corporate governance (Part 2), exhortations to other corporate participants

(Part 3) and finally, explanatory notes to principles and best practices and

exhortations (Part 4).

Chapter 5 – The Malaysian Code On Corporate Governance

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SECTION 1

1. The significance of a Code on Corporate Governance for Malaysia

1.1 We stress the importance of the Code as an initiative of the private sector. The need fora Code was inspired in part by a desire for the private sector to initiate and lead a reviewand to establish reforms of standards of corporate governance at a micro level. This isbased on the belief that in some aspects, self-regulation is preferable and the standardsdeveloped by those involved may be more acceptable and thus more enduring.

1.2 The Code essentially aims at setting out best practices on structures and processes thatcompanies may use in their operations towards achieving the optimal governanceframework. These structures and processes exist at a micro-level which include issuessuch as the composition of the board, procedures for recruiting new directors,remuneration of directors, the use of board committees, their mandates and theiractivities.

1.3 The significance of the Code is that it allows for a more constructive and flexible responseto raise standards in corporate governance as opposed to the more black and whiteresponse engendered by statute or regulation. It is in recognition of the fact that thereare aspects of corporate governance where statutory regulation, is necessary and otherswhere self-regulation, complemented by market regulation is more appropriate.

1.4 For example, the responsibilities of companies and directors need to be defined by law,but the process or system of governance is harder to capture in legal terms. A statutorycode would have to focus on governance structure. Yet, more important than the structureis the way in which boards work within it and the quality of people who make it work.

1.5 The impact the Code will have in raising standards of corporate governance can be seenfrom the experiences of other jurisdictions. To quote the Hampel Committee1,

“… it is generally accepted that implementation of the Code’s (Cadbury Code of BestPractices) provisions has led to higher standards of governance and greater awarenessof their importance. …it is clear that Greenbury’s primary aim - full disclosure - is beingachieved.”

1.6 The Cadbury Committee published a report on compliance with the Code in May 1995.The report showed that significant changes had taken place in the structure of UK boards,in line with the committee’s recommendations2. Greater awareness of corporategovernance issues is a first step towards good corporate governance. The level ofawareness and attention generated by the Cadbury report has been phenomenal. Thereport has struck a chord internationally, and it has provided a yardstick against whichstandards of corporate governance are being measured.

1 Paragraph 1.8 and 1.9 Final report of the Hampel Committee on Corporate Governance

2 What is hard to tell, however, is how far these structural changes were translated into changes in the working of the board. In other

words, are these changes more of form than of substance?


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1.7 Of significance, is the aspirational and evolutionary way in which codes influence theexpectations of society, that are eventually reflected in the law. The attention generatedon corporate governance issues has already had an impact on evolving judicialinterpretations of directors’ duties. There is an increasing trend (internationally) tohold directors liable to a higher objective standard. The Australian case of Daniels vAnderson3 which deals with the tortious duty of care owed by directors, is a clear instanceof non-executive directors being increasingly held to an objective standard of care. TheEnglish case of Dorchester Finance v Stebbings4, is another such example.

1.8 The need for a code also results from economic forces and the need to re-invent thecorporate enterprise, so as to efficiently meet emerging global competition. The world’seconomies are tending towards market orientation. In market-oriented economies,companies are less protected by traditional and prescriptive legal rules and regulations.Malaysia is no exception and the shift to a full-disclosure regime, to be completed bythe year 2001 is such an example. Hence there is the need for companies to be moreefficient and well-managed than ever before to meet existing and anticipated world-wide competition. The role of directors then increases in importance. The role of theboard in hiring the right management, compensating, monitoring, replacing and planningthe succession of senior management is crucial, as management undertakes the keyresponsibility for the enterprise’s efficiency and competitiveness. The role of the Code isto guide boards by clarifying their responsibilities, and providing prescriptionsstrengthening the control exercised by boards over their companies.

1.9 In developing the Code we have been mindful of developments in other jurisdictions.We have endeavoured to keep the discussion at an international level. Standardsdeveloped for Malaysia must measure up to international thinking on this subject.

2. Compliance

2.1 It must be recognised that no system of control, whether statutory or not, can eliminatethe risk of fraud without shackling companies so as to impede their ability to competein the market place.

2.2 To be effective, the Code will require some form of backing. And therefore not unlikethe approach in the UK and Canada it is proposed that the Code be backed by thelisting rules of the KLSE. The proposed approach essentially calls for voluntarycompliance with the Code coupled with a requirement in the listing rules which mandatesdisclosure of the extent of compliance with the best practice set out in the Code, whileallowing for some flexibility in its implementation by companies. The aim of the Code isto encourage disclosure and provide information to investors in order that they canmonitor the way the companies to whom they have entrusted their funds, are being run.It is directed at establishing best practice, at encouraging pressure from shareholders tohasten its widespread adoption, while allowing for some flexibility in implementation.

2.3 The KLSE plays a key role in giving corporate governance a lead in Malaysia. Withoutthe KLSE’s authority behind the Code, through making disclosure of Code compliancea listing obligation, the Committee’s recommendations necessarily will only have limitedimpact.

3 (1995) 37 NSWLR 438

4 [1989] BCLL 498

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2.4 The KLSE, or any Exchange for that matter, has advantages to reap from backing sucha Code. To quote Sir Adrian Cadbury5 ,

“The challenge to stock exchanges will be to hold their own in a world of global markets,where advantages in information technology are increasingly making geographicallocation immaterial…The competitive advantage for which stock exchanges around theworld are aiming is that of a reputation for high standards of financial reporting andcommercial probity. Those seeking to raise capital and those investing funds will turn tofinancial centres that inspire trust and confidence.”

2.5 Compliance however is a matter for everyone concerned with corporate governance -financial institutions, the various professional organisations and the media. In this respectthe role of shareholders, namely institutional shareholders, to apply pressure to hastenthe widespread adoption of the Code is essential. Shareholders should take a positiveinterest in the composition of the board of directors, with checks and balances andother governance-related issues to influence standards of corporate governance practisedby these companies. It is vital to seize the opportunity presented by a climate of opinion,which accepts that changes are needed, and which is expecting the Committee to givethe necessary lead.

Compliance under the Malaysian Code

2.6 The recommendations set out in the Code are premised on a prescriptive approach tocorporate governance. In this respect, the proposed Code sets out four forms ofrecommendations –

• Principles – Part 1 sets out broad principles of good corporate governance forMalaysia. The objective of principles is to allow companies to apply these flexiblyand with common sense to the varying circumstances of individual companies.Companies will be required by the Listing Requirements to include in their annualreport a narrative statement of how they apply the relevant principles to theirparticular circumstances. This is to secure sufficient disclosure so that investors andothers can assess companies’ performance and governance practices, and respondin an informed way.

• Best practices in corporate governance – Part 2 sets out best practices forcompanies. It identifies a set of guidelines or practices intended to assist companiesin designing their approach to corporate governance. While compliance with theseguidelines is not mandated, companies will be required as a provision of the listingrules of the KLSE to explain any circumstances justifying departure from such bestpractices.

• Exhortations to other participants – Part 3 is not addressed to listed companiesbut to investors and auditors to enhance their role in corporate governance. Theseare purely voluntary.

• Explanatory notes and “mere best practices” – Part 4 provides explanatory notesto the principles and best practices set out in Parts 1 and 2 and exhortations set out

5 Update on the Cadbury report: Where it is today? – paper presented at the CEO Forum on Corporate Governance, Kuala Lumpur

1997, co-organised by KLSE, Egon Zender International Limited and Asian Strategy and Leadership Institute (ASLI).


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in Part 3. Additionally, Part 4 also sets out best practices directed at listed companiesthat do not require companies to explain circumstances justifying departure frombest practices - “mere best practices”.

3. Principal parties in corporate governance

3.1 The power for governing a company is allocated amongst the shareholders, the board ofdirectors and management. The recommendations of the Committee under the Codeis premised on the fact that good corporate governance rests firmly with the board ofdirectors. Shareholders and auditors necessarily only play secondary roles.

3.2 The board of directors is legally and practically charged with the responsibility of directingand managing the business of the company on behalf of the owners. The board delegatesaspects of this responsibility to management.

3.3 What are the aims of those who direct and manage companies? The single overridingobjective by all listed companies, whatever the size or type of business, is the preservationand enhancement over time of their shareholders’ investment. All boards have thisresponsibility and their policies, structure, composition and governing processes shouldreflect this.

3.4 At the same time, the company must develop relationships relevant to its success. Thesedepend on the nature of the company’s business; but they will include the interests ofcreditors, employees and customers. It is management’s responsibility to develop policiesthat address these matters. However, in doing so they must have regard to the overridingobjective of preserving and enhancing the shareholders’ investment over time. Broadly,the board’s task is to approve appropriate policies and to approve the performance ofmanagement in implementing them.

3.5 It is worth stressing, however, that the directors’ relationship with the shareholders isdifferent in kind from their relationship with the other stakeholders’ interests. Whiledirectors as a board are responsible for relations with stakeholders, they are accountableto the shareholders. The policy considerations underlying such a definition of boardresponsibility is fundamental to capital formation and the financing of businesses.Investors will only commit funds to the company if they know that the board will makedecisions reflecting the best interests of the company and its owners. To define boardresponsibilities to act in the interests of a broader group than the company’s shareholderswould confuse board responsibilities and significantly undermine the accountability ofthe board. However, in making decisions to enhance shareholder value, boards mustdevelop and sustain these stakeholder relationships.

3.6 Shareholders as owners of the business are a principal party in corporate governance.There are, however, limitations to shareholder action in corporate governance. Firstly,shareholders themselves are subject to financial constraints. Secondly, shareholderscannot be denied their rights; they must be free to buy or sell as they please. Thirdly,shareholders are not experienced business managers and cannot substitute for them.Shareholders, however, can and should test strategy and performance over time andgovernance practices, and can and should hold the board accountable. In practice,however, the idea of shareholder democracy is difficult.

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One issue that we have chosen to focus on relates to the relationship between the boardand the controlling shareholders of a company. A distinguishing feature of the Malaysiancorporate landscape is the number of public companies which have a significantshareholder, that is to say a shareholder whose holdings are such that it can exercise orinfluence the control of the company. Control is ultimately exercised by electing orinfluencing the election of the board of directors. Many Malaysian companies aremembers of groups of companies under the common influence of one shareholder orgroup of shareholders. A frequent result is “related-party transactions” within thesegroups of companies. We detect an immense degree of scepticism within the shareholdercommunity about the ability of directors to represent the interest of all shareholders inthe context of a related-party transaction. We also detect an extension of this scepticismto the ability of boards to effectively represent the interests of all shareholders in othercircumstances. One of the objectives of this Code has been to address the perceptionsthat give rise to this scepticism and to improve the contribution of directors to thegovernance of companies.

3.7 The statutory role of auditors is to provide shareholders with independent and objectiveassurance on the reliability of the financial statements and of certain other informationprovided by the company. This is a vital role; it justifies the special position of auditorsunder the CA. But, to quote the Hampel report, “auditors do not have an executive rolein corporate governance. If directors fall short of high standards of corporate governance,the auditors may be able to identify the deficiency; they cannot make it good”.

3.8 For these reasons it is clear that the responsibility for good corporate governancerests primarily with the board of directors. Shareholders and auditors can, therefore,necessarily only play secondary roles. The recommendations in the Code reflect thisbalance.

4. The approach

4.1 There are three broad approaches to the issue of corporate governance that have beenundertaken by jurisdictions around the world –

• A prescriptive approach – where the standard of corporate governance is set byspecifying desirable practices coupled with a requirement to disclose compliancewith them. For example, the London Stock Exchange adopts a standard best practicebenchmark for all listed companies.

• A non-prescriptive approach – This approach simply requires corporate governancepractices in a company to be disclosed. The emphasis here is on the disclosure ofactual corporate governance practices. The thinking behind this approach is thateach company’s corporate governance needs may be different and directors ofcompanies should apply their minds to addressing these needs. The Australian StockExchange has taken this approach.

• The hybrid approach – This is the approach preferred by the Hampel committee.The Committee considered that there is a need for broad principles and that allconcerned should then apply these flexibly and with common sense to the varying


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circumstances of individual companies. Good corporate governance is not just amatter of prescribing particular corporate structures and complying with a numberof hard and fast rules. The need for principles surfaced from the review the Committeeconducted of the Cadbury and Greenbury Codes, where the original intention ofthe committees has been largely ignored. To quote the Hampel report,

“Companies’ experience of the Cadbury and Greenbury codes has been ratherdifferent. Too often they believe that the codes have been treated as sets of prescriptiverules. The shareholders or their advisers would be interested only in whether theletter of the rule had been complied with – yes or no.”

4.2 In response to this, the Hampel report draws a distinction between principles of corporategovernance and more detailed guidelines like the Cadbury and Greenbury Codes. Toquote the Hampel report6 ,

“With guidelines, one asks, how far are they complied with?; with principles, the rightquestion is “How are they applied in practice?”

It was recommended that companies should include in the annual report and accountsa narrative statement of how they apply the relevant principles to their particularcircumstances. Given that good corporate governance rests with the board of directors,the written description of the way in which the board has applied the principles ofcorporate governance represents a key part of the process. The Hampel committeetherefore recommended that the current requirement for companies to confirmcompliance with Cadbury prescriptions should be superseded by a requirement to makea statement to show how they (i) apply the principles, and (ii) comply with the combinedcode7 and in the latter case, to justify any significant variances8.

The approach for Malaysia

4.3 The Committee considered the Hampel approach to be the most suited for the Malaysiancontext for two reasons –

4.4 First, that best practice prescriptions are necessary. The work of the Committee hasproceeded on the basis that standards of corporate governance in Malaysia are lackingand that there is a need to raise these standards. Therefore to go to the other extreme ofmerely requiring disclosure of existing corporate governance practices of Malaysiancompanies (such as that required by the Australian Stock Exchange in respect of itslisted companies) is not sufficient. To take this route, one would have to be fairlycomfortable with the standard of corporate governance practised in public listedcompanies.

4.5 In this respect it is equally important that these prescriptions are accompanied by a rulerequiring disclosure of the extent to which listed companies have complied with theprescriptions and where they have not, the reasons why. It is not proposed thatcompanies should be required to comply strictly with the prescriptions developed. Each

6 Paragraph 2.1

7 The Hampel Committee recommended and has now produced a set of principles and a Code of Good Corporate Governance

practice, which will embrace the recommendations of Cadbury, Greenbury as well as the Hampel committee.8 The recommendations of the Hampel committee have been accepted by the London Stock Exchange.

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company should have the flexibility to develop its own approach to corporate governance.And while the prescriptions establish a sound approach to corporate governance,companies may develop alternatives that may be just as sound. Nevertheless theprescriptions set the standard that companies must measure up to. Such a rule alsoensures that the investment community receives an explanation for the company’sapproach to governance so that it is in a position to support the approach or work toinfluence change.

4.6 Second, that companies must nevertheless be encouraged to consciously addresstheir governance needs. This was the thrust of the Cadbury report. But as alluded toearlier, the experience in the UK suggests that too often companies comply with thestrict letter of the best practice prescriptions without regard to the spirit of it.

4.7 The biggest problem with a prescriptive approach is that it would encourage directorsto concentrate on form rather than on exercising their judgement on what corporategovernance practices are best for their companies. Directors may then adopt a practiceof ticking a series of boxes to indicate that they have complied with the prescribed bestpractices. This can be seized on as an easier option rather than the diligent pursuit ofcorporate governance objectives. Additionally, the checklist method of ticking everybox may be perceived by investors as implying endorsement by the regulator9 of thecompany’s corporate governance practices. Shareholders or their advisers would beinterested only in whether the letter of the rule has been complied with – yes or no. A“yes” would receive a tick.

4.8 Perhaps most worrying is the fact pointed out by the Hampel committee that undersuch a box ticking system, it would not be difficult for lazy or unscrupulous directors orshareholders, to arrange matters so that the letter of every governance rule is compliedwith but not the substance. It might even be possible for the next disaster to emerge ina company with, on paper, a 100% record of compliance. The true safeguard for goodcorporate governance lies in the application of informed and independent judgementby experienced and qualified individuals – executive and non-executive directors,shareholders and auditors. “Box ticking” is neither fair to companies, nor likely to beefficient in preventing abuse. We have the very real experience in Malaysia in the formof audit committees, where companies merely comply in form by setting up suchcommittees without giving heed to the spirit of the requirement by ensuring, for example,the quality of the people within the committee.

4.9 The Hampel recommendations seek to address this issue by requiring companies toinclude in the annual report a narrative account of how they apply the broad principlesset out in the code. They do not prescribe the form and content of the statements.Rather it aims to secure sufficient disclosure so that investors and others can assess thecompany’s performance and governance practices, and can respond in an informedway.

9 In this case the Exchanges


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The recommendations

4.10 As alluded to above, the recommendations of the committee come in broadly fourforms –

• Principles – Part 1 sets out broad principles of good corporate governance forMalaysia. The objective of principles is to allow companies to apply these flexiblyand with common sense to the varying circumstances of individual companies.Companies will be required by the Listing Requirements to include in their annualreport a narrative statement of how they apply the relevant principles to theirparticular circumstances. This is to secure sufficient disclosure so that investorsand others can assess companies’ performance and governance practice, and respondin an informed way.

• Best practices in corporate governance – Part 2 sets out best practices forcompanies. It identifies a set of guidelines or practices intended to assistcompanies in designing their approach to corporate governance. While compliancewith these guidelines is not mandatory, companies will be required as a provision ofthe Listing rules of the KLSE to explain any circumstances justifying departure frombest practice. In developing the best practices, we have relied on the breadth andexperience of the committee members and of working group members. We havealso had the benefit of the joint survey conducted by Price Waterhouse and theKLSE which provided valuable insight into board composition, structure andorganisation, structure and organisation of audit and remuneration committees,structure and state of internal controls and others.

• Exhortations to other participants – Part 3 is not directed at listed companies butto investors and auditors. These are entirely voluntary to enhance their role incorporate governance.

• Explanatory notes and “mere best practices” – Part 4 provides explanatory notesto the principles and best practices set out in Parts 1 and 2 and exhortations in Part3. Additionally Part 4 also sets out best practices that do not require companies toexplain circumstances justifying departure from best practices - “mere best practices”.These are purely intended as a guide to boards and companies.

5. Other pertinent matters

Companies to whom directed

5.1 The Code, set out in section 2 of this Chapter, is primarily directed to boards of all listedcompanies on the KLSE.

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Statement of compliance

5.2 It is proposed that all listed companies reporting in respect of years ending after theimplementation date of the report should state in the reports and accounts how theyhave applied the principles set out in Part 1 of the Code and a statement of compliancein respect of the best practices set out in Part 2 and identify or give reasons for any areasof non-compliance. In this respect, boards are not expected to comment separately oneach item of the Code with which they are complying, but areas of non-compliance willhave to be dealt with individually.

5.3 The committee recognises that smaller listed companies may initially have difficulty incomplying with some aspects of the Code. The boards of smaller listed companies whocannot, for the time being comply with parts of the Code should note that they mayinstead give reasons for non-compliance.

Sanctions for non-disclosure

5.4 Where a company fails to comply with the mandatory disclosure requirements underthe Listing rules, it is open to the Exchange to take any action against the listed entity orits directors as mandated by the listing rules and section 11 of the SIA.

Keeping the Code up to date

5.5 We have addressed those issues which have appeared to require the most immediateattention. The situation however is developing.

5.6 We believe that a successor committee should be appointed in 2 years to monitordevelopments in corporate governance, and to review the continued relevance of therecommendations in the Code. This effort should be led by the industry as it is importantfor the corporate sector to prove to investors, other stakeholders and the public sectorthat the governance of companies is a top priority.


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SECTION 2

THE PROPOSED MALAYSIAN CODE ONCORPORATE GOVERNANCE

PART 1 PRINCIPLES OF CORPORATE GOVERNANCE

A Directors

I The Board. Every listed company should be headed by an effective boardwhich should lead and control the company.

II Board Balance. The board should include a balance of executive directorsand non-executive directors (including independent non-executives) such thatno individual or small group of individuals can dominate the board’s decisionmaking.

III Supply of Information. The board should be supplied in a timely fashionwith information in a form and of a quality appropriate to enable it todischarge its duties.

IV Appointments to the Board. There should be a formal and transparentprocedure for the appointment of new directors to the board.

V Re-election. All directors should be required to submit themselves for re-election at regular intervals and at least every three years.

B Directors’ Remuneration

I The Level and Make-up of Remuneration. Levels of remuneration should besufficient to attract and retain the directors needed to run the companysuccessfully. The component parts of remuneration should be structured soas to link rewards to corporate and individual performance, in the case ofexecutive directors. In the case of non-executive directors, the level ofremuneration should reflect the experience and level of responsibilitiesundertaken by the particular non-executive concerned.

II Procedure. Companies should establish a formal and transparent procedurefor developing policy on executive remuneration and for fixing theremuneration packages of individual directors.

III Disclosure. The company’s annual report should contain details of theremuneration of each director.

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C Shareholders

I Dialogue between Companies and Investors. Companies and institutionalshareholders should each be ready, where practicable, to enter into a dialoguebased on the mutual understanding of objectives.

II The AGM. Companies should use the AGM to communicate with privateinvestors and encourage their participation.

D Accountability and Audit

I Financial Reporting. The board should present a balanced and understandableassessment of the company’s position and prospects.

II Internal Control. The board should maintain a sound system of internalcontrol to safeguard shareholders’ investment and the company’s assets.

III Relationship with the Auditors. The board should establish formal andtransparent arrangements for maintaining an appropriate relationship withthe company’s auditors.


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PART 2 BEST PRACTICES IN CORPORATE GOVERNANCE

AA The Board of Directors

I Principal responsibilities of the Board – The board should explicitly assumethe following six specific responsibilities, which facilitate the discharge ofthe board’s stewardship responsibilities:-

• Reviewing and adopting a strategic plan for the company;

• Overseeing the conduct of the company’s business to evaluate whetherthe business is being properly managed;

• Identifying principal risks and ensure the implementation of appropriatesystems to manage these risks;

• Succession planning, including appointing, training, fixing thecompensation of and where appropriate, replacing senior management;

• Developing and implementing an investor relations programme orshareholder communications policy for the company; and

• Reviewing the adequacy and the integrity of the company’s internal controlsystems and management information systems, including systems forcompliance with applicable laws, regulations, rules, directives andguidelines.

Constituting an effective board

II Chairman and Chief Executive Officer – There should be a clearly accepteddivision of responsibilities at the head of the company, which will ensure abalance of power and authority, such that no one individual has unfetteredpowers of decision. Where the roles are combined there should be a strongindependent element on the board. A decision to combine the roles ofChairman and Chief Executive should be publicly explained.

III Board balance – Non-executive directors should be persons of calibre,credibility and have the necessary skill and experience to bring an independentjudgement to bear on the issues of strategy, performance and resourcesincluding key appointments and standards of conduct. To be effective,independent non-executive directors need to make up at least one third ofthe membership of the board.

Size of non-executive participation

IV In circumstances where a company has a significant shareholder, in additionto the requirement that 1_

3 of the board should comprise independent directors,the board should include a number of directors which fairly reflects theinvestment in the company by shareholders other than the significantshareholder. For this purpose, a “significant shareholder” is defined as ashareholder with the ability to exercise a majority of votes for the election ofdirectors.

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V In circumstances, where the shareholder holds less than the majority but isstill the largest shareholder, the board will have to exercise judgment indetermining what is the appropriate number of directors which fairly reflectsthe investment in the company by the remaining holders of the shares.

VI The board should disclose on an annual basis whether 1_3 of the board is

independent and in circumstances where the company has a significantshareholder, whether it satisfies the requirement to fairly reflect through boardrepresentation, the investment of the minority shareholders in a company.The board should disclose its analysis of the application of the best practicesset out above, to the circumstances of the board.

VII Whether or not the roles of Chairman and Chief Executive are combined, theboard should identify a senior independent non-executive director of a boardin the annual report to whom concerns may be conveyed.

VIII Appointments to the board – The board of every company should appoint acommittee of directors composed exclusively of non-executive directors, amajority of whom are independent, with the responsibility for proposing newnominees for the board and for assessing directors on an on-going basis. Theactual decision as to who shall be nominated should be the responsibility ofthe full board after considering the recommendations of such a committee.The nominating committee should –

• Recommend to the board, candidates for all directorships to be filled bythe shareholders or the board.

• Consider, in making its recommendations, candidates for directorshipsproposed by the Chief Executive Officer and, within the bounds ofpracticability, by any other senior executive or any director or shareholder.

• Recommend to the board, directors to fill the seats on board committees.

IX The board, through the nominating committee, should annually review itsrequired mix of skills and experience and other qualities, including corecompetencies which non-executive directors should bring to the board. Thisshould be disclosed in the annual report.

X The board should implement a process, to be carried out by the nominatingcommittee annually for assessing the effectiveness of the board as a whole,the committees of the board and for assessing the contribution of eachindividual director.

XI Boards should be entitled to the services of a company secretary who mustensure that all appointments are properly made, that all necessary informationis obtained from directors, both for the company’s own records and for thepurposes of meeting statutory obligations, as well as obligations arising fromthe Listing rules of Exchanges or other regulatory requirements.


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XII Size of boards – Every board should examine its size, with a view to determiningthe impact of the number upon its effectiveness.

XIII Directors’ Training – As an integral element of the process of appointing newdirectors, each company should provide an orientation and educationprogram for new recruits to the board.

Board structures and procedures

XIV The board should meet regularly, with due notice of issues to be discussedand should record its conclusions in discharging its duties and responsibilities.The board should disclose the number of board meetings held a year and thedetails of attendance of each individual director in respect of meetings held.

XV The board should have a formal schedule of matters specifically reserved toit for decision to ensure that the direction and control of the company isfirmly in its hands.

Relationship of the board to management

XVI The board, together with the Chief Executive Officer, should develop positiondescriptions for the board and for the Chief Executive Officer, involvingdefinition of the limits to management’s responsibilities. In addition, the boardshould approve, or develop with the Chief Executive Officer, the corporateobjectives, which the Chief Executive Officer is responsible for meeting.

XVII Quality of information – The board should receive information that is notjust historical or bottom line and financial-oriented but information that goesbeyond assessing the quantitative performance of the enterprise and looks atother performance factors such as customer satisfaction, product and servicequality, market share, market reaction, environmental performance and soon, when dealing with any item on the agenda.

XVIII The chair of the board shall undertake primary responsibility for organisinginformation necessary for the board to deal with the agenda and for providingthis information to directors on a timely basis. If the chair is also the ChiefExecutive Officer, the board should also have in place a procedure to ensurethat its agenda items are placed on the agenda and for providing thisinformation to directors.

XIX Access to information – Directors should have access to all information withina company whether as a full board or in their individual capacity, infurtherance of their duties.

XX Access to advice – There should be an agreed procedure for directors, whetheras a full board or in their individual capacity, in furtherance of their duties totake independent professional advice at the company’s expense, if necessary.

XXI All directors should have access to the advice and services of the companysecretary.

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XXII Directors should appoint as secretary someone who is capable of carryingout the duties to which the post entails and their removal should be a matterfor the board as a whole. The board should recognise that the Chairman isentitled to the strong and positive support of the company secretary inensuring the effective functioning of the board.

XXIII Use of board committees – Where the board appoints a committee, it shouldspell out the authority of the committee, and in particular, whether thecommittee has the authority to act on behalf of the board or simply has theauthority to examine a particular issue and report back to the board with arecommendation.

XXIV Remuneration committees – Boards should appoint remunerationcommittees, consisting wholly or mainly of non-executive directors, torecommend to the board the remuneration of the executive directors in all itsforms, drawing from outside advice as necessary. Executive directors shouldplay no part in decisions on their own remuneration. Membership of theremuneration committee should appear in the directors’ report.

The determination of remuneration packages of non-executive directors,including non-executive chairmen should be a matter for the board as a whole.The individuals concerned should abstain from discussion of their ownremuneration.

BB Accountability and Audit

The audit committee

I The board should establish an audit committee of at least three non-executivedirectors, a majority of whom are independent, with written terms of referencewhich deal clearly with its authority and duties. The Chairman of the auditcommittee should be an independent non-executive director.

II The duties of the audit committee should include the following:-

(i) To consider the appointment of the external auditor, the audit fee andany questions of resignation or dismissal;

(ii) To discuss with the external auditor before the audit commences, thenature and scope of the audit, and ensure co-ordination where morethan one audit firm is involved;

(iii) To review the half-year and annual financial statements of the board,focusing particularly on:-

• Any changes in accounting policies and practices;

• Significant adjustments arising from the audit;

• The going concern assumption;

• Compliance with accounting standards and other legalrequirements.


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(iv) To discuss problems and reservations arising from the interim and finalaudits, and any matter the auditor may wish to discuss (in the absenceof management where necessary);

(v) To review the external auditor’s management letter and management’sresponse;

(vi) Where an internal audit function exists, to ensure that it is adequatelyresourced and has appropriate standing within a company, and to reviewthe internal audit programme.

(vii) To consider any related party transactions that may arise within thecompany or group;

(viii) To consider the major findings of internal investigations andmanagement’s response;

(ix) To consider other topics as defined by the board.

III The Finance director, the Head of Internal Audit (where such a function exists)and a representative of the external auditors shall normally attend meetings.Other board members may attend meetings upon the invitation of the auditcommittee. However, at least once a year the committee shall meet with theexternal auditors without executive board members present.

IV The audit committee must have explicit authority to investigate any matterwithin its terms of reference, the resources which it needs to do so and fullaccess to information. The committee should be able to obtain externalprofessional advice and to invite outsiders with relevant experience to attend,if necessary.

V The audit committee should meet regularly, with due notice of issues to bediscussed and should record its conclusions in discharging its duties andresponsibilities.

VI The board should disclose in an informative way, details of the activities ofaudit committees, the number of audit meetings held a year and details ofattendance of each individual director in respect of meetings.

CC Shareholders

The relationship between the board and shareholders

I Boards must maintain an effective communications policy that enables boththe board and management to communicate effectively with its shareholders,stakeholders and the public generally. This policy must effectively interpretthe operations of the company to the shareholders and must accommodatefeedback from shareholders, which should be factored into the company’sbusiness decisions.

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PART 3 PRINCIPLES AND BEST PRACTICES FOR OTHER CORPORATEPARTICIPANTS

I Shareholder Voting. Institutional shareholders have a responsibility to makeconsidered use of their votes.

II Dialogue between Companies and Investors. Institutional investors shouldencourage direct contact with companies including constructivecommunication with both senior management and board members aboutperformance, corporate governance and other matters affecting shareholders’interest.

III Evaluation of Governance Disclosures. When evaluating companies’governance arrangements, particularly those relating to board structure andcomposition, institutional investors and their advisers should give due weightto all relevant factors drawn to their attention.

IV External Auditors. The external auditors should independently report toshareholders in accordance with statutory and professional requirements andindependently assure the board on the discharge of its responsibilities underD.I and D.II above in accordance with professional guidance.


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PART 4 EXPLANATORY NOTES

PRINCIPLES OF CORPORATE GOVERNANCE

Under Part 1, directors are required to include in their annual report a narrative statement ofhow they apply the relevant principles to their particular circumstances. Given that theresponsibility for good corporate governance rests with the board, a written description of theway in which the board applies the principles of good corporate governance, represents a keypart of the process. The form and content of the statement are not prescribed, except insofar ascompanies are required to explain circumstances justifying departure from best practice set outin Part 2.

A The Board of Directors

I The Board. Every listed company should be headed by an effective boardwhich should lead and control the company.

4.1 This endorses the unitary board structure for Malaysian companies. It stresses the dualrole of the board - leadership and control - and the need to be effective in both. Withinthe context of a Malaysian board, this means a board made up of a combination ofexecutive directors, who with their intimate knowledge of the business take on primaryresponsibility for leadership of the company and non-executive directors, who can bringa broader view to the company’s activities, under a Chairman who accepts the dutiesand responsibilities that the post entails. A crucial pre-requisite to creating an effectiveboard is the explicit assumption by the board of its principal responsibilities, whichfacilitate the discharge of the board’s stewardship responsibilities.

II Board Balance. The board should include a balance of executive directorsand non-executive directors (including independent non-executives) such thatno individual or small group of individuals can dominate the board’s decisionmaking.

4.2 This highlights the need to avoid the board being dominated by one individual. It isimportant that there should be a sufficient number of independent directors who arenot only independent but seen to be independent; and that these individuals should beable both to work co-operatively with their executive colleagues and to demonstrateobjectivity and robust independence of judgement when necessary. The risk is perhapsgreatest where the roles of Chairman and Chief Executive are combined. It is here thatthe presence of a sufficient number of independent directors is crucial.

III Supply of Information. The board should be supplied in a timely fashionwith information in a form and of a quality appropriate to enable it todischarge its duties.

4.3 Information is power. The effectiveness of non-executive directors (indeed, of alldirectors) turns, to a considerable extent, on the quality of the information they receive.However individual directors do not have the time or the resources to obtain informationfrom the company, relevant to the proposed board decision. There should be proceduresin place to ensure that the board is supplied in a timely fashion with information.

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IV Appointments to the Board. There should be a formal and transparentprocedure for the appointment of new directors to the board.

4.4 The board’s process for assessing existing directors and identifying, recruiting, nominating,appointing and orienting new directors is central to enhanced governance. This functioncan be performed by the board as a whole. But we endorse the view that the adoption ofa formal procedure for appointments to the board, with a nomination committee makingrecommendations to the full board, should be recognised as good practice. This is dealtwith in more detail in Part 2.

V Re-election. All directors should be required to submit themselves for re-election at regular intervals and at least every three years.

4.5 We endorse the view that it is the board’s responsibility to appoint new directors andthe shareholders’ responsibility to re-elect them. Re-election at regular intervals notonly promotes effective boards but affords shareholders the opportunity to review thedirectors’ performance in turn and where necessary, to replace them. This is consistentwith Rule 309 of the Listing Requirements which requires that a public listed companymust have provisions in its articles of association for election of directors to take placeevery year.10 The Listing Requirements go on to require all directors, except the managingdirector, to retire from office once at least in each three years, but shall be eligible for re-election. This principle goes beyond the listing rule by including the managing directorto submit himself for re-election at least every three years.

B Directors’ Remuneration

4.6 Directors’ remuneration should be embraced in the corporate governance process; theway in which directors’ remuneration is handled can have a damaging effect on acompany’s public reputation, and on morale within the company. We suggest thefollowing broad principles –

I The Level and Make-up of Remuneration. Levels of remuneration should besufficient to attract and retain the directors needed to run the companysuccessfully. The component parts of remuneration should be structured soas to link rewards to corporate and individual performance, in the case ofexecutive directors. In the case of non-executive directors, the level ofremuneration should reflect the experience and level of responsibilitiesundertaken by the particular non-executive concerned.

4.7 This wording makes it clear that those responsible should consider the remuneration ofeach director individually, and should do so against the needs of the particular companyfor talent at board level at the particular time. The remuneration of executive directorsshould be linked to performance while the remuneration of non-executives should belinked to their experience and level of responsibilities undertaken.

II Procedure. Companies should establish a formal and transparent procedurefor developing policy on executive remuneration and for fixing theremuneration packages of individual directors.

10 Articles 63-66 Table A of the CA contain provisions relating to retirement by rotation.


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4.8 Whatever the procedure, directors, whether executive or non-executive, should notparticipate in decisions on their own remuneration packages.

III Disclosure. The company’s annual report should contain details of theremuneration of each director.

4.9 Investor concern on remuneration practices in Malaysia is not at the level that it is inthe United Kingdom, Australia and the United States. Nevertheless this disclosurerequirement recognises and promotes important principles of fairness and accountability.Also, this principle implies that the report would be in the name of the board, ratherthan of the remuneration committee.

4.10 The company’s annual report should therefore contain the details of remuneration ofeach director. Standards should be set which provide a rational and objectiveremuneration policy. For example, the objective of determining remuneration for adirector might be to ensure that the company attracts and retains the directors neededto run the company successfully or linking remuneration rewards to corporate andindividual performance.

C Shareholders

I Dialogue between Companies and Investors. Companies and institutionalshareholders should each be ready, where practicable, to enter into a dialoguebased on the mutual understanding of objectives.

4.11 This gives general endorsement to the idea of dialogue between companies and majorinvestors.

II The AGM. Companies should use the AGM to communicate with privateinvestors and encourage their participation.

4.12 Private investors are able to make little contribution to corporate governance. The mainway of achieving greater participation is through improved use of the AGM. We discussa number of suggestions for this purpose in Part 2 of the Code.

D Accountability and Audit

I Financial Reporting. The board should present a balanced and understandableassessment of the company’s position and prospects.

4.13 This follows the Cadbury Code. It is not limited to the statutory obligation to producefinancial statements. The wording refers mainly to the annual report to shareholders,but the principle also covers interim and other price-sensitive public reports and reportsto regulators.

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II Internal Control. The board should maintain a sound system of internalcontrol to safeguard shareholders’ investment and the company’s assets.

4.14 This covers not only financial controls but operational and compliance controls, andrisk management, since there are potential threats to shareholders’ investment in eachof these areas.

III Relationship with the Auditors. The board should establish formal andtransparent arrangements for maintaining an appropriate relationship withthe company’s auditors.

4.15 The duties of the audit committee required by the Listing Requirements should includekeeping under review the scope and results of the audit and its cost effectiveness, andthe independence and objectivity of the auditors.


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PART 2 BEST PRACTICES IN CORPORATE GOVERNANCE

The enumerated text below (e.g. I,II, III) represents best practice benchmarks as set out inPart 2 of the Code. Part 2 is directed at boards of listed companies. Boards are required tojustify significant variances with the best practices set out here, in the annual report. Boardsare not expected to comment separately on each item of best practice with which they arecomplying but areas of non-compliance will have to be dealt with individually. Other bestpractice recommendations (“mere recommendations”) may be found in the text of the discussionbelow. Boards are not required to justify significant variances with “mere best practices” in theannual report. These are italicised and in bold for ease of reference.

AA The Board of Directors

4.16 The key to good governance lies in getting the right board in place. A company with aproperly balanced board and effective independent directors should be left to run itsbusiness, with the board being accountable for its stewardship. Our analysis of the roleof the board involves a discussion of the responsibilities of the board, the constitutionof the board and the structures and processes within the board.

4.17 Boards should assume responsibility over all of the principal responsibilities set outbelow to effectively lead and control the company.

I Principal responsibilities of the Board – The board should explicitly assumethe following six specific responsibilities, which facilitate the discharge ofthe board’s stewardship responsibilities.

• Reviewing and adopting a strategic plan for the company – Modernorganisational theory posits that defining a corporate goal or mission anddefining the strategy to achieve it, are integral to corporate success. Theleadership for this process comes from management. Management have theprimary responsibility for articulating strategy because they have the greatestknowledge of the firm and its competetive environment and they ultimatelyexecute the plan. The role of the board is clear in that they are to review,approve or disapprove management’s proposal. In doing so they shouldbring an objectivity and breadth of judgement to the strategic planningprocess as they are not involved in the day to day management of thebusiness.

If the board is to independently judge the merits of a management’s proposalconcerning strategic or business plans, boards need to evaluate elementswhich should be taken into account in the process of creating the strategicplan for the company. These elements vary from company to company, butgenerically they include factors such as the existing and potential rivals of acompany; the company’s external environmental factors (economic, socialand political); and the internal characteristics of an organisation (goals,assets, liabilities and structure).11 The board should properly satisfy itselfthat management has taken into account all the appropriate elements.

11 Sharon Oster, Modern Competitive Analysis (2nd Ed., 1994)

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The board is also responsible for monitoring management’s success inimplementing the strategy. In this respect it should identify and understandthe benchmarks that will inform it of the plan’s progress after implementation.

• Overseeing the conduct of the company’s business to evaluate whetherthe business is being properly managed – A basic function of the board isto oversee the performance of management to determine whether thebusiness is being properly managed. The board’s obligation to oversee theperformance of senior management does not imply an antagonisticrelationship between the board and the executives. Rather it contemplatesa collegial relationship that is supportive yet watchful. In this respect theboard must ensure that there are, objectives in place against whichmanagement’s performance can be measured.

• Identifying principal risks and ensure the implementation of appropriatesystems to manage these risks – The board must understand the principalrisks of all aspects of the business that the company is engaged in andrecognising that business decisions require the incurrence of risk. The targetis to achieve a proper balance between risks incurred and potential returnsto shareholders. This requires boards to ensure that there are in place systemsthat effectively monitor and manage these risks with a view to the long termviability of the company.

• Succession planning, including appointing, training, fixing thecompensation of and where appropriate, replacing senior management;

This reflects the fact that the board functions through delegation tomanagement. The board must ensure management of the highest calibre inappointing, training, assessing and providing for succession. The key to theeffective discharge of this job is to provide for the best Chief Executive Officerfor the job as the Chief Executive Officer is the company’s business leader.The board will assess the Chief Executive Officers performance against theobjectives established by the board in cooperation with the Chief ExecutiveOfficer and will assess his or her contribution on corporate strategy. Theboard must also be satisfied that there are programmes in place to train anddevelop management and must also provide for the orderly succession ofmanagement.

• Developing and implementing an investor relations programme orshareholder communications policy for the company; and

The responsibility of the board here is to ensure that the company has inplace a policy to enable the company to communicate effectively with itsshareholders, other stakeholders and the public generally. The policy shouldensure that it effectively interprets the operations of the company to theshareholders and must accommodate feedback from shareholders, whichshould be factored into a company’s business decisions.


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• Reviewing the adequacy and the integrity of the company’s internal controlsystems and management information systems, including systems forcompliance with applicable laws, regulations, rules, directives andguidelines.

This is a responsibility that firmly rests in the hands of the board. The resultsof the survey indicate that the majority of boards of Malaysian public-listedcompanies do not consider themselves ultimately responsible for ensuringthat an effective system of internal control is in place. Boards have to ensurethat there is a satisfactory framework of reporting on internal financialcontrols and regulatory compliance.

Constituting an effective board

4.18 The composition of the board of directors of a listed company is one of the most crucialissues in corporate governance. Every public-listed company should be headed by aneffective board which can both lead and control the business. Within the context of aunitary board system, this means a board made up of a combination of executive directors,with their intimate knowledge of the business, and of outside non-executive directors,who can bring a broader view to the company’s activities, under a Chairman who acceptsthe duties and responsibilities that the post entails. The discussion here relates to theconstitution of the board which is both capable of exercising independent judgementand which is perceived as capable of exercising independent judgement.

II Chairman and Chief Executive Officer. There should be a clearly accepteddivision of responsibilities at the head of the company, which will ensure abalance of power and authority, such that no one individual has unfetteredpowers of decision. Where the roles are combined there should be a strongindependent element on the board. A decision to combine the roles ofChairman and Chief Executive should be publicly explained.

4.19 There are two key tasks at the top of every public company - the running of the boardand the executive responsibility for the running of the company’s business. In respect ofthe running of the board, Chairmen are primarily responsible for the following:-• the working of the board;• the balance of membership, subject to board and shareholder approval;• ensuring that all relevant issues are on the agenda;• ensuring that all directors, executive and non-executive alike, are enabled and

encouraged to play their full part in its activities. This includes making certain thatdirectors, especially non-executive directors receive timely, relevant informationtailored to their needs and that they are properly briefed on issues arising at boardmeetings; and

• ensuring that executive directors look beyond their executive function and accepttheir full share of responsibilities of governance.

The Chief Executive’s task is to run the business and implement the policies and strategiesadopted by the board.

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4.20 The Chairman’s role in securing good corporate governance is crucial. Given theimportance and particular nature of the Chairman’s role, it should in principle be separatefrom that of the Chief Executive. If the two roles are combined in one person, it representsa considerable concentration of power.

4.21 One issue that surfaces in the Malaysian context in respect of the role of the Chairmanis the almost “too ready” acceptance of the views of the dominant voice at the meeting.There is a general unwillingness by boards to pursue debate and a perhaps an over -eager desire to find a consensual resolution to issues and problems. Achieving consensusmore often than not is a compromise towards the most entrenched view on the board,of sometimes a single voice, rather than that of the majority of board members. The roleof the independent Chairman becomes crucially important in two respects. First, heshould encourage a healthy debate on the issue and bring to the board a healthylevel of scepticism and independence. Second, he should ensure that every boardresolution is put to a vote to ensure that it is the will of the majority and not that ofthe dominant owner that prevails.

III Board balance – Non-executive directors should be persons of calibre,credibility and have the necessary skill and experience to bring an independentjudgement to bear on the issues of strategy, performance and resourcesincluding key appointments and standards of conduct. To be effective,independent non-executive directors need to make up at least one third ofthe membership of the board.

4.22 The calibre of non-executive members of the board is of special importance in settingand maintaining standards of corporate governance. Non-executive directors areappointed onto boards for various reasons – to make positive contribution as equalboard members to the development of the company’s strategy; to tap on their skills andexpertise derived from their diverse backgrounds12, to represent their interests on theboard in the case of substantial shareholders and to provide a balanced and independentview onto the board. However, a special quality that non-executive directors, particularlyindependent non-executive directors, should bring to board deliberations is that ofindependence of judgement. Hence the requirement that independent non-executivedirectors need to make up at least one third of the membership of the board. Thisrecognises that there may be non-executive directors who are not “independent” whomay nonetheless make a useful contribution to the board.

Definition of the term “independent”

4.23 The term “independent” is defined under rule 9 of the Listing Requirements asfollows –

“The composition of the board of directors should reflect the ownership structure of thecompany. Every listed company should have independent directors, that is, directorsthat are not officers of the company; who are neither related to its officers nor represent

12 Particularly in smaller companies where these skills may not be otherwise available to management.


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concentrated or family holdings of its shares; who, in the view of the company’s boardof directors, represent the interests of public shareholders, and are free of any relationshipthat would interfere with the exercise of independent judgement.”

There are two features to this definition that the Committee endorses –

4.24 First, that it incorporates an imprecise definition of independence. It is not practicableto lay a more precise criteria of independence.13 It should be for the board to take aview as to whether a particular director is independent in the above sense. The corollaryis directors should be prepared to disclose in the annual report as well as in the noticeof meetings embodying the resolution for their re-election, which of the directors areconsidered to be independent and prepared to justify their view if challenged.

4.25 Second, the term “independence” refers to two crucial aspects – independence frommanagement and independence from a significant shareholder. The concept ofindependence varies from country to country. The Cadbury definition of independenceessentially focuses on independence from management. This reflects the shareholdingstructure of companies in the UK where it typically involves a separation of managementand control. Therefore, efforts are generally directed towards strengthening controlsover management. The TSE Committee report on the other hand, requires two types onindependent elements on the board. First, the concept of unrelated directors who areessentially directors independent of management. The second type of independentelement that was considered necessary by the TSE Committee essentially relates toindependence from a significant or controlling shareholder. The purpose of this constrainton the significant shareholder’s ability to elect the board, is to ensure in general termsthat there is a component of the board, at least in numbers, generally reflecting theinvestment of the public or the minority shareholder in the company, which is not relatedto either the significant shareholder or the company. The Listing Requirements definitionof “independent” similarly requires independence from “concentrated and familyholdings of shares”.

Size of non-executive participation

4.26 Even where an independent non-executive chooses to take a stand against managementhe is more often than not outvoted by the executive members of the board, or in caseswhere a significant shareholder controls the board, by the latter. The number ofindependent non-executives is significant and it should be such that their views willcarry significant weight in board decisions.

4.27 There are divergent views internationally on the size and number of independent non-executive directors on the board. The Cadbury Committee suggested that there be atleast three non-executive directors on the board of which a majority should beindependent. The Hampel Committee were of the opinion that if non-executive directorsare to be effective on the board, they should make up not less than 1_

3 of the board, again

13 The Cadbury Code defines as independent, directors who are “independent of management and free from any business or other

relationship which could materially interfere with the exercise of independent judgement, apart from their fees and shareholding”. TheHampel Committee endorsed this definition on grounds that it may be impracticable to lay down a more precise criteria of independence.The argument in favour of such an imprecise definition is essentially that it should be for the board to take a view on whether anindividual director is independent in the above sense. The TSE Committee report adopts a similarly imprecise definition.

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a majority of which should be independent. The Report of the TSE Committee onCorporate Governance in Canada, proposes as a Guideline that every board should beconstituted with a majority of individuals who qualify as unrelated. The term “unrelated”essentially refers to independence from management.

4.28 The results of the survey indicate that there is a reasonably proportionate mix ofindependent non-executive directors (average number – 2.6), non-executive directors(average number – 2.6) and executive directors (average number 2.5). The averageboard size was found to be 8 persons. On average therefore independent non-executivedirectors constitute about 1_3 of the board. This is the methodology by which the committeearrived at this prescription. The committee preferred this approach as opposed to thatof prescribing a figure because the figure must correspond to the board size and in thisrespect the size of companies listed on the KLSE and, therefore, their board sizes varysignificantly. The requirement that 1_3 of the board must be independent takes into accountthe varying board sizes of these companies.

IV In circumstances where a company has a significant shareholder, in additionto the requirement that 1_3 of the board should comprise independent directors,the board should include a number of directors which fairly reflects theinvestment in the company by shareholders other than the significantshareholder14 . For this purpose, a “significant shareholder” is defined as ashareholder with the ability to exercise a majority of votes for the election ofdirectors.

4.29 This recommendation introduces a form of proportional representation. For example, ifthe significant shareholder holds shares representing 2_

3 of the equity and 2_3 of the votes

for the election of the directors of the company which has a board of 9 directors andwhich wishes to satisfy this best practice, the holder can elect up to 6 directors whohave interests in or relationships with the significant shareholder.

4.30 However this recommendation only extends to circumstances where the significantshareholder is also the majority shareholder, i.e. the shareholder able to exercise majorityvotes for the election of directors. It is not extended to cover situations where thesignificant shareholder holds less than the majority but is still the largest shareholder.

V In circumstances, where the shareholder holds less than the majority but isstill the largest shareholder, the board will have to exercise judgement indetermining what is the appropriate number of directors which fairly reflectsthe investment in the company by the remaining holders of the shares.

4.31 If the proportional representation requirement is applied, the holder of 1_3 of the shares

of the company with a 9 director board could only elect three directors not related tothe holder. Proportional representation in this respect may compromise the ability ofthe significant shareholder to exercise control and execute his or her strategy for thecompany. Also, practically speaking, the committee found it impossible to believe thatindependent directors, no matter how well compensated, spend anywhere near the

14 The committee essentially adopted the proposal of the TSE Committee on Corporate Governance in its Guidelines for Improved

Corporate Governance in Malaysia - “Where were the Directors?” It should be noted that the Canadian corporate landscape is notunlike ours where there are a number of companies which have a significant shareholder - a shareholder whose holdings are suchthat it can exercise or influence the control of the company.


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amount of time thinking about the future of the company as would such a majorityshareholder. In any case investors acquire shares in a company with a significantshareholder, generally aware of the shareholding and relying in many cases on thesignificant shareholder to exercise control and execute his or her strategy for the company.

4.32 In these circumstances, the board will have to exercise its judgement in determiningwhat is the appropriate number of directors, which fairly reflects the investment in thecompany by the remaining holders of the shares.

VI The board should disclose on an annual basis whether 1_3 of the board is

independent and in circumstances where the company has a significantshareholder, whether it satisfies the requirement to fairly reflect through boardrepresentation, the investment of the minority shareholders in a company.The board should disclose its analysis of the application of the best practicesset out above, to the circumstances of the board.

4.33 This leaves it to the market to judge the composition and effectiveness of the board.Investors must take a positive interest in the composition of boards of directors, withchecks and balances, and to the appointment of a core of non-executive directors of thenecessary calibre, experience and independence.

VII Whether or not the roles of Chairman and Chief Executive are combined, theboard should identify a senior independent non-executive director of a boardin the annual report to whom concerns may be conveyed.

4.34 This essentially adopts the recommendation by the Hampel committee. This applieseven where the roles of Chairman and Chief Executive are separate in recognition thatevery board needs vigorously independent non-executive directors. There can, inparticular, be occasions, when there is a need to convey concerns to the board otherthan through the Chairman and Chief Executive. Such a situation could arise where anautocratic Chairman is closely allied to a powerful Chief Executive. Although in such asituation the roles of Chairman and Chief Executive were separated, there would be aneed for a mechanism whereby directors could take a concern to an identifiedindependent figure. The identification of such a non-executive is generally regarded asan essential “safety valve”. It is not envisaged that such an individual would for thispurpose need special responsibilities or an independent leadership role.

VIII Appointments to the board – The board of every company should appoint acommittee of directors composed exclusively of non-executive directors, amajority of whom are independent, with the responsibility for proposing newnominees for the board and for assessing directors on an on-going basis. Theactual decision as to who shall be nominated should be the responsibility ofthe full board after considering the recommendations of such a committee.The nominating committee should –

• Recommend to the board, candidates for all directorships to be filled bythe shareholders or the board.

• Consider, in making its recommendations, candidates for directorshipsproposed by the Chief Executive Officer and, within the bounds ofpracticability, by any other senior executive or any director or shareholder.

• Recommend to the board, directors to fill the seats on board committees.

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4.35 The board’s process for assessing existing directors and identifying, nominating,appointing and orienting new directors is central to enhanced governance. This functioncan be performed by the board as a whole but as a matter of best practice we recommendthat this responsibility be delegated to a committee. The nomination committee removesfrom the Chief Executive Officer, the general responsibility for constituting the board. Adirector who is beholden to the Chief Executive Officer will have difficulty in actingindependently, at least in assessing management. The nominating committee shouldnot have the delegated power from the board to implement its recommendations butshould be obliged to report its recommendations back to the full board for itsconsideration and implementation. This is in recognition of the importance of chemistrywithin the board and the need for board membership to be endorsed by all or the majority.Boards of directors function most effectively if they are forthright and collegial, ratherthan secretive and confrontational, either in discussions between themselves or in theirdiscussions with management.

IX The board, through the nominating committee, should annually review itsrequired mix of skills and experience and other qualities, including corecompetencies which non-executive directors should bring to the board. Thisshould be disclosed in the annual report.

4.36 The board should at least annually identify the mix of skills and experience and otherqualities it requires for it to function completely and efficiently. It is of course possiblefor a board to access particular skills and experience either within the company or fromexternal advisers. However, depending on the company’s business it is likely that therewill be certain skills and experience which are so strategic and fundamental to successthat they should exist at the board level itself and in particular amongst the independentdirectors.

X The board should implement a process, to be carried out by the nominatingcommittee annually for assessing the effectiveness of the board as a whole,the committees of the board and for assessing the contribution of eachindividual director.

4.37 Assessing the contribution of individual directors is not as assessment related to theperformance of the company nor is it an assessment designed to relate directorcompensation to company performance. The assessment of directors is an examinationof each individual director’s ability to contribute to the effective decision making of theboard. Each board will have its own approach to assessing its effectiveness and thecontribution of members. In the latter respect companies should identify a criteria forindividual contributions and should be willing to provide feedback to directors in respectof their individual performance. This process of assessment is necessary for it will makedirectors aware that their performance is being reviewed by their fellow directors andshould enhance each director’s contribution. The process may also provide constructiveinput to each individual director as to how he or she may better contribute to thefunctioning of the board.

XI Boards should be entitled to the services of a company secretary who mustensure that all appointments are properly made, that all necessary informationis obtained from directors, both for the company’s own records and for thepurposes of meeting statutory obligations, as well as obligations arising fromthe Listing rules of Exchanges or other regulatory requirements.


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4.38 It is crucial that company secretaries undertake the task of handling all of the preparatorywork that has to be completed and information that has to be gathered prior to thedirectors taking up their posts. This includes ensuring that the appointments are correctlymade and that all relevant information that the company requires from directors areobtained. The amount of information required from new directors is vast. It coversinformation that is required for the company’s own records, that which is required tomeet statutory obligations and information for Exchanges and the regulators. Failure toprovide this information speedily may result in fines and late filing penalties beingimposed on directors, the company or both and in some cases criminal liability ondirectors.

4.39 It is not just the company that requires information from its directors. If directors are tomake a speedy and effective contribution, then they also require information. Companysecretaries should be in a position to provide every new director with essentialinformation that he will require to undertake his functions and such additionalinformation as and when appropriate.

4.40 In this respect, the relevant professional organisations should develop a best practicesguide to provide a useful checklist for the more experienced company secretary to ensurethat appointments are properly made and provide checklists of all information requiredfrom and by a new director. This will also act as an invaluable guide for the lessexperienced company secretary.

XII Size of boards. Every board should examine its size, with a view to determiningthe impact of the number upon effectiveness.

4.41 The number of directors constituting a board is an important factor in determining theeffectiveness of the board. The problem with boards that are too big is that the individualdirectors may feel constrained about actively participating in board decisions and hencehave little sense of personal accountability. There also may be difficulty in individualsfunctioning within time constraints and their ability to make effective decisions. Someboards may also be too small. Bearing in mind the principal responsibilities of the board,each board should ensure that it has enough directors to discharge these responsibilitiesand perform those functions.

XIII Directors’ Training – As an integral element of the process of appointing newdirectors, each company should provide an orientation and educationprogram for new recruits to the board.

4.42 The program could be a one or two day event which would involve educating the directoras to the nature of the business, current issues within the company and the corporatestrategy, the expectations of the company concerning input from directors, and the generalresponsibilities of directors. Some companies have developed orientation manuals.However, the manual is just a beginning. The program should include the opportunityto discuss with experts the responsibilities of a director and of the board as a whole aswell as the opportunity to visit facilities and to meet with corporate officers to discussand better understand the business which will allow the director to contribute effectivelyfrom the outset of the appointment.

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4.43 It is equally important that directors should receive further training from time totime, particularly on relevant new laws and regulations and changing commercialrisks.

Number of Directorships

4.44 The committee concluded that it would not be practicable to prescribe a maximumnumber of directorships that a person should be entitled to hold. However, werecommend that the nominating committee in assessing the suitability of anindividual to be elected to the board will take into account the individual’s othercommitments, resources and time available for input for the board15 .

Board structures and procedures

4.45 The effectiveness of a board is buttressed by its structures and procedures.

XIV The board should meet regularly, with due notice of issues to be discussedand should record its conclusions in discharging its duties and responsibilities.The board should disclose the number of board meetings held a year and thedetails of attendance of each individual director in respect of meetings held.

4.46 The survey results indicate that over one third of companies, held three or less fullboard meetings a year. While 5% of companies surveyed only held one. The Committeeconsidered that stipulating a minimum figure for board meetings to be unpracticable.However, it is difficult to imagine how a board is in control of the company it if meetsless than four times. We recommend instead that the directors should be required todisclose the number of board meetings held a year and the details of the attendance ofeach individual director to enable shareholders to evaluate the commitment of a particulardirector to the affairs of the company. It is then for the shareholder to satisfy himselfwhether the board is in control of the company.

XV The board should have a formal schedule of matters specifically reserved toit for decision to ensure that the direction and control of the company isfirmly in its hands.

4.47 This acts as a safeguard against misjudgements and possible illegal practices. A scheduleof matters should be given to directors on appointment and should be kept up to date.Such a schedule would at least include:-

• Acquisitions and disposal of assets of the company or its subsidiaries that are materialto the company;

• Investments in capital projects, authority levels, treasury policies and riskmanagement policies.

Boards should lay down rules to determine materiality for any transaction and shouldestablish clearly which transactions require multiple board signatures. Boards shouldalso agree on the procedures to be followed when exceptionally, decisions are requiredbetween board meetings.

15 The government has since taken a policy decision to restrict the number of directorships that may be held by directors of public

listed companies. This restriction is to be implemented through the Listing Requirements.


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Relationship of the board to management

4.48 Many of the responsibilities of the board are delegated by the board to management. Akey principle to the effective functioning of the board is that it is able to functionindependently of management. There should be an adequate degree of independenceand a process or practice in place to allow directors to meet and actively exchangeviews. In the absence of this ability, a board cannot effectively assess the direction of thecompany and the performance of management - one of the board’s principalresponsibilities.

4.49 The chair or the committee or other director assigned this responsibility, is responsiblefor managing the processes of the board and for ensuring that the board discharges theresponsibilities we have previously defined for it. Appropriate procedures may involvethe board meeting on a regular basis without management present or may involveexpressly assigning the responsibility for administering the board’s relationship tomanagement to a committee of the board.

XVI The board, together with the Chief Executive Officer, should develop positiondescriptions for the board and for the Chief Executive Officer, involvingdefinition of the limits to management’s responsibilities. In addition, the boardshould approve, or develop with the Chief Executive Officer, the corporateobjectives, which the Chief Executive Officer is responsible for meeting.

4.50 It is important for the board and management to undertake this exercise. The allocationshould reflect the dynamic nature of the relationship necessary for the company toadapt to changing circumstances. There will be no one correct prescription for theallocation of responsibilities; it will depend on the circumstances of every company.The allocation of responsibility can be expressed by defining the limits to management’sauthority on the assumption that corporate action beyond this authority is theresponsibility of the board. Position descriptions should also be prepared for the chairof the board.

XVII Quality of information – The board should receive information that is notjust historical or bottom line and financial oriented but information that goesbeyond assessing the quantitative performance of the enterprise and looks atother performance factors such as customer satisfaction, product and servicequality, market share, market reaction, environmental performance and soon, when dealing with any item on the agenda.

4.51 This is a point stressed by the TSE Committee on corporate governance. We wish tounderscore the importance of the board receiving information that is not just historicalor bottom line and financial oriented. An effective board of directors will seek informationthat goes beyond assessing the quantitative performance of the enterprise and looks atother performance factors such as customer satisfaction, product and service quality,market share, market reaction, environmental performance and so on.

XVIII The chair of the board shall undertake primary responsibility for organisinginformation necessary for the board to deal with the agenda and for providingthis information to directors on a timely basis. If the chair is also the ChiefExecutive Officer, the board should also have in place a procedure to ensurethat its agenda items are placed on the agenda and for providing thisinformation to directors.

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4.52 All boards should specifically allocate the responsibility for setting the board agendaand for organising and circulating the information relevant to the agenda on a timelybasis.

XIX Access to information – Directors should have access to all information withina company whether as a full board or in their individual capacity, infurtherance of their duties.

4.53 We endorse the view of the Cadbury report, when they say that the effectiveness of non-executive directors turns to a considerable extent on the quality of information thatthey receive and the use they make of it. All directors (executive and non-executive),have the same right of access to information. Non-executive directors lack the insideknowledge of the company of the executive directors, but they have the same right toinformation as they do. The company should ensure that they are granted this access.

XX Access to advice – There should be an agreed procedure for directors, whetheras a full board or in their individual capacity, in furtherance of their duties totake independent professional advice at the company’s expense, if necessary.

4.54 Occasions may arise when directors have to seek legal or financial advice in thefurtherance of their duties. They should always be able to consult the company’s advisers.If however they consider it necessary to take independent professional advice, it isrecommended that they should be entitled to do so at the company’s expense, throughan agreed procedure laid down formally. To impose some discipline upon the engagementof outside experts, we recommend that the engagement by an individual director of anoutside expert be subject to the approval of the appropriate committee of the board.

XXI All directors should have access to the advice and services of the companysecretary.

4.55 The company secretary has a key role to play in ensuring that board procedures arefollowed regularly and are reviewed. It should be standard practice for companysecretaries to administer, attend and prepare minutes of board proceedings. The proximitythat a company secretary has to the board of directors also makes them the perfectcandidate for undertaking an advisorial role in relation to the board in respect ofcompliance issues. This then follows through into a crucial role in encouragingcompliance with the law.

4.56 The Chairman will look to the company secretary for guidance to the board on whattheir responsibilities are under the rules and regulations to which they are subject andhow those responsibilities should be discharged. The compliance advice should extendto embrace all laws and regulations and not merely the routine filing requirements andother administrative requirements of the CA. The Cadbury Committee considered it therole of the company secretary to advise the chairman and the board on theimplementation of the Code of Best Practice.

XXII Directors should appoint as secretary someone who is capable of carryingout the duties to which the post entails and their removal should be a matterfor the board as a whole. The board should recognise that the Chairman isentitled to the strong and positive support of the company secretary inensuring the effective functioning of the board.


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4.57 The responsibility for ensuring that the secretary remains capable and any questions asto the secretary’s removal should be a matter for the board as a whole.

XXIII Use of board committees – Where the board appoints a committee, it shouldspell out the authority of the committee, and in particular, whether thecommittee has the authority to act on behalf of the board or simply has theauthority to examine a particular issue and report back to the board with arecommendation.

4.58 In addition to the audit committee, which is required to be established by the listingrules of the Exchange, typical issues to be delegated to committees of larger publiccompanies will include –

• Nominating directors, assessing the effectiveness of the board and the contributionof individual directors – this is alluded to earlier.

• Compensation and remuneration of directors and senior management.

• Internal controls and the integrity of the external audit.

4.59 The number of board committees will be a function of the size of the company and theboard. Smaller companies will have fewer committees with some of them havingresponsibility for more than one area of the company’s activities.

4.60 Sometimes boards delegate important powers to an executive committee. Where theexecutive committee approves important corporate plans and actions on an ongoingbasis, the composition of such an executive committee should approximate thecomposition of the full board. There should be enough independent elements toapproximate the proportion of such directors on the full board.

B Director remuneration

4.61 Board remuneration is an important aspect of effective corporate governance. Theremuneration of directors should be appreciable and should reflect the responsibilityand commitment which goes with board membership. This applies to both executive aswell as non-executive directors. If directors are paid a token amount there may be atendency to think that the job is not important. On the other hand, if remuneration isexcessive, the director may lose his or her independence. He or she will be perceived assomeone who cannot afford to put his or her directors’ position on the line.

XXIV Remuneration committees. Boards should appoint remuneration committees,consisting wholly or mainly of non-executive directors, to recommend to theboard the remuneration of the executive directors in all its forms, drawingfrom outside advice as necessary. Executive directors should play no part indecisions on their own remuneration. Membership of the remunerationcommittee should appear in the directors’ report.

The determination of remuneration packages of non-executive directors,including non-executive chairmen should be a matter for the board as a whole.The individuals concerned should abstain from discussion of their ownremuneration.

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BB Accountability and Audit

The audit committee

An independent audit committee serves to implement and support the oversight functionof the board in several ways.

• Such a committee provides a means for review of the company’s processes forproducing financial data, its internal controls, and the independence of the company’sexternal auditor, and a forum for dialogue with the company’s external and internalauditors. In theory, the full board might execute these functions itself, because theboard is obliged in any event to be conversant with those matters. In practice,however, there are several reasons why an audit committee would normally constitutea preferable location for these functions. For one thing, a focused review and detaileddiscussion of the company’s processes for producing financial data, its internalcontrols, and independence of its external auditor might be too time-consuming forthe full board. For another, because the company’s financial data concerns theperformance of management, it is important to have forum for discussing this data,and the manner of its preparation, in which management participates only on request.

• An independent audit committee reinforces the independence of the company’sexternal auditor, and thereby helps assure that the auditor will have free rein in theaudit process. This reinforcement is achieved in part by conferring, on an organ thatis independent of the management whose financial results are being audited, a vitalrole in the retention, discharge, and compensation of the external auditor.

• An independent audit committee provides a forum for regular, informal, and privatediscussion between the external auditor and directors who have no significantrelationships with management. In the absence of such a forum, an external auditorwould often be reluctant to call for a meeting at the board level unless a problem ofgreat magnitude had arisen. In contrast, the provision of an institutionalised forumfacilitates and indeed encourages the external auditor to raise potentially troublesomeissues at a relatively early stage, allows the auditor to broach sensitive problems inan uninhibited and private fashion, and gives the auditor assurance that it can readilyget a hearing in the event of disagreement with management.

• An independent audit committee reinforces the objectivity of the internal auditingdepartment (if there is one). If that department reports primarily to management (asis normally the case), and has no regular access to the board or to a board committee,it may encounter resistance to recommendations that do not meet with management’sapproval. Regular access to an audit committee may help ameliorate such resistance.A working relationship with an audit committee is also likely to increase the statusand therefore the effectiveness of the internal auditing department.

4.62 The requirement for audit committees are set out in the Listing Requirements whichrequire all listed companies to have audit committees comprising 3 members of whom amajority shall be independent16. The Listing Requirements also set out the minimumfunctions of the audit committee. The objective of the Code is to flesh out the specificduties of the audit committee within the general functions set out in the rules.

16 Rule 344A KLSE Listing Requirements


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I The board should establish an audit committee of at least three non-executivedirectors, a majority of whom are independent, with written terms of referencewhich deal clearly with its authority and duties. The Chairman of the auditcommittee should be an independent non-executive director.

4.63 This essentially sets out the existing requirement under the Listing Requirements. Theappointment of a properly constituted audit committee is an important step in raisingstandards of corporate governance. Their effectiveness depends on their having a strongchairman who has the confidence of the board, the auditors and on the quality of non-executive directors. Membership of the audit committee is a demanding task requiringcommitment, training and skill. The directors concerned need to have a sufficientunderstanding of the issues to be dealt with by the committee to take an active part in itsproceedings.

4.64 One issue that the committee was asked to deal with is the issue relating to the presenceof controlling shareholders and substantial shareholders, who are also the non-executivedirectors of a company, on the audit committee. These persons would have a vestedinterest in ensuring that the financial affairs of the company are properly handled. It isa powerful monitoring tool in ensuring that the interests of management are at all timesaligned with that of the owners. In this respect, we recommend that such personsshould be encouraged to participate in audit committees, subject to the requirementthat the majority of the non-executive director’s presence should, nevertheless, remainindependent as defined by the Listing Requirements.

II The duties of the audit committee should include the following –

(i) To consider the appointment of the external auditor, the audit fee andany questions of resignation or dismissal;

(ii) To discuss with the external auditor before the audit commences, thenature and scope of the audit, and ensure co-ordination where morethan one audit firm is involved;

(iii) To review the half-year and annual financial statements of the board,focusing particularly on:-

• Any changes in accounting policies and practices;

• Significant adjustments arising from the audit;

• The going concern assumption;

• Compliance with accounting standards and other legalrequirements.

(iv) To discuss problems and reservations arising from the interim and finalaudits, and any matter the auditor may wish to discuss (in the absenceof management where necessary);

(v) To review the external auditor’s management letter and management’sresponse;

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(vi) Where an internal audit function exists, to ensure that it is adequatelyresourced and has appropriate standing within a company, and to reviewthe internal audit programme;

(vii) To consider any related party transactions that may arise within thecompany or group;

(viii) To consider the major findings of internal investigations andmanagement’s response;

(ix) To consider other topics as defined by the board.

III The Finance director, the Head of Internal Audit (where such a function exists)and a representative of the external auditors shall normally attend meetings.Other board members may attend meetings upon the invitation of the auditcommittee. However, at least once a year the committee shall meet with theexternal auditors without executive board members present.

IV The audit committee must have explicit authority to investigate any matterwithin its terms of reference, the resources which it needs to do so and fullaccess to information. The committee should be able to obtain externalprofessional advice and to invite outsiders with relevant experience to attend,if necessary.

V The audit committee should meet regularly, with due notice of issues to bediscussed and should record its conclusions in discharging its duties andresponsibilities.

4.65 The committee endorse the recommendations of PRO NED, UK, in its Guidelines forAudit Committees. It is essential to time meetings and plan their agendas so that issueswhich have an impact on the company’s prepared figures and published statements arediscussed early enough to allow changes to be considered. The number of meetingsrequired in a year depends on the company’s terms of reference and the extent of thecomplexity of the company’s financial operations. What is usually required is the threeor four meetings planned to coincide with the audit cycle and the timing of the publishedfinancial statements. Additionally, there may be ad hoc meetings in response to specialcircumstances as the company’s affairs demand.

4.66 The PRO NED Guidelines state that the main meetings are often planned as follows –

• Between the end of one year’s audit and the beginning of the nextWhere the committee’s remit extends to internal accounting systems as well as theaudit process, a meeting early in the company’s FY is necessary to discuss the contentof the management letter in the presence of the auditors, the approach to the currentyear’s audit and any significant problems that can be foreseen, either as a result ofthe past year’s experience or because of new accounting standards or other changesin statutory or listing requirements. Any discussion with the Finance Director as tothe cost effectiveness of the audit should also take place at this stage.


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• Before the issue of the Interim StatementsIn companies where the audit committee is responsible for reviewing these, thismeeting will take place at an appropriate point before their release.

• After the Interim ResultsThis may be a convenient point to review the company’s systems of internal controlin light of the interim report, and possibly also to discuss major reports prepared bythe internal audit department.

• After the year end, but before the accounts are finalisedThis review of the annual financial statements should be timed so that checks andadjustments recommended as a result of the meeting can be carried out before theboard meeting at which the accounts are adopted.

VI The board should disclose in an informative way, details of the activities ofaudit committees, the number of audit meetings held a year and details ofattendance of each individual director in respect of meetings.

Currently, companies generally disclose the identities of their audit committeemembers and essentially set out the terms of reference of the company. Directorsshould be required to disclose the number of audit committee meetings held ayear and the details of the attendance of each individual director to enableshareholders to evaluate the commitment of a particular director. This bestpractice also clarifies that the obligation to disclose the activities of the auditcommittee lies with the board as a whole and not the audit committee separately.

Preparation for membership of the audit committee – Where a new member isappointed to the audit committee, the process for inducting a director, setout in XIII above should be supplemented, in consultation with the Financedirector, by meetings with other members of management below board levelresponsible for the financial control system and those responsible for internalaudit where there is one. Knowledge of the people concerned is as valuable asknowledge of the systems they operate.

Internal audit

4.67 It is good practice for companies to establish internal audit functions to undertakeregular monitoring of key controls and procedures. The function of the internal auditorsis complementary but different from that of outside auditors. Such regular monitoring isan integral part of a company’s system of internal control and helps to ensure itseffectiveness. An internal audit function is well placed to undertake investigations onbehalf of the audit committee and to follow up any suspicion of fraud. It is essential thatheads of internal audit should have unrestricted access to the chairman of the auditcommittee to ensure the independence of their position.

4.68 Companies which do not already have a separate internal audit function shouldfrom time to time review the need for one.

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CC Shareholders

The relationship between the board and shareholders

4.69 The intimacy of the relationship between the board and management generally doesnot exist between the board and shareholders even though the directors are elected byand are accountable to the shareholders. The important exception is the significantshareholder that sits on the board or controls the board through his nominees.

Interests represented by the board

4.70 This area is fraught with difficulties and appears to be an area of some confusion. Insome ways, the presence of a controlling interest on a board is a check in that in suchcases the controlling owners can provide the oversight that an independent board shouldprovide in the absence of a controlling owner. However, in recognition of the fact thatnon-controlling shareholders need special vigilance at board level it has beenrecommended that the definition of independence should include independence fromsuch controlling interest and the fact that the board should ensure that its compositionreflects the ownership structure of the company. Beyond this the Committee finds itvery difficult to control the activities of these persons through best practices.

4.71 The Committee nevertheless sought to clarify the confusion that exists in terms of theinterests represented by the board.

4.72 As alluded to earlier, the expression of interests which must be reflected in board decisionsis often extended from the interests of the company to the interests of the shareholdersgenerally, on the theory that the ultimate responsibility for the board is to create valuefor shareholders and therefore what is in the best interests of the company should alsobe in the best interest of the owners.

4.73 We wish to emphasise that if the extension is made from the company to shareholders’generally, the board cannot use this definition to define its obligations in terms ofthe best interest of any single shareholder or any shareholder group. Perhaps mostworrying is the fact that there are some directors who erroneously believe that if aparticular shareholder is responsible for their election, the director should represent thebest interest of that shareholder in his or her corporate decision making. It is not unheardof for some directors to reflect the best interest of a significant shareholder rather thanthe best interest of the company in a corporate decision. Directors must be scrupulousin identifying what they regard as the best interest of the company or its shareholdersgenerally.

4.74 The problem is particularly acute in the case of nominee directors. A person who has amajor stake in a company will often appoint some one that he trusts to the board inorder to keep an eye on his investment. The nominee’s relationship with his principal isa fiduciary one.17 There is an issue therefore with regard to the competing fiduciaryresponsibilities of these persons. However, it must be highlighted that it is fairly well

17 Re Syed Ahmad Alsagoff [1960] MLJ 147, where Tan Ah Tah J decided that a nominee director is a “trustee” for his principal.


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settled under law that a crucial aspect of the duties of nominee directors is that he is notentitled to sacrifice the interests of the company in favour of that of his principal. In thisrespect, Winslow J’s dicta in Raffles Hotel Ltd. v Rayner18 is instructive.

“A company is entitled to the undivided loyalty of its directors. A director who is thenominee of someone else should be left free to exercise his best judgement in the interestsof the company he serves and not in accordance with the directions of his patron.”

4.75 It is accepted however that this rule is difficult in practice, as nominees are usuallyemployees of the principal. Where the nominee is a non-executive director of a company,the position is less complex. The nominee can and should quite easily avoid conflictsof interest by simply refraining from participating in a decision where the interestsof his principal and the company conflict.

4.76 But where the nominee is also an executive director, where he actually runs the businessof the company, the instances of conflict are numerous and he may find it difficult torefrain from participating in a decision where the interests of his principal and thecompany conflict. There may also be greater pressure exerted on him to act in favour ofhis principal. In this regard, it is recommended that there must be strong independentelements on the board to provide such a check against the conduct of preferring theinterests of the principal to the interests of the company.

4.77 Apart from this circumstance, the allocation of decision-making authority between theboard and shareholders is generally not an issue. Decisions made by shareholders relateto the election of directors, the election of auditors, and generally to fundamental changesto the company’s constitution or business. Good governance also requires shareholdervotes in circumstances where the board of directors may be interested in the transaction.This role, expressed through the voting power of ordinary shareholders, means that it isimportant for boards to maintain an active and constructive shareholders’communications policy both through following the minimum requirements of the CAand voluntarily maintaining principles of good practice in handling shareholders’ affairs.

I Boards must maintain an effective communications policy that enables boththe board and management to communicate effectively with its shareholders,stakeholders and the public generally. This policy must effectively interpretthe operations of the company to the shareholders and must accommodatefeedback from shareholders, which should be factored into the company’sbusiness decisions.

We encourage this relationship provided that information which a companyprovides to an investor should not qualify as undisclosed material informationabout the corporation.

18 [1965] 1 MLJ 60

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The AGM

4.78 The AGM is a crucial mechanism in shareholder communication. The AGM gives allshareholders, whatever the size of shareholding, direct public access to their boards.The question is how to enhance the format for AGMs so investors see the value inattending it. We believe that the AGM can be made a more meaningful and interestingoccasion for all participants. To enhance the value of general meetings, our mainrecommendation is that there should be a specific effort to develop best practices ingeneral meetings not unlike the best practices guide prepared by the Institute of CharteredSecretaries in the UK. Some recommendations in the context of improving the qualityof AGMs are the following:-

i. Boards should ensure that each item of special business included in the noticemust be accompanied by a full explanation of the effects of a proposedresolution.

ii. In the case of re-election of directors, boards should ensure that the notice ofmeetings state which directors are standing for election or re-election with abrief description to include matters such as age, relevant experience, list ofdirectorships, date of appointment to the board, details of participation inboard committees and the fact that a particular director is independent.

iii. The Chairman should provide a reasonable time for discussion at the meeting.The Chairman should not attempt to limit discussion of genuine questionsand the practice of discouraging shareholders from asking questions or beingdismissive of questions is discouraged. Where appropriate, the Chairmanshould also undertake to provide the questioner with a written answer toany significant question which cannot be answered on the spot. He shouldexercise his discretion wisely in entertaining questions from shareholders.The Chairman’s role in sifting the genuine questions from vexatious ones iscrucial. Again a best practices guide to guide the Chairman in dischargingthis role is invaluable.

iv. In companies whose AGMs are well-attended, companies, boards and/ormanagement should conduct a business presentation with a question andanswer session.

v. Companies should count all proxies lodged with them in advance of themeeting, and without a poll being demanded, should announce the totalproxy votes for and against each resolution once it has been dealt with by themeeting on a show of hands. This will indicate publicly the proportion oftotal votes in respect of which proxies were lodged and the weight ofshareholders’ opinion revealed by those proxy votes. Publication couldpotentially see an increase in proxy votes.


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vi. Companies should provide shareholders upon request, with a summary ofthe discussion at the AGM. The Cadbury Committee recommended19 thatcompanies should after the event, send shareholders a brief summary of pointsraised at the AGM. The cost of doing this, either by a separate mailing or withthe next financial report circulated to shareholders will be borne by thecompanies. However it must be borne in mind that the costs could be substantial,not least because of the printing costs involved. This is especially so in the caseof companies with very large registers.

vii. The Hampel committee suggested instead that companies should prepare aresume of discussion at the meeting (but not a full detailed record), togetherwith the voting figures on any poll or a proxy count where no poll was calledand send this on the shareholder’s request.

viii. The Committee recommends that companies should prepare a resume ofdiscussion to be sent to shareholders upon request as a matter of best practice.This differs from the minutes of general meetings20 as these normally record theconclusions and not the discussions.

19 Paragraph 6.8

20 which is a statutory requirement under section 156(1) CA

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PART 3 PRINCIPLES AND BEST PRACTICES FOR OTHER CORPORATEPARTICIPANTS

These are not addressed to listed companies but are addressed to investors and auditorsin recognition of the crucial role they play in corporate governance.

I Shareholder Voting Institutional shareholders have a responsibility to makeconsidered use of their votes.

4.79 Institutional shareholders include insurance companies, pension funds and professionalfund managers. An important degree of common interest between a private investorand institutional investors is that they largely hold shares on behalf of individuals. Inparticular they have the same stake in standards of financial reporting and of governancein companies in which they have invested. Given the weight of their votes, the way inwhich institutional shareholders use their power to influence the standards of corporategovernance is of fundamental importance. The wording above does not make votingmandatory; i.e. abstention remains an option; but these shareholders should, as a matterof good practice, make considered use of their votes. In this respect, institutionalshareholders should take a positive interest in the composition of boards, with checksand balances, and to the appointment of a core of non-executives of necessary calibre,experience and independence. In this respect, local institutional shareholder associationsshould formulate guidelines for the development of a constructive relationship betweenthe company and the owner.

II Dialogue between Companies and Investors. Institutional investors shouldencourage direct contact with companies including constructivecommunication with both senior management and board members aboutperformance, corporate governance and other matters affecting shareholders’interest.

4.80 Shareholders receive reports and accounts and other explanatory circulars fromcompanies which are required by statute or, for example by, the stock exchange. Theyalso have the right to attend company meetings where they can raise questions aboutthe affairs of a company. In addition some companies have a practice of makingpresentations to institutional or other shareholders. While these communications arenecessary, they may not be sufficient to allow companies and shareholders to gain a fullunderstanding of each others aims and requirements.

4.81 A direct dialogue gives investors a better appreciation of a company’s objectives, itspotential problems and the quality of its management, while also making a companyaware of the expectations and concerns of the shareholder. Two way communicationbetween companies and institutions is an important aspect of corporate governancebecause corporate managers need full information about the assessments of institutionsthat hold their shares. Two way communication such as this helps create a more stableshareholder base. The belief is that shareholders will be willing to maintain theirshareholding and take a longer term view of their investment if they have a betterunderstanding of the corporate strategy.


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4.82 We therefore encourage this relationship provided two issues are properly addressed.

• The information which a company provides to an investor should not qualify asundisclosed material information about the corporation.

• Companies should endeavour to ensure that the same opportunity should be availableto all shareholders.

4.83 In this respect the best practice above clarifies that neither side should be required toenter into dialogue. Individual companies and investors must remain free to abstainfrom dialogue; the sheer numbers on both sides may make comprehensive coveragedifficult.

III Evaluation of Governance Disclosures. When evaluating companies’governance arrangements, particularly those relating to board structure andcomposition, institutional investors and their advisers should give due weightto all relevant factors drawn to their attention.

4.84 This follows from the discussion earlier on the importance of considering disclosureson their individual merits, as opposed to ‘box ticking’. Shareholders should showflexibility in the interpretation of the Code and should listen to directors’ explanationsand judge them on their merits.

IV External Auditors. The external auditors should independently report toshareholders in accordance with statutory and professional requirements andindependently assure the board on the discharge of its responsibilities underD.I and D.II under Part 1 of this Code in accordance with professionalguidance.

4.85 This points up the dual responsibility of the auditors - the public report to shareholderson the statutory financial statements and on other matters as required by the ListingRequirements; and additional private reporting to directors on operational and othermatters.

Chapter 6

REFORM OF LAWS,REGULATIONS AND RULES

REFORM OF LAWS, REGULATIONSAND RULES

Introduction

This Chapter considers the existing laws, regulations and rules to determine

whether legislative or regulatory reform is required to bring them up-to-date

with current commercial reality as well as with internationally accepted

concepts on corporate governance. The review covers the following areas:-

• Duties, obligations, rights and liabilities of directors, company officers,

and controlling shareholders;

• Adequacy of disclosures and conflicts of interests with respect to

transactions that involve the waste of corporate assets;

• Enhancing the quality of general meetings;

• Shareholders’ rights and remedies;

• Developing effective governance and enforcement mechanisms within

the regulatory framework.

These areas are considered in the context of the provisions of the CA, the

Listing Requirements and securities laws, as well as case law.

Chapter 6 – Reform Of Laws, Regulations And Rules

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ISSUE ONE

REVIEW OF PROVISIONS DEALING WITH DUTIES, OBLIGATIONS, RIGHTS ANDLIABILITIES OF DIRECTORS, COMPANY OFFICERS AND CONTROLLINGSHAREHOLDERS

1. Overview

1.1 In conducting the review in this area, we have asked ourselves two questions:-

• Is there a need to raise standards of conduct practised by directors, officers,controlling shareholders by law or rule amendment? or,

• Is the converse true, in that the laws are unduly onerous to the extent of being anunnecessary fetter on the operations of companies?

1.2 In respect of the need to raise standards, our review indicates that while directors arealready subject to extensive laws and regulations regulating their conduct, their awarenessof the extent of responsibilities attaching to their office appears to be minimal. Amongother things, perhaps this fact is attributable to two main reasons:-

• The complexity of these laws results in the duties not being readily apparent to aperson without legal training. The laws governing the duties of directors areencapsulated in various sources, legislation, rules, common law fiduciary dutiesand negligence to name a few. Of these various sources, legislation receives thehighest amount of recognition and awareness. The aim of the Committee in thisrespect has been to clarify their duties and obligations in such a way that they arereadily apparent to most participants.

• To some extent, the lack of recognition of these laws and rules has been perpetuatedby ineffectual enforcement. Issues pertaining to the role of regulators in enforcinglaws are taken up in detail in issue 5 below. However in examining the duties andobligations of directors and the various sources they emanate from, we have alsobeen cognisant of the enforceability of these provisions and attempted to identifysolutions to these problems.

1.3 We have nevertheless remained conscious of the need to maintain an acceptable balancebetween the need for entrepreneurial energy by directors and management and the needfor controls. Any reform introduced in this area should not unduly fetter the exercise oftheir judgment or their enterprise nor discourage persons from taking on directorshipsor key management positions in companies because of concerns relating to personalexposure to liability.

1.4 The other area of review essentially relates to abuses by controlling shareholders at theexpense of minority shareholder rights. Many Malaysian companies are members ofgroups of companies under the common influence of one shareholder or group ofshareholders. A frequent result is related party transactions within these groups ofcompanies. There has been extensive coverage of the abuses by controlling shareholders


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both at board level as well as in respect of their right to vote. The Committee attempts todeal with and recommend some form of regulation of their activities. In short, they arethe following:-

• Enforcing obligations of controlling or significant shareholders as directors wherethey effectively control a company - the Committee considered the existing difficultiesin enforcing directors duties on these persons using the concept of shadowdirectorships and proposes a method to resolve this problem; and

• Codifying restrictions on their right to vote in certain key situations.

2. Duties, Rights and Liabilities of Directors, Company Officers andControlling Shareholders

2.1 The Board of Directors

ISSUE

Clarification of the collective duty of the board to “manage” the businessand affairs of a company

2.1.1 Theoretically articles of association vest powers of management in the board1 .In practice, there is a great difference amongst companies as to how much theboard actually participates in the day-to-day running of the business.

2.1.2 In small and medium-sized companies generally, the directors are alsoshareholders of the company who conduct the management of the companyand are involved in the operational decision-making2 .

2.1.3 But when a company reaches the size and complexity of a large listed entity, theboard as a whole is unlikely to be involved in the day-to-day business of thecompany. In large companies, the actual management of a business is usuallydelegated to managing director(s)3 and other salaried employees4. It is commonfor such principal executive officers of these companies to have a seat on theboard. For example, chief executives of companies are now invariably themanaging directors of companies. There may be other members of the executive(aside from the managing director) who are also members of the board, forexample directors in charge of finance, production etc. The non-executivemembers of a board include nominees of major shareholders and otherindependent board members5.

1 Reg. 73 of Table A, CA

2 Even then there may be distinctions made between the extent of board participation in the day-to-day running of the business. In

sole proprietorships, the owner of the business will generally run the business himself and the presence of the other directors islargely in name only and to fulfil the statutory requirement of two directors. However in the case of incorporated partnerships orfamily companies, the board generally runs the business as opposed to one or two controlling shareholders calling all the shots.3 Reg 91-93 Table A, CA allow the board to further delegate the power to managing director(s).

4 For example, group general managers, chief executives, chief operating officers.

5 KLSE Main Board Listing requirements – Rule 9.

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2.1.4 In these large companies, the board sets the strategic direction of the company.The management of the company (i.e. the employees running the business underthe guidance of a chief executive or the managing director) will implement thedecisions of the board. This is however a generalisation and it must be said thatthere are extremely wide variations in the structuring of the relationships betweenthe board and management.

2.1.5 However in the main, the power of executive officers in the management oflarge listed companies is undeniable and is well described in the Submission bythe Staff of the National Companies and Securities Commission (now the ASIC)to the Senate Standing Committee on Constitutional and Legal Affairs regardingCompany Directors’ Duties (1989) i.e.,

“Recognition has been given in recent years to the considerable power whichexecutive officers can exercise in the management of companies vis-à-vis that ofdirectors. This trend appears to have increased in recent years as directors,particularly of large corporations, have become more concerned with broadbrushissues and executives are employed for their expertise in particular areas ofmanagement. … [t]his …suggests, the real power to manage a company lieswith its executive officer”6.

2.1.6 Also, in the US, judicial refinement of the duty further explains that “directorialmanagement does not require a detailed inspection of day-to-day activities, butrather a general monitoring of corporate affairs and policies”7.

2.1.7 To date, there has neither been statutory nor judicial recognition in Malaysia ofthe board’s collective duty to oversee management in the event they delegatetheir management powers. There is, therefore, a case for revising the language,to accommodate a more realistic definition of the responsibilities of today’s boardof directors in large companies. The question is, therefore, whether there shouldbe specific recognition of this role in the CA or such other appropriate forum.In the international arena, this has principally been achieved via two means –through a Code and through the law (i.e. companies legislation).

2.1.8 In both the UK and Toronto, this duty of oversight is described in the form ofbest practices through the Code of Best Practices of the Cadbury Committeeand the Report of the TSE Committee, respectively8. This is based on the notionof a gradual and incremental approach towards raising awareness in corporategovernance, which in turn may result in judicial recognition of these conceptsand/or codification in the law.

2.1.9 New Zealand, on the other hand, has given statutory recognition to the role ofthe board to monitor management. The approach adopted has been essentiallyto retain the board’s flexibility to delegate management powers whilst givingstatutory recognition to the monitoring function of the board if and when they

6 at paragraph 4.

7 Francis v United Jersey Bank, 87 N.J. 15, 432 (New Jersey Supreme Court).

8 The TSE Committee did recommend in page 19 of its report that the current definition of responsibilities of the board as “managing

the business and affairs of a corporation should be revised to accommodate a more realistic definition of the duties of today’s boardof directors.”


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do decide to delegate. Section 130 of the New Zealand Companies Act 1993(NZCA), allows the board to delegate its powers but in return imposes upon itthe responsibility for the exercise of the power of the delegatee, via a belief onreasonable grounds before the exercise of the power that the delegatee wouldexercise the power in conformity with the duties imposed on directors either bythe NZCA or the company’s constitution, and that the board has a duty tomonitor, by reasonable means, the exercise of that power. This not only imposesa duty to monitor but places an obligation on the board to be cautious in theirdelegation and their choice of delegatee.

2.1.10 The Ontario Business Corporation Act, s115(1) has also recognised thelimitations on the ability of the board to manage the business of the companyand has revised the general duty of the board to mean “manage or supervise themanagement of the business and affairs of a corporation”.

2.1.11 As stated earlier, the power of management of boards is provided for in thearticles of association of companies. It is nevertheless submitted that a provisionshould be inserted in the law, clarifying the responsibilities of the board to“oversee the conduct of the company’s business to evaluate whether thebusiness is being properly managed”. The advantage of codification in thisrespect is that, first, it offers clear statement of responsibilities to boards andsecond, it offers clear direction to the courts of the collective role of boards.

2.1.12 The provision should nevertheless be sufficiently flexible to allow for widevariations in the structuring of the relationships between the board andmanagement taking into account the various types and sizes of companiesregulated by the CA. For example, there may be smaller listed companies whereboards actually manage the company9. The provision in the American LawInstitute’s restatement of corporate law is instructive. It recommends thecodification of boards’ functions and powers as part of the general modernisationof corporate statutes10. In this respect it recommends the following provisionsfor inclusion in state corporation statutes:-

“Section 3.02 Functions and powers of the Board of Directors

Except as otherwise provided by statute:-

(a) The board of directors of a publicly held corporation should performthe following functions:-

(1) Select, regularly evaluate, fix the compensation of, and whereappropriate replace principal senior executives;

(2) Oversee the conduct of the corporation’s business to evaluatewhether the business is being properly managed;

9 Refer to footnote 2.

10 Principles of Corporate Governance – Analysis and Recommendations – Paragraph 3.02.

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(3) Review and, where appropriate, approve the corporation’sfinancial objectives and major corporate plans or actions;

(4) Review and, where appropriate, approve major changes in, anddeterminations of other major questions of choice respecting, theappropriate auditing and accounting principles and practices tobe used in the preparation of the corporation’s financialstatements;

(5) Perform such other functions as are proscribed by law or assignedto the board under the standard of a corporation.

(b) A board of directors has also the power to:-

(1) Initiate and adopt corporate plans, commitments, and actions;

(2) Initiate and adopt changes in accounting principles and practices;

(3) Provide advice and counsel to principal senior executives;

(4) Instruct any committee, principal senior executive or other officer,and review the actions of any committee, principal senior executiveor other officers;

(5) Make recommendations to shareholders;

(6) Manage the business of the corporation;

(7) Act as to all other corporate matters not requiring shareholderapproval.

(c) Subject to the board’s ultimate responsibility for oversight undersubsection (a)(2), the board may delegate to its committees the authorityto perform any of its functions and exercise any of its powers.”

2.1.13 Issues pertaining to the codification of the powers and functions of the boardare dealt with under paras 2.1.14 to 2.1.20. For purposes of this discussion, therelevant provisions of the restatement by the American Law Institute areparagraphs 3.02(a)(2) and 3.02(b)(6). Paragraph 3.02(a)(2) provides as one ofthe functions of boards of public companies, the duty to oversee management.This is then supplemented by subsection 3.02(b)(6) which provides that theboard has always the “power to manage the business of the company”. Thisprovision does two things. First, it preserves the existing delineation of powersbetween the board and the general meeting. Article 73 Table A of the CA, asalluded to in paragraph 2.4 above, confers general powers of management onthe board and this allows the board to carry out transactions which the companyitself is empowered to do, in the absence of articles or statutory provisionsqualifying this general power11. Second, it allows for wide variations in the

11 In Re Patent File Co, exparte Birmingham Banking co.(1870) LR 6 Ch 83.


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structuring of the relationships between the board and management takinginto account the various types and sizes of companies regulated by the CA.

Recommendations

That a provision should be inserted in the law, clarifying the responsibilitiesof the boards of public companies “to oversee the conduct of thecompany’s business to evaluate whether the business is being properlymanaged”.

That the provision should be sufficiently flexible to allow for wide variationsin the structuring of the relationships between the board and managementas well as the various types and sizes of companies regulated by the CA. Inthis respect, it is proposed that the provision should clarify that, subject tothe memorandum and articles of a company as well as statute, the “power”to manage a company rests with the board.

ISSUE

Clarification of other functions of the Board

2.1.14 Initiatives in corporate governance have generally taken the opportunity to stateexplicitly the functions and responsibilities of the board. For example, theCadbury Code of Best Practices recommends that boards should have a formalschedule of matters specifically reserved to them for their collective decision, toensure that the direction and control of the company remains firmly in theirhands. Cadbury recommends that the schedule should at least include:

• Acquisitions and disposals of assets of a company or its subsidiaries that arematerial to the company; and

• Investments, capital projects, authority levels, treasury policies and riskmanagement policies.

2.1.15 The TSE Committee on corporate governance lists as the five specificresponsibilities of the board, the following:-

• Adopting of a strategic planning process;

• Managing risk;

• Appointing, training and monitoring senior management;

• Adopting an effective communications policy; and

• Monitoring the integrity of corporate internal controls and managementinformation systems.

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2.1.16 Both approaches above are in the form of best practices. The advantage to bestpractices is the flexibility with which board functions and responsibilities, maybe described. The proposed Code sets out the principal responsibilities of theboard12.

2.1.17 The Committee however, went on to consider whether the functions and powersof the board should be set out in legislation. As alluded to in paragraph 2.1.12above, the American Law Institute’s restatement of corporate law13 recommendsthe codification of a board’s functions and powers as part of the generalmodernisation of corporate statutes. The provision is repeated here for easyreference.

“Section 3.02 Functions and powers of the Board of Directors

Except as otherwise provided by statute:-

(a) The board of directors of a publicly held corporation should performthe following functions:-

(1) Select, regularly evaluate, fix the compensation of, and whereappropriate replace principal senior executives;

(2) Oversee the conduct of the corporation’s business to evaluatewhether the business is being properly managed14;

(3) Review and, where appropriate, approve the corporation’sfinancial objectives and major corporate plans or actions15;

(4) Review and, where appropriate, approve major changes in, anddeterminations of other major questions of choice respecting, theappropriate auditing and accounting principles and practices tobe used in the preparation of the corporation’s financialstatements16;

(5) Perform such other functions as are prescribed by law or assignedto the board under the standard of a corporation17 .

12 Part 2, Best practice AA- I

13 Principles of Corporate Governance – Analysis and Recommendations – Paragraph 3.02.

14 In publicly held corporations, the management function is normally vested in the principal senior executives. A basic function of the

board is to select these executives and to oversee their performance to determine whether the business is properly managed. Thisoversight function is not performed directly by actively supervising the principal senior executives, but indirectly, by evaluating theperformance of those executives and replacing any who are not meeting reasonable expectations concerning job performance.15

What constitutes a major corporate plan or action is a matter of business judgement. Examples of major corporate plans wouldnormally include long-term strategic and investment plans, annual capital and operating budgets, and targeted rates of return.Examples of major corporate actions include the creation or retirement of significant long-term debt, programmes for the issuance orreacquisition of significant amount of equity, significant capital investments or acquisitions of stock in other corporations, etc.16

In practice, this function will often be delegated to the audit committee, although the committee should normally exercise itsjudgement so as to refer major issues to the board.17

This makes it clear that in addition to the functions enumerated above, the board also has the obligation to perform any functionsthat is prescribed by law or assigned to it under the articles of association of a company.


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(b) A board of directors has also the power to:-

(1) Initiate and adopt corporate plans, commitments, and actions;

(2) Initiate and adopt changes in accounting principles and practices;

(3) Provide advice and counsel to principal senior executives;

(4) Instruct any committee, principal senior executive or other officer,and review the actions of any committee, principal senior executiveor other officer;

(5) Make recommendations to shareholders;

(6) Manage the business of the corporation;

(7) Act as to all other corporate matters not requiring shareholderapproval.

(c) Subject to the board’s ultimate responsibility for oversight undersubsection (a)(2), the board may delegate to its committees the authorityto perform any of its functions and exercise any of its powers.”

2.1.18 There are two points to note in this provision:-

• First, the section is limited to publicly held companies18; and

• Second, the section sets forth in sub-sections (a)(1)-(4), a few very minimumfunctions of the board, and then goes on in subsections (a)(5) and (b)(1)-(7) to permit complete flexibility in board executive relationships, subjectonly to the performance of those minimum functions. Thus section 3.02permits extremely wide variations in the structuring of relationships betweenthe board and senior executives.

2.1.19 The advantage of codification is that it is a clear signal to both corporateparticipants as well as the courts of the minimum functions of boards. To quotethe American Law Institute’s rationale for the rule,

“Section 3.02 is intended as a statement of the rules that a court would adopt,giving full weight to all considerations (including judicial precedents) that thecourts deem it appropriate to weigh.” Section 3.02 is not intended…to enlargethe scope of a director’s legal obligation and liability, the performance expectedof directors to comply with the duty of care or the role and accountability ofdirectors concerning the corporation’s compliance with the law. Rather it isintended to clarify the applicable concepts that are relevant to delineating, inparticular cases, the scope, performance and the role of directors.”

18 This term is defined in section 1.31 of the American Law Institute’s Principles of Corporate Governance to mean “a corporation that

as of the record date for its most recent annual shareholders’ meeting had both 500 or more record holders of its equity securitiesand US$5 million or more of total assets; but a corporation shall not cease to be a publicly held corporation because its total assetsfall below US$5 million, unless total assets remain below US$5 million for two consecutive years.

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2.1.20 It is submitted that in expansion of the recommendation in 2.1.11 and 2.1.12above, there should be a statutory formulation of the minimum functions of theboard. This formulation should only apply to public companies, as it is only inthese larger companies where one witnesses a separation of the role of the boardfrom management. This formulation should also permit complete flexibility inboard - executive relationships, subject only to the performance of thoseminimum functions.

Recommendations

That in expansion of the recommendation in 2.1.11 and 2.1.12 above thereshould be a statutory formulation of the minimum functions of the board.

That the formulation should only apply to public companies.

That the formulation should also permit complete flexibility in board -executive relationships, subject only to the performance of those minimumfunctions.

ISSUE

Should the specific duties of executive and non-executive directors withinthe board structure be clarified?

2.1.21 Regulations 91-93 of Table A, CA provide that the board of directors may appointone of their own to the office of managing director upon whom they may confertheir management powers. The managing director is responsible for the day-to-day operations of the company. In contrast with previous practice of having ageneral manager who would be the chief executive of the company, chiefexecutives are now invariably the managing directors of companies. There maybe other members of the executive (aside from the managing director) who arealso members of the board, for example directors in charge of finance, production,etc. Executive directors make valuable contributions to boards, and it is fromthem that the primary drive to make a company succeed must come.

2.1.22 Non-executive directors are appointed for various reasons – to make positivecontributions as equal board members to the development of the company’sstrategy, to tap on their skills and expertise derived from their diversebackgrounds19, to represent their interests on the board in the case of substantialshareholders, and to provide a balanced and independent view onto the board.This latter role is increasingly being construed as a duty on the non-executivemembers on the board to monitor the activities of the executive on the board.

2.1.23 To date, there has been neither statutory nor judicial recognition of thismonitoring role of non-executive directors in Malaysia. The general attitude isthat a non-executive director is under no obligation to supervise his co-directors

19 Particularly in smaller companies where these skills may not be otherwise available to management.


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or to acquaint himself with all the details of the running of the company. Recentdevelopments and increased awareness in respect of corporate governance issuesindicate that this view is outdated.

2.1.24 The attention generated by the various Codes of Best Practice in corporategovernance has raised the profile of the non-executive director, particularly onethat is independent. Independent non-executive directors are said to provide amonitoring mechanism of the executive directors’ management practices, becauseof the fear that an executive director’s decisions on the board may be cloudedby his role in management.

2.1.25 The Codes on corporate governance highlight the need for some independentelement on the board. They generally look to non-executive directors to providethis independence20. The Cadbury Code of Best Practice requires a majority ofnon-executives to be independent of management.

2.1.26 But they are not merely watchdogs. The UK Institute of Directors argue that the“idea that non-executive directors are merely watchdogs is invalid. They mustbe able to contribute enterprise as much as integrity, and to support the enterpriseof the executive team”. The Hampel Committee stress this point when they saythat an “unintended side effect of the Cadbury report has been to over-emphasisethis monitoring role21 ”.

2.1.27 The issue to be considered is whether there is a need to legislate the monitoringrole of non-executive directors, particularly independent non-executivedirectors? The approach internationally has been to highlight this aspect oftheir role through a Code of Best Practices. It is submitted that the latter approachis the appropriate step to take in view of the fact that setting out their dutiesstatutorily may:-

• First, detract from the fact that the overall responsibility for supervision ofmanagement lies with the board of directors as a whole, and hence, withevery director;

• Second, to do otherwise may dissuade persons from taking on non-executivedirectorships; and

• Finally, standards set out in the Code are aspirational and are an ideal wayof requiring change in a gradual and incremental manner.

Recommendations

That the role of non-executive directors to bring a balanced andindependent view onto the board should not be legislated.

20 Executive directors are part of management and therefore very little credibility in terms of independence.

21 Paragraph 3.7 Report of the Hampel Committee on Corporate Governance.

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2.2 Directors’ Duties

2.2.1 The duties of directors vis-à-vis the company and shareholders in general arecomprehensive. Directors are subject to a myriad of statutory and general lawduties, in contract (for executives), equity, tort, statute and other regulatoryrequirements. What is perhaps lacking is an acceptable level of awareness bydirectors of the duties that they are subject to.

2.2.2 Section 132(1) CA imposes upon directors the general duty –

“To act honestly and use reasonable diligence in the discharge of the dutiesof his office”.

Section 132 (1) CA does not purport to be an exhaustive statement of directors’duties. Section 132(5) of the CA expressly states that these duties are in additionto and not in derogation of any other written law or rule of law relating to theduty or liability of directors or officers of a company. Accordingly cases reflectingthe common law and equitable rules relating to directors are still relevant. Inthis respect a director has three broad categories of duties: fiduciary duties, theduties of skill, care and diligence and statutory duties.

2.2.3 Other sources of duties of directors include duties arising out of the articles ofassociation of companies and contract. The articles form a statutory contractbetween the shareholders of the company. Therefore, the scope of equitableand common law duties must be read in the context of the way in which thearticles are drafted. Courts would only intervene in cases where there is anabuse of power and they are loath to impinge on the freedom to contract byrewriting contracts for the parties. The contractual duties of directors are inaddition to other duties generally applicable to directors. Managing directorsare often appointed under a written service contract, which among other things,articulate their duties.

2.2.4 The approach of the Committee in this respect has not been to impose furtherduties and obligations of directors. Rather the Committee has sought to clarifytheir duties and obligations in such a way that directors are made to take noticeof and understand clearly the obligations required of them. This has to someextent involved a codification of common law provisions.

First fiduciary principle - Section 132(1) CA – The duty to act honestly

ISSUE

Is there a need to clarify the duty to act honestly?

2.2.5 The phrase “act honestly” in section 132 has been defined in the Victorian caseof Marchesi v Barnes & Keogh22 as follows:-

“To “act honestly” refers to acting bona fide in the interests of the company inthe performance of functions attaching to the office of the director.”

22 [1970] VR 434, 438 per Gowans J (Supreme Court of Victoria)


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2.2.6 The Courts generally ask whether the directors have done what they honestlybelieve to be right and they normally accept that they have, unless the court issatisfied that they have not behaved as honest men of business might be expectedto act. Even if the directors did not act with conscious dishonesty, the law wouldimpose on them, a duty to direct their minds to the question whether thetransaction was in fact in the interests of the company. The test is a subjectiveone, as it is for the directors and not the court to consider what is in the bestinterests of the company.23

2.2.7 There is however evidence of some tendency on the part of the courts to applya more objective test. It has been held in this respect that the proper test iswhether an intelligent and honest man in the position of a director of a companycould, in the whole of the existing circumstances, have reasonably believed thatthe transaction was for the benefit of the company24.

2.2.8 The companies legislation of both New Zealand and Canada contain a provisioncorresponding to subsection 132(1) CA, though in a different form. In NewZealand, “a director of a company, when exercising powers or performing duties,must act in good faith and in what the director believes to be in the best interestsof the company”. In Canada, a director, “in exercising his powers and discharginghis duties shall act honestly and in good faith with a view to the best interests ofthe corporation25”.

2.2.9 The Australian Corporations Law also has an equivalent duty which is almostidentical to the Malaysian provision26. Australia has recently undertaken a lawreform programme i.e. the CLERP27 which suggests a re-formulation of this dutyto act “honestly” to capture the fiduciary duties of “good faith in the best interestsof the corporation”. The problem with the existing formulation of the duty toact “honestly” is that it could be read to require some element of wrongdoing orfraud. The CLERP proposal seeks to clarify the duty by adopting the generalinterpretation of this duty under common law, i.e. to act bona fide in the bestinterests of the company.

2.2.10 It is submitted that the duty to act honestly in section 132(2) CA should be re-formulated to require a director to act “bona fide in the best interests of thecompany.” This will not only lend clarity to the obligation of a director underthis rule but go some way towards addressing the erroneous belief on the part ofsome directors that they are there to represent the best interests of the shareholderresponsible for their election.

Recommendation

That the duty to act honestly in section 132(2) CA should be re-formulatedto require a director to act “bona fide in the best interest of the company”.

23 Per Lord Greene M R in Re Smith & Fawcett Ltd [1942] Ch. 304 at 306, C.A.

24 Charterbridge Corporation v Llyods Bank [1970] Ch 62, 74 accepted by the CA in Intraco Ltd. v Multi Pak Singapore Pte. Ltd. [1995]

1 SLR 313, 325.25

Canadian Business Corporations Act 1975, paragraph 122(1)(a).26

Section 232(2) Corporations Law.27

Proposals for reform: Paper no.3

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ISSUE

Is there a need for statutory clarification of the term “ best interests of acompany”?

2.2.11 Directors have to identify what is in the best interests of the company. In Brady& Brady v Brady & Another28, Nourse LJ said;

“The expression “interests of the company” is one which is often used but rarelydefined. It seems quite likely that it is sometimes misunderstood and it is possiblethat it has slightly different meanings in different contexts.”

2.2.12 It has also been suggested that the phrase should not be defined,29 because“defining the phrase would not serve the need for flexibility in dealing withunpredictable situations which may arise from an infinite variety of circumstancesor for the purpose of coping with the changing patterns of commercial life.”Section 309(1) of the UK Companies Act 1985 offers some guidance as to thematters which directors of companies are to have regard to in the performanceof their functions. They are said to include “interests of the company’s employeesin general30, as well as the interests of members”. Section 309(2) of the same isquick to provide that,

“…the duty imposed by this section on directors is owed by them to the company(and the company alone) and is enforceable in the same way as any otherfiduciary duty owed to a company by its directors.”

Section 159 of the Singapore Companies Act similarly allows directors to haveregard to the interests of the company’s employees generally as well as theinterests of members when exercising their powers.

2.2.13 The Committee considered the provision in the UK and Singapore to be toonarrow. There are various other interests that directors may take into accountdepending on circumstances. For example, there is already a well establishedbody of law to say that “interests of the company” may at times mean “interestsof creditors” especially where a company is insolvent or approachinginsolvency31. There has also been dicta to the effect that in considering theinterests of the company, directors may take into account the interests of bothpresent and future shareholders32. It is therefore submitted that bearing in mindthe need for flexibility, the term should not be clarified by statute.

Recommendation

That the term “best interests of a company” should not be statutorily clarified.

28 (1988) BCLC 20 (Court of Appeal)

29 Loh Siew Cheang – Corporate Powers (page 58)

30 This requirement was only inserted in the amendment to the UK Companies Act in 1980. Until then directors could only have regard

to the interests of their members.31

West Mercia v Dodd, Kinsela v Russel Kinsela Pty Ltd [1986] 4ACLC 215.32

His Lordship Lord Cullen’s obiter statements in Dawson v International Coats Paton [1989] BCLC 233.


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ISSUE

Clarification of the position of nominee directors

2.2.14 The expression “best interests of the company” which must be reflected in aboard’s decision is often extended from the interests of the company to theinterests of the shareholders generally on the theory that the ultimateresponsibility of the board is to create value for shareholders and, therefore,what is in the best interests of the company should generally also be in the bestinterests of the owners33.

2.2.15 It should be emphasised however that where the extension is made from the“company” to the “shareholders generally” the board cannot use this extensionto define its obligations in terms of the best interests of a significant shareholderas opposed to the best interests of the company. Directors must be scrupulousin identifying what they regard as the best interests of the company and of aparticular shareholder, especially in conflict of interest situations.

2.2.16 Also section 132(3) CA states that a director who breaches the duty to acthonestly and use reasonable diligence or misuse company information is liableto the company, therefore underscoring the fact that duties are owed to thecompany and not the individual shareholders.

2.2.17 This appears to be an area of general confusion. There are some directors whoerroneously believe that if a particular shareholder is responsible for theirelection, the director should represent the best interests of that shareholder inhis or her corporate decision making.

2.2.18 The Code clarifies that where the extension is made from acting in the interestsof the “company” to mean “shareholders generally”, the board cannot use thisto define its obligations in terms of the best interests of any single shareholderor shareholder group or for that matter, the shareholder responsible for hiselection. The Code also encourages directors to be scrupulous in identifyingwhat they regard as the best interests of the company whether or not this interestconflicts or coincides with the best interests of a controlling or significantshareholder.

2.2.19 The problem with respect to nominee directors has been alluded to in the Code.Essentially, a person who has a major stake in a company will often appointsomeone whom he trusts onto the board in order to keep an eye on hisinvestment. The nominee’s relationship with his principal is a fiduciary one34.He represents his principal’s interest, but is not an agent for whom his principalis vicariously liable35. Nevertheless, the principal is liable to indemnify thenominee against liabilities entered into as nominee.

33 Allen v Gold Reefs of West Africa Ltd. [1990] 1 Ch 656, Greenhalgh v Arderne Cinemas (1951) Ch 286.

34 Re Syed Ahmad Alsagoff [1960] MLJ 147, where Tan Ah Tah J decided that a nominee director is a “trustee” for his principal.

35 Kuwait Asia Bank EC v National Mutual Life Nominees Ltd. [1990] 3 WLR 297.

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2.2.20 A crucial aspect of the duty of nominee directors is that he is not entitled tosacrifice the interests of the company in favour of that of his principal. In thisrespect, Winslow J’s dicta in Raffles Hotel Ltd. v Rayner36 is instructive.

“A company is entitled to the undivided loyalty of its directors. A director whois the nominee of someone else should be left free to exercise his best judgementin the interests of the company he serves and not in accordance with thedirections of his patron.”

2.2.21 This rule is difficult in practice as they are usually employees of the principal. Inthis respect there are two types of nominee directors - executive and non-executive. The latter functions as a watchdog. He does not participate in themanagement of the company. He can quite easily avoid conflicts of interest bysimply refraining from participating in a decision where the interests of hisprincipal and the company conflict. But where the nominee is also an executivedirector, where he actually runs the business of the company, the instances ofconflict are numerous and he may find it difficult to refrain from participatingin a decision where the interests of his principal and the company conflict.There may also be greater pressure exerted on him to act in favour of his principal,bearing in mind his position of power37.

2.2.22 Problems also arise in the context of reporting to the principal. The companycannot stop a nominee from examining the company accounts38. But it may bedisloyal of him to report what he knows to the principal39.

2.2.23 It is submitted that there should be statutory clarification of the role of nomineedirectors bearing in mind their peculiar position, i.e. the parallel fiduciaryobligations owed both to his principal as well as the company. Statute shouldmake clear that a nominee director’s primary duty is to act in the best interestsof the company and that his duty to his principal is always subject to his duty toact in the best interest of the company. A re-statement of such a duty in the lawpotentially places a nominee in a far stronger position vis-à-vis his principal.

2.2.24 The prescriptions in the Code then supplement the statutory provision byidentifying ways in which situations of conflict, between the duty to his principaland his duty to the company may be managed. The Code suggests that thenominee should refrain from participating in a decision where the interests ofhis principal and the company conflict or in situations where the nominee inconflict holds an executive position in the company, to ensure that there is astrong independent element on the board to bring independent judgement tobear on decisions of the board.

Recommendation

That there should be statutory clarification of the fact that a nomineedirector’s primary obligation is to act in the best interests of the companyand that his duty to his principal is always subject to his duty to act in thebest interests of the company.

36 [1965] 1 MLJ 60.

37 Walter Woon Company Law at pg 290 suggests that the only way in which this conflict may be avoided is for the nominee director

to not accept appointment onto a board where his interests may conflict with that of the principal38

Berlei Hestia (NZ) Ltd. v Fernyhough [1980] 2 NZLR 150 (Supreme Court of New Zealand)39

Raffles v Rayner [1965] 1 MLJ 60


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Second fiduciary principle - Duty to avoid conflicts of interest40

ISSUE

Should the fiduciary duty to avoid conflicts of interest be codified?

2.2.25 This is an area that the Committee considers as crucially important. There hasbeen numerous criticisms leveled against the practices of directors that give riseto conflict. These include for example, the practice of operating businesses incompetition with the listed entity, taking advantage of contracts belonging tothe listed entity, disposition of non-performing assets into the listed entity whiletaking over performing assets at below market value and the practice of interestedparties voting on transactions in obvious conflict of interest, to name a few.These practices have played a significant role in undermining confidence in theMalaysian capital markets. The Committee, therefore, considered the adequacyof present laws to address this problem.

2.2.26 To some extent there are already provisions in the law to address some of theabuses mentioned above. The common law rule that directors cannot enter intoa contract with his company without disclosing the fact that he is a party atinterest41, is reinforced by several provisions of the Act. For example, section132E CA prohibits a director from entering into substantial property transactionswith a company without the approval of members, sections 131 CA makes certaindisclosures of interest mandatory, section 133 of the CA prohibits companies(other than exempt private companies) from making loans to its directors. Alsosection 132(2) CA makes some attempt at codifying the duty to avoid conflict,namely in the case of misuse of information by directors and officers42.

2.2.27 However there are gaps in the existing provisions in statute in regulating abusessuch as the practice of operating businesses in competition with the listed entityor taking advantage of contracts belonging to the listed entity save under thegeneral category of the “duty to act honestly”. There are however numerousfiduciary principles under common law to deal with these abuses.

2.2.28 To counter the abuses mentioned above, the Committee considered itinappropriate for this matter to be left purely to case law. The problem with caselaw in this area is that it is difficult to distill a set of clear rules for directors tooperate by. The rules operate by reference to the particular facts of the case inquestion. As Laskin J said in Canadian Aero Services Ltd. v O’Malley43 “newfact situations may require a reformulation of an existing principle to maintainits vigour in the new setting.”

2.2.29 The problem is essentially enforcement. As a general rule, directors do not owefiduciary duties to members44. For this reason a member cannot sue to enforce acompany’s rights against the directors45. The power to institute action in thecompany’s name generally rests with the board46. It is practically very difficult

40 This duty is essentially a subset of the directors’ duty to act in the best interests of the company. However as the equitable rules in

this area have developed separately, it warrants separate discussion.41

PJTV Denson (M) Sdn. Bhd. v Roxy (Malaysia) Sdn. Bhd. 1980 2 MLJ 136,13942

In 3.2.31 the deficiencies in section 132(2) are highlighted.43

(1973) 40 DLR (3d) 371, 383 (Supreme Court of Canada)44

Percival v Wright [1902] 2 Ch 42145

Foss v Harbottle (1843) 2 Hare 4146

John Shaw & Sons v Shaw (1935)

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to cause the company to commence action against the defaulting directorespecially where he controls the board. So it is not uncommon to find that acompany commences court action after there has been a change in managementor where the defaulting director has left the company. There is an avenue forminority shareholders to institute action in the company’s name, but to do sohe would have to fall within one of the four exceptions to the rule in Foss vHarbottle. In practice, the practical legal costs of funding an action and thecomplexity of both the substantive and procedural requirements have proved tobe almost insurmountable to minority shareholders. The advantage ofcodification is that a breach entails criminal action. Once criminal proceedingscommence, this may exert enough pressure on boards to institute civil actionfor damages or to recover profits made by the defaulting director.

2.2.30 It is submitted that, bearing in mind the extent of abusive practices in listedcompanies today, and the need for a clear set of rules stating the obligations ofdirectors and officers in these situations, as well as the practical problemsassociated with enforcement of common law fiduciary duties, this is a matterworthy of legislative action.

2.2.31 Legislation should set out clearly the obligations of directors in their dealingswith the company in conflict situations, and the ways in which such conflictsmay be managed without detriment to the company.

Recommendation

That the common law fiduciary duty to avoid conflicts of interest should becodified.

ISSUE

Elements of the statutory fiduciary duty to avoid conflicts of interest

2.2.32 The Committee does not intend to provide an exhaustive discourse on theelements of the statutory fiduciary duty to avoid conflicts of interest. Rather itattempts to set forth generally, a minimum number of rules that should regulatethe conduct of a director acting with an interest in a matter, and highlight areasfor further consideration in developing this statutory duty.

2.2.33 Under common law, directors must not place themselves in a position wheretheir duties to the company conflict with their personal interests and duty toothers47. The duty which has been described as “inflexible” is there for reasonsof expediency rather than morality. A classic exposition of this rule is that ofLord Herschell in Bray v Ford48.

47 Chua Boon Chin v JM McCormack [1979] 2 MLJ 156, 158.

48 [1869] AC 44,51 (House of Lords).


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“It is an inflexible rule of the Court of Equity that a person in a fiduciaryposition…is not, unless otherwise expressly provided, entitled to make a profit;he is not allowed to put himself in a position where his duties and his interestmay conflict. It does not appear to me that this rule is…founded on principlesof morality. I regard it rather as based on the consideration that, human naturebeing what it is, there is a danger in such circumstances, of the person holdingthe fiduciary position being swayed by interest rather than by duty, thusprejudicing those whom he is bound to protect. It has therefore been deemedexpedient to lay down this positive rule.”

2.2.34 By laying down this positive rule, temptation is placed out of the reach of thedirectors. However directors are not required to be insensible to their owninterests. They do not live in an “unreal world of detached altruism”49 in whichtheir own interests are forgotten. Being in a position of conflict is not per se abreach of fiduciary duties. It is the failure to disclose material facts to themembers and to obtain their sanction that constitutes the breach. The standardby which this duty is measured is an objective one, i.e. would a reasonable manwhen looking into the relevant facts and circumstances of a particular casethink that a conflict is possible?

2.2.35 The conflict of interests situations dealt with by cases generally take the followingforms:-

• Use information acquired by virtue of position as director to make a profitfor himself50 ;

In this respect it must be noted that section 132 (2) CA provides that “anofficer or agent of a company…shall not make improper use of anyinformation acquired by him by virtue of his position as officer or agent ofthe company… to gain directly or indirectly an advantage for himself or forany other person or to cause detriment to the company.”

• Use of corporate property or money51;

• Taking of corporate opportunities52;

• Competition with the corporation53;

2.2.36 The case law in this area is voluminous and generally known for judicial creativity.Also, there is a certain amount of inconsistency in the application of the law54.It is, therefore, impossible to lay down an exhaustive statement of the areas inwhich this rule applies and therefore difficult to offer clear guidance to directors

49 per Latham CJ Mills v Mills (1937) 60 CLR 150, 164 (High Court of Australia)

50 Regal Hastings v Gulliver (1942) 1 All E.R. 378

51 Guiness v Saunders [1950] 1 All E.R. 652

52 Peso Silver Mines v Cropper (1966) 58 DLR [2nd ] 1

53 London & Mashonaland Export Company v New Mashonaland Exploration Co. [1891]

54 For example, the differing statements of the duties of directors in taking up corporate opportunities belonging to the company. In

Peso Silver Mines v Cropper, the Supreme Court of Canada held that where the board has bona fide rejected an opportunity on thecompany’s behalf, a director is allowed to take that opportunity for himself without the necessity of disclosure to the company.However, in Regal Hastings Ltd. v Gulliver, Lord Wright expressed the view that a director could only avail himself of an opportunitywhere it had been rejected by the board on the company’s behalf, where he had specifically obtained the assent of the shareholders.

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of the rules they are expected to operate by. Internationally, the manner in whichthe courts have interpreted the duty of loyalty has evolved over the years; fromthe position that transactions are voidable without regard to fairness, to themodern view that if the transactions are fair and that fair procedures have beenobserved, such transactions will be allowed to stand. The Committee has sought,therefore, to identify broadly, aspects of the rules or fair procedures by whichdirectors should observe in conflict situations, while preserving the ability ofthe court at all times, to enquire into the fairness of a transaction.

2.2.37 In codifying the duty to avoid conflicts of interest, section 132(2) CA will requirerevision for the following reasons:-

• First, it is only limited to misuse of information. It does not include othercrucial aspects of conflict highlighted above – for example, the misuse ofcorporate property, the taking of corporate opportunities and issuespertaining to directors engaging in business in competition with the company.

• Second, as the prohibition is against making improper use of informationacquired by virtue of his position to gain an advantage for himself or tocause detriment to the company, the duty is absolute. However, this isunnecessarily restrictive and case law does allow for a more facilitativeapproach – by allowing it where there has been full disclosure and ratificationof the transaction. A more commercially realistic approach would be toallow for a “cure” for such transactions.

2.2.38 For this reason the Committee submits that the statutory formulation on conflictsof interest in section 132(2) CA should reflect the following minimum elements-

a) That the provisions should embrace the following conflict situations:-

• Misuse of corporate information, property or position;

• The taking of corporate opportunities; and

• Engaging in business in competition with the company.

b) That there should be full disclosure of the conflict of interest as well asmaterial facts of the transaction.

c) That the transaction should be authorised following disclosure concerningthe conflict of interest and the transaction by disinterested directors. Greatemphasis should be placed on the desirability of providing a companywith disinterested representation as a technique for dealing with conflictsof interest. Issues pertaining to the presence of independent elements inboard composition have been taken up in the Code. In the case ofauthorisation by disinterested directors, there should be clear guidance asto the minimum standards of conduct expected of him in exercising hisbusiness judgement. For example, that he:-

• is not interested in the subject of the business judgement;


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• is informed in respect of the subject of the business judgement to theextent that the director or officer reasonably believes to be appropriateunder the circumstances; and

• rationally believes that the business judgement is in the best interestsof the company55.

d) That the ability of the court to enquire as to the fairness of a transactionshould be preserved at all times. The effect should be such that even wherea transaction has been approved by disinterested directors, the challengingparty may hold the director liable if he is able to establish that thedisinterested directors could not reasonably have concluded that thetransaction approved by them was fair to the company. The advantage tosuch a provision is that it addresses issues pertinent to the Malaysiancorporate landscape, where it is common to find the so-called independentmembers of the board to be friends and invitees of a controlling shareholder.It behooves directors to consider a transaction very carefully and fullydocument the reasons why they thought that the company shouldnevertheless enter into it. It was suggested that an incentive should becreated within the framework to persuade directors to adopt theseprocedures. One such example would be through the burden of proofrequirements. For example, where a transaction has been approved orratified in the manner required, the burden of proving that the particulartransaction is not fair should rest with the person challenging thetransaction. Where, however, the transaction has not been approved orratified in the appropriate manner, then the director in question shouldhave the burden of proving that the transaction is fair to the company.Further consideration should go into this issue.

Recommendations

That the statutory fiduciary duty to avoid conflicts of interest should amongother things:-

(a) Embrace the following conflict of interest situations:-

• Misuse of corporate information, property or position;

• The taking of corporate opportunities; and

• Engaging in business in competition with the company.

(b) Set out the minimum procedures that directors should adopt in conflictof interest situations which should include the procedures outlined in2.2.38 (b) and (c ) above; and

(c) Preserve the power of the court to enquire into the fairness of atransaction at all times.

55 This is the so called safe harbour created by the business judgement rule. A fuller discussion on this issue is alluded to below.

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Third fiduciary principle - Duty to act for a proper purpose

ISSUE

Should the fiduciary duty to act for a proper purpose be codified?

2.2.39 Although directors may act honestly in what they believe to be for the benefit ofthe company, directors may still be liable if they have exercised the power for apurpose different from that which the powers were conferred upon them56. InHoward Smith v Ampol Petroleum, the Privy Council held that while thedirectors had acted in good faith (i.e. there was no purpose of personal gain,etc.) they nevertheless remained liable because they had exercised their powersfor a collateral purpose. The fact that the directors have acted bona fide isirrelevant as the duty to act for a proper purpose is independent of the duty ofgood faith.

2.2.40 The statutory formulation of directors’ fiduciary duties in Canada includes, inaddition to the duty to act honestly and in good faith with a view to the bestinterests of the company, the duty to act for a proper purpose. The CLERPproposal alluded to above recommends that this duty should be placed onstatutory footing as well.

2.2.41 It is submitted that in the spirit of clarifying the duties and obligations of directorssection 132(1) CA should be amended to state explicitly the duty to act for aproper purpose.

Recommendation

That section 132(1) CA should be amended to state explicitly the duty toact for a proper purpose.

ISSUE

Should section 132(1) CA spread its net wider and codify the requirementof skill and care?

2.2.42 There is a striking contrast between the directors’ heavy fiduciary duties andtheir relatively light obligations of skill and diligence. Unlike their robustapproach when adjudicating on questions of loyalty and good faith, courts displaya reluctance to interfere with directors’ business judgment and have generallytaken a lenient view of the duties of care, skill and diligence of directors. Courtsare also perhaps conscious of substituting their hindsight for a director’s foresightand are therefore unwilling to condemn directors, though events have provedthem wrong.

2.2.43 Section 132 (1) CA sets out the duty of the director “to use reasonable diligencein the exercise of the duties of his office”.

56 Howard Smith Ltd v Ampol Ltd [1974] A.C. 821. P.C. at 834.


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2.2.44 The common law spreads a wider net with its requirement of skill and care. Theduty of skill, care and diligence to be exercised by directors is set out in thelandmark decision of Re City Equitable Insurance Company57. Traditionally,directors’ duties of skill have been treated as if they were the same as the dutiesof care and diligence. A director’s duty to display skill is conceptually differentfrom his duty to take care which is again different from his duty to exercisereasonable diligence.

Duty of skill

2.2.45 Directors are subject to the duty of skill to the company under common law.Basically, a director need only exhibit the degree of skill that is reasonably to beexpected from a person with his knowledge and experience58.This comprisesboth an objective and a subjective test. The benchmark therefore is that of areasonable person with his knowledge and experience. This seems fairconsidering that the CA does not prescribe any minimum qualifications beforea person can become a director. It follows, however, that if a director possessesspecial qualifications, e.g. as a lawyer or accountant, he is expected to use thatskill for the company. It will be no defence for a professionally qualified directorto say that he is in fact a bad lawyer or an incompetent accountant. He is expectedto show a reasonable amount of skill, commensurate with his qualificationsand experience.

Duty of care

2.2.46 While it may be unfair to expect an unqualified person to show much skill inthe performance of his duties as a director, there is no excuse however for aperson who accepts a director’s post not to be careful. Developments in the lawin respect of this duty increasingly indicates that directors are being held to anobjective standard of care. The case of Daniels v Anderson59 dealt with thetortious duty of care owed by directors. The Court of Appeal, while recognisingthat the duty would vary with the size and business of the company, and theexperience or skills of the particular director, held that it would be measured byan objective standard to which both executives and non-executives would besubject.

2.2.47 The following general principles may be gleaned from the cases in this area:-

• A director must take trouble to discover what his rights and obligations areunder the articles and law60;

• Directors may delegate their powers and trust their delegates, in the absenceof circumstances that would excite the suspicion of a reasonable man; and

• A director is generally not responsible for acts and omissions of his co-directors even if he did not attend board meetings. He is not responsible for

57 [1925] 1 Ch 407

58 Romer J. in Re City Equitable Fire Insurance Co. Ltd [1925] Ch 407

59 (1995) 37 NSWLR 438

60 Re Duomatic Ltd. [1969] 2 Ch 365

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loans made in his absence61 or things done in his absence from boardmeetings generally62. In the Marquis of Bute’s63 case, the learned judge64,drew a distinction to find that neglect and omission to attend meetings isnot the same as neglect or omission of a duty that ought to be performed atthose meetings. In the particular facts of this case, the defendant (thePresident of the Bank) had attended only one board meeting and had noinvolvement in the affairs of the company. There was a failure by managementto observe bank rules relating to deposits and repayment, and this resultedin the perpetration of fraud upon the bank. The Marquis was held to beentitled to rely on those who did attend the meeting. The lesson to be gleanedfrom this decision is that a director who attends board meetings and rubberstamps recommendations without independently evaluating the merits of aparticular recommendation, runs a far greater risk of breaching his duty ofcare as compared to one who doesn’t attend meetings at all65.

Duty of diligence

2.2.48 Following from the discussion above, while directors are generally notresponsible for acts and omissions of his co-directors at times when he did notattend board meetings, he may nevertheless be liable under his duty to exercisediligence in performing his duties. Re City Equitable, however, also stands forthe proposition that a director is not bound to give continuous attention to theaffairs of the company. His duties are of an intermittent nature to be performedperiodically at board meetings or any board sub-committee that he may be placed.This rather relaxed early twentieth century view of what is expected of a director,may not hold true today.

2.2.49 For example Article 72, Table A of the CA, provides that a director shall vacatehis office if he absents himself from the meeting of directors for a period of 6months without leave of absence from the board. This is to ensure that there areno “sleeping directors” on a company’s board. Also in the case of executivedirectors, modern service contracts stipulate that directors should devote alltheir time to the company’s affairs. With respect to non-executive directors, thegeneral trend towards raising their profile has actually seen some increase inthe expectations of the court with respect to their role. For example, in the caseof Dorchester Finance v Stebbings66, one of the grounds under which Forster Jfound non-executives to be liable is that they had failed to perform any duties atall as directors of Dorchester Finance. This increases the duty of diligencerequired of non-executives and is a definite shift away from Re City Equitable.

2.2.50 The discussion above illustrates that the requirement under common law fordirectors to exercise skill, care and diligence in the exercise of their duties iswider than that required under section 132(2) CA. The duty to exercise skill isconceptually different from his duty to take care which is again different fromhis duty to exercise reasonable diligence. The Canadian Business Corporations

61 Ramskill v Edwards (1885) 31 Ch D 100 (High Court, England)

62 Re Montrotier Asphalte Co. (1876) 34 LT 716

63 [1892] Ch 100

64 Stirling J.

65 Selangor United Rubber v Craddock [1967] 2 All E.R. 1255

66 [1989] BCLC 498


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Act67 incorporates the duties of care diligence and skill in statute. It is submittedsection 132(1) CA should be amended to include the duties of care and skill.This is the right approach again in the spirit of clarifying their duties.

Recommendation

That section 132(1) should be amended to include the duties of skill andcare.

ISSUE

Should there be a clarification of the standard of care, skill and diligencerequired of executive and non-executive directors?

2.2.51 Directors with full time service contracts may be subject to the contract whichmay go beyond his duties as a director under statute and common law. Forexample, he may be required to devote all his time to the company, and ifemployed for skills, to provide the requisite skill. If he fails to do so, he is inbreach of his contractual duty.

2.2.52 However, in the case of non-executive directors, there are no service contractsto bind them. Also they are not full time officers of a company.

2.2.53 Judicially, there is recognition that non-executive directors cannot therefore bemeasured against the same standard as that used for executive directors. Thestandard of care required of directors and officers have been judicially determinedaccording to the particular circumstance of the officer concerned. The duty ofcare, skill and diligence required is measured against the standard of a personwith his knowledge and experience68.

2.2.54 The application of the objective/subjective test on the standards of care to bedischarged by non-executives as advocated by Re City Equitable InsuranceCompany69 has been lenient. The classic illustration of this lower standard canbe found in the Marquis of Bute’s case70 alluded to above.

2.2.55 However, increasingly the courts have required a greater degree of care to beexercised by directors, including non-executive directors, partly as a result ofthe attention generated on their role in corporate governance. There is anincreasing trend (internationally) to hold directors liable to a higher objectivestandard.

2.2.56 There is now dicta by the highest courts in Australia that supports the applicationof a more stringent duty on directors. In the case of Daniels v Anderson71 whichdeals with the tortious duty of care owed by directors, the judge at first instanceclearly considered the content of the duties of executive and non-executive duties

67 Section 122(1)(b) Canadian Business Corporations Act

68 Re City Equitable Fire Insurance Co Ltd [1925] Ch. 407

69 [1925] 1 Ch 407

70 [1892] Ch 100

71 (1995) 37 NSWLR 438

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as the same. The Daniels case follows the same approach taken in cases thatincreasingly adopt a more objective standard for both executive and non-executive directors. The Court of Appeal did, however, recognise that the dutywould vary with the size and business of the company, and the experience orskills of the particular director; although it would be measured by an objectivestandard to which both executives and non-executives would be subject. Thecase reflects the importance of the role of directors and officers in Australia. Itis no longer acceptable for directors to be passive in company affairs and directorsare expected to have the appropriate skills and competence to perform the role.

2.2.57 Australia had, in its 1992 amendments to the CL, given a statutory recognitionto the distinction between the different types of directors. Their equivalentprovision now reads “in the exercise of his or her powers and the discharge ofhis or her duties, an officer of a corporation must exercise the degree of careand diligence that a reasonable person in a like position in a corporation wouldexercise in the corporation’s circumstances” (s232(4) of the CL). The ExplanatoryMemorandum to the amendment indicated that the special background,qualifications and management responsibilities of the particular officer may betaken into account in evaluating their compliance with the duty of care anddiligence.

2.2.58 There is currently a proposal to clarify this obligation even further. CLERP hasproposed to reform s232(4) of the CL to incorporate the intention of the previousamendment such that the standard of care required by the duties of care anddiligence of the director (and officer) of the company be assessed by referenceto the particular circumstances of the officer concerned. The standard is to bemeasured against that of a reasonable person if they were:-

• a director or officer of a corporation in the corporation’s circumstances;

• occupying the office within that corporation held by the director or officer;and

• had the directors or officer’s experience, powers and duties.

2.2.59 This is to overcome the problem that the earlier provision only covered “position”of the director or officer which connotes the circumstances of the director’soffice, rather than the director’s personal qualities.

2.2.60 Unlike the position under common law, section 132 of the CA also makes nodistinction between executive and non-executive directors. Although there hasbeen a dearth of judicial interpretation of this section, it is not inconceivablethat the interpretation of the standard of care would follow the approach undercommon law and would be applied in this context to adjust the standard of careaccording to the circumstances of the officer concerned.

2.2.61 If s.132 of the CA is interpreted in line with English precedents “reasonablediligence” in s.132 would then mean a degree of diligence and care which isreasonable in the circumstances and no more72, this of course applies whether adirector has or does not have executive functions.

72 Byrne v Baker [1964] VR 443, 450


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2.2.62 Although Australian cases are only persuasive in Malaysia, it may indicate ajudicial trend in applying a more objective standard for all directors, i.e. withouttaking into account the particular circumstances of the director or officerconcerned. These concerns prompted the CLERP proposals to amend the lawto take into account the particular circumstances of the director or officer. Thisis to overcome concerns that using the same objective standard for bothexecutives and non-executives may dissuade suitably qualified persons frombeing independent non-executive directors.

2.2.63 In light of the direction taken by Australian cases, do we wish to wait for theevolutionary development of the law by judicial interpretation, or pre-empt thesame by introducing a clear statutory standard by which to measure the exerciseof the powers of directors?

2.2.64 It is submitted that the trend towards holding non-executive directors to anincreasingly higher standard should not be stopped. In fact, it should beencouraged. Judicial interpretations of directors’ duties have tremendous effectin influencing change in companies and it is generally regarded as one of thecatalysts for change in developed countries, where the past decade has seen aremarkable movement away from complacent boards composed of companyexecutives and CEO’s friends and invitees towards actively involved andindependent boards.

2.2.65 The background to the recommendations for reform in Australia should beappreciated. The Australia corporate law reform programme is driven by anagenda that is quite different from ours. Briefly, theirs is premised on the factthat there is already an acceptable level of governance practised in Australiancompanies and the law should now encourage directors to make entreprisingdecisions with the ultimate aim of making businesses in Australia morecompetitive. Malaysia is, however, at the initial stages of developing independentand effective boards, and in particular independent and effective directors.Therefore, amending section 132 CA to ensure that the standard of care imposedis with reference to the particular circumstances of the director, and to articulatethe circumstances which should be taken into account in determining the dutyof directors, may impede the development of a higher standard of care beingpractised by non-executive directors. In any case, it is fairly well settled law inMalaysia that the duties of directors are in reference to the particularcircumstances of the director in question.

Recommendation

That section 132 (1) CA should NOT be amended to clarify that the standardof care imposed is with reference to the particular circumstances of thedirector.

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2.3 Controlling shareholders

ISSUE

Should fiduciary duties imposed on directors be extended to embracecontrolling shareholders or shareholders with significant influence overthe control of the company.

2.3.1 The law applicable to fiduciaries does not apply to shareholders. Their right tovote is a right in property. Therefore, when a shareholder votes on his shares, heexercises a proprietary right and not a fiduciary power.

2.3.2 Essentially, a controlling shareholder is able to exert his influence in twosignificant ways. First, by exercising his right to vote at a general meeting andsecond, by exerting his influence over the board. The first issue is dealt with in2.3.13 below. It is the second issue that is being considered here – i.e. shareholdercontrol over the board and therefore board decisions. This is a very significantpower in the hands of a controlling shareholder. As alluded to earlier, the articlesof companies confer broad powers of management on directors73. These carryvery significant powers, which include the power to institute action, the powerto approve all transactions of a company not requiring the approval of the generalmeeting, access to confidential company information in pursuance of thisfunction, to name a few.

2.3.3 The section 4 definition of directors under the CA deems as directors persons“in accordance with whose directions or instructions the directors of acorporation are accustomed to act…” i.e. shadow directors. Shadow directorsare not de facto directors. In the case of the latter there is usually an activeholding out by the company that a person is acting as a director, although neveractually or validly appointed as such. The concept of a shadow director isexplained in Re Hydrodam Corby Ltd. [1994] 2 BCLC 180, 182 (High Court,England) by Millet J in the following way:

“…A shadow director, by contrast, does not claim or purport to act as a director.On the contrary, he claims not to be a director. He lurks in the shadows, shelteringbehind others who, he claims are the only directors of the company to theexclusion of himself. He is not held out as a director by the company. Toestablish that a defendant is a shadow director of a company, it is necessary toallege and prove:-

• who are the directors of the company, whether de facto or de jure;

• that the defendant directed those directors on how to act in relation to thecompany or that he was one of the persons who did so;

• that those directors acted in accordance with such directions; and

• that they were accustomed so to act.”

73 Reg. 73, Table A, CA


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Millet J in this case accepted implicitly that a body corporate could be a shadowdirector of another company. The effect of section 4 is that they are subject tothe duties imposed by law on directors generally.

2.3.4 The problem with this definition lies in enforcement or more specifically proof.It is practically very difficult to establish that a particular director is acting underthe control of another, and harder still that he is also accustomed to act in thisway. It is almost too easy to conceal their control, under a system which reliesentirely on the willingness of the boards to disclose the identity of the personpulling the strings. Technological advancements in communications render italmost impossible to trace a particular instruction with respect to a particulartransaction.

2.3.5 However, the potential harm that such conduct has on minority shareholderrights is tremendous. It is not uncommon to find controlling shareholdersundertaking businesses in direct competition with that of the listed entity, or“asset shifting” at the expense of the listed entity. While the legislature has madeattempts to control such transactions, the problem with prescriptive requirementsare that a clever adviser will probably find ways around the requirement.Fiduciary duties, on the other hand, are based on principles of equity and thereis, therefore, some consideration in respect of the fairness of a transaction.

2.3.6 It has been suggested that one way around the problem of enforcement is todeem significant shareholders of a certain shareholding threshold and above asdirectors. This is in a sense a rebuttable presumption and it is for the particulardirector in question to establish that he is not a “shadow director”. Such aprovision will assist in closing gaps in duties and obligations, including publicdisclosure obligations that directors are subject to.

2.3.7 The all consuming question in this respect is what the appropriate thresholdshould be. For purposes of the Malaysian Code on Take-over and Mergers,control is set at 33.3%. Should a similar benchmark be used for this purpose?The underlying rationale for the 33% band is the assumption that 33% of thevoting power may result in a change of control.

2.3.8 However in terms of commercial reality, the 33% band is conservative. Incompanies with a huge shareholding base it is believed that 15% - 20% controlover voting rights is sufficient for control. The Committee is unable to decideon a threshold without further empirical study, and recommends that this issuebe studied further by the relevant authority.

2.3.9 The second question that the Committee is undecided on relates to theformulation of control. Should it be limited to shareholding or beneficial interestsin voting shares or should the concept of “effective control” which embraces awider range of transactions be adopted? Better yet, should the formulation ofcontrol include “interests in shares” as defined under section 6 and 6A of theCA?

2.3.10 It is clear that this requirement should be extended beyond direct shareholding.Control extends beyond proprietary interest. The question therefore is how farthis should be extended? The concept of interest in shares extends beyondproprietary interest, whether legal or beneficial. It refers to the factual

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circumstances under which a person is able or entitled to exercise or controlthe exercise of votes attached to shares regardless of how that result is achievedor how the interest is derived. Section 6(A)(4)(a) in this respect embodies theconcept of shadow directors. The concept, however, goes much wider. Forexample, under section 6A(6) CA it is extended to include persons who haveentered into a contract to purchase a share or have a conditional or unconditionalright to have the shares transferred over, to name a few. The drawback to theprovision is that the obligation under the section is very wide and it introducesan element of uncertainty as to the persons falling within the ambit of the section.Also, to date, the concept of interest in shares is used in relation to disclosure.If it is extended to the requirement being proposed, this will have the effect ofimposing the entire spectrum of duties on directors, imposed in section 132 CA.

2.3.11 The concept of effective shareholding is essentially the following: If A has acontrolling interest in B which has shareholding in C, A’s effective shareholdingor control in C is achieved by multiplying A’s percentage shareholding in B withB’s percentage shareholding in C. It is much narrower in ambit than the conceptof interest in shares. The advantage to this formulation is that it is certain, andthat there is a definite body of persons on whom the obligations may be placed.The disadvantage, however, is that it is much narrower and easily avoidable bya person seeking to evade the obligations that this proposed requirement seeksto impose.

2.3.12 The Committee flags this area as an important and urgent area for consideration.As it has potentially far reaching effects, the Committee recommends that thisproposal be taken up for further consideration by the relevant authority andupon sufficient consultation with the industry.

Recommendation

The Committee therefore recommends that the proposal to deemsignificant shareholders of a certain shareholding threshold and above asdirectors be considered further by the relevant authority and upon sufficientconsultation with the industry.

ISSUE

Abuses by controlling shareholders in respect of their right to vote

2.3.13 A shareholders’ right to vote is a right in property. Therefore, when a shareholdervotes on his shares, he exercises a proprietary right and not a fiduciary power.In Pender v Lushington74, Jessel MR had this to say in respect of the shareholder’sright to vote,

“ There is…no obligation on a shareholder of a company to give his vote merelywith a view to what other persons may consider to be the interests of the companyat large. He has a right, if he thinks fit, to give his vote from motives or promptingof what he considers his own individual interest.”

74 (1877) 12 AC 589


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2.3.14 The proprietary nature of the right to vote is so well ingrained that even ifdirectors, who are also shareholders, are bound as directors to take a particularcourse of action, they are not, as shareholders, bound to vote in the same manner.Walton J in Nothern Counties Securities Ltd. v Jackson and Steeple Ltd.explains it the following way,

“Where a director votes as a director for or against any particular resolution ina director’s meeting, he is voting as a person under a fiduciary duty to thecompany for the proposition that the company should take a certain course ofaction. When a shareholder is voting for or against a particular resolution, he isvoting as a person, owing no fiduciary duty to the company who is exercisinghis own right in property to vote, as he thinks fit. The fact that the result of thevoting at a meeting …will bind the company cannot affect the position that invoting he is voting simply as an exercise of his own property rights.”

2.3.15 This is however, not an absolute right. There are limits to the majority votingpower under common law. The justification for judicial interference with theprinciple of majority rule is based on the principle that both the company (as adirect consequence of incorporation) and minority shareholders have rights oftheir own, that the majority cannot deprive them of75. Examples of rightsbelonging to a company include corporate opportunities, the right to sue andthe right to issue shares. Examples of rights of minority shareholders may takethe form of personal rights (e.g. right to property in shares, right to pre-emption)and derivative rights (e.g. right to reap benefits or potential benefits fromundertakings or potential undertakings of the company).

2.3.16 The courts have essentially sought to control the exercise of majority votingpower through the equitable doctrine that the law will not permit the fraudulentexercise of a power. The term fraud is understood to mean fraud in the widerequitable sense, where there need not be actual deceit or dishonesty76.

2.3.17 Just as it is difficult and undesirable to define with exactitude, the meaning ofthe phrase, “bona fide in the interests of the company as a whole”, and tocategorise factors which would assist in determining the propriety of purposebehind the conduct of directors, as alluded to earlier, it is also difficult andundesirable to attempt to define or categorise in advance what conduct wouldconstitute a fraud on a power. Therefore, each case is generally left to be decidedon its own facts. The cases in which the doctrine of fraud on a power has beeninvoked may be grouped into three categories77. They are cases dealing with:-

• appropriation of rights, advantages and property belonging to the company;

• expropriation of rights, advantages and property belonging to the company;and

• ratification for breach of duty on the part of directors.

75 Peter’s American Delicacy v Health & Co. (1939) 61 CLR 457

76 Estmanco v Greater London Council [1982] 1 All E R 437

77 Loh Siew Cheang, Corporate Powers at page 110

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2.3.18 Other than the obligations in relation to the disclosure of substantialshareholdings under the CA as well as disclosure obligations when participatingin an interested transaction with the company, “controlling shareholders” arepresently not precluded from voting in relation to any particular transaction inwhich he has an interest in by the CA. Proposals in relation to the right of“controlling shareholders” to vote may be rationalised with proposals to dealwith directors in the event of the director’s conflict of interest with regard to thecompany.

2.3.19 The Committee recommends that the concept of a “duty of fair dealing” notunlike what we have proposed directors should be subject to, should be extendedto include controlling shareholders. This may entail, for instance, a general rulethat a controlling shareholder that enters into a transaction with a company hasa duty of fair dealing to a corporation. It fulfils this duty if, for instance:-

• the transaction is fair to the corporation when entered into; and

• the transaction is authorised in advance or ratified by “disinterestedshareholders”, (i.e. shareholders who have no interest in the transaction)following disclosure concerning the conflict of interest and the transaction,and does not constitute a “waste of corporate assets” at the time of theshareholder action.

2.3.20 The range of situations should not be limited to transactions involvingacquisitions and disposals such as that embodied in section 132E CA. However,a determination will have to made by the relevant regulator of the circumstancesunder which such a duty should be imposed. A circumstance that may warrantimposition of such a duty is, for example, in conflict of interest situations wherethere is use by a controlling shareholder of corporate property, corporateinformation or corporate position. This matter requires further review and it isrecommended that the relevant regulator determine the extent of the applicabilityof such a provision.

Recommendations

The Committee recommends that the concept of a “duty of fair dealing”be extended to include controlling shareholders in respect of their right tovote in certain defined circumstances.

The relevant regulator should attempt to define the circumstances underwhich such a duty should be imposed.


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2.4 Officers

ISSUE

Should the duty under section 132 CA be extended to officers?

2.4.1 In Australia78 and Canada79 the statutory equivalent to section 132 CA apply toofficers of companies. That is to say, officers of companies are subject to bothfiduciary duties as well as the duties of care, skill and diligence that directorsare subject to.

2.4.2 While section 132 (1) is not extended to officers there are nevertheless provisionsin the CA that impose obligations on management. For example, section 132(2)which sets out the prohibition against misuse of information and section 132A,where the insider trading provisions apply to “officers”. There are also provisionssuch as section 99B SIA that impose disclosure obligations on chief executivesof companies. Similarly, the CA imposes on both directors as well as managersthe requirement to maintain proper accounts. “Managers” for purposes of theCA is defined as the “principal executive officer” of a company.

2.4.3 The reluctance to extend the duties under the CA to embrace “officers” is tosome extent attributable to the definition of the term “officer” in the CA whichis defined widely to include all employees of a company. However, the argumentfor the imposition of duties on officers takes on greater weight if it is limited toprincipal executives of companies or “managers”, or in other words, personswho are in a position to make material decisions for a company and should,therefore, be subject to the duties and obligations imposed on directors.

2.4.4 It is submitted therefore that the duties imposed under section 132 CA shouldbe extended to embrace senior or principal executive officers of companies andso should the proposed amendments to section 132CA.

Recommendation

That the duties under section 132CA should be extended to embrace senioror principal executive officers of companies.

2.5 Company Secretaries

ISSUE

Clarification of the role of company secretaries

2.5.1 Every company in Malaysia must have one or more company secretaries, whomust be resident in Malaysia80. Section 139(3) provides that the companysecretary shall be appointed by the directors.

78 Section 232(2) Corporations Law

79 Section 122 (1)(a) Canadian Business Corporations Act 1975

80 Section 139(1) CA

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2.5.2 Section 139 of the CA requires all company secretaries to be a member of aprofessional body prescribed by the Minister of Domestic Trade and ConsumerAffairs or licensed by the ROC (s139B of the CA). The Minister of DomesticTrade and Consumer Affairs had also launched a Company Secretary’s Code ofEthics (“Code of Ethics”) in an effort to instill professionalism and effectivenessin company secretaries.

2.5.3 Section 4 of the CA considers the company secretary to be an officer of thecompany. He is subject to liabilities an officer, which include among other thingsliability under section 132(2) CA for misuse of corporate information and 132ACA for insider trading.

2.5.4 The role of the company secretary is not an easy one to describe. Their duties toa large extent are not fixed by law but are generally those assigned to him by thearticles or his contract of employment. Also, it is not uncommon for companysecretaries to “double up” as legal officers, finance officers or even corporatefinance officers. In smaller companies, one of the directors may concurrentlyact as the company secretary (if qualified).

2.5.5 At its core, the secretary’s function is basically to handle all the paperwork andprocedural matters that running an incorporated company involves. Theyessentially undertake the company’s responsibilities of keeping the registeredoffice open and accessible to the public for the minimum hours specified eachday (s119), keeping the register of directors, managers and secretaries (s141)and lodging the annual returns of the audited Accounts and Directors’ Report(s165 and 8th Schedule), to name a few. The SC’s Policies and Guidelines on theIssue/Offer of Securities also place a duty on company secretaries to receiveand keep a record of disclosure by directors of public listed companies of theirdealings in securities of such companies, as well as requiring the companysecretary to table those disclosures at the meetings of the board of directors(Para 5.03(2)).

2.5.6 However, he is today more than a glorified office manager. There has been judicialrecognition of the increasing role of the company secretary in the day-to-daybusiness of companies. He is the chief administrative officer of a company andclothed with ostensible authority to enter into contracts concerningadministrative matters81. The company secretary is, however, not part ofmanagement and, therefore, has no power to make commercial decisions onthe company’s behalf82.

2.5.7 There is also the developing role of the company secretary in terms of advisingthe board and the chairman of the company’s and directors’ complianceobligations under the law. The Cadbury Committee looked to companysecretaries to advise the chairman and the board on the implementation of theCode of Best Practice. Their role is, therefore, not purely administrative. Theyhave a crucial advisory role as well, which then follows through into a crucialrole in encouraging compliance with the law.

81Panorama Development v Fidelis (1971) 2 QB 711; Mohamed b Othman v Abdul Shattar b Abdul Ibrahim [1987] 2 MLJ 695, 697

82 Mohamed b Othman v Abdul Shattar b Abdul Ibrahim [1987] 2 MLJ 695, 697


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2.5.8 In a large listed company, the company secretary is usually an employee. Insmaller companies, this function or the task may be farmed out to an independentcompany secretarial firm. However, various arrangements may exist dictatedlargely by commercial considerations. For example, some listed entities haveboth internal and external company secretaries; the external secretary in thisrespect is largely responsible for procedural matters that the running of anincorporated company involves, while the internal company secretary takes ona more administrative role. On the other hand, some companies may requirethe company secretary to handle administrative matters only, while the widercompliance issues are dealt with by a legal or other officer.

2.5.9 The advantage of internal company secretaries is that their hands-on role in thedaily workings of the company makes them the perfect candidate for undertakinga compliance role, as they have intimate knowledge of the administrativeworkings of the company to be able to comment on their compliance with lawsand regulations. The problem, however, is that internal secretaries are employeesof the company, appointed by directors, hereby casting doubt on theirindependence from the board.

2.5.10 In contrast, external secretaries are not involved in the management of thecompany, and therefore may have sufficient distance from the company to beindependent of the board. However, there are reservations about their ability tomeet the expectations of performing an advisory role because of their lack ofproximity with the company.

2.5.11 The Committee considered whether company secretaries should be mandatedby law to advise the board. It decided that it would be impossible to do so, inrecognition of the fact that there are persons other than company secretariesthat may undertake this task. Also, such a provision does not address the mischiefthat is intended to be addressed, i.e. that directors should take advice on theircompliance obligations when deliberating on transactions on behalf of thecompany.

2.5.12 The Committee then considered if directors should be placed under a positiveobligation under law to take the advice of company secretaries when decidingto undertake certain material transactions, which would include related partytransactions. It was felt that such a duty does not recognise fully the fact thatthe role of an adviser to the company may be fulfilled by persons who are notcompany secretaries, but who are nevertheless competent to undertake such arole. It was, however, felt that a more meaningful approach would be to requirea director to inform himself, to the extent he deems appropriate, about the subjectmatter of the business judgment. This is an element of the statutory businessjudgement rule that we allude to below. In this respect, the director is then opento take such advice from a range of persons including company secretaries.

2.5.13 In any case, the prescriptions in the Code that essentially prescribe that alldirectors should have access to the advice and services of a company secretary,may in time facilitate a gradual and incremental shift towards increasing theirrange of responsibilities into a wider advisory function.

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Recommendations

That there should be no codification of the advisorial role of companysecretaries.

That directors should not be placed under a positive obligation under lawto take the advice of company secretaries when deciding to undertakecertain material transactions. Rather it should take the form of an indirectrequirement of informing himself, to the extent he deems appropriate, aboutthe subject matter in question. This is consistent with the recommendationin paragraph 3.2.5 below on the inclusion of a statutory business judgementrule.

3. Defences

3.1 Reliance on others

ISSUE

To what extent can directors rely on others in carrying out their duties?

3.1.1 As discussed earlier, a director may in appropriate circumstances be justified intrusting an official to perform certain duties83 . But, the judgment of the majorityof the New South Wales Court of Appeal in Daniels, indicated that directorscannot blindly rely on the judgments of others. Ignorance, a failure to inquireand a blind reliance on the judgment of others would not protect directors fromliability for the breach of the duty of care and diligence. The court also requiredthat directors be reasonably familiar with the business of the company.

3.1.2 The CLERP proposal argues that the inability of directors to rely on otherscould lead to a conservative approach to decision-making, and has made a casefor the introduction of legislation following the New Zealand approach. TheNZCA allows directors to delegate powers in return for undertaking a supervisoryrole. In that role they may rely on reports, statements, financial data and otherinformation supplied by employees, experts, professional advisers and otherdirectors where the matters fall within their designated field of responsibility.

3.1.3 This approach is preferable. If directors are unable to rely on others in order toglean information, directors would therefore be forced to make detailed andexhaustive inquiry into every matter, thus holding up the decision-makingprocess. There should, however, be safeguards in place to ensure that thisrequirement is not abused.

83 Re City Equitable Fire Insurance Co [1925] Ch. 407 [See also discussion earlier on the Common Law duties of skill, care and

diligence owed by directors].


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3.1.4 The safeguards should include the following:-

• That the director must act in good faith – The good faith test contemplatesan inquiry into the directors state of mind. It recognises that the specialskill, background or expertise of a director may render unwarranted reliancethat would be proper for a director lacking such special skill, backgroundor expertise.

• That the director should reasonably believe that the reliance or continuingreliance is warranted.

• The person relied on should be such that the director “reasonably believesmerits confidence”.

Recommendation

The ability to rely on others to perform the duties associated with his officeshould be included as a defence under the law subject to necessarysafeguards to ensure that this right is not abused.

3.2 Business judgement rule

ISSUE

Should a statutory business judgement rule be introduced?

3.2.1 If the objective is to promote honest, informed and rational business judgmentby directors, should they be able to avail themselves of a defence from personalliability for breaches of duties in respect of such judgement?

3.2.2 At common law, Courts are loath to substitute its judgment for the businessjudgement of directors or shareholders. However, the business judgement ruledoes not apply where the judgement was not arrived at bona fide in the interestsof the company as a whole or has been precipitated by improper motives.

3.2.3 Australia and the United States have attempted to formulate a business judgementrule. In the United States, the rule takes the form of judicial doctrine. CLERP,however, has proposed a statutory formulation of the business judgement rule.

3.2.4 CLERP proposes that an officer of the corporation would have discharged hisduty of care and diligence in respect of a business judgement if:-

• the judgement was exercised in good faith and for a proper purpose;

• the officer does not have a material personal interest in subject matter of thebusiness judgement;

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• the officer informs himself about the subject matter of the business judgementto the extent that he thinks appropriate; and

• rationally believes that the business judgement is in the best interests of thecorporation.

3.2.5 It is submitted that such a statutory safe harbour is necessary in tandem withthe extensive codification of fiduciary duties and the duties of skill and care andthe introduction of a statutory derivative action as recommended in chapter 6para 4.24 of the Report. The statutory provision should additionally explicitlypreserve the application of all other common law defences.

Recommendation

That a statutory safe harbour in the form of the business judgement rule isnecessary in tandem with the extensive codification of fiduciary duties andthe duties of skill and care and the introduction of a statutory derivativeaction as recommended in chapter 6 issue 4 paragraph 4.24 of the Report.The statutory provision should additionally explicitly preserve the applicationof all other common law defences.


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ISSUE TWO

TO REVIEW PROVISIONS OF LAW AND REQUIREMENTS IN RESPECT OF:-

• THE ADEQUACY OF DISCLOSURES; AND

• CONFLICTS OF INTERESTS WITH RESPECT TO TRANSACTIONS THAT INVOLVETHE WASTE OF CORPORATE ASSETS.

1. Background

1.1 Disclosure requirements exist for the following reasons –

• To ensure that all investors have equal and timely access to information to preservethe integrity of the market (i.e. to ensure that market participants have equalopportunities and face equal risks and that market supply and demand is not distortedby information asymmetry).

• To provide the public with adequate information about the affairs of the companyin order to enable them to make informed decisions about investing or whether tocontinue investments in the company.

1.2 Regulation is justified to the extent that it offsets the inefficiencies of an imperfect market.The burden of continuous reporting under securities laws may be costly and timeconsuming or may place the company in a disadvantageous position with regard to itscompetitors. Accordingly, there needs to be a balance between the principle that themarket should be provided with adequate information to avoid a false market and theneed for the company to keep price sensitive information confidential.

1.3 Disclosure in respect of conflicts or potential conflicts of interests with the interests ofthe company, are also relevant. With respect to directors, they are fiduciaries and any oftheir interests which compete with that of the company or with their duties, should bedisclosed, so as to maintain the integrity and confidence in the directors. At present,there are certain prohibitions against particular transactions being effected without theapproval of shareholders. The issue is whether the law should require that these interestedparties such as directors, and controlling shareholders, should abstain from voting asshareholders in respect of such transactions.

Sources of information to investors regarding the affairs of the company

1.4 Formal sources of information about a public listed company are:-

• Announcements and circulars issued pursuant to the continuing disclosurerequirements under the listing requirements of the relevant exchange84 andGuidelines of the SC;

84 Listing Requirements and Chapter 7 of the SC Guidelines prescribe the matters which must be submitted to the exchange and the

SC.

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• Prospectuses - on issue of securities or offer for sale to public;

• Other documents required to be lodged under the CA, including the annual report;and

• AGMs.

2. Adequacy Of Disclosures

2.1 In reviewing the adequacy of disclosures, it would be useful to segment disclosures inrelation to public offerings of securities, and continuous disclosure requirements inregard to the trading of securities on the KLSE.

Regulation of public offering of securities in the primary market

2.2 Currently, section 32 of the SCA provides that the SC (which is accountable to theMinister of Finance) should administer matters relating to a proposal by any persons tomake available, offer for subscription or purchase or issue an invitation to subscribe orpurchase securities. Part IV of the CA, on the other hand, provides for another set ofrequirements governing the issue and offer of securities which is administered by theROC. The ROC is answerable to the Minister of Domestic Trade and Consumer Affairs.The requirements with respect to the contents of prospectuses (other than for unit trusts)are contained in Part IV of the CA. Under the current structure, the SC does not havedirect powers in relation to prospectuses under such circumstances. Without the powerto administer these prospectus requirements, it would be difficult to undertake consistentregulation of the proposals to offer securities under section 32 of the SCA.

2.3 In the interests of efficiency and providing legal and regulatory certainty, the relevantMinistries have recognised the need to rationalise this area in order to clearly delineatethe responsibilities of the SC and the ROC (as the repository of prospectuses). Therelevant Ministries have confirmed that steps will be taken towards rationalising theregulatory roles to ensure that a full view of proposals to offer securities can be taken.The SC will thus have all the powers, duties and responsibilities in relation to prospectusesand other provisions concerned with issues and offers of securities while the ROC willhave powers in relation to the lodgement of prospectuses after registration by the SC.

2.4 In respect of primary market disclosures, steps have already been taken to increase theresponsibilities of the directors and advisers85 with respect to submissions made to theSC. Under the provisions of the SCA, there are sanctions86 for false or misleadinginformation submitted to the SC in relation to specific submissions. Thus, any applicant,officer or associate, its advisers or any other person will commit an offence if they submitany information to the SC under such circumstances87. In addition, the CA has certainprovisions that require the person who submits a prospectus for registration, to maintainthe accuracy of prospectuses before the issue of the securities88. Work towardsstrengthening the rights of investors to take action for false and misleading statements

85 E.g. directors, underwriters, advisers and experts

86 Section 32B of the SCA

87 That is, if they submit information in relation to a proposal that is false or misleading, or from which there is a material omission, or

who engages in any conduct that he knows to be misleading or deceptive or is likely to mislead or deceive the Commission.Contravention of this provision subjects the offender to a fine not exceeding RM 3,000,000 or to imprisonment for a term notexceeding 10 years or both.


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in respect of primary market disclosures will be dealt with in the transfer of powers fromthe ROC to the SC through the relevant amendments to the SCA and the CA. Theamendments are premised on the fact that persons responsible for prospectuses mustexercise a high duty of care in the discharge of their responsibilities. Additionally,disclosures will be simplified and enable ready comparison with other similar information.

Continuous disclosure requirements in the secondary market

ISSUE

How existing continuing disclosure requirements and sanctions for non-compliance with disclosure requirements may be enhanced

2.5 For the investing community to be vibrant, it must be confident of the accuracy andtimeliness of the information upon which it must rely. Serious concerns exist about theongoing disclosures of listed companies. The concerns focus both on the timeliness ofthe release of information and upon the content of releases. We regard the decision asto the timing of release of the information as of paramount importance in buildingshareholder confidence in corporate management. The benefit of ensuring continuingdisclosure is that the market remains fully informed of developments of the company.This also ensures that the market operates efficiently and effectively. In principle, wherethe investors’ expectations of disclosures are met, confidence in the market will bebolstered, and this might be reflected in a reduction in costs of capital. Disclosures atthe initial issue or offer of securities, and continuous disclosure must, therefore, beeffectively regulated89.

2.6 Malaysian law, primarily through the CA, Listing Requirements as well as the SCGuidelines on the Issue and Offers of Securities, spells out rules relating to the timingand content of disclosures. There are extensive provisions under the Listing Rules thatprovide for the policies of the KLSE with respect to continuing disclosures90 . Ourcontinuous disclosure system includes timely disclosure releases regarding materialchanges, as well as half-yearly and annual reports.

2.7 The SIA, prohibits a person from making a statement or disseminating information thatis false or misleading in a material particular and is likely to induce transactions withrespect to the securities, if he does so when he does not care whether the statement orinformation is true or false, or where he knows or ought reasonably to have known thatit is false or misleading in any material particular91 . Civil remedies now exist in respectof such contraventions.

88 Section 46 of the CA.

89 Other jurisdictions, such as Australia, regards continuous disclosure requirements to serve two purposes :

(i) to facilitate investment decisions in an equitable manner;(ii) as a function of corporate governance.90

Pertinent KLSE disclosure requirements:-Part 2 of the Listing Requirements sets out the requirements expected in relation to announcements. The KLSE maintains andenforces corporate disclosure policy under Part 10 of the Listing Requirements. The policy is to ensure the perpetuation of a fair andorderly market, and the exchange requires all listed companies to:• make available to the public information necessary to informed investing;• all those investors must have equal access to such information.The exchange adopts 6 specific policies which are set out under Part 2.Part 4 of the Listing Requirements sets out the obligations of a listed company in relation to acquisitions and disposals by thecompany, and transactions entered into by the company with, or, involving connected persons. The obligations are:• to make a disclosure of the relevant transactions; and• to obtain shareholders approval for the transaction.91

Section 86 of the SCA

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2.8 Breach of the Listing Requirements essentially allows the Exchange to take action anyof the penalties provided for in Part 12 of the Rules as well as Section 11 of the SIA. Inthis respect, we consider it necessary for securities laws to place a positive obligation oncompanies to disclose to the Exchange information that must be disclosed under itsrules. It is submitted that92 there should also be civil and criminal consequences forintentionally, recklessly or negligently failing to notify the exchange of information thatmust be disclosed under its rules.

2.9 One recent development in the context of disclosure of information in financial reportsis the establishment of the Malaysian Accounting Standards Board under the provisionsof the Financial Reporting Act 1997. This Act provides for the promulgation ofaccounting standards by this Board and for its application to reporting entities. Section27 of this Act stipulates that where financial statements are required to be prepared andlodged under any law administered by the SC, the Central Bank or the ROC, suchfinancial statements shall be deemed not to have complied with the requirement ofsuch law unless they have been prepared in accordance with the relevant approvedaccounting standard. In pursuance of this requirement, amendments have been madeto the CA to ensure that financial statements required to be submitted under this Actare prepared in accordance with the relevant accounting standards. At the same time,the SC is in the process of preparing the relevant regulations to ensure that the similarobligation is imposed upon listed companies. The Committee fully supports theseinitiatives to strengthen the quality of financial reporting.

2.10 It must be noted that there are no statutory provisions attaching civil liability to decisionsas to the timing and content of disclosures generally. Securities legislation does notprovide for the recovery of damages by the investor against the person who has madethe misleading or deceptive statement or information in respect of his continuingobligation to disclose information93. This right exists in respect of disclosures inprospectuses under section 46 CA. The difference between liability for statementsincluded in prospectuses and secondary market type disclosures is essentially that inthe case of the former, there is a well established process, to ensure that the statementsare throughly vetted prior to release.

2.11 It is submitted that amendments should be made to legislation to allow for civil liability.In response to the concerns expressed as to the extent of personal liability that directorsassume in respect of these statements, the relevant authority should determine the ambitof the provision. While a statutory provision imposing civil liability on directors for thecontent of continuous and timely disclosures is generally acceptable, there is difficultyin supporting civil liability of directors for the timeliness of releases. One of the mostdifficult decisions that companies face is the timing of releases concerning materialchanges in the affairs of the company. Where directors choose to err on the side ofcaution, it must be noted that the market can be harmed by both pre-mature and latedisclosures.

92 Section 1001A of the Australian Corporations law provides, in summary, that a listed entity must not contravene ASX’s provisions

by intentionally, recklessly or negligently failing to notify the ASX of information• that is not generally available; and• that a reasonable person would expect if it were generally available to have an effect on the price of its securities.93

Except where it involves a contravention of section 86 SIA.


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2.12 One fundamental area that crops up in the area of enhancing timely and accuracy ofdisclosures is the need to rationalise the fragmentation that exists in the law regulatingcontinuing disclosures of companies. It is important to ensure that there are clear linesof responsibility between the various institutions who regulate the market. This wouldenable market participants to clearly identify their disclosure obligations while ensuringthat in the event of breach of the relevant requirements, swift and definitive action canbe taken by the responsible authority. This rationalisation effort has already commencedin respect of the prospectus provisions as mentioned above and it is submitted that suchan effort should also be regarded as being of prime importance in enhancing secondarymarket disclosures.

Recommendations

• Continue the exercise to enhance and rationalise disclosure requirements inrespect of prospectuses. In addition, provisions should encourage directors andother corporate advisers to exercise a high duty of care in the discharge oftheir responsibilities. Also disclosures should be simplified and enable readycomparison with other similar information.

• Sanctions: There should be civil and criminal consequences of intentionally,recklessly or negligently failing to notify the exchange of information that mustbe disclosed under the rules of the exchange.

• Sanctions: That securities legislation should provide for the recovery of damagesby the investor against the person who has made any misleading or deceptivestatement or information under such circumstances in respect of continuingdisclosures.

Disclosures in directors’ statement and auditors report

ISSUE

Director’s statement on internal controls

2.13 Under section 167 of the CA, directors and managers are required to maintain adequateaccounting records to enable them to disclose with reasonable accuracy, at any time,the financial position of the company and in order to meet this responsibility they mustin practice maintain some form of control system over the company’s process of financialmanagement. However, there is no explicit requirement in company law for them tomaintain an effective system of internal financial control, let alone internal controls.

2.14 Auditors in turn, as part of their usual audit procedures will consider how far they canrely on the company’s internal control systems in carrying out their audit of the financialstatements. As a normal part of their audit procedures the auditors thus evaluate theinternal control systems and, if they plan to rely on them in reaching their audit opinion,they will test the operation of those systems. As a by-product of this, auditors will usuallycomment to management on their findings in what is commonly known as themanagement letter. However, there is at present no requirement under the CA for auditorsto report on the adequacy of internal controls.

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2.15 Cadbury recommended that “the directors should report on the effectiveness of thecompany’s system of internal control94 and that this report should be reviewed by theauditors95”. In respect of the latter, Cadbury left open the question of to whom theauditors should report, and whether their findings were to be made to the public. TheListing Rules of the London Stock Exchange are also silent on the matter of reporting.However, the Auditing Practices Board (APB) Bulletin (1995/1) suggests that auditorsare to issue a report to the company and strongly recommends that such reports beincluded in the company’s annual report and accounts. A survey conducted by KPMGPete Marwick96 on this disclosure requirement revealed that two thirds of companiesare including the auditors report on corporate governance matters in the company’sannual report and accounts. Most companies not publishing the report make referenceto the auditor’s review.

2.16 The Hampel report recommends that three amendments be made to the requirement ofthe Code of Best Practices. They are as follows –

• That the word “effectiveness” be dropped from the Code. The Hampel committeefound that the word “effectiveness” has proved difficult for directors and auditorsin the context of public reporting. It can imply that controls can offer absoluteassurance against misstatement or loss; in fact no system of control is proof againsthuman error or deliberate override. There has also been concern that directors andauditors who confirmed the effectiveness of a company’s control system may beexposed to legal liability if unintentional misstatement or loss of any kind is foundto have occurred.

• That the reporting on controls be widened to include reporting on all controls andnot just financial controls. Not only is it difficult to distinguish financial from othercontrols but it is important for directors and management to consider all aspects ofcontrol.

• That auditors should not be required to report publicly on director’s statements, butthat they can contribute more effectively by reporting to directors privately. Thiswould enable a more effective dialogue to take place; and allow best practice tocontinue to evolve in the scope and nature of such reports, rather than externallyprescribing them.

2.17 It is also important to note that aside from the issues highlighted by the Hampelcommittee, this requirement has generally been regarded as beneficial. This requirementhas forced audit committees and boards to give more time to considerations of risks(both operational and financial) and their control.

94 Item 4.5 Cadbury Code of Best Practice

95 Footnote, Cadbury Code of Best Practice

96 The KPMG Review and Survey – Corporate Governance – A Practical Guide to disclosure implications. The survey involved a study

of corporate governance disclosures of FT-SE 100 companies. Approximately 63 company accounts were studied (48 related to theyear ending 31

st December 1995 while the remainder were predominantly March 1996 year ends).


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Recommendations

• That the Listing Requirements require directors to make a statement about theinternal controls in a company. It is the descriptive statement that is mostimportant from a reader’s point of view, as it is the information contained thereinthat will enable them to judge the directors’ approach to risk and control. Inthis respect, the reporting on controls is not merely limited to financial risk andcontrols but also the broader canvass of operational risks and controls.

• That auditors be required to review the directors’ statement on internal controls.However, they should not be required to report publicly on director’s statements,but to report the results of the review to the directors privately.

• The recommendation proposed for the Code, which requires that directorsmaintain a sound system of internal controls to safeguard shareholders’investments and the company’s assets97 is an essential pre-requisite for purposesof fulfilling this reporting requirement.

ISSUE

Directors’ going concern statement

2.18 This concept is defined in accounting standards (IAS 198 ) as the assumption that theenterprise will continue in operation for the foreseeable future. This means in particularthat the profit and loss account and balance sheet assume no intention or necessity ofliquidation or curtailing materially the scale of its operations.

2.19 Whilst the requirement for directors to prepare financial statements giving a true andfair view creates a presumption that they will satisfy themselves that the company is notin financial difficulties and that the going concern basis is appropriate, there is no explicitobligation in company law that they should do so. There is similarly no requirement inlaw for the directors to report to shareholders that they have satisfied themselves aboutthe going concern basis or the adequacy of financial resources.

2.20 Auditors in turn, while obliged by auditing guidance “to be satisfied that the goingconcern basis is appropriate” are not obliged to perform any procedures specificallydesigned to identify any indications that the going concern basis may no longer bevalid.

97 Part 2 – AAI of the Code.

98 The International Accounting Standards (IAS) have been adopted by MASB as the accounting standards for Malaysia. It also has

legal force under the Financial Reporting Act 1986

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2.21 Cadbury recommended “that directors should state in the report and accounts that thebusiness is a going concern, with supporting assumptions or qualifications as necessary”;“that auditors should report on this statement”; “that the accounting profession…shouldtake the lead in developing guidance for companies and auditors”, and that the questionof legislation should be decided in the light of experience.” The London Stock Exchangesubsequently incorporated the requirement to make a going concern statement withinits rules99 effective for accounting periods beginning on or after 31 December 1995.

2.22 The Committee was concerned that if this responsibility was made a requirement of thelisting rules, directors may err on the side of caution in the case of doubt. The effect ofcautious and perhaps negative statement may cause tremendous harm to a companyand perhaps affect its position as a going concern. It is noted that the Hampel committeerecommended that the guidance developed by a Joint Committee set up by theaccountancy profession and issued in November 1994 is satisfactory and that there isno need for legislation.

2.23 In response to suggestions that the accounting standards already require directors toprepare accounts on a going concern basis and that it is therefore unnecessary, theCommittee found that this requirement obliges directors to focus on whether the companyis properly regarded as a going concern and hence, it should remain. The Committeeconsidered that the requirement for a public statement in respect of going concern willplay an important part in maintaining good corporate governance practices.

2.24 It is submitted that the Listing rules of Exchanges should require directors to state in thereport and accounts that the business is a going concern with supporting assumptionsor qualifications as necessary.

Recommendation

• That the Listing rules of Exchanges should require directors to state in the reportand accounts that the business is a going concern with supporting assumptionsor qualifications as necessary.

• That the Listing rules of Exchanges should require auditors report on thisstatement in their report.

ISSUE

Statement of directors’ responsibilities

2.25 Cadbury recommended that “directors should explain their responsibility for preparingaccounts next to a statement by the auditors about their reporting responsibility”.100

2.26 This recommendation was made to address the problem of the so-called “expectationgap” – the difference between what audits achieve and what it is thought they achieve.An essential first step in the opinion of the Cadbury committee towards narrowing the

99 Listing Requirements, paragraph 12.43(v)

100 Item 4.4 Cadbury Code of Best Practice


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“expectations gap” is to be clear about the respective responsibilities of directors andauditors for preparing and reporting on financial statements of companies and hencethe reporting requirement.

Recommendation

That the Listing Requirements should require directors to explain their responsibilityfor preparing accounts next to a statement by the auditors about their reportingresponsibility.

ISSUE

Whether the accounting standards are sufficient for the disclosure purposesand whether harmonisation of standards with international standards isnecessary

Recommendation

Measures must be taken to harmonise financial reporting requirements withinternational standards by the Malaysian Accounting Standards Board. TheCommittee does not consider that its terms of reference requires it to review theareas where the accounting authorities are closely involved.

ISSUE

Who should be responsible for ensuring that continuing disclosure obligationsof the listed company are complied with?

2.27 This relates to the issue as to whether or not there should also be disclosure of theextent of compliance by listed companies with respect to corporate governance standardsprescribed. The existing non-financial disclosure requirements under companies andsecurities legislation and the disclosure policies of the KLSE are fairly extensive101 .However, methods of encouraging compliance as well as to enforce these requirementsshould be enhanced, for instance, by requiring a company secretary, or a person withinthe organisation to undertake the responsibility for ensuring that all proper disclosuresare made.

2.28 The issue with company secretaries is that in the case of external company secretaries,reservations have been expressed about their ability to meet the expectations of acompliance person in respect of disclosures because of their lack of proximity with the

101 At present, the continuing disclosure obligations under rule 334 of the Listing Requirements provide that the “The Exchange

considers that the conduct of a fair and orderly market requires every listed company to make available to the public informationnecessary to informed investing; and to take reasonable steps to ensure that all who invest in its securities enjoy equal access tosuch information”. The rule is essentially that a company must make timely and adequate disclosure of information which a reasonableor potential investor would want to know in order to decide on what course of action to take, and information must be given topreserve the integrity of the market.

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company. It is submitted therefore that this responsibility should only be undertaken bya person within the company, who may or may not be the company secretary of thecompany102.

Recommendation

That the Listing rules of the Exchanges should require every company to identify aperson within the company to undertake the responsibility that all relevantdisclosures are made.

3. Director’s Interests

3.1 The statutory principle is that directors must disclose all interests which may be inconflict with the interests of the company103 . Conflicts of interest may arise througheither a personal interest or a duty to some third party. These situations include:-

• Holding of any other office in another company including being a nominee directorof that company104 ;

• Possession of any property; and

• An interest in a contract with that company105.

Under such circumstances, directors are required to notify the company.

3.2 The position at common law is that the director is not allowed to be interested intransactions involving the company or derive any profit from his position, unless hedeclares the nature of his interest, and the shareholders in general meeting release himfrom the application of this principle. A breach of this principle would entitle the companyto consider the transaction voidable, and the company may recover all benefits derivedby the director. The purpose is not only to prevent financial loss to the company, butalso to ensure integrity of management, which would have more information than otherswith respect to the company.

102 The Executive Summary of the joint survey by Price Waterhouse and the KLSE indicates that about 80% of companies had

policies to monitor compliance with the KLSE’s Corporate Disclosure Policy, out of which more than half delegated the task ofensuring compliance to the company secretary with a quarter to the Chief Financial officer and some 9% to the Managing director.103

Section 99B of the SIA now provides that a chief executive and a director of a listed company must disclose to the SC of hisinterest in securities of the listed corporation of which he is a director or chief executive or an associated corporation of the listedcompany. The consequence of a breach of this provision is criminal sanction of up to RM 1 million or imprisonment of up to 10 yearsor both.104

Subsection 131(5) of the CA provides that every director who holds any office or possesses any property whereby directly orindirectly duties or interests might be created in conflict with his duties and interests as directors, shall declare at a meeting of theboard of directors, the fact, nature and extent of the conflict. There are criminal sanctions for breach of this provision, also undersubsection 131(8) of the CA. The effect of this subsection is that directors may create interests and duties in conflict with their dutiesand interests as directors, provided that this is declared at a board meeting.105

Section 131(1) of the CA provides that every director of a company who is in any way interested in a contract or proposed contractwith the company shall, as soon as practicable after the relevant facts have come to his knowledge, disclose the nature of his interestat a director’s meeting. The consequences of a breach of this provision are criminal sanctions under section 131(8) of the CA - (7years or RM 150,000 or both). It is not clear whether this affects the enforceability of the contract (except where it is clear from thearticles of association).


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ISSUE

Whether a director should be forbidden to vote with regard to arrangements ortransactions in which he is interested, or in relation to which he holds any propertyor other office which would be in conflict with his duties as a director?

3.3 The common law principles may however be abrogated or modified by articles ofassociation, subject to mandatory statutory and regulatory rules of disclosure, i.e.beneficiaries may waive common law principles which are for its own protection. Thus,a director may vote in a transaction in which he is interested provided that he hasdeclared his interest in the transaction, unless:-

• the articles provide otherwise106 ; or

• statute specifically prohibits him from voting.

3.4 Section 132E of the CA prohibits a company from entering into any arrangement ortransaction with its director (or a director of its holding company or a person connectedwith the director) to acquire or dispose of any non-cash asset of requisite value107 unlessprior approval of the company in general meeting has been obtained108 . The consequenceof an infringement is that the arrangement may be avoided at the option of the company,unless it is ratified by the company in general meeting109.

3.5 The sanctions are as follows:-

• a director or a connected person and any director who authorised the arrangementor transaction (each a “defaulter”) is liable to account to the company for any director indirect gains which might have been made by them and they are jointly andseverally liable to indemnify the company for any loss or damage resulting; and

• a defaulter is liable to be imprisoned for five years or be subject to a fine of RM30,000/- or both.

3.6 However, it is noted that if the facts are fully disclosed, the transaction is still capable ofbeing ratified. Under such circumstances, the defaulter may not only keep the profitsbut does not have any liability to make good the losses110 . In respect of listed companies,rule 118(2) of the Listing Requirements states that the KLSE reserves the right to requirethat a director, or substantial shareholder who is interested in a transaction, whetherdirectly or indirectly, refrain from voting as a shareholder at a general meeting wherethe acquisition or realisation requires shareholders’ approval. The KLSE would alsonormally require that the transaction obtain the approval of shareholders in meeting,and the details of such transaction be circulated to the shareholders prior to the meeting.

106 Article 81, Table A of the CA provides that a director must not vote in respect of any contract or proposed contract with the

company in which he is interested, or any matter arising from this. If he does vote, his vote will not be counted. However, it is notmandatory for companies to adopt Table A, the terms of which may be expressly excluded.107

As defined under section 132E(5) of the CA108

The prohibition does not apply to arrangements or transactions falling within section 132F of the CA.109

Or where the transaction involves a transfer of asset to or by a director of its holding company or connected person, by a resolutionof the holding company.110

See page 279, Low S.C. “Corporate Powers”.

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3.7 The difficulty with restraining a shareholder from voting has been alluded to in Issue 1.Essentially, the right to vote is a fundamental one - it is proprietary and it is the methodby which a member gets his voice heard in the company’s affairs. The right is protectedby statute (s.148 CA) and cannot be excluded by the memorandum or articles. In commonlaw, this right to vote can be suspended by the articles only if:-

• the member failed to pay all calls and other sums payable on the shares; or

• if the shares are non-voting preference shares.

3.8 Cases have decided that a member can vote on a resolution even where he has aninterest in the subject matter of the resolution111 . He is entitled to vote in his own interests.It is imperative then to enact statutory provisions to clearly give companies the right toexclude shareholders interested in the subject matter of the resolution, from voting, inorder to arm rule 118 with statutory backing.

3.9 Notwithstanding the removal of any ambiguity as to the legal basis for rule 118, theUEM-Renong debacle highlights the need to extend this exclusion to parties who areindirectly involved in a transaction. Rule 118 of the Listing Requirements, as it stands,only gives the Exchange the right to exclude related parties, from voting on a matter inwhich they are directly involved. It was felt that as both Renong and UEM were managedby the same interested parties, that Renong should be disqualified from voting. Rule 118should therefore be amended to require directors, substantial shareholders and alsopersons connected with such directors or substantial shareholders who are interestedin a transaction, to abstain from voting.

3.10 Efforts to widen and strengthen rule 118 preceded the Committee. Both the SC andKLSE initiated the review in response to the public outcry that followed the abovementioned deal and it is now in the final stages of completion.

111North-West Transportation Co. Ltd. v Beatty (1887) 12 App Cases 589


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Recommendation112

• Directors, substantial shareholders or a person connected with a director or asubstantial shareholder113 (“relevant parties”), interested in a transaction, shouldbe required in the law to refrain from voting as a shareholder in respect of thattransaction114 . The relevant regulatory bodies are already working on this matter,and steps will be taken to expedite the necessary amendments to give effectto this principle.

• The prohibition from voting would extend to “relevant transactions” which willbe defined. These “relevant transactions” would include, for example,acquisitions and disposals of interests in companies, joint ventures, the releaseof profit guarantees which may have been given by the directors in favour ofthe listed company.

Update

On 2 July 1998, the SC directed the KLSE to make changes to its Listing Requirements.These changes and other consequential revisions are reflected in Rules 111 to 120under Part 4 of the Main Board Listing Requirements and Rules 5.1 to 5.10 underPart 5 of the Second Board Listing Requirements.

Under the revised rules of the KLSE, a director or substantial shareholder of a listedcompany or any person connected with the director or substantial shareholder,with any interest, direct or indirect, in the transaction, cannot vote in respect of thetransaction.

The other amendments to the KLSE rules:-

• Widen the scope of the application of the rules beyond transactions involvingthe interests, whether direct or indirect, of directors and substantial shareholders,to include transactions with persons connected with them;

• Require details of such transactions to be announced and included in circularsto shareholders, as well as require prior shareholder approval for the transaction;

• Enhance disclosure in the announcement and circular to shareholders;

• Require the appointment of corporate advisers to ensure that the transactionis carried out on fair and reasonable terms; and

• Require the board of directors to state that the transaction is in the best interestsof the company.

The enhanced disclosure in the announcement and circular also apply to othernon-related party or interested party transactions which exceed prescribedmateriality percentage ratios i.e. 5% where an announcement must be given tothe KLSE, and 15%, where a circular must be sent to shareholders for their information.

Whether subsection 132C of the CA in relation to the approval for matters whichwould “materially and adversely affect” the company should be amended.

112 See update.

113 Within the meaning of section 122A of the CA, i.e.

• a member of the director or substantial shareholder’s family;• a body corporate associated with the director or substantial shareholder;• a trustee of a trust under which the director or substantial shareholder or member of his family is a beneficiary;• a partner of that director or substantial shareholder or a partner of a person connected with that director or substantial shareholder.114

This would not extend to unlisted public companies, and private companies.

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ISSUE

Should section 132C be amended?

3.11 Section 132C of the CA provides that directors shall not carry into effect or execute anytransaction for the acquisition of an undertaking or property of a substantial value, orthe disposal of a substantial portion of the company’s undertaking or property whichwould materially and adversely affect the performance or financial position of thecompany, unless the proposal or transaction has been approved by the company ingeneral meeting.

3.12 It is found that in practice, a director will not be prepared to say that a transactionwould adversely affect the performance or financial position of the company, since thatwould mean that the director is not carrying out his duties as a director.

3.13 Another problem with section 132C is that it gives rise to uncertainty as to the scope ofthe section, leading to doubts as to whether in any one transaction, approval of thegeneral meeting is necessary. In this respect, the new rules 111-120 of Part 4 ListingRequirements set out a better defined criteria for the regulation of related partytransactions. It introduces tests such as the assets test, profits test, consideration test,consideration to market capitalisation test and equity or capital outlay test. It isrecommended that the criteria for materiality should be set out in the CA and should beformulated in the same manner as laid out in the Listing Requirements.

Recommendation

• Section 132C of the CA should be amended so that the prohibition relatesonly to a relevant acquisition or disposal which is material, and the removal ofthe requirement that it will adversely affect the performance or financial positionof the company.

• Section 132C of the CA should be amended to set out the criteria for materiality.The criteria for materiality should be formulated in the same manner as laidout in Rules 111-120 of Part 4 of the Listing Requirements.

ISSUE

Whether the disclosures of directors interests under sections 131 and 134 of theCA should be extended to interests held by their spouses and children

3.14 Section 131 of the CA provides that every director of a company who is in any wayinterested in a contract or proposed contract with the company shall, as soon aspracticable after the relevant facts have come to his knowledge, disclose the nature ofhis interest at a directors’ meeting. Subsection 131(5) of the CA provides that everydirector who holds any office or possesses any property whereby directly or indirectly


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duties or interests might be created in conflict with his duties and interests as director,shall declare at a meeting of the board of directors, the fact, nature and extent of theconflict. The committee considers that this should extend also to disclosure of interestsof director’s spouses and children115 .

3.15 Section 134 of the CA provides that a company shall keep a register showing withrespect to each director, inter alia, particulars of shares in a company or related companyin which he is director. The committee considers that the whole of section 134 shouldbe applicable also to spouses and children of the directors116 . Under the SIA, theobligation of a chief executive and a director of a listed company to disclose to the SChis interest in securities of the listed corporation of which he is a director or chiefexecutive or an associated corporation of the listed company, extends to those of hisspouse, child or parent117 .

Recommendation

• In relation to section 131 of the CA, the director’s disclosure duties should beextended to disclosure of interests of director’s spouses and children.

• In relation to section 134 of the CA, this should also be extended to spousesand children of directors.

• Consideration should be given as to whether the provisions under the CA andthe SIA with regard to disclosures by directors should be rationalised.

ISSUE

Should sections 133 and 133A of the CA be amended?

3.16 Section 133 of the CA prohibits companies (other than exempt private companies) frommaking loans to its directors or directors of companies which are related to it, or toguarantee or provide security in connection with a loan to such directors. Section 133Aof the CA extends this prohibition to persons who are connected to its directors or thedirectors of the holding company. The transactions are in respect of “loans” only. Thisdoes not cover transactions with directors involving some form of financial benefitwithout the granting of a loan.

Recommendation

Sections 133 and 133A to be amended to cover quasi-loans or other financialbenefits, arrangements, gifts or quasi-gifts.

115 The Singaporean Companies Act section 156 provides for such disclosures.

116 cf. corresponding requirements under the Singaporean Companies Act sections 164(15) and (16) and section 62(4)(a) of the

Banking and Financial Institutions Act 1989.117

Subsections 99B(2) and 99(B)(5) of the SIA.

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4. Related Party Transactions

ISSUE

Whether subsection 132G of the CA should be amended?

4.1 Section 132G of the CA is directed at prohibiting the acquisition of shares from a relevantperson or the shareholders at large of the target company. The relevant person is:-

(a) a director;(b) substantial shareholder of the acquiring company; or(c) persons connected with (a) or (b);

each of whom must be a substantial shareholder of the target company.

4.2 The explanatory memorandum to the Companies Bill highlights the mischief that thissection is meant to address.

“The new section 132G seeks to prohibit the acquisition by a company of shares orassets of another company, where a shareholder or director of the company has asubstantial shareholding in that other company unless the shares of that other companyhave been held by the shareholder or director, or the assets have been held for morethan three years.”

4.3 The following are amendments proposed to this section –

• That errant directors and vendors aware of the illegality should be made to indemnifythe company for expenses incurred in acquiring the shares or assets and such furtherexpenses as would be incurred in recovering the consideration.

• That innocent parties who have no knowledge of the transaction at the time oftransaction and who have acted honestly and reasonably are able to recover.

• That the relevant regulator should review the necessity for the absolute prohibitionwith respect to section 132G transactions in view of the fact that the drafting of thesection can sometimes have the effect of capturing genuine transactions. There is acase, therefore, for such transaction to be made subject to the prior approval ofshareholders, with the interested parties abstaining from voting.


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118 Section 132G(1) provides that “Notwithstanding the provisions of section 132C and 132E, a company shall not enter into any

arrangement or transaction to acquire the shares or assets of another company in which a shareholder or director of the acquiringcompany, or a person connected with such shareholder or director has a substantial shareholding as defined in section 69D whetheror not for the benefit of such shareholder, director or connected person or for any other person unless the arrangement or transactionwas entered into three years after such shareholder, director or connected person as the case may be first held the shares in thatother company or after the assets were first acquired by the said company, as the case may be.” In Actacorp Holdings & Anor. (1993)3 MSCLC 91, it was held that the period of three years run from the date on which the person first became a substantial shareholderin the target company, and not the date any shares in general were first held.

Recommendation

The ROC is currently undertaking a study to amend Section 132G. It is recommendedthat section 132 G CA should be amended:-

• to ensure that errant directors and vendors aware of the illegality should bemade to indemnify the company for expenses incurred in acquiring the sharesor assets and such further expenses as would be incurred in recovering theconsideration;

• to ensure that innocent parties who have no knowledge of the transaction atthe time of transaction and who have acted honestly and reasonably areable to recover; and

• to clear the ambiguity with regard to the phrases “first held the shares in thatother company118 ”.

The ROC should also review the necessity for the absolute prohibition with respectto section 132G transactions in view of the fact that the drafting of the section cansometimes have the effect of capturing genuine transactions. There is a case,therefore, for such transaction be made subject to the prior approval of shareholders,with the interested parties abstaining from voting.

ISSUE

Should section 132E of the CA be amended?

4.4 Section 132E of the CA which deals with substantial property transactions between thecompany and its directors or persons connected with directors allows for thesetransactions to be ratified by the company in the general meeting.

4.5 The Listing Requirements (Part IV, Rules 111-120) require that in respect of substantialtransactions (i.e. where the size of the transaction is equal to or exceeds 25% of specifiedpercentage ratios) directors should obtain the prior approval of shareholders at a generalmeeting. It is recommended that the provision in section 132E CA that allows forratification of transactions falling within its purview should be removed. This is becausein the more volatile market environment of today, undoing a transaction, especially onethat is substantial in size may be impossible or may encounter considerable difficulties.

4.6 A further amendment that should be made to section 132E is to remove ambiguitiesassociated with determining whether or not the transaction is a substantial propertytransaction or not. There has been some uncertainty as to whether the section precludesthe board from executing a conditional agreement given the wide language of the

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provision. This has given rise to various devices e.g. execution of MOUs, Letters ofIntent or initialising a penultimate draft.

4.7 As alluded to in para 3.13 above, rules 111-120 of Part 4 of the Listing Requirements setout a better defined criteria for regulation of material or substantial transactions. It isrecommended that section 132E should be reformulated to reflect the criteria set out inRules 111-120 of Part 4 of the Listing Requirements.

Recommendation

• That the provision in section 132E CA that allows for ratification of transactionsfalling within the purview of the section should be removed.

• That section 132E should be reformulated to reflect the criteria set out in Rules111-120 of Part 4 of the Listing Requirements.

ISSUE

Are the penalties for breach of the related party provisions under the CAsufficient?

4.8 Currently, the penalties for breach of the legal provisions in relation to substantialacquisitions and disposals (i.e. section 132C) and substantial property transactions (i.e.section 132E) involving the company and directors or persons connected with directorsis 5 years imprisonment or a fine of thirty thousand ringgit or both.

4.9 An additional penalty for breach of Section 132E is that the director or person connectedwith him and any director who authorised the arrangement must:-

• account to the company for any gain made by undertaking the transaction; and

• jointly and severally with any person similarly liable, indemnify the company forany loss or damage resulting from the transaction.

4.10 The insider trading provisions, under the SIA not only allow investors to seek fullcompensations for loss from offenders, but also allow the SC to institute civil proceedingsagainst an insider to recover up to three times the profit or loss avoided by the insiderand to impose a civil penalty of up to RM 500,000. As substantial or connected partytransactions have the potential to inflict more harm on minority shareholders than eveninsider trading, the penalties for breach should be modernised and substantially increased.

Recommendation

The penalties for breach of related party transaction provisions should bemodernised and substantially increased.


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5. Other Matters

ISSUE

Disclosure of Substantial Shareholding

5.1 The CA requires a person to notify119 the exchange and listed corporation of hissubstantial shareholding (ie. any person having 5% or more of the nominal value of thevoting shares in the company120 ) and any changes121 thereto and the circumstances bywhich the change has occurred122 , or when he ceases to be a shareholder123 . The noticesare required to be given within 14 days from the date on which he becomes a substantialshareholder, or there is a change in circumstances, or he ceases to be a shareholder, asthe case may be. A change in circumstances, with respect to a substantial shareholder,also takes into account his deemed interest in shares. Under section 6A(4) of the CA, aperson is deemed to have an interest in shares where a body corporate has an interest inshares and –

• the body corporate is, or its directors are accustomed, or is under an obligation,whether formal or informal, to act in accordance with the directions, instructionsor wishes of that person in relation to that share;

• that person has a controlling interest in the body corporate; or

• that person, or associates of that person or that person and associates of that personare entitled to exercise or control the exercise of not less than 15% of the votesattached to the voting shares in that body corporate.

5.2 Failure to report as required subjects the defaulter to a penalty of RM 5,000/- with adefault penalty of RM 500/- only124 . However, the courts have powers with respect todefaulting substantial shareholders125. The penalty for a contravention of the court order,is RM 3,000/- with a default penalty of RM 500.

5.3 The Securities Industry (Reporting of Substantial Shareholding) Regulations which cameinto effect on the 1st of May 1998 now require that any person who is a substantialshareholder of a public company (where listed or not) is to provide notice of such interestto the SC. It should be noted that while these disclosure requirements mirror thosewhich are provided under the Companies Act, breach of these regulations entail a fineof RM 500,000 or imprisonment for a term not exceeding 5 years or both. This is asubstantially higher penalty than that provided for under the CA.

119 Section 69D of the CA

120 Section 6A(4) of the CA sets out the circumstances under which a person would be deemed to have an interest in shares. A person

shall be deemed to have an interest in shares where a body corporate has an interest in shares and -• the body corporate is, or its directors are accustomed, or is under an obligation, whether formal or informal, to act in accordance

with the directions, instructions or wishes of that person in relation to that share;• that person has a controlling interest in the body corporate; or• that person, or associates of that person or that person and associates of that person are entitled to exercise or control the

exercise of not less than 15% of the votes attached to the voting shares in that body corporate.121

Section 69F of the CA122

Section 69F of the CA123

Section 69G of the CA124

Section 69M of the CA125

Section 69N of the CA

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5.4 Section 99B of the SIA now provides that a chief executive and a director of a listedcompany must disclose to the SC his interest in securities of the listed corporation ofwhich he is a director or chief executive or an associated corporation of the listedcompany. The consequence of a breach of this provision is criminal sanction of up toRM 1 million or imprisonment of up to 10 years or both.

Recommendations126

• In order to ensure the timeliness of disclosures, the period for reporting the factof, or changes in substantial shareholding, should be reduced. As a corollary tothe reduction of this period, consideration may have to be given as to whetherthe reporting obligation should be based on knowledge by the shareholderthat he has reached the 5% reporting threshold127 . The ROC has confirmedthat it will take the necessary measures to amend the CA for such purposes.The relevant amendment are also to be effected on the Securities Industry(Reporting of Substantial Shareholding) Regulations 1998.

• The reporting requirements, i.e. to the company, the ROC, and the SC may berationalised, as well as the penalties for breaches of the provisions under theCA and the SIA.

Update

The provisions relating to substantial shareholdings under the CA has been amendedby the A1043, w.e.f. 1st November 1998.

A new section 69P of the CA has been inserted. A person who becomes a substantialshareholder (holding an aggregate nominal value of shares of not less than 2%)after the coming into force of this amendment, must give notice to the ROC, within7 days of becoming a substantial shareholder. Penalties for breaches have alsobeen rationalised.

The change in the definition of “substantial shareholder” and the period for reportinghas also been incorporated into the Securities Industry (Substantial Shareholders’Reporting) Regulations 1998, in relation to reporting to the SC. This also took effectfrom 1st November 1998.

126 See update.

127 In jurisdictions such as the UK, the number of days in which the person must report a substantial shareholding is two days. This

may give rise to difficulty where the shareholder is not able from time to time determine whether his shares constitute the percentagewhich triggers off the reporting obligation, in particular where the share capital is changed. In the UK, provisions make the obligationto notify based upon knowledge.


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ISSUE

Regime for voluntary suspension of trading of securities of public listedcompanies

5.5 The KLSE Listing Requirements do not specifically provide for voluntary suspensions128.Rule 336 of the Listing Requirements uses the term “temporary halt in trading” wherethe Exchange may allow for a temporary halt in trading, pending an announcement ofmaterial information, as a mechanism to avoid rumours and market instability, as wellas the unfairness to investors that may arise, when material information has reachedparts but not yet all of the investing community. Rule 334 does provide some guidanceas to the type of events that constitute material information.

5.6 There has been considerable abuse, resulting in suspensions lasting for weeks and evenmonths. This led to the Exchange issuing its “Policy on the Period of Suspensions byListed Companies”(the Policy), in April 1995. A summary of the contents of the “Policy”is as follows:-

• Listed companies are subject to a maximum suspension period of 10 days;

• Listed company must make an interim announcement on the 5th market day of thesuspension;

• The Exchange has the power to lift suspensions on the 11th market day, regardless ofwhether or not the listed company makes an announcement or requests for thelifting of the suspension; and

• After the lifting of the suspension by the Exchange, no requests for suspension willbe entertained, until a lapse of 10 market days.

5.7 While this went some way towards addressing the problem of lengthy suspensions, itdid not address the abuses relating to reasons for requesting suspensions. The Exchangein this respect continued to entertain all requests for suspensions without enquiringinto the reasons for it. The current practice, therefore, is for the Exchange to immediatelygrant an automatic 10 day suspension, upon receipt of a request for voluntary suspension.This has led to considerable abuse. This is revealed for example, by the announcementfollowing a 10 day suspension of the company undertaking an ESOS scheme or in somecases, purchase of a factory worth RM 2 million or announcing a joint venture.129 Inrecent times, and especially as a result of falling share prices, there has been a sharpincrease in the number of requests for voluntary suspensions, reaching 36 within a singleday at its peak.

5.8 One reason offered by AWAS for the abuse is related to banks making margin calls onloans. Where a company defaulted in its obligation to top up its margins, banks purportedto execute their rights in respect of the securities held by it as collateral on a default bya company to top up collateral. The majority shareholders of these companies, out ofdesperation, resorted to suspending their securities, buying time of 10 days to either re-negotiate the loan with the bank, obtaining alternative sources of financing, or in manycases, simply hoped to see an improvement in the share price.

128 Unlike the Listing Rules of the Stock Exchange of Hong Kong (SEHK) and Australian Stock Exchange (ASX).

129 Source: AWAS

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5.9 Three aspects of KLSE’s existing role in allowing suspensions merit mention:-

• The KLSE does not evaluate the reasons for the request for suspension. It entertainsall requests for suspension as a matter of course.

• When a request for suspension is made, the KLSE automatically grants the companya 10 day suspension.

• While the KLSE does not currently have a policy of granting extensions (exceptafter a lapse of 10 market days from the last suspension), extensions are neverthelessallowed.

5.10 To protect the integrity of the market, the KLSE is proposing to revise its current policyon voluntary suspensions, with the primary objective of discouraging requests forprolonged periods of suspension and for the purpose of maintaining an orderly and fairmarket.

As recent experiences amply demonstrate, the regime for voluntary suspensions is abusedespecially by majority shareholders at the expense of the investing public, since thereasons underlying the suspension can hardly be said to be in the interests of all partiesconcerned.

• Under the proposed policy, the exchange will consider each application on its merits.This evaluation process will assist to weed out the genuine requests from those thatare not. The KLSE will formulate a Practice Note on the information that it willrequire in order that it may come to a considered decision on whether or not toallow a suspension. Consideration will be given to the concept of material corporateactivities to provide some clarity to the types of activities that would be allowed.

• The KLSE’s surveillance and enforcement process is crucial in ensuring complianceby listed entities. The apparent ambiguity130 in section 11 of SIA with regard to thepowers of the KLSE to take action against persons other than the company, in theevent of default, will be clarified.

• There is also the potential abuse by applying for extensions. It is submitted that theKLSE rules should make no provision for extensions. Where extensions are sought,they should be subject to a higher authority, e.g. approval of the committee of theKLSE and the SC.

Recommendation

The KLSE should revise its current policy on voluntary suspensions, with the primaryobjective of discouraging requests for prolonged periods of suspension and for thepurpose of maintaining an orderly and fair market.

130This is discussed in Issue 5.


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ISSUE

Section 67A of the CA – Share buybacks

5.11 Section 67A was introduced last year to allow any public-listed company to purchaseits own shares or give financial assistance to any person for the purpose of purchasingits shares.

5.12 Hitherto, the fundamental principle of company law is that a company cannot buy itsown shares since this would result in an unauthorised reduction in capital. Howeverthis has changed rapidly in many countries including, the UK and Australia whilst inthe US, the regime is even more facilitative of share buy-backs.

5.13 Several benefits can be reaped from share buybacks:-

• Companies with cash resources beyond their anticipated requirements can returnsurplus funds to their shareholders;

• Companies can improve earnings per share when surplus funds are not generatinggood returns;

• Companies have greater flexibility in ordering their capital structure and in matchingthat structure to their needs at any stage of their development;

• Quoted companies whose shares generally trade at a discount to net asset valuemay achieve an increase in the net asset value per share; and

• The marketability of shares in private companies may be increased since potentialpurchasers include the company itself. This affords greater flexibility to shareholdersin private companies who might otherwise find it difficult to realise their investments.

5.14 Section 67A basically disapplies the prohibition on share buy-backs under section 67 ofthe CA. The section allows any public listed company to buy back its own shares providedit is authorised by the articles and that the company must be solvent at the date of thebuy-back. The purchase is made through the stock exchange and the purchase must bedone in the interest of the company.

5.15 The new provisions, however, have generated controversy and confusion on severalfronts:-

• financial assistance

there is ambiguity as to the meaning of financial assistance and the treatment of sharespurchased with the company’s financial assistance. The confusion arises out of thepossible interpretations of “financial assistance.” It hinges on whether it includes aperson who has been given financial assistance, is acting as an agent for the company inpurchasing its own shares and whether those shares should therefore be cancelled.

• cancellation of the shares

there is inflexibility as to the treatment of shares repurchased by the company as suchshares must be cancelled.

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• the lack of safeguards for shareholders

the provision only requires that the buy-back be authorised by the articles of association.The KLSE Guidelines, however, requires that the shareholders in general meeting givea mandate to the directors of the company to make such a purchase while ensuring thatshareholders be given sufficient information to make an informed decision at the meeting.

There are no safeguards in relation to what resources a company may use in order topurchase its own shares although the Guidelines expressly requires that the purchasebe wholly out of distributable profits.

• implications on market manipulation and insider trading provisions of the SIA

the Explanatory Memorandum states that share buyback is “intended to stabilise thesupply and demand as well as the price of shares of the company on the stock exchange”.Section 67A must be clarified in relation to provisions of the SIA which prohibittransactions which have the effect of raising, fixing or maintaining or stabilising theprice of securities.

• the use of the share premium account

Under the present KLSE Guidelines, companies are allowed to use distributable profitsonly to finance any repurchase. However, not many of the companies have adequatedistributable profits to embark on a meaningful exercise but they do have share premiumaccount that may be utilised for the said purpose.

Unfortunately Section 60 of the CA restricts the use of the share premium account forspecific purposes only which does not include share repurchase.

However, as share repurchase are restricted to a pro-rated offer to all existing ordinaryshareholders in the ordinary course of trading, the shareholders are thus treated equallyand fairly and so the use of the share premium account must not be restricted to thosespecifically mentioned under section 60 of the CA. The share premium account shouldbe made available to finance the share repurchase program.

Recommendations131

The provisions of s67A be reconsidered in light of the ambiguities and lack ofsafeguards. In addition, the use of the share premium account for share buybacksmust be considered.

UpdateAmendments to section 67A of the CA came into force on 1st October 1998. Theamendments were made to provide for the following:-

• Companies are allowed to utilise their share premium account;

• No compulsion for companies to cancel shares bought back;

• Allowing companies to keep shares as Treasury stocks;

• Introduction of appropriate anti-manipulation rules; and

• Prohibiting the use of financial assistance for share buy-back.

131 See update.


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Annex

1. Listing Requirements and Chapter 7 of the SC Guidelines:-

1) the company must submit a copy of its published annual report to the SC for itsretention within 14 days of the AGM;

2) that the SC be informed of any change to the business or registered address ofthe company, together with any change in directorships, within 7 days of thesame;

3) that all interim reports and periodic financial reports be submitted to the SCimmediately upon their becoming available, and that these be announced inaccordance with the Listing requirements;

4) that the company discloses the names of the substantial shareholders, as definedunder section 69D of the CA to be any person who holds more than 5 percentof the aggregate voting shares in the company, and provides the SC and theKLSE with any notice of changes of substantial shareholdings, setting out thefollowing information which it has received from such shareholders for publicrelease, namely:-

• the date of the change in interest;

• circumstances giving rise to the change;

• the number of securities acquired or disposed of, both in absolute termsand expressed as a percentage of the issue capital;

• amount of consideration received or paid for the securities; and

• the number of securities held before and after the change, both in absoluteterms and expressed as a percentage of the issued capital.

5) that the shareholding spread must be set out in a particular format at a date noearlier than 42 days from the date of the issue of the audited annual accounts.

2. Pertinent KLSE Disclosure Requirements

2.1 Part 2 of the Listing Requirements sets out the requirements expected in relation toannouncements. It imposes an obligation on listed companies to immediately divulgeany information as is necessary to avoid a false market in the trading of securities.Listed companies are to make disclosures, in particular to the KLSE and the marketwhere:-

• it intends, or does not intend, to recommend a dividend;

• calls for meetings to pass ordinary and special resolutions;

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• receives notices of substantial shareholders or changes in substantial shareholders;

• effects changes in directors, company secretary or auditors;

• proposes to amend its M&A;

• acquires shares in an unquoted company which results in the latter becoming asubsidiary or where the consideration exceeds 5% of the net assets of the listedentity;

• acquires more than 10% of the paid up capital of another listed company, or wherethe consideration exceeds 5% of the net asset of the listed entity;

• sells any shares in another company which would result in the latter ceasing to be asubsidiary, or where its shareholding falling below 10% if the other company is alisted entity;

• any application filed with court to wind up the company or any of its subsidiaries;

• the appointment of any receiver or liquidator of the company or any of thesubsidiaries;

• undertakes a revaluation of its assets and/or those of its subsidiaries (unless it is inthe ordinary course of business and in accordance with the Guidelines of the SC);

• proposes to issue new securities exceeding 10% of the nominal value of that sameclass or which would effect a transfer of a controlling interest;

• proposes either a rights or a bonus issue;

• proposes to allot shares to its directors or to implement an ESOS.

2.2 There are also requirements to publish:-

• half yearly reports not later than 3 months after the end of the half yearly FY;

• preliminary financial statements not later than 3 months after the end of the FYsetting out prescribed information; and

• explanations for any differences between the audited accounts and any forecasts,projections previously made.

2.3 Annual reports

• are to be prepared in consolidated form, to set out specific items in respect of turnoverand investment and other income, with comparative figures for the previous year;and include

• a statement of source and application of funds;


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• a statement as at the end of the FY showing the interest of each director of thecompany, or in a related corporation as appearing in the register required under theCA.

• particulars of material contracts involving directors interests, either still subsistingat the end of the FY or if not, then subsisting entered into, since the end of theprevious FY.

• a statement made not earlier than 6 weeks from the date of issue of the annualaudited accounts setting out:-

■ names of substantial shareholders and their equity interest;

■ number of holders of each class of equity securities and voting rights attachedto each class;

■ a distribution schedule;

■ a statement of the percentage of the total holding of the 20 largest holders ofeach class of equity securities; and

■ the names of the 20 largest holders of each class of equity securities and thenumber of equity securities of each class held.

• first year - principles of equity accounting.

• particulars of property.

Annual audited accounts are to be prepared in accordance with accounting standardsof MIA and MACPA and the 9th Schedule, CA.

Part 10 of the Listing Requirements

2.4 The KLSE maintains and enforces corporate disclosure policy under Part 10 of theListing Requirements. The policy is to ensure the perpetuation of a fair and orderlymarket, and the exchange requires all listed companies to –

• make available to the public information necessary to informed investing.

• all investors must have equal access to such information.

2.5 The exchange adopts 6 specific policies –

2.5.1 A listed companies must “make immediate public disclosure of all materialinformation concerning its affairs, except in exceptional circumstances”. A listof exceptional circumstances are found in the rules.

2.5.2 A listed company is required to release material information to the public in amanner designed to obtain its fullest possible public dissemination.

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2.5.3 The policy on clarification or confirmation of rumours and reports - Whenevera listed company becomes aware of a rumour or report, true or false, that containsinformation that is likely to have, or has had, an effect on the trading in thecompany’s securities or would likely to have a bearing on investment decisions,the company is required to publicly clarify the rumour reports as soon as possible.

2.5.4 Policy on response to unusual market action. The company is expected to makeinquiry to determine whether the rumours or other conditions requiringcorrective action exist, and if so, to take whatever action is appropriate. If, afterthe company’s review, the unusual market action remains unexplained, it maybe appropriate for the company to announce that there has been no materialdevelopment in its business affairs nor previously disclosed, nor, to its knowledgeany other reason to account for the unusual market action.

2.5.5 Policy on unwarranted promotional disclosure. The company is to refrain fromsuch disclosure activity which exceeds that necessary to enable the public tomake informed investment decisions. Such activity includes inappropriatelyworded news release, public announcements not justified by actual developmentsin the company’s affairs, exaggerated reports or predictions, flamboyant wordingand other forms of overstated or overzealous disclosure activity which maymislead investors and cause unwarranted price movements and activity in acompany’s securities.

2.5.6 Insider dealing. The insider should not trade on the basis of material informationwhich is not known to the investing public. Moreover, the insiders should refrainfrom trading, even after the material information has been released to the pressand other media, for a period sufficient to permit through public dissemination,an evaluation of the information.

• ensure the timely release of such information to the public in a mannerdesigned to maximise public dissemination.

• promptly and publicly clarify any rumour or report which may have an effecton trading of its securities.

• make inquiries into any unusual market activity in its securities and tothereafter make such appropriate announcements as may be necessary inthe circumstances.

• refrain from unwarranted and unnecessary promotional disclosure.

In addition, the company is to provide the SC with information of all situationswhere conflicts of interest may arise in respect of any management or businessagreements entered into between the company and its local or foreign associatedor related companies.

Part 4 of the Listing Requirements

2.6 Part 4 of the Listing Requirements set out the obligations of a listed company in relationto acquisitions and disposals by the company, and transactions entered into by thecompany with, or, involving connected persons.


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ISSUE THREE

ENHANCING THE QUALITY OF GENERAL MEETINGS

1. Background

1.1 The provisions in the CA on general meetings help to define the relationship betweenshareholders and the board of directors. The overall relationship was described by theCadbury Committee as follows:

“The formal relationship between the shareholders and the board of directors is that theshareholders elect the directors, the directors report on their stewardship to theshareholders and the shareholders appoint the auditors to provide the external checkon the directors’ financial statements. Thus, the shareholders as owners of the companyelect directors to run the business on their behalf and hold them accountable for itsprogress.”

1.2 This role, expressed through the voting power of ordinary shareholders, means that it isimportant for boards to maintain an active and constructive shareholders’communications policy both through following the minimum requirements of the CAand voluntarily maintaining principles of good practice in handling shareholders’ affairs.

1.3 The focus on disclosures in Issue 2 follows through into this discussion. Disclosure maycome in various forms - disclosures in the annual report, their interim reports,announcements made through the Stock Exchange, circulars to shareholders and generalcommunications to the market and the financial press. The AGM in this respect, is animportant mechanism in shareholder communications. As the Cadbury Committee noted,the AGM gives all shareholders whatever the size of the shareholding, direct publicaccess to the boards. However, the Committee also drew attention to the problems withthe present practice132 :

“If too many AGMs are at present an opportunity missed, this is because shareholdersdo not make the most of them and in some cases the boards do not encourage them todo so.”

1.4 It is fair to say that in Malaysia, attendance at general meetings is generally dominatedby retail investors. This in itself makes a case for strengthening the quality of generalmeetings. This has been an area of much focus in the United Kingdom in recent times.The Department of Trade and Industry in the UK issued a Consultation document recentlyseeking views on shareholders’ rights to table resolutions, shareholders’ questions atthe AGM, and on the right to appoint corporate representatives or proxies to speak at ageneral meeting. Following from the Cadbury report a City/Industry Working Groupwas established “The Myners Group” which published a report on Shareholder/Companyrelationships - “Developing a Winning Partnership”133 . Interestingly the Group had said

132 Paragraph 6.7 Cadbury Code of Best Practices

133 Published in 1995

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that virtually all participants in their consultation exercise viewed the AGM as anexpensive waste of time and money. Criticisms referred to include poor attendance byinstitutional shareholders and questions from individuals which were irrelevant to themajority of shareholders present.

1.5 The Myners Group reached the following conclusion –

“We believe the AGM is too important to leave as it is. We seriously considered proposingthat current legislation should be amended to permit shareholders to opt out of therequirement to have an annual meeting, with a proviso that say that 10% or moreshareholders by value could demand one…However we favoured a second option, whichwas to retain the statutory backing for the AGM but to change its format, so that majorshareholders see value in attending it.”

1.6 The group went on to make a number of recommendations that are worth noting –shareholders should be encouraged to submit their questions in advance, questionsspecific to individual shareholders should be referred to the individual director forresponse after the meeting, the company should provide an updated trading statement,operational managers might make presentations and be available to answer questionsoutside the meeting.

1.7 The Committee therefore considered how improvements on the conduct of generalmeetings might be achieved.

The purpose of the AGM

1.8 Although all companies are required to hold AGMs under the law134 the event is notmerely a legal formality. It is the principal forum in which directors account toshareholders for their stewardship of the company. In fact, it is the only certainopportunity that a member will have to meet and query directors on matters pertainingto the running of the company.

1.9 The CA prescribes certain matters to be conducted at AGMs. The accounts of thecompany must be laid before the meeting135 . The CA does not require that the membersapprove the accounts; all that has to be done to satisfy the CA is that the accounts arelaid before the general meeting. Appointment of auditors must also be done at thecompany’s AGM136 . Other recurring business that is generally transacted include:-

• re-appointment of directors;

• general approval for the issue of shares137;

• retirement and election of directors;

• fixing of auditor’s remuneration; and

• declaration of dividends.

134 Section 143 (1) CA



137 Section 132D CA


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1.10 The latter three are not required by law but generally made mandatory through thearticles of association. All other matters are generally transacted as special business.

1.11 The Committee believes that the shareholders’ relationship with their company can bedeveloped significantly by enhancing the AGM. The discussion is divided into threeareas:

Section 1 – Before the AGMSection 2 – Proceedings at the AGMSection 3 – After the AGM

2. The Annual General Meeting

2.1 Before the AGM

ISSUE

Content of the Notice of AGM

2.1.1 As far as shareholders are concerned, companies start the visible process ofpreparing for AGMs by sending the shareholders the Notice of the AGM andusually the directors’ report and accounts for the preceding FY of the company.The Notice generally sets out the date, time and venue of the AGM, and givesdetails of the business to be transacted. Rule 26 of the Listing Rules sets out thebasic requirements with respect to the contents of notice requirement. It providesfor the notice to state the date, time and venue of the meeting138 .

2.1.2 In practice, the notice sets out the series of resolutions for approval by members.Under case law, the notice calling a meeting must contain sufficient informationto enable a prudent member to decide whether or not he will attend a meeting.If a material fact is not disclosed in the notice calling the meeting, any resolutionspassed may be invalidated by a member. The test is, therefore, whether or notthe member had fair warning of what was to be done at the meeting. At the veryleast the text of the resolution to be passed must be set out. Failure to do so mayinvalidate proceedings at the meeting139 .

2.1.3 It is recommended that the Listing Requirements should be amended to embodya general requirement requiring listed companies to ensure that the notice callinga meeting contains sufficient information to enable a reasonably prudent memberto decide whether or not he will attend a meeting.

138 However, where the notice calling for the meeting is to consider resolutions regarding material transactions, the Listing Requirements

do require circulars to be issued to shareholders in addition to the notice that is given. All circulars are vetted by the KLSE.139

Hup Seng Co. Ltd. v Chin Yin [1962] MLJ 371

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Recommendation

It is recommended that the Listing Requirements should be amended toembody a general requirement requiring listed companies to ensure thatthe notice calling a meeting contains sufficient information to enable areasonably prudent member to decide whether or not he will attend ameeting.

ISSUE

Election and re-election of directors

2.1.4 There has been concern expressed that too few boards currently make any realeffort to persuade shareholders of the merits of directors nominated for electionor re-election.

2.1.5 When proposing the re-election of directors it is understood that many companiesdo not specify in the notice which directors are standing for election and re-election. The Committee recommends that the Listing rules of Exchanges shouldspecify that notice of meetings should state which directors are standing forelection and re-election. This should be accompanied by a brief description ofthe individuals concerned, including:-

• their ages;

• the relevant experience they possess;

• a list of other directorships they hold/have held;

• the date that they were first appointed to the board;

• details of any board committee to which each belongs; and

• in respect of independent directors, there should be specific mention of thefact that they are independent.

2.1.6 The Singapore Stock Exchange Listing Manual requires the following additionalinformation as regards directors’ appointments to be included which theCommittee submits should also be reflected in the Listing rules of the Exchange.

• shareholding in companies and subsidiaries of companies;

• family relationship with directors or substantial shareholders;

• any conflicts of interest that they have with the listed entity; and

• list of convictions for offences, if any.


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Recommendation

The Committee recommends that the Listing rules of Exchanges shouldspecify that notice of meetings should state which directors are standingfor election and re-election. This should be accompanied by a briefdescription of the individuals concerned, including:-

• their ages;

• the relevant experience they possess;

• a list of other directorships they hold;

• the date that they were first appointed to the board;

• details of any board committee to which each belongs;

• in respect of independent directors, there should be specific mentionof the fact that they are independent;

• shareholding in companies and subsidiaries of companies;

• family relationship with directors or substantial shareholders;

• any conflicts of interest that they have with the listed entity; and

• list of convictions for offences, if any.

ISSUE

Should the notice period in respect of AGMs be extended?

2.1.7 Section 143 of the CA sets out the requirement for the holding of a generalmeeting. It requires a company to hold an AGM at least once in every calendaryear and not more than fifteen months after the last AGM of the company.Under section 145(2) of the CA at least 14 days notice must be given of meetingsother than a meeting to pass a special resolution (21 days)140 or requiring specialnotice141 (28 days). This means that there must be 14 clear days between theissue of the notice and the date of the meeting. This applies to both AGMs aswell as extraordinary general meetings (EGMs). Notice of the meetings must begiven by the company to every member142 . The company’s auditor is also entitledto the notice of meetings143 .

2.1.8 The notice and accompanying circulars should be sufficiently clear so thatmembers may get a fair and reasonable intimation of what is actually proposedto be done without the necessity of painstaking reading. There is no actual legalrequirement that an explanatory circular be sent out.

2.1.9 The problem raised is in the context of institutional shareholders whose registeredaddress of service is usually that of the custodian. There have been problemsexpressed with the fact that the notice of meetings at times do not get to theseshareholders on time because of the additional layer of persons that it has to gothrough.

140 Section 152(1) CA

141 Meetings in respect of removal of directors and removal of auditors.

142 Section 145(4) read together with section 148(1)CA.

143 Subsection 174(7) CA.

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2.1.10 Section 369 of the UK Companies Act 1985 provides for a longer notice periodin respect of AGMs. The UK requires a 21 day notice period for AGMs and a 14day notice period for EGMs. The ICSA Best Practices Guide for AGMs extendsthis period to at least 20 working days, excluding weekends and holidays. Thisrecommendation is largely based on the fact that an increasing number ofinvestors now hold shares through nominees. Allowing a longer circulationperiod recognises this, and gives more time for such nominees to obtain andsubmit proxy votes.

2.1.11 The fact that some investors do not get notice of meetings within the 14-daytime period suggests that a longer circulation period may be necessary. It issubmitted that, in recognition of this, the existing notice period under section145(2) of the CA in respect of AGMs should be extended to 21 days in line withthe position in the UK. The notice period in respect of EGMs may remain at 14days. Similarly, the notice requirements in respect of special resolutions andspecial notices may remain at 21 days and 28 days respectively. The ListingRequirements144 which require notices to be circulated at least 14 days ahead ofthe meeting should be amended accordingly.

RecommendationThe existing notice period under section 145(2) CA in respect of AGMs shouldbe extended to 21 days in line with the position in the UK. The notice periodin respect of EGMs may remain at 14 days. Similarly, the notice requirementsin respect of special resolutions and special notices may remain at 21 daysand 28 days respectively.

That the Listing Requirements which requires notices to be circulated atleast 14 market days ahead of the meeting should be amendedaccordingly.

ISSUEProxy solicitations

2.1.12 Proxies play a vital role in modern day company meetings, namely listedcompanies. Its importance lies not only in the fact that it serves as a convenientmedium through which busy shareholders and shareholders residing in differentparts of the country may exercise their corporate rights at meetings, but also inits potential for being abused or utilised by directors to canvass for votes toendorse a particular course of action that they may be interested in.

2.1.13 In the latter respect, proxy forms usually accompany notices of meetings anddirectors have at their disposal the entire corporate machinery to influenceshareholders by giving their uncontradicted views or opinion through noticesin the form of circulars or explanatory statements.

2.1.14 In contrast, shareholders’ access to the corporate machinery to put forwardtheir views is minimal. In this respect, directors are not under a duty, whetherlegal or moral, to put forward the views of dissenting shareholders in any circularor explanatory statement that they decide to issue.

144 Rule 299


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2.1.15 In Malaysia, proxy solicitations become particularly active during M&A, or wherethere is a threat of an impending take-over, and at times even in respect of largerelated party transactions. This inequality between directors and shareholdersis particularly apparent, where the outcome of a proposal is likely to bedetermined by proxy votes.

Disclosures

2.1.16 While statutory provisions regulating the use of proxies exist in Malaysia, thesestatutory provisions cannot, as such, be described as regulating proxy voting.These statutory provisions are aimed at curbing undue restrictions which maybe inserted in articles of associations against voting by proxy. This may becontrasted with certain jurisdictions where, in respect of public companies,special regulations have been made to prevent the possible abuse of proxy voting.

2.1.17 In some countries, special regulations have been made to prevent possible abuseof proxy voting145 .

2.1.18 There are broadly two aspects to the debate on proxy voting:-

a) Restrictions on the right to vote by proxy; and

b) Regulations on solicitation of proxies.

2.1.19 The CA as well as the Listing Requirements have provisions that preventprohibition on the right to vote by proxy. That aspect of the law is already wellregulated in Malaysia. In respect of solicitations, the Listing Requirements offersome form of regulation. In this respect, rule 77 of the Listing Requirements,merely provides that proxy forms are to be designed in such a way so as to allowa shareholder to indicate how he would like his proxy holder to vote in relationto each resolution.

2.1.20 The United States has perhaps the most comprehensive set of rules on proxysolicitations. These came about as a result of the number of well-publicisedcorporate frauds which had been perpetrated through management solicitationof proxies without informing shareholders on the nature of matters to be votedon. The SEC proxy rules began in 1935 as a series of minimal disclosurerequirements, and a prohibition against fraudulent statements that applied tomaterials asking shareholders directly for the vote. These relatively simple ruleswere “designed to assure the security holders whose proxy or consent is solicitedwill be awarded adequate information as to the action proposed to be taken,and as to the source of the solicitation and the interests of the solicitor”146 .While these rules imposed absolute informational and procedural requirementson soliciting parties, they left most aspects of the voting market undisturbed.That is to say, they did not limit the private provision of information aboutvoting issues or prevent soliciting parties from making whatever arguments theywished, as long as no formal voting request was included in the samecommunication.

145 E.g. US and Canada

146 SEC (1935 p,1)

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2.1.21 By 1956, the rules specified extensive disclosure requirements, including specificrules for any dissident shareholder wishing to challenge management, set outpre-registration requirements and SEC review of all communications with respectto the voting arena147 . The main criticism is essentially that the frameworkimposes major costs and procedural deterrents on anyone wishing to monitormanagement and induce corporate change. This has been largely as a result ofrules that have created a series of deterrents to communications amongshareholders. The system of proxy regulation forbids the sort of informed, co-ordinated, yet informal activity that would be pursued by institutional investorsin monitoring management. Essentially it restricts shareholders from formingan informal coalition to pressure management. It even prevents activities suchas canvassing peers about specific management voting proposals, for example,on executive compensation schemes. Institutional shareholders are thereforeforced to act as if they do not exist.

2.1.22 In contrast to the highly regulated scheme in the US, it is interesting to note thatjurisdictions such as the UK and Australia do not have extensive rules regulatingsolicitations. In the UK for example, in recognition of the practice of boards tosend out proxy forms in their favour with the notice of the meeting, the LondonStock Exchange rules requires listed companies to send out “two-way proxies”i.e. forms that enable members to direct proxies whether to vote for or againstresolutions. The position is similar in Australia. There is, however, a rule incommon law that where there is voting by proxy, an explanatory circular isnecessary. The circular must be fair and must give all the information reasonablynecessary to enable the recipients to determine how to vote148 . Where anexplanatory circular is misleading, the court may restrain the holding of themeeting149 . Beyond that, proxy solicitations are not regulated. They are no rulesregulating the type of information to be included, or for pre-vetting of thesedocuments.

2.1.23 The US proxy solicitation rules go much further. Among other things it requiresextensive disclosure requirements, pre-registration and SEC review of allcommunications that might influence shareholder agreements. The definitionof solicitations as well is wide enough to cover any communication toshareholders that could result in the procurement, withholding or revocation ofa proxy. The rules have been interpreted to the extent that any portion of theannual report that could be construed to contain advocacy on proxy issues nowhad to be filed as if they were proxy material. Also, if parties to a proxy disputewished to distribute newspaper articles or analyst reports to voters, they wouldnow have to file those materials, stating whether any remuneration had beenpaid to the publishing party for the preparation of the materials or to securepermission to re-circulate them. The original anti-fraud provisions had also beenchanged to deter communication of contentious and sophisticated information,and to promote non-analytical, factual background material. Full compliancewith the SEC review process, which involves making initial submissions,suggested changes and re–submissions, involves tremendous cost.

147 SEC (1940 p.1)

148 Re Dorman Long & Co. Ltd. [1934] Ch 635

149 Bain & Co. Nominees Pty. Ltd. v Grace Bros. Hldg. Ltd. (1983) 7 ACLR 777


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2.1.24 While there is merit in regulating the quality of disclosures accompanying proxysolicitations, the level and breadth of regulation is a crucial issue. It may havethe effect of imposing tremendous costs on companies. The Committeerecommends that the relevant regulator should study the matter further todetermine the level and breadth of regulation to be imposed on proxysolicitations.

Recommendation

That the relevant regulator should study the matter further to determinethe level and breadth of regulation to be imposed on proxy solicitations.

2.2 Proceedings At The AGM

ISSUE

Attendance at AGMs

2.2.1 Private or retail shareholders generally represent the largest proportion ofshareholders attending AGMs. Institutional shareholders generally prefercommunications in the form of private briefings with the company. Consultationsby a working group set up to develop best practices for AGMs in the UK150

revealed reasons for their reluctance to attend general meetings –

• They may not be able to provide representatives for all of the companies inwhich they invest.

• Institutions believe that information obtained at an AGM will not add tothat which they have gleaned through their briefings with the company orfrom reviewing the financial statements or the notice.

2.2.2 However, the fact that they no longer take place within the formal atmosphereof company, AGMs may lead the individual investor to feel disenfranchised.Such private meetings with institutional shareholders deprive the privateshareholder of the opportunity for understanding concerns and hearing questionsraised by institutional shareholders and the answers given by the company,bearing in mind their superior access to resources and sophistication.

2.2.3 The goal, therefore, should be to enhance the quality of proceedings at themeeting so that all investors see the worth in attending the meetings. In thisrespect, the Committee re-emphasises the recommendations of the Code151 onthe need for the relevant professional organisations to undertake the task ofdeveloping best practices in general meetings for Malaysian companies. Thereis already precedent in this area in the form of the ICSA Guide to Best Practicesin AGMs.

150 ICSA Best Practices Guide 1996 - Paragraph 2.17

151 Para 4.78 Part 4

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Recommendation

Re-emphasis on the recommendations of the Code in relation to the needfor the relevant professional organisations to undertake the task ofdeveloping best practices in general meetings for Malaysian companies.

ISSUE

Shareholder communications – asking questions

2.2.4 The Committee attaches great importance to boards maintaining an active andconstructive shareholders’ communication policy, both by following theminimum requirements of the CA and by maintaining principles of good practicein handling shareholder affairs. It is best practice for all boards to provideadequate time for shareholder communications at AGMs.

2.2.5 The CA makes no formal provision for shareholder questions and their handlingis solely a matter of company practice. Under common law, shareholders areobliged to confine their questions to matters in the resolution. However, duringthe course of many public company AGMs there is an open forum for questionsfrom shareholders which can range widely over almost any subject. Usually thisis done under the agenda item adopting the reports and accounts.

2.2.6 The Committee considered whether there should be a formal provision in thelaw for shareholder questions. There are two possible approaches to this. First,a provision could be inserted into the CA requiring companies to make such aprovision at the AGM. This would be a codification of good practice.

2.2.7 Alternatively, shareholders may be given a specific right to table a question tobe asked at the AGM. However, such a right to table questions may raise majordifficulties of procedure. An AGM would become unmanageable if everyshareholder had an unconditional right to have his or her question answered atthe meeting. Provision would be needed on the order in which the questionsare to be taken. Limits would have to be placed on the number of questions.Directors would have to be able to exclude inappropriate questions, but mightas a result face criticism for selecting favourable questions. Provision wouldhave to be made for supplementary questions and for limiting the debate oneach question. And time would have to be allowed for the hearing of questionsnot notified in advance.

2.2.8 The outcome could be rigid; excessively detailed and rigid rules in the Act, whichmight make the asking of the questions more difficult and hamper companies inthe effective conduct of the AGM. For these reasons, the Committee recommendsthat the handling of questions at AGMs is best left out of the statutory provisionsand should be dealt with in the development of best practice by the company.


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The Committee considers the role of the Chairman to be crucial in handlingquestions and in sifting the genuine from the vexatious. A best practice guide inthis area would be a significant aid to the Chairman.

Recommendation

That the handling of questions at AGMs is best left out of the statutoryprovisions. This will be dealt with in the development of best practice by thecompany and has already been referred to under the Code151 .

ISSUE

Voting by mail

2.2.9 Existing Malaysian law does not allow for voting by mail. However, voting bymail is generally regarded as significant in strengthening the ease with which ashareholder is allowed to vote152 . It overcomes several practical difficultiesassociated with having to attend general meetings.

2.2.10 From the point of view of retail investors (who dominate the Malaysian investinglandscape), who may be dispersed all over the country, voting by mail is a cheaperand more efficient method of enabling shareholders to exercise their right tovote.

2.2.11 This argument takes on greater force in the context of institutional investors,namely foreign institutional investors. Voting by mail empowers them to takeon a greater role in the company’s affairs as opposed to “voting with their feet”.

2.2.12 Many companies also hold their AGMs within the same time period, whichmakes it difficult for shareholders to exercise their right to vote unless they gothrough the legal procedure of designating their proxies at the meeting.

2.2.13 It is therefore recommended that the CA should allow for voting by mail. Thisprovision would be supplemented with provisions mandating reasonable noticeperiods and sufficient disclosure of information to give shareholders anopportunity to decide how they should vote as alluded to above.

Recommendation

The CA should allow for voting by mail.

151 Part 4 paragraph 4.78 (iii) deal with the best practices for a Chairman dealing with questions and answers.

152Journal of Political Economy, R La Portaetal (1998)

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153 Section 157 of the CA provides that the books containing the minutes of proceedings of any general meeting must be made

available for inspection by members without charge.154

Paragraph 6.8 Cadbury Code of Best Practices155

Part 4, para 4.78(iv).

2.3 After The AGM

ISSUE

Summary of meetings

2.3.1 It is a legal requirement under the CA153 for minutes of the AGM to be kept ina minute book for inspection by any member. The right to inspect minutes is,however, not usually exercised by members.

2.3.2 The Cadbury Committee recommended154 that companies should, after the event,send shareholders a brief summary of points raised at the AGM. This could bedone either by a separate mailing or with the next financial report circulated toshareholders. However, it must be borne in mind that the costs could besubstantial, not least because of the printing costs involved. This is especially soin the case of companies with very large registers.

2.3.3 The Hampel committee suggested instead that companies should prepare aresume of discussion at the meeting (but not a full detailed record), togetherwith the voting figures on any poll or a proxy count where no poll was called,and send this on the shareholders request.

2.3.4 The Code recommends that companies should prepare a resume of discussionto be sent to shareholders upon request as a matter of best practice. TheCommittee is of the opinion that this should not be made a requirement of law.

Recommendation

That companies should prepare a resume of discussion to be sent toshareholders upon request as a matter of best practice as referred to in theCode155 and not law.


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ISSUE FOUR

PROVISIONS DEALING WITH SHAREHOLDERS’ RIGHTS AND REMEDIES

This paper discusses the various issues relating to shareholders’ rights and remedies in thecontext of corporate governance.

1. Statutory Remedy Against Oppression

1.1 The CA provides statutory remedies for shareholders unhappy with acts of the company.Currently, shareholders may choose the route of section 181 or section 218 of the CA.

1.2 Section 181 provides for a statutory remedy against oppression. It embodies a member’spersonal right to be treated fairly. The relief sought must be for an injury done to himself.

1.3 Section 181 of the CA entitles a member to make an application to court for appropriateorders where the member is oppressed, prejudiced or unfairly discriminated against, orhis interests disregarded. The underlying element is one of unfairness to the shareholderconcerned. Shareholders generally prefer the route of s181 as it accords them a widerrange of remedies. The Court may order any remedy it thinks fit to remedy the matterscomplained of by the aggrieved member, even so far as to alter the memorandum andarticles of association of the company, restricting or removing the powers of directors156

in the appropriate circumstances157 . Anecdotal evidence suggests that the wide range oforders has resulted in this remedy being the most commonly utilised by disgruntledshareholders.

1.4 The Court’s discretion to choose from a wide range of remedies, may include thefollowing:-

• prohibiting, canceling or varying the transaction or resolution;

• regulating the conduct of the affairs of the company in future;

• providing for the purchase of the shares of the company by other members of thecompany or the company; or

• winding-up the company.

1.5 Conduct caught under section 181 encompasses autocratic conduct by the board,appropriation of business, property or corporate opportunities at the expense of thecompany or its minority shareholders, unjustifiable failure to pay dividends or fairdividends or the directors’ neglect of the duty of care, skill and diligence158 where itaffects the shareholder personally.

156 Re HR Harmer Ltd [1958] 3 All ER 689 and Re Coliseum Car Stand Service Ltd orders of Roxburg J dated 1 May 1958 (unreported)

157 Kumagai Gumi Co Ltd v Zenecon-Kumagai Sdn Bhd & Ors [1994] 2 MLJ 789

158 See discussion by Loh S.C, Corporate Powers at p.154

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1.6 If the injury is to the company, the proper plaintiff is the company and the proper actionis a derivative action. However, if the action is for oppression and there is evidence toshow that there is damage to the company, the wide discretion of the court allows it toorder compensation to the company159 .

2. Statutory Remedy of Winding-up

2.1 Pursuant to section 218 of the CA, the holder of fully paid up shares may petition theCourt for the winding-up of the company. The Court would grant such a petition in arange of specified circumstances, including:-

• the company is insolvent;

• the directors have acted in their own interests instead of in the interests of themembers; or acted unfairly or unjustly to other members of the company; and

• if the Court is of the opinion that it is just and equitable that the company be dissolved.

2.2 “Just and equitable circumstances” have been divided into two categories, those describedas illegality or failure of the sub-stratum of the company, and those dealing with themanagement or operation of the company160 .

2.3 It is a drastic solution, and unlike the situation in UK and Canada, unless it can beshown that the petition is frivolous or lacks substance, the Court has no alternative butto order the winding-up of the company even if another remedy would have been justifiedin the circumstances161 . This upholds the principle that litigants are entitled to choosewhatever remedies they feel appropriate to remedy the injustice to them.

3. Remedies At Common Law – The Personal Action

3.1 A shareholder has a right to bring action where wrongs affect his interests in his personalcapacity. The four sources of this personal right are:-

• memorandum and articles of association;

• general law;

• provisions of the CA; and

• personal contracts.

159 Kumagai Gumi Co Ltd v Zenecon Pte Ltd [1995] 2 SLR 297

160 See discussion by Loh S.C, Corporate Powers at p.643

161 Tien Ik Enterprises Sdn Bhd & Ors v Woodsville Sdn Bhd [1995] 2 AMR 1033


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Memorandum and articles of association

3.2 Section 33 declares that a company’s memorandum and articles of association constitutea contract which binds the members. The section stipulates that the memorandum andarticles bind a company and its members as though these documents had been signedand sealed by each member and contained covenants on the part of each member toobserve all their provisions. The rights include Reg. 97 of Table A, CA which makesprovision for the inspection of balance sheets and other documents of the company, theright to receive notice and to attend and vote at meetings and the right to transfer shares.

3.3 Ordinarily, it would follow therefore that a member should have standing to sue wheneverthere has been a breach of the provisions of the memorandum or articles. However, thecourts have indicated that a shareholder does not have an unqualified right to seekrelief in court. A member can only sue on rights in his capacity as member, and notthose involving internal corporate procedure. Therefore, a member can compel thepayment of a dividend duly declared, but cannot force a director to retire in accordancewith the provisions of the articles. These matters come within the realm of the rule inthe case of Foss v Harbottle. The various limitations of the rule are discussed below.

General Law

3.4 The rights include the right to sue on abuse of power and restrain ultra vires transactions.

Provisions of the CA

3.5 These include provisions such as the right to inspect the minute books (section 157 ofthe CA), register of members without charge (section 160 of the CA) and disclosure ofdirectors’ shareholdings (section 134 of the CA).

Personal Contracts

3.6 Aside from the contract arising out of the memorandum and articles of association, amember can enforce any contract between him and the company.

4. Remedies At Common Law – The derivative action

ISSUE

Is there a need for a statutory derivative action to be introduced?

4.1 The directors’ fiduciary and statutory duties as well as their duties at common law ofcare, diligence and skill, are duties owed to the company and not to the individualshareholders. The rule in Foss v Harbottle162 is that the proper plaintiff to take actionfor breaches of directors’ duties is therefore the company and not the individualshareholders. The rationale is that the company is an entity distinct from its shareholders.

162 (1843) 2 Hare 461

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The rule also avoids a multiplicity of suits on the same subject matter. Barring anythingin the articles or any shareholders’ agreement, the right to authorize proceedings belongto the body in whom the function of management is vested, i.e. the board. Generally,the power to sue is in the hands of management and a member cannot sue on thecompany’s behalf. If the member feels that a wrong has been done to the company andthe company has failed to do anything about it, he may request the board of directors totake action. If they refuse or fail, then the shareholder may requisition a general meetingto pass a resolution to commence litigation. Failing which, the shareholder maycommence the action himself. This also applies to wrongs against the company by thirdparties.

4.2 However, the Foss v Harbottle rule is more notable for its exceptions, the followingbeing by no means exhaustive:-

1) ultra vires acts;

2) fraud on the minority;

3) special majorities - where the individual member can sue if the matter is one whichrequires the sanction of a special majority;

4) personal rights of the shareholders have been invaded; or

5) when the justice of the case requires it163 .

4.3 In the derivative action, the plaintiff undertakes the action on behalf of himself and allother shareholders of the company, other than the defendants who are shareholders.The company is named as the nominal defendant to enable the company to enforce itsrights in the event the plaintiff succeeds in his action. The action must fall within one ofthe exceptions to the rule in Foss v Harbottle. The matters alleged, if established, wouldentitle the company to the relief claimed, and that the wrongdoers are in control of thecompany, and the company will not or has refused to sue. Since the action is broughtfor the benefit of the company, the plaintiffs are entitled to apply for an order of indemnityfor the costs of the proceedings.

4.4 CLERP in Australia has highlighted the numerous problems associated with the commonlaw derivative action. The major uncertainty is whether ratification by some shareholdersof directors’ breach of duty would result in denying other shareholders the right to bringa derivative action to protect the company.

4.5 The ratification problem does not arise out of the ultra vires exception. As the companydoes not have the power to carry out the transaction, the act is incapable of ratification.On the other hand, fraud on the minority requires that the majority obtain some benefitat the expense of the company or that some loss or detriment was caused to the company,and the majority used their controlling power to prevent an action being brought againstthem by the company. Ratification by the majority is a very real problem in this instance.

163 Per Edgar Joseph Jr J in Tan Guan Eng & Anor v Ng Kweng Hee & Ors [1992] 1 MLJ 487. Note that Walter Woon in Company Law

(2 ed.) at 329 regards exception 3 and 4 as not exceptions at all, but as instances which fall outside the operation of the rulecompletely.


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4.6 CLERP additionally highlights that the shareholder bringing the action is potentiallyliable for the costs of the action even though they have no rights to the potential damages.Furthermore, although Australian courts have been flexible in applying the existence ofthe “justice” exception to the common law rule, it is still a matter at their discretion.

4.7 CLERP also argues that the statutory derivative action would not impose a new form ofliability on directors, but rather removes uncertainty and therefore provides a moreeffective mode by which directors’ duties can be enforced. It also removes a regulatoryburden on the authorities by providing an effective mechanism by which shareholderscan protect themselves.

4.8 Most persuasive is the CLERP argument that codifying the derivative action wouldpotentially create a valuable tool to enhance corporate governance and maintain investorconfidence.

4.9 They have, therefore, proposed a statutory derivative action to overcome the inadequaciesof common law and allow shareholders or directors of the company to bring an actionon behalf of the company, for a wrong done to the company where the company isunwilling or unable to do so. The key elements of the proposed action are:-

• shareholders, directors and officers of the company, past or present, as well as theASIC, may commence the action in Court;

• the Court must be satisfied that four criteria have been met - inaction by the company,applicant acting in good faith, action appears in the best interests of the companyand there is a serious question at issue; and

• the Court to have broad discretion on orders as to costs, ratification by generalmeeting would not be a bar, the Court can order supervision by an independentinvestigator to ensure that action was conducted in the best interests of the companyand the applicants would be given access to company records.

4.10 As a natural consequence, directors and other officers of the company must be offereda safe harbor from litigation where the officer had made honest, informed and rationalbusiness judgment.

4.11 In addition to the oppression remedy, Singapore enacted a statutory derivative actionvia ss216A and 16B of the Companies Act in 1993, which copied Canadian legislation.Section 216A requires the complainant to give 14 days’ notice to the directors to givethem the opportunity to commence the action themselves (section 216A(3)). There is aprovision to waive this rule if the complainant can show that notice cannot be given inaccordance with Section 216A(3) (section 216A(4)).

4.12 A complainant must then apply to court for leave to commence an action on behalf ofthe company (a “complainant” may be a member of the company, the Minister of Finance,in the case of a company declared to be under investigation, or any other person who inthe discretion of the court is a proper person to make an application (s216A(1)). Thecomplainant must show that there is an arguable case against the proposed defendants.

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The Ontario High Court had recognised the difficulty of complainants to access companyrecords, and has therefore interpreted the equivalent provisions flexibly to allow affidavitsbased in part upon information and belief164 . If there is an arguable case, it must beshown that it is in the interests of the company that the case be pursued. These mayinclude commercial reasons.

4.13 If the court gives leave, the complainant then takes the steps necessary to initiate theaction using the company’s name.

4.14 The Singaporean provisions also go further than the common law derivative action toallow a complainant to intervene in or defend an existing action.

4.15 Section 216A(5) allows the court to make an order requiring the company to payreasonable legal fees and disbursements incurred by the complainant in connectionwith the action.

4.16 Finally, the court has a wide discretion to make such orders as it thinks fit in the interestsof justice (section 216A(6)) .

4.17 The advantages of the Singaporean approach are:-

• As the complainant requires the leave of the court to commence action, the plaintiffneed not conclude the action before the court could decide on whether or not theplaintiff should be permitted to prosecute it. The court only has to decide on thedesirability of allowing the complainant to control the action without analyzing thecompany’s alleged cause of action against the wrongdoer. There is also the chancethat if the defendants are indeed guilty of breaches of duty, they would be inclinedto settle at this stage.

• The court has the ability at a preliminary stage to strike out frivolous and vexatiousactions.

• The court has the ability to impose conditions on the bringing of the action, totailor the order to the justice of the case. This may include an order giving thecomplainant access to company records to enable him to gather evidence for theaction, a problem which often deters well-meaning shareholders from bringing anaction.

• The court has the ability to order that the company indemnify the complainant forthe costs of the action. This overcomes the disadvantage of the common lawderivative action where if the shareholder wins, the benefits accrue to the company,but if he loses, he pays the costs of all the parties. A shareholder would traditionallyhave to use his own money, while the directors could be defending themselves withthe company’s resources. In certain cases, a plaintiff in a derivative action may obtainan order that the company indemnify him against the costs of the action. Butindemnification is merely discretionary and a complainant must commence an actionby being prepared to pay the costs of the action. Now, a minority shareholder onlyhas to undertake the cost of the initial application for leave.

164 Armstrong v Gardner (1978) 20 OR (2d) 648, 652


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• The statutory action also allows the court to enable the complainant to commencean action as well as intervene or defend an existing action. A minority shareholdercould therefore take over the conduct of a company’s defence in situations where itappears that the directors may not be doing a proper job, for e.g. losing to benefitthemselves or their cronies.

• This avenue of redress would also overcome the requirements of section 181 whichrequires the shareholder to show that act was oppressive, unfairly discriminates,prejudicial or in disregard of interests as members.

4.18 However, the provisions of section 216A do not apply to listed companies. This is becauseof the fear that unscrupulous people would make frivolous applications to harass listedcompanies in an attempt to manipulate the share price. There is a very real fear that theUS experience is replicated domestically. There have been instances of “strike suits” inthe US brought for the purpose of obtaining a fee or being bought off. Companies alsoincur costs of defending such suits, both monetary and in terms of diverting resourcesaway from the operation of the business.

4.19 The American Law Institute (ALI) recommended certain changes in the law to overcomethese problems165 . Amongst the recommendations:-

• A shareholder will only have standing to maintain a derivative action if theshareholder acquired the shares before the material facts related to the wrong-doingwere publicly disclosed, known or specifically communicated to the shareholder, orthe shareholder obtained it by devolution of law from a prior holder of the securityas described above. The shareholder must also hold the shares until the time ofjudgment unless he fails to do so as a result of a corporate action in which he failedto acquiesce. In those situations, the action must be commenced prior to thecorporate action terminating the holder’s status, or the court finds that thisshareholder is better able to represent the interests of the shareholders other thanany other holder who has brought suit. The shareholder must also satisfy the Courtthat he is able to fairly and adequately represent the interests of the shareholders.This would overcome the fear that suits are brought by litigants who purchased theshares in the company for the specific purpose of bringing an action.

• As in Singapore, ALI also recommends that the shareholder make a written demandupon the Board of Directors, requesting the board to commence action or to takesuitable corrective measures. The company has to reject the demand, before theshareholder can commence the derivative action. This provides the Board with anopportunity to pursue other remedies or take other remedial actions, or to take overthe suit.

• Another safeguard is to require an attorney’s certification that the suit was not filedfor an improper purpose, to harass, cause unnecessary delay or needless increase inthe cost of litigation.

• The Court can also award costs against the shareholder if it finds that the suit wasmade in bad faith or without reasonable cause.

165 Principles of Corporate Governance: Analysis and Recommendations Vol 2 at 33

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• Provisions to allow the board or a properly delegated committee to request for adismissal of a derivative in specified circumstances.

• A derivative action should not be settled, discontinued, compromised or voluntarilydismissed by agreement between the plaintiff and the defendant, except with theapproval of the court.

4.20 For certain shareholders of a listed company, the exit option of selling his shares is morecost-effective than litigation. However, certain institutional shareholders with largeshareholdings may have a greater interest in bringing an action for wrongs done to thecompany as seen in the case of Prudential Assurance Co Ltd v Newman IndustriesLtd166 . The derivative action is also still open. To date, there has been no decision inMalaysia as to the existence of the last exception to the rule, which has been applied inAustralia167 . Courts in Malaysia have indicated a preference for the existence of the“justice” exception168 , which provides courts with greater flexibility to hear shareholdergrievances against directors.

4.21 Balancing the benefits of a statutory derivative action against the spectre of massivelitigation mandates a cautious approach. Whether an incremental approach of onlylimiting it to certain types of companies such as public listed companies, or a boldapproach to adopt statutory derivative actions would merit further study and review.

4.22 For a start, for public listed companies, perhaps a paternalistic solution may be adopted.It may be more effective to allow a regulatory body to take action on behalf of aggrievedshareholders of public-listed companies. Section 50 of the ASIC Act, allows theCommission to begin civil proceedings on behalf of a person. The Commission is allowedto begin such proceedings if, as a result of an investigation or from a record ofexamination, it appears to the Commission to be in the public interest for a person tobegin and carry on a proceeding for the recovery of damages for fraud, negligence,default, breach of duty, or other misconduct committed in connection with a matter towhich the investigation or examination related, or recovery of property of the person.The Commission requires the person’s consent to begin such an action.

4.23 It is recommended that a similar provision be enacted to allow the relevant regulatorybody to commence civil proceedings on behalf of an individual in circumstances similarto that provided for in the ASIC Act. However, it is proposed that the circumstances bewidened beyond situations which arise out of an investigation or examination by theregulatory body to include situations arising out of request by the company or individualconcerned.

4.24 In the meantime, the statutory derivative action, incorporating some of the safeguardssuggested by the ALI, merits further review. Codifying the derivative action would, overthe long run increase private enforcement and reduce the need for public or regulatoryinterference. Shareholders, particularly minority shareholders, can be weaned off theirover-reliance on regulatory authorities as they become more cognizant of their role inthe governance of their companies and thus take a more pro-active stance, be it internally,or via the judicial system.

166 [1981] Ch. 257

167 Biala Pty Ltd & Anor v Mallina Holdings Ltd & Ors (1993) 11 ACSR 785

168 Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd & Ors [1995] 3 MLJ 417


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Recommendation

Consider the enactment of a provision to allow the relevant regulatory body toconduct civil proceedings on behalf of any company or individual in the followingcircumstances:-

• that it is in the public interest;

• that it may arise out of investigation or examination by the relevant regulatorybody; and

• that it may arise out of a request by a company or individual concerned.

Consider the introduction of a statutory derivative action in the long termincorporating the safeguards proposed by the American Law Institute.

5. Class actions

ISSUE

Should we consider making representative or class actions more facilitative?

5.1 Class actions permit a representative or representatives to sue for a class of personswhen the matter in dispute is common to all the members of the class and it is impracticalfor all persons affected to bring an action before the court.

5.2 Proponents of class actions argue that they are often the sole means of enabling similarlyinjured persons to seek a remedy against injustices inflicted upon them by large multi-million dollar corporations. In addition, class actions would provide individuals withthe clout to obtain greater compensation in situations where each person within thegroup suffers only limited damages. Class actions also provide an effective remedy againstthe errant defendant who is a multiple offender without incurring the costs of separatelawsuits and the risk of inconsistent decisions.

5.3 In Malaysia, representative actions may only take either the form permitted under Order15 rule 12 or rule 13, both of the Rules of the High Court of Malaysia. The former isappropriate where every member of the class can be ascertained, whereas the latterdeals with representative actions involving parties, which cannot be ascertained or cannotreadily be ascertained.

5.4 O15r12 states that “where numerous persons have the same interest in any proceedings,the proceedings may be begun and, unless the Court otherwise orders, continued by oragainst any one or more of them as representing all or as representing all except one ormore of them.“

5.5 The rule is derived from the practice of the Court of Chancery. The Court of Chanceryrequired the presence of all parties interested in the matter or suit in order that the finalend be made to the controversy; but relaxed the rule in instances where the parties wereso numerous that justice could not be done. Therefore, where a group of persons are

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interested in a general right, the rule would allow an individual or some individuals tobe selected from the group to represent the rest, so that the right might be decidedbetween all parties of the suit so constituted. The rule applies to all causes and mattersand it is not confined to persons who have or claim some beneficial proprietary right.

5.6 “The rule has been framed and adopted for a useful and important object - the saving ofthe mutiplication of actions, with the attendant costs, in cases where one action wouldserve to determine the rights of a number of persons in a question with another partycalled as defendant. A series of different actions one after another by different plaintiffsis to be no longer necessary in cases where numerous persons have “the same interestsin one cause or matter”, for in such cases “one or more persons may sue on behalf of orfor the benefit of all persons so interested”169

5.7 In light of the origins of the rule, the Courts were keen to emphasize the flexibility ofthis tool of convenience in the administration of justice170 . Furthermore, “[t]he principleon which the rule is based forbids its restriction to cases for which an exact precedentcan be found in the reports. The principle is as applicable to new cases as to old, andought to be applied to the exigencies of modern life as occasion requires.” 171

5.8 The prerequisites of the rule are:-

• there must be “numerous persons” (the case of Re Braybrook172 considered fivepersons as not being “numerous”, unless the amount involved is very small or theCourt is satisfied that all the persons interested desire representation);

• there must be the same common interest arising under the same contract or thesame grant or claim in respect of the same subject matter;

• the relief sought must not be personal but beneficial to the class as a whole;

• the parties represented must constitute a defined class.173

5.9 It appears however that where the relief sought is the recovery of damages, the plaintiffsonly have recourse via O15r4 which allows for joinder of parties. Alternatively, thecourt may grant declaratory relief. Practically, this means that once the plaintiff in hisrepresentative capacity has established his claim to the declaratory relief sought, it willstill be necessary for each member of the class to bring his own action to establishdamage suffered by him within the limitation period. The declaratory order would makeit easier for the class member to bring the action, insofar as the issues covered by theorder would be res judicata between members of the class and the defendants174 .

5.10 A further problem with this rule is that the representative persons and those representedare not considered parties to the proceedings, and as such, the court has no power toorder any represented person to make discovery of documents.

169 Per Lord Shand in The Duke of Bedford v Ellis & Ors [1901] AC 1 at 14

170 Per Megarry J. in John v Rees; Martin v Davis; Rees v John [1969] 2 All ER 274

171 Per Lord Lindley in Taff Vale Ry. Co. v Amalgamated Society of Railway Servants [1901] A.C. 424 at 443

172 [1916] W.N. 74

173 High Court Practice: Issue 4 at 372 and 373

174 Note that damages have been granted in an action for conspiracy (Hardie & Lane Ltd v Chiltern [1928] 1 K.B. 663, C.A.) or

infringement of copyright (E.M.I. Records Ltd v Riley [1981] 2 All E.R. 838]


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5.11 The represented parties are also not liable for costs175 which would discourage manywould-be plaintiffs from undertaking the role of representative plaintiff. This may beovercome by the court granting an order that the company indemnify the representativeplaintiff for the costs of the action.

5.12 In a derivative action a plaintiff cannot sue in his own name. He must indicate that heis bringing the action in a representative capacity and disclose in the pleadings that it isa derivative action. Procedural rules also require that there be an express statement inthe pleading for whose benefit the action is being brought. The inability to award damagesto each member of the class is also not a bar, as the derivative action is commenced inthe name of the company, and all damages or restitution of profits accrue to the companyand not the individual shareholders.

5.13 However, the application of representative actions for the oppression remedy of section181 and the winding up provisions of section 218 remain uncertain. The, Malaysiancourts should nevertheless be mindful of the flexibility underscoring this avenue of action.The winding-up remedy would easily satisfy the four-fold test. In the case of section181, if the class of shareholders seeking redress is described with sufficient clarity, thereshould be no bar to a representative action under O15 r12. The only obstacle is the ruleagainst recovery of damages.

5.14 Civil procedure in the US is much more facilitative of class actions. Federal Rule onCivil Procedure 23 permits an individual to bring an action on behalf of himself and aclass of other individuals where:-

1) their claims present a common issue of fact or law;

2) they are so numerous that joinder is impracticable;

3) the claims of the named individual representative is typical of those of the class;

4) the named individual will fairly and adequately represent the interests of the absentclass members; and

5) it may apply to actions seeking either equitable or monetary relief.

5.15 There is thus no procedural bar against the recovery of damages. The general rule is thatdifferences in the amount of damages claimed by the class members will not defeat classcertification, so long as the damages are readily calculable on a classwide basis. Eachmember of the class is entitled to a pro-rata share of the damages recovered in theaction.

5.16 However, the US experience is cause for caution. In the United States, a series oflegislations was introduced which provided that an investor will have a claim when acorporation with publicly traded securities makes misleading statements about itsperformance or prospects, or keeps adverse information from its public investors.

5.17 The flood of litigation that followed drove Congress to introduce the Private SecuritiesLitigation Reform Act of 1995. The Act sought to tighten the circumstances in which a

175 Markt & Co. Ltd v Knight Steamship Co Ltd [1910] 2 KB 1021

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class action may be brought in securities fraud litigation, to reduce abusive litigationand coercive settlement. Prior to the Act, plaintiffs bought securities just to participatein a private action, sometimes at the behest of lawyers who profit under the Americansystem of allowing contingency fees. The Act required a plaintiff to file a sworncertification that he did not purchase the subject matter securities at the direction ofcounsel or in order to participate in a private action. The certification must also identifyany other action filed during the preceding three-year period where the plaintiff soughtto serve as a representative party on behalf of the class, as well as ensuring that theplaintiffs do not accept payment for serving as representative party on behalf of theclass beyond the plaintiff’s pro-rata share of recovery. The Act also required more detailedallegations specific to the action, and the presence of a lead plaintiff.

5.18 The committee therefore, aims to strike a balance between facilitating class actions andopening the floodgates. This may be achieved by merely removing the impediment torecovery of damages. The damages obtained may then be pro-rated according to theshareholding of the member concerned as at the date of the commencement of theaction.

Recommendation

Consider the introduction of statutory provision(s) to simplify civil procedures andto permit shareholders to undertake representative/class actions to obtain a pro-rata share of damages.

6. Injunctions against breach of the law

ISSUE

Should there be a statutory provision to allow shareholders to apply to Court foran injunction against breaches of the law?

6.1 Currently, an injunction can only be obtained if a shareholder can commence an actionwithin the limited avenues available to him.

6.2 Section 409A of the Singapore Companies Act allows a member to restrain the directorsfrom entering into a transaction in breach of their fiduciary duties to the company.There is no Malaysian equivalent to this section.

6.3 Section 1324 of the Australian Corporations Law allows the court to grant an injunctionagainst any person engaged, or who is engaging or is proposing to engage in conductthat constituted, constitutes or would constitute:-

• a contravention of;

• attempting to contravene;

• aiding, abetting, counseling or procuring a person to contravene;

• inducing or attempting to induce, whether by threats, promises or otherwise, a personto contravene;


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• being in any way, directly or indirectly, knowingly concerned in, or party to, thecontravention by a person; or

• conspiring with others to contravene

the provisions of the Corporations Law and its regulations.

6.4 In situations where the Court has the power to grant an injunction against a person, theCourt may also order that person to pay damages to any other person (section 1324(10)).

6.5 The ASIC or a person whose interests have been, are, or would be affected by the conductstated may make the application to Court. This section, therefore, very neatly overcomesthe Foss v Harbottle rule, and does not require that persons have personal rights of aproprietary nature or rights analogous thereto to bring an action under this section.Although it fails to cover breaches under general law, it is a right step in allowing minorityshareholders an opportunity to apply to court to stop directors or any other personsfrom committing an offence against the Corporations Law.

6.6 Clearly for breaches of express provisions of statute, the law should be facilitative toallow a shareholder to halt or prevent a contravention. Breaches under general law canotherwise be dealt with under the statutory derivative action.

Recommendation

Consider the introduction of a statutory provision in line with the Australian approachof section 1324 of the corporations law which allows shareholders or the relevantregulatory body to make applications to court to seek injunctions to halt or preventbreaches of the law.

7. Right to inspect documents

ISSUE

Should there be a statutory provision that gives shareholders the right to inspectdocuments?

7.1 In order for shareholders to enforce any right in Court, it is crucial that they have accessto the relevant information. Shareholders have often complained that they are effectivelyprevented from utilizing actions that are open to them simply by virtue of the fact thatthey cannot arm themselves with the necessary information to mount a proper action.

7.2 The CA, grants members the right to inspect the register of substantial shareholders(section 69L), the register of debenture holders (section 70), register of interest holders(section 92), instrument and register of charges (section 115), register of directors,managers and secretaries (section 141), register of directors’ shareholdings (section 134),minute books of general meetings (section 157), register and index of members (section160). By virtue of s170, the profit and loss statement, balance sheet and auditor’s reportis sent to members before the general meeting at which those documents would be laid

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before the shareholders. Section 34 requires that the company send a copy of itsmemorandum and articles of association upon the request of the member subject topayment of a nominal sum.

7.3 However, Art 97 of Table A, CA states that the other accounts, books or papers of thecompany can only be inspected by a member, if not already authorised by statute, ifauthorised by the directors or by the company in general meeting. This is at a greatdisadvantage to minority shareholders, yet on the other hand, the company and itsofficers should not be constantly harassed to open the company’s accounts, books orpapers merely for shareholders out on a fishing expedition. Furthermore, even in theevent the members are allowed to inspect such documents, they often do not have theexpertise with which to examine them.

7.4 Section 319 of the CL overcomes these concerns by providing a statutory right formembers to authorize auditors and solicitors to inspect records of the company on theirbehalf, but only upon application to the Court.

7.5 The Court must also be satisfied that the member is acting in good faith and that theinspection is made for a proper purpose. This allows the court to be an effective sieve toprevent unscrupulous shareholders from accessing company records for frivolous reasons,harassment or for industrial espionage. In addition, the court can thus minimisedisruptions to business operations which would be inevitable.

Recommendation

Consider the introduction of a statutory method by which shareholders can obtainaccess to company records:-

• by application to court;

• satisfying the court that he is acting in good faith and the inspection is for aproper purpose; and

• that the shareholder is allowed to authorize solicitors and auditors to inspectthe documents and to make copies.

8. The judicial process - alternative dispute resolutions, another court

ISSUE

Does the current judicial system adequately deal with corporate litigation?

8.1 Even after crossing the hurdle of finding the appropriate avenue with which to seek aremedy, shareholders also have to contend with the lengthy judicial process.

8.2 It is estimated that on average, cases take 2 to 3 years from the filing of papers to thecompletion of the trial, although anecdotal evidence suggests that most cases involvingcompany law are settled pre-trial, usually at the point of interlocutory applications for


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injunctions. The length of time taken for the judicial process oftentimes acts as a deterrentagainst shareholders contemplating the filing of a suit.

8.3 Although the High Court of Malaya at Kuala Lumpur has a specific Commercial Divisionin which to deal with matters relating to companies, when the court sits in other parts ofthe country, there is no specific division of matters.

8.4 It is recommended that further detailed study should be undertaken to establish theextent to which the court system is utilised to resolve company law disputes, as well asthe shortcomings of the system in providing access and quick and decisive solutions tothe same. The study should also look into the feasibility of methods for alternativedispute resolution, the possibility of setting up specialized commercial courts orspecialised tribunals or even into training for members of the bench. The study shouldalso look into methods of encouraging practitioners to bring their experience andexpertise into assisting dispute resolution.

8.5 The study should carefully consider the success of the Commercial Court of the HighCourt of England and the Courts of the Southern District of New York, which havelong been the favored forum for the purposes of conferring jurisdiction in internationalfinancial transactions because, inter alia:-

• speedy and effective judicial remedies; and

• special courts staffed by judges who are experienced in deciding and who regularlydecide not merely ordinary commercial disputes, but financial and business disputes,sometimes with an international dimension.

Recommendation

To study the current judicial system in relation to company law matters as well asthe feasibility of alternative dispute resolution mechanisms with the objective ofproviding for the commercial and corporate sector a system that is manned byspecialists which will ensure that the system will be responsive to the needs anddemands of the business community and able to dispose of cases in an efficientmanner.

9. Enhancing shareholder activism without recourse to courts

ISSUE

A Minority Shareholder Watchdog Group?

9.1 This is a proposal that the Committee feels should be actively pursued – i.e. the settingup of a Minority Shareholder Watchdog Group to monitor and combat abuses by insidersagainst the minority.

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9.2 This would be a first step towards encouraging shareholder activism in Malaysia. Therole of shareholders and, namely institutional shareholders in demanding and pursuinghigher corporate governance standards is increasing. The proposed Code for example,relies substantially on market regulation, and particularly, institutional investors to hastenthe widespread adoption of the Code.

9.3 The setting up of the Minority Shareholder Watchdog Group will certainly give impetusto the implementation of the Code and to shareholder activism generally.

9.4 On the issue of who should take the initiative to get this going, the Committee wouldsuggest that the Employee Provident Fund (EPF) as the largest institutional investor inMalaysia would be an ideal candidate to organise such a Watchdog Group and possiblywith the technical assistance of the WB or the ADB. Other potential participants includethe MICG, the Malaysian Investors Association and the Malaysian Association of AssetManagers.

9.5 As the growth of the fund management industry in Malaysia gathers momentum throughdecentralisation of EPF’s investment, these fund managers can then play a more activerole in the Watchdog Group.

Recommendation

That the EPF should take the lead to organise a Minority Shareholder WatchdogGroup with technical assistance from the WB or ADB.


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ISSUE FIVE

TO DEVELOP EFFECTIVE GOVERNANCE AND ENFORCEMENT MECHANISMSWITHIN THE REGULATORY FRAMEWORK

1. Introduction

1.1 This part seeks to address the concerns expressed over enforcement, or the lack thereofin the Malaysian capital markets. The Committee, in the course of its study has beenoverwhelmed by the significance placed on the role of enforcement in its contributionto the massive loss of investor confidence in the Malaysian capital markets.

1.2 It is to be noted that criticisms levelled against enforcement generally focus on the roleof regulators. They range from matters such as effective enforcement of existing legislation,autonomy of regulators to act against offenders and the problems relating to patronage.The Committee strongly believes that while regulators have a crucial role in securingcompliance with laws, good corporate governance is not a matter for regulators alone.

1.3 An inherent difficulty with statutory enforcement is that enforcement is more oftenthan not “after the fact” and its effect is generally a deterrent to future breaches. Forexample, the UEM acquisition of Renong shares, in relation to timely disclosure ofmaterial information, although both the ROC and the KLSE took appropriate actionwhen it was discovered, in the hostile mood that surrounded this affair, it was felt to betoo little, too late. There are therefore potential “before the fact” enforcers that deserveattention. The focus of the Committee in this area is therefore to strengthen keygovernance or enforcement mechanisms both within and outside a company. Theemphasis in this respect is to identify all potential enforcers of good governance incompanies. It must be noted that the term “enforcers” is used in the broadest sense torefer to any person who may have a role whether directly or indirectly in encouraginggood corporate governance practices.

1.4 Enforcers of good corporate conduct can broadly be divided into internal and externalenforcers. Possible internal enforcers of good corporate governance include shareholders,non-executive directors, audit committees and to a lesser extent, company secretaries.Potential external enforcers of good corporate conduct include auditors, corporateadvisers and the regulators.

2. Internal enforcers

The issue of shareholder enforcement has been dealt with at length in Issue 4 above.Aside from shareholders, the following are potential “enforcers” of good corporateconduct – non-executive directors, audit committees and company secretaries.

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2.1 Non-executive directors

2.1.1 In paragraph 2.1.27 of Issue 1, it was decided that the law should not distinguishbetween the duties of executive and non-executive directors. However, the Codewould recognise the distinctive role of independent non-executive directorparticipation on the board in reviewing the actions of the executive and takingthe lead in conflict of interest situations.

2.1.2 It is generally felt that this raising of the profile of non-executives has been verybeneficial to the industry.176 There are, nevertheless, grave doubts about theability of independent non-executive directors to monitor management and abuseby controlling shareholders. They include issues relating to the degree of theirindependence (appointment and removal of non-executive directors which isin practical terms controlled by the board or a controlling shareholder) and thetools they have able to discharge this aspect of their role effectively.

ISSUE

Appointment, removal, resignations and re-elections of non-executivedirectors

Appointment

2.1.3 It is fair to say that the process for appointment and removal of directors isessentially controlled by directors or controlling shareholders as the case maybe. This is especially so in light of the fact that a distinguishing feature of theMalaysian corporate landscape is that there are a number of public companieswhich have a significant shareholder and whose holdings are such that it canexercise or influence the control of a company. Control is ultimately exercisedby electing or influencing the election of the board of directors and throughremoval. It is not surprising to find boards made up of friends and invitees ofthe controlling shareholder who are ultimately loyal to those responsible fortheir election.

2.1.4 The appointment and retirement of directors are essentially governed by thearticles of association of a company. In this respect directors may be appointedby shareholders at a general meeting or by the board of directors. In practice,most directors are appointed by directors themselves for the filling of a casualvacancy or as an additional director by virtue of the powers granted to themunder Article 68, Table A of the CA. Any director so appointed shall hold officeonly until the next following AGM, and shall be then eligible for re-election.177

Further, rule 305 of the Listing Requirements requires that any director appointedby the Board to fill the casual vacancy shall hold office until the next AGM andshall be eligible for re-election.178 Despite the requirement to take all “in between

176 The Hampel Committee reports that the recommendations of the Cadbury Committee in raising the profile of non executives has

been “very beneficial”.177

Article 68, Table A of the CA178

Part 8 of the Listing Requirements sets out the various provisions that a public-listed company must have in its articles ofassociation. Rule 309 requires that a public-listed company must have provision in its articles of association for election of directorsto take place every year, and all directors except the managing director shall retire from office once at least in each 3 years, but shallbe eligible for re-election. Article 66 provides that shareholders are responsible for the election of directors in place of those retiring.


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appointments” to the general meeting, boards essentially control the selectionof directors, unless the company is controlled by a significant shareholder, inwhich case, he controls the board.

2.1.5 In every appointment there are certain forms179 that are required to be lodgedwith the ROC. In the case of listed companies, the KLSE shall be notified of theappointment of director as soon as possible in accordance with Rule 30 of theListing Requirements. The SC also needs to be notified of the appointment withinseven days of the appointment as required by paragraph 7.02 of the SC Guidelinesand more recently under subsection 99D(2)(c) SIA. The law sets out notificationsrequirements for the appointment of directors to the relevant authorities. It doesnot prescribe the selection process.

2.1.6 The Code strengthens this requirement by recommending that non-executivedirectors should be selected through a formal and transparent process. Thesuggested “formal process” is through the setting up of the nominationcommittee, with the responsibility for proposing to the board, any newappointments, whether of executive or non-executive directors. The proposednomination committee should have a majority of non-executive directors on itand be chaired by a non-executive director. Beyond this prescription, thecommittee found it unnecessary to prescribe the selection process in the law.

Removals

2.1.7 The CA sets out the provisions for the removal of directors of public companiesunder section 128 CA. It allows members to remove a director any time duringhis term of office regardless of provisions to the contrary in the memorandumor the articles of association of a company. Special notice is required of anyresolution to remove a director or to appoint some other person in his place.The company must send a copy of the special notice to the director concernedand he is entitled to be heard on the resolution at the meeting. The said directoris also entitled to make representations in writing (not exceeding a reasonablelength) to the company and request that the members of the company be notifiedaccordingly. Briefly, the procedures for removing a director in a public companyare as follows:-

• A member gives special notice of the resolution to remove the director fromthe company;

• The company sends a copy of this notice to the director concerned;

• The company will notify the KLSE if it is listed, forwarding a copy of thespecial notice to the KLSE;

• The director is entitled to make written representations to the company;

• The company states the fact of the representations being made in any noticeof resolutions given to members;

179 Form 48A and Form 49

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• The company sends a copy of the representations to every member to whomthe notice is sent. The company need not send out copies of therepresentations if the material is defamatory and the court confirms this;

• The Court may order the director to pay the whole or part of the company’scosts on the application notwithstanding that the director is not a party tothe application;

• The company passes an ordinary resolution at the general meeting;

• The company may appoint another director in place of the removed director;

• Form 49 for his removal is filed;

• The Register of Directors is updated; and

• If it is listed, the company is to inform the KLSE and the SC.180

2.1.8 It should be noted while the company is required to notify the KLSE of theremoval, it is not bound to give reasons for the removal, nor is the directorbeing removed required to make representations to the KLSE. Therefore, theKLSE is not made aware of the circumstances surrounding the removal, whichmay be information beneficial to the KLSE in its enforcement efforts. It issubmitted that amendments should be made to this rule to require the companyto forward to the KLSE a copy of the written representations of the director, oralternatively to require the director to make representations to the KLSE of thecircumstances surrounding his removal. This is purely to aid the KLSE in itsenforcement efforts and not for purposes of reinstating the director concerned.A variant to removals is essentially where a director is not re-elected. The listingrules should be extended to embrace re-elections of directors.

Resignations

2.1.9 In the case of resignations, a director may resign by giving written notice to thecompany, provided there remains in the company, 2 directors, each having hisprincipal or only place of residence in Malaysia. Form 49 is required to be lodgedwith the Registrar within the statutory period of one month from the effectivedate of resignation. There is no requirement for directors to make representationsto the company or the regulators of the circumstances surrounding theresignation. This does not recognise the fact that some resignations may be“forced” upon a director.

2.1.10 The Committee considered the implications of placing directors under positiverequirement to disclose reasons for his resignation. We concluded that such arequirement encroaches unnecessarily on the affairs of a director. In any case,it is always open to a resigning director to deny the existence of suspiciouscircumstances surrounding his removal. The Committee preferred instead tomake channels of communication with the regulatory authority clear and open.

180 Section 99D(2)(b) requires a company to inform the Commission in writing should the chief executives or directors of a listed entity

cease to hold office as a chief executive or director within two weeks of the occurrence of such an event.


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It is recommended that the Listing Requirements should state clearly, the rightof directors to bring to the notice of the KLSE, circumstances which the resigningdirectors think ought to be made known to the authorities.

Directors declining to stand for re-elections

2.1.11 A variant of resignations is essentially re-elections or more specifically,declination by directors to stand for re-election. In these circumstances, theListing Requirements should similarly allow directors to bring to the notice ofthe KLSE, circumstances which the directors declining to stand for re-electionthink ought to be made known to the authorities.

Recommendation

That amendments should be made to the Listing Requirements to requirethe company to forward to the KLSE a copy of the written representationsof the director, or alternatively to require the director to make representationsto the KLSE of the circumstances surrounding his removal. This provisionshould be extended to include a situation where a director is not re-elected.This is purely to aid the KLSE in its enforcement efforts and not for purposesof reinstating the director concerned.

That the listing rules should allow directors to bring to the notice of the KLSEof circumstances which the resigning directors, or the directors decliningto stand for re-election think ought to be made known to the authorities.

ISSUE

Remuneration of non-executive directors

2.1.12 Directors are not servants of the company and as such have no implied right toremuneration for services. They are only entitled to remuneration if it is providedin the articles of association. There is usually provision for payment in the articlesof association e.g. Article 70, Table A, CA which provides that the remunerationof directors shall be determined from time to time by the company at the generalmeeting and that the remuneration is accrued from day to day. In respect ofexecutive directors, his appointment is usually coupled with a service agreementstipulating the terms and conditions of his service including his salary.

2.1.13 Non-executive directors do not have salaried appointment with the companyand receive fees laid down in the articles of association and generally determinedby members at a general meeting. A frequent complaint in respect of non-executive directors is that the level of remuneration does not commensuratewith the additional responsibilities imposed on them. This is a valid issue as thelevel of remuneration that a director receives plays a key role in incentivisingnon-executive directors to play a keener role in the affairs of a company.

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2.1.14 On fees, there is a balance to be struck between recognising the value of thecontribution made by non-executive directors and not undermining theirindependence. The demands now being made on conscientious non-executivesare significant and, therefore, their fees should reflect the time they devote tothe company’s affairs, their experience and responsibilities undertaken.

2.1.15 For this reason the Code recommends payment of non-executive directors foradditional responsibilities undertaken (especially where they participate on boardcommittees), their experience and time devoted to company affairs. This iscoupled with a requirement for disclosure of fees payable to non-executivedirectors. It will be for the market to judge if the fees are adequate. It will also gosome way towards indicating to the public of the value the company places onits non-executive directors and the importance the company places on corporategovernance issues.

2.1.16 In respect of their independence, suggestions have been made to the effect thatnon-executive directors should be subject to a source of income that isindependent of the company. However, we consider this to be too radical aproposal. To do so would be to over emphasise their monitoring role. Non-executive directors are appointed to the board primarily for their contributionto the development of the company’s strategy. What matters is that non-executivedirectors should command the respect of the executive members of the boardand should be able to work with them in a cohesive team to further the interestsof the company.

2.1.17 One other means of encouraging and incentivising non-executive participationon the board is to encourage equity participation by non-executive directors.Equity participation by non-executive directors should be acquired by themindependently and not through a share option scheme designed for executiveswhose role is to manage the company. The directors’ role is to assess effectivelythe performance of the company and its executives and a conflict of interestwould be created if non-executive directors participated in a similar scheme tothe executives. If it is decided (pursuant to a review conducted by the KLSEand is alluded to in 2.1.19 below) that the Listing Requirements definitions of“independence” should be extended to exclude “substantial shareholders”, itfollows then that equity participation by non-executive directors should notexceed the 2% threshold applied to substantial shareholders.

Recommendations

That non-executive directors should not be subject to a source of incomethat is independent of the company.

That one method of incentivising active non-executive participation onthe board, is through encouraging equity participation by these directors.


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ISSUE

Definition of independence

2.1.18 The composition of the board of directors is one of the most important issues incorporate governance and of crucial importance are the provisions ensuringthe existence of independent elements on the board. This is, however, not anarea appropriate for legislative intervention due to the need to maintain flexibilityin the application of the rules. In this respect, the Code is an ideal forum toregulate this activity181 . The Code provides for extensive prescriptions onindependence, based on rule 9 Listing Requirements182 . It essentially,

• prefers an imprecise definition of independence - it should be for the boardto take a view as to whether a particular director is independent or not. Itrequires instead for directors to disclose in the annual report as well as thenotice of meetings embodying the resolution for their re-election, which ofthe directors are considered to be independent and be prepared to justifytheir views if challenged.

• relates to two aspects of independence. First, independence frommanagement and, second, independence from controlling interests. The latteris in recognition of the fact that non-controlling shareholders need specialvigilance at board level on their behalf.

2.1.19 The KLSE is currently considering a proposal to expand the definition ofindependence embodied in Rule 9 to exclude substantial shareholders. This isbased on the belief that substantial shareholding in a company is an interest orinfluence that could potentially create a conflict of interest and affect investorperception about the ability of the director concerned to act solely in the bestinterests of the company. The Committee initially agreed with the proposedexpansion. However, based on feedback received and the subsequent loweringof the threshold of shareholding to be a substantial shareholder, it was felt thatany attempt to exclude substantial shareholders (who are also minorityshareholders) from participating as independent board members can have theeffect of disenfranchising a significant group of persons with a strong incentive(as a result of their large shareholding) to ensure that their rights are not aggrievedby the conduct of the controlling shareholder. There is a strong case, therefore,for retaining the existing definition of “independence” in the ListingRequirements. The KLSE should, therefore, study this issue further.

Recommendation

That the KLSE should re-evaluate its proposal to expand the definition of“independence” embodied in Rule 9 to exclude substantial shareholders.

181 It will be remembered that the Code provides for voluntary compliance, backed by the Listing Requirements which mandates

disclosure of the extent of code compliance.182

Rule 9 sets out the requirement for there to be independent directors on boards of listed companies and the criteria for independence.

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ISSUE

Size of non-executive director participation on the board

2.1.20 Even where non-executive directors choose to take a stand against managementthey are more often than not outvoted by the executive members of the board,or in cases where a significant shareholder controls the board, by the latter.

2.1.21 This is nevertheless an area that the Committee considers impossible to legislate,for it calls for flexibility in application. The Code in this respect provides abenchmark that listed companies should measure themselves by requiring thatat least one third of the Board should be independent.

2.1.22 This is then supplemented by a prescription introducing a form of proportionalrepresentation stating that in circumstances where a company has a significantshareholder, in fulfilling the requirement that the 1_

3 of the board shouldcomprise independent directors, the board should include a number ofdirectors which fairly reflect the investment in the company by the shareholderother than the significant shareholder. The term significant shareholder isdefined as a shareholder with the ability to exercise a majority of votes for theelection of directors.

2.1.23 Boards are then to disclose its analysis of the application of these best practicesset out above, to the circumstances of the board.

2.1.24 The Committee felt it is necessary for the listing rules of the KLSE to supplementthe prescriptions in the Code by mandating a minimum number of “independent”directors on the board. The figures should not be fewer than 2. This recognisesthat it is practically very difficult to form an effective check against the non-independent elements on the board.

Recommendations

That the Listing Requirements should prescribe a minimum number of non-executive participation on the board and that this number should not befewer than 2.

ISSUE

Cumulative voting for directors

2.1.25 A proposal was made following consultation on the report for the introductionof cumulative voting for directors. Under cumulative voting, a shareholder isallowed to cast all their votes for one candidate standing for election on theboard of directors (as opposed to casting one vote for each candidate). Theshareholder is therefore allowed to cumulate his entitlement to one vote percandidate and cast it all in favour of one director.


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2.1.26 Cumulative voting essentially seeks to harness the ability of large minorityshareholders to put their representatives on boards to monitor managementperformance and control self dealing by controlling shareholders. It must benoted that whilst cumulative voting can strengthen the monitoring power oflarge minority shareholders, it is of little direct help to retail shareholders. Theidea, however, is that all shareholders benefit if large minority shareholders areable to effectively monitor management and abuse by controlling shareholders.

2.1.27 Cumulative voting is not unprecedented. It is practised in certain common lawjurisdictions such as Canada and the US. It has also been endorsed in someliterature such as Black and Kraakman – A Self Enforcing Model of CorporateLaw, 1996 (Harvard Law Review). In Law and Finance – Journal of PoliticalEconomy, La Porta, et al (1998), the existence of laws allowing for cumulativevoting are set out as one of the rights that measure how strongly a legal systemfavours shareholders in the voting process.

2.1.28 The principal argument against cumulative voting is that there will be a necessityto prescribe a minimum board size and also that it may lead to divided boards.However, bearing in mind the heavy reliance on independent directors to takethe lead in management oversight and control self dealing by controllingshareholders, whether on the board or through board committee participation,a strong case may be made for strengthening the process by which independentdirectors are given a presence on boards. Therefore, we would suggest that thisrecommendation be given immediate consideration and that the relevantregulator study this issue further.

Recommendation

That the relevant regulator study the issue of the introduction of cumulativevoting for directors further.

ISSUE

Access to information by non-executives

2.1.29 All directors (executive and non-executive), have the same right of access toinformation. Practically however, while non-executive directors have the sameright to information as the executive members of the board, they lack the insideknowledge of the company of the executive members. However, theireffectiveness turns on a considerable extent to the quality of information thatthey receive and the use they make of it.

2.1.30 A prescription stating this right is set out in the Code essentially requiring theBoard to establish procedures granting this access.

2.1.31 The question is, however, whether this right should be embellished through arequirement of the law so as to deal with a situation where a director is deniedthe right to inspect documents by the company. A director seeking access todocuments will not be able to enforce such a requirement if it is stated in theCode.

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2.1.32 It is submitted that this right should be stated in the CA, with recourse to thecourts to enforce this right. The section should give every director in dischargeof the duties of his office, including his duties as a member of a board committee,the right to inspect and copy all books, records, and documents of every kind,and to inspect physical properties of a company.

2.1.33 There should be three broad limits placed on this right. The burden of provingthat one or more of the limits is applicable to a director’s application to enforcethis right should be on the company.

2.1.34 First, the right is not to be enforced upon application by the director to court toenforce this right, if the company establishes that the information to be obtainedby exercise of the right is not reasonably related to the performance of directorialfunctions and duties. For example, if the company establishes that theinformation the director seeks to inspect consists of a closely guarded tradesecret, or operating information developed by third persons and used by thecompany under a secrecy agreement, the director’s application should be deniedbecause knowledge of such secrets would rarely be necessary for the performanceof a director’s functions and duties.

2.1.35 Second, a court may, in its order, limit the ambit of the inspection when necessaryto protect the company from undue burden or expense that complying with thedirector’s request would be so expensive and time-consuming as to seriouslydisrupt the ongoing conduct of the business.

2.1.36 Finally, a director’s right to information is not to be enforced when the companyestablishes that the director is likely to use the information in a manner thatwould violate the director’s fiduciary or other obligation to the company. Inmaking this determination, the court should consider the effect of an orderprohibiting such conduct. If the court is convinced that the director intends touse the information in a manner that would violate the director’s fiduciaryobligations, it should refuse to give the director the access requested.

2.1.37 If the company resists in providing the requested information, as a practicalmatter the right will need to be enforced by an application for a court order. Ina complex and fast-moving world, a substantial delay in the delivery ofinformation may dilute or entirely drain its significance. Therefore, the provisionshould recognise that it is desirable to decide applications expeditiously and,therefore, that the court should be able to decide such applications by a hearingon the basis of affidavits, at its discretion. Although the hearing on such anapplication should be expedited, there must, of course, be due notice to thecompany.

2.1.38 The provision should also make it clear that if the director is successful in anapplication brought after the company has denied a request, the director isentitled to be reimbursed by the company for the expenses, including legal feesreasonably incurred in connection with the application.


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Recommendations

That a provision should be inserted in the CA to the effect that every directorin the discharge of the duties of his office including his duties as a memberof a board committee, has the right to inspect and copy all books, records,and documents of every kind, and to inspect physical properties of acompany.That the following limits be placed on this right:-

• Where the company establishes that the information to be obtained isnot reasonably related to the performance of directorial functions andduties.

• Second, a court may, in its order, limit the ambit of the inspection whennecessary to protect the company from undue burden or expense;

• Where the company establishes that the director is likely to use theinformation in a manner that would violate the director’s fiduciary orother obligations to the company.

That the provision should provide for applications to be heard expeditiouslyand, therefore, that the court should be able to decide such applicationsby a hearing on the basis of affidavits, at its discretion.

That the provision should provide that where the director is successful in anapplication brought after the company has denied a request, the directoris entitled to be reimbursed by the company for expenses, including legalfees reasonably incurred in connection with the application.

ISSUE

Access to professional advice

2.1.39 Under present law, the full board has the kinds of powers flowing from thepower to manage the business of a company. Occasions do arise when theindependent members of a board or board committee members may need somesort of expert advice if they are to exercise their functions and powers in aproper fashion. There is no direct authority for recognising such a power in asubset of directors. Also while a committee would normally have impliedauthority to take all actions necessary to properly execute its functions, currentcorporate practice typically entails a return to the board for specific authorisationto retain such experts as the need arises. Normally, these directors should lookto the in-house legal or other adviser, corporate staff, or regular external advisersfor such assistance, but in some cases it may be necessary to look to others.

2.1.40 The Code addresses this with a best practice prescription to the effect that thereshould be an agreed procedure for directors, in furtherance of their duties totake independent professional advice if necessary at the company’s expense.However, if the board refuses to authorise payment for retention of such advice,the directors should be allowed an avenue to enforce this right.

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2.1.41 It is therefore submitted that a provision should be inserted in the CA to givethe independent directors of a company, acting as a body, or board committeesto retain experts to advise them on problems arising in the exercise of theirfunctions and powers, at the company’s expense, if the relevant directorsreasonably believed that retention of an outside expert was required for theproper performance of their functions and powers, and if the amount involvedwas reasonable. The provision should go on to give these directors the right toenforce this provision in court, where it is denied by the company.

2.1.42 The phrase “acting as a body” contemplates that in making a decision to retainan expert the independent directors of the company will act at a meeting ofthose directors called upon reasonable notice by one of them and attended byat least a majority of them.

2.1.43 This provision should not preclude corporate staff, or regular outside advisersor other experts, from providing assistance to individual directors as a matter ofaccommodation, nor does it preclude a company from voluntarily adopting astructure in which the board or some subset of the board has its own legaladviser or other expert staff.

2.1.44 An application to the court could be made before or after the expert is retained.If the application is made after, the questions concerning whether retention ofthe expert was reasonably required for the proper performance of the directors’functions and powers, the reasonableness of the amount involved, and whetherassistance by corporate staff or regular advisers was inappropriate or inadequate,should be judged as at the time of retention of the advice.

Recommendation

That a provision should be inserted in the CA to give the independentdirectors of a company, acting as a body, or board committees, the rightto retain experts to advise them on problems arising in the exercise of theirfunctions and powers, at the company’s expense, if the relevant directorsreasonably believed that retention of an outside expert was required forthe proper performance of their functions and powers, and that the amountinvolved was reasonable. The provision should go on to give these directorsthe right to enforce this provision in court, where it is denied by the company.

ISSUE

Calibre of non-executive directors

2.1.45 A crucial issue in this respect is also the calibre of the particular non-executivedirector in question. Concerns have been expressed as to whether the supply ofnon-executives will be adequate to meet the demand. It is crucial that there arepolicies and training programmes in place to increase the pool of high calibrenon-executive directors. An example of a policy to facilitate this objective, is toencourage executive directors of companies to accept appointments on boardsof other companies. Issues relating to training are dealt with in Chapter 7 of thispaper.


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2.2 Audit committees

2.2.1 The Listing Requirements of the KLSE provide that all listed companies are tohave audit committees made up of at least two independent directors. Thisrequirement was introduced as a result of strong criticism of shortcomings incorporate governance, in the quality of executive management and theeffectiveness of board supervision.

2.2.2 An independent audit committee serves to implement and support the oversightfunction of the board in several ways.

2.2.3 Such a committee provides a means for review of the company’s processes forproducing financial data, its internal controls, the independence of the company’sexternal auditor, and a forum for dialogue with the company’s external andinternal auditors. In theory, the full board might execute these functions itself.In practice, however, there are several reasons why an audit committee wouldnormally constitute a preferable location for these functions. For one thing, afocused review and detailed discussion of the company’s processes for producingfinancial data, its internal controls, and independence of its external auditormight be too time-consuming for the full board. For another, because thecompany’s financial data concerns the performance of management, it isimportant to have a forum for discussing this data, and the manner of itspreparation, in which management participates only on request.

2.2.4 An independent audit committee reinforces the independence of the company’sexternal auditor, and thereby helps assure that the auditor will have free rein inthe audit process. This reinforcement is achieved in part by conferring on anorgan that is independent of management and whose financial results are beingaudited, a vital role in the retention, discharge, and compensation of the externalauditor.

2.2.5 An independent audit committee provides a forum for regular, informal, andprivate discussion between the external auditor and directors who have nosignificant relationships with management. In the absence of such a forum, anexternal auditor would often be reluctant to call for a meeting at the board levelunless a problem of great magnitude had arisen. In contrast, the provision of aninstitutionalised forum facilitates and indeed encourages the external auditorto raise potentially troublesome issues at a relatively early stage, allows the auditorto broach sensitive problems in an uninhibited and private fashion, and givesthe auditor assurance that it can readily get a hearing in the event of disagreementwith management.

2.2.6 An independent audit committee reinforces the objectivity of the internal auditingdepartment (if there is one). If that department reports primarily to management(as is normally the case), and has no regular access to the board or to a boardcommittee, it may encounter resistance to recommendations that do not meetwith management’s approval. Regular access to an audit committee may helpameliorate such resistance. A working relationship with an audit committee isalso likely to increase the status and therefore, the effectiveness of the internalauditing department.

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2.2.7 In practice, it has been said that these audit committees have been ineffectual,due to both the lack of representation by persons of sufficient calibre and thefact that they have not been given the tools to discharge their responsibilitieseffectively. The Code deals extensively with the issues identified below. In thisexercise the Committee essentially focuses on those aspects of the Code thatshould be reflected in the rules, thereby mandating compliance with theseprescriptions. In this respect, the KLSE is currently in the process of reviewingits rules on audit committees. The Committee’s aim is to provide input for thatexercise.

ISSUE

Membership of the audit committee

2.2.8 The existing Listing Requirements require every listed company to have auditcommittees comprising at least three members, a majority of whom should beindependent.183 It is submitted that this rule should be maintained. The number‘three’ is related to its functions, to ensure that audit committees have theresources necessary to undertake their tasks effectively.

2.2.9 The Listing Requirements further provide that the committee should comprisea majority of members who are independent directors. The rule should be clarifiedto require the Chairman of the audit committee to be an independent director.The effectiveness of the audit committee depends to an extent on their having astrong chairman, who has the confidence of the board and the auditors. TheFinance director, the Head of Internal Audit and a representative of the externalauditors shall normally attend meetings. Other board members may attendmeetings upon the invitation of the audit committee. This ensures that a necessarylevel of calibre and expertise as well as accountability is available in the auditcommittee. However, at least once a year, the audit committee meetings shouldmeet without the executive committee members present to ensure that there is aforum for the auditors to broach sensitive problems in an uninhibited and privatefashion. Additionally, the term of office of each member of the audit committeeshould be subject to review every three years. This allows for the evaluation ofthe performance of the audit committee and of each individual director on thecommittee.

Recommendation

That the existing Listing Requirements should be clarified to require theChairman of the committee to be independent and that the Financedirector, the Head of Internal Audit and a representative of the externalauditors to attend meetings. Other board members shall attend meetingsat the invitation of the audit committee. However, at least once a year, thecommittee shall meet with the external auditors without the executivemembers of the board present. Additionally, the term of office of eachmember of the audit committee should be subject to review every threeyears.

183 Rule 344A(2) KLSE Listing Requirements


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ISSUE

Terms of reference of the audit committee and actions open to auditcommittees

2.2.10 The Listing Requirements set out the functions of the audit committee184. TheCode seeks to clarify the duties of the audit committee in greater detail.

2.2.11 In this respect the Code specifies as one of the functions of the audit committee,to consider and where it deems necessary, investigate any matter referred to itor that it has come across in respect of a transaction, procedure or course ofconduct that raises questions of management integrity, possible conflict of interestor abuse by a significant or controlling shareholder. This should be specificallyset out as a mandatory function of the audit committee.

2.2.12 The Committee felt it necessary for the duty to investigate to be supplementedwith a statement as to the possible courses of action open to the audit committee.For example, it may in some cases, decide to take such questions directly to theboard. In others it may wish to conduct its own investigation, or requestmanagement to conduct an appropriate investigation. Where the committeepursues a certain issue but finds no substance, the matter could rest there.However, if as a result of the committee’s inquiries, a matter is left in significantdoubt, or if the committee concludes a questionable practice has occurred, thecommittee should normally report to the board. Where however the board doesnot take action, the directors making up the committee should be required underthe listing rules to report the matter directly to the KLSE. This is in recognitionof the fact that the audit committee is a committee of the board. Hence, it maynot be appropriate for the committee to take the matter to the authorities.However, the Listing rules may then place a positive obligation on the directorsforming the membership of the audit committee to make this report.

Recommendation

That the Listing Requirements be embellished to set out the the duty of theaudit committee to consider and where it deems necessary, investigateany matter referred to it or that it has come across in respect of a transaction,procedure or course of conduct that raises questions of managementintegrity, possible conflict of interest or abuse by a significant or controllingshareholder.

These duties should be supplemented with a statement as to the possiblecourses of action open to the committee. Where the committee pursues acertain issue but finds no substance, the matter could rest there. However, ifas a result of the committee’s inquiries, a matter is left in significant doubt,or if the committee concludes a questionable practice has occurred, thecommittee should normally report to the board. Where however the boarddoes not take action, the directors making up the committee should berequired under the Listing Requirements to report the matter directly to theKLSE.

184 Rule 344A(5) Listing Requirements.

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ISSUE

Access to information

2.2.13 The above illustrates that audit committees will require full access to companyinformation to undertake their responsibilities effectively. The discussion inrespect of non-executive directors in paragraphs 2.1.29 – 2.1.38 apply here.

ISSUE

Access to professional advice

2.2.14 Again there should be a specific statutory provision recognising the rights ofeach director to have access to independent professional advice at the company’sexpense. Therefore, the discussion in paragraphs 2.1.39 - 2.1.44 apply equally.

2.3 Company secretaries

ISSUE

Enhancement of the independence of company secretaries

2.3.1 As alluded to in paragraph 2.5.3 of Issue 1, a company secretary is an officerunder the CA. As an officer, the company secretary is expected to exerciseindependent judgment when discharging his duties. And in this respect theypay a valuable role in ensuring good corporate governance by acting as adviserto the Chairman and the board on the disclosure and other complianceobligations of the company under the law.

2.3.2 In this respect, item 11 of the Code of Ethics for Secretaries states as goodconduct in the discharge of his duties,

“To be impartial in his dealings with shareholders, directors and without fear orfavour, use his best endeavour to ensure that the directors and the companycomply with relevant legislation, contractual obligations and other relevantrequirements.”

2.3.3 The reality, however, is that company secretaries are appointed by the directors,185

his term and remuneration fixed by directors and may be removed by them.186

There is at present no support or mechanism within the CA that embellishestheir independence in discharging their duties. This accounts for the perceptionthat they are completely subservient to the will of the board.


186 Article 95, Table A of the CA


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2.3.4 However, the discussion in Issue 1 illustrates that there is increasing expectationof the role that they are expected to play in advising boards in respect ofcompliance issues. This increases the potential for removal by an untowardboard. It is, therefore, necessary to put checks in place to ensure that companysecretaries remain sufficiently independent to take on this increased role.

2.3.5 The committee considered ways and means of strengthening the existingframework for appointments and removals of company secretaries. It wassuggested that all appointments and removals of company secretaries should besubject to the general meeting, not unlike the existing requirements for directorsand auditors. It was, however, felt that this may be too radical a move bearing inmind the increased costs that the company could potentially be subject to. Thereis nevertheless scope for improvement within the four corners of the existingrequirement.

2.3.6 Currently, companies are required to notify the Registrar of appointments ofcompany secretaries. The CA also requires notification of the removal orresignation of such company secretary187 . The Committee considered that oneway of enhancing the existing notification requirement is to set out a requirementfor the countersignature of the company secretary being removed or resigning,stating that his/her removal, or resignation is not for professional reasons. Wherethe notification is filed without a counter signature, it is then open to the Registrarto make the appropriate enquiries. This requirement should not apply to allcompanies. It should be limited to public listed companies where the disclosureand compliance obligations are highest. The value in the provision lies not onlyin the fact that the regulators are made aware of suspicious removals but moreimportantly that directors are mindful of the fact that they may not abuse theremovals of company secretaries. This gives company secretaries the opportunityto assert their independence within the company.

2.3.7 On the other hand, it was also felt that this notification requirement couldcompromise the director’s ability to remove an incompetent company secretary.A company secretary could now hold a director to ransom by not agreeing tothe counter signature.

2.3.8 It was felt that this issue should be looked into further by the relevant regulator.A key consideration in this respect should be the utility to the regulator of thenotification and whether the costs imposed by this requirement outweigh thebenefits.

Recommendation

That the relevant regulator should study further the issue of whether thenotification for removal of a company secretary should set out arequirement for the countersignature of the company secretary beingremoved or resigning, stating that his/her removal, or resignation is not forprofessional reasons.

187 Section 141(6)(d)CA.

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3. External enforcers

External enforcers of good corporate governance for purposes of this discussion areauditors, corporate advisers and regulators.

3.1 Auditors

ISSUE

Extension of the basic statutory duty of auditors

3.1.1 The role of an auditor is a vital one. The basic statutory duty of auditors is toreport to the shareholders on whether the company’s annual accounts areproperly prepared and give a true and fair view. It is designed to providereasonable assurance that the financial statements are free of misstatements.

3.1.2 Under the Malaysian Companies Act, the statutory duty of the auditor does notextend to ensuring whether the director’s report is consistent with the accountsunlike the UK Companies Act where under section 235(3), auditors are requiredto consider whether the information given in the director’s report for the FY forwhich the annual accounts are prepared is consistent with those accounts; andif they are of the opinion that it is not, they shall state that fact in their report.

3.1.3 Bearing in mind that the director’s statement is generally regarded as the mostwidely read part of the financial report, it is submitted that the basic statutoryduty of auditors should be extended to include reporting on whether the director’sreport is consistent with the accounts.

3.1.4 There are similarly other requirements placed on auditors by the London StockExchange Listing Rules that are currently not in existence in Malaysia. Essentially,the Listing Rules require directors to agree with auditors, the content ofpreliminary announcements of financial results. In this respect we recommendthat the Listing rules of Exchanges should include auditor agreement of thecontent of preliminary announcements of financial results consistent with theaim of ensuring integrity and credibility of publicly reported information.

Recommendations

That the basic statutory duty of auditors should be extended to includereporting on whether the director’s report is consistent with the accounts.

That the Listing rules of Exchanges should require the auditors’ agreementof the content of preliminary announcements of financial results consistentwith the aim of ensuring integrity and credibility of publicly reportedinformation.


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ISSUE

Auditor objectivity and independence

3.1.5 The audit provides an external and objective check on the way in which thefinancial statements have been prepared and presented, and is an essential partof the checks and balances required. If reliance is to be placed on accounts, it isessential that they should be true and fair and that is more likely to be the caseif someone independent of the company has vetted them and certified that theyare so. The question, therefore, is how to ensure auditor objectivity andindependence.

3.1.6 The framework in which auditors operate, however, is not well designed incertain respects to provide the objectivity that shareholders and the public expectof auditors in carrying out their functions. The main reasons are as follows –

• Accounting standards and practice allow boards too much scope forpresenting facts and figures derived from them in a variety of ways. Auditorscannot stand firm against a particular accounting treatment if it is permittedwithin the standards.

• Although shareholders formally appoint auditors and the audit is carriedout in their interests, the shareholders have no direct say in audit negotiationsand have no direct link with the auditors. Auditors do, however, have towork closely with those in management who have prepared the financialstatements that they are auditing in order to carry out their tasks. The auditfirms in this respect, like any other business, will wish to have a constructiverelationship with their clients.

• Audit firms are also in competition with each other for business. They wishto maximise their business with companies of which auditing may only be apart. To the extent that they compete on the basis of their professionalreputation, this will act as an incentive to maintain high standards. So willthe ethical guidance of the profession, and the threat of litigation. To theextent, however, that audit firms compete on price and on meeting the needsof their clients (the companies they audit), this may be at the expense ofmeeting the needs of shareholders.

• Companies too are subject to competitive pressures. They will wish tominimise their audit costs and they are likely to have a clear view as to thefigures they wish to see published, in order to meet the expectations ofshareholders.

3.1.7 Steps have already been taken, within the last two years to strengthen the auditsystem through the establishment of a new regulatory framework. The FinancialReporting Foundation and its associated body, the Malaysian AccountingStandards Board – have been set up to improve and tighten accounting standards,to give these standards the force of law and to facilitate enforcement of thesestandards through companies. The new system has only recently been establishedand its impact has yet to be felt. We endorse the steps that are being taken to

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develop more effective accounting standards. These provide important referencepoints against which auditors exercise their professional judgment. Their positionis strengthened if standards do not allow for alternative accounting treatment.The work of the Malaysian Accounting Standards Board is well in hand andhas our full support.

3.1.8 There are certain other aspects of the framework surrounding auditors that canbe improved to strengthen their independence and their role as watchdogs. Inaddition to the above, the Committee also considered the following additionalaction to strengthen public confidence in the audit approach.

• It has been suggested that a percentage limit should be placed on the totalincome that an audit firm may receive from a single client. This could bedone via the by-laws of the relevant professional organisation concerned.This is to counter any temptation that may exist where a significantproportion of the income of an audit firm is dependent on a single auditclient. The Committee were generally reluctant to impose such a requirementfor the following reasons:-

■ difficulty in defining what a single client constitutes – would it includecompanies within the same group of companies or associate companies?

■ difficulty associated with fixing a threshold;

■ whether the threshold should include fees earned in respect of non-audit work. The problem with non-audit work is that where auditorsundertake non-audit services, it will increase the value of the firm to theauditorship and thus make the auditors more reluctant to do anythingwhich will render it likely that the board of directors will seek to get ridof them as auditors. If so, then if in a particular year, a client undertakesa major corporate project, etc., would the audit firm be in breach despitethe fact that this is an “exceptional” fee earned. On the other hand, ifthe threshold does not include non-audit fees, this would render therequirement quite redundant; and

■ difficulty associated with enforcing this rule. Financial statements ofauditors are generally regarded as very confidential. Unless thisrequirement had the force of law, it would be almost impossible toenforce.

• The Committee recommend as an alternative to the single client rule, fulldisclosure of fees paid to audit firms for non-audit work. The essentialprinciple is that disclosure will enable the relative significance of thecompany’s audit and non-audit fees to be assessed. As such subparagraph1(q) of the 9th Schedule CA requirements in respect of disclosures in profitand loss accounts, should be extended to include disclosure of fees paid inrespect of non-audit work.


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• The issue of “quarantining” audit from other services was considered as acounter measure for treating audits as “loss leaders” in return for the morelucrative non-audit work. The problem with such a prohibition, and as rightlypointed out by the Cadbury report188 is that it would limit the freedom ofcompanies to choose their source of advice and could increase their costs.The Cadbury committee recommended instead that the audit committee ofa company should undertake the task of keeping under review the overallfinancial relationship between the company and the auditors. In particular,the audit committee should have a key role where auditors also supply asubstantial volume of non-audit services to clients.189 This is already includedas a function of the audit committee in the Listing Requirements.

• Another proposal considered was that some form of compulsory rotation ofaudit firms should be introduced, to prevent relationships betweenmanagement and auditors from becoming too comfortable. The Committee,however, felt that any advantages that this would bring would be more thanoutweighed by the loss of trust and experience built up when the relationshipsare sound and by the risk of audit effectiveness at the changeover. This wasan issue considered by the Cadbury Committee where they suggested that aperiodic change of audit partners should be arranged to bring a freshapproach to the audit. The Cadbury recommendation came in the form ofexhortations to the accounting profession to draw guidelines to this effect.It is believed that some of the bigger accounting firms already practice thisas a matter of international best practice. The Committee recommend thatthe relevant professional body should develop guidelines to this effect.

Recommendations

That there should be disclosure of fees paid to audit firms for non-auditwork. In this respect, subparagraph 1(q) of the 9th Schedule CA requirementsin respect of disclosures in profit and loss accounts, should be extended toinclude services paid in respect of non-audit work.

That a periodic change of audit partners should be arranged to bring afresh approach to the audit. The Committee recommend that the relevantprofessional body should develop guidelines to this effect.

Auditors as watchdogs

3.1.9 The primary responsibility for prevention and detection of fraud or other illegalacts on the part of the company rests with the board as part of its fiduciaryresponsibility for protecting the assets of the company. The auditors’responsibility is essentially to properly plan, perform and evaluate his auditwork so as to have reasonable expectation of detecting material misstatementsin financial statements.

188 Paragraph 5.11

189 These are recommendations of the Hampel committee on the issue of auditor independence.

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ISSUE

Duty to report breaches of law or reasonable suspicions of breaches tothe regulatory authority

3.1.10 Subsection 174(8) CA places a statutory duty on an auditor to report in writingto the Registrar, where in the course of performance of his duties as an auditorof a company he is satisfied that:-

• There has been a breach or non-observance of any of the provisions of theAct;

• The circumstances are such that in his opinion the matter has not been orwill not be adequately dealt with by comment in his report on the accountsor consolidated accounts or by bringing the matter to the directors of thecompany or if the company is a subsidiary, of the directors of the holdingcompany.

3.1.11 Failure to do so carries the penalty of imprisonment for two years, or thirtythousand ringgit or both.

3.1.12 The obligation to report is triggered when the auditor is satisfied that a breachof the Act has occurred and where he has no confidence that the directors willdeal adequately with the matter.

3.1.13 There are several problems associated with this duty. On a practical level,breaches of the law and especially in cases of fraud, if it involves forgery, collusionor management override of control systems are hard to detect. Also, the term“he is satisfied” introduces a subjective element to the duty to report.

3.1.14 It is submitted that that section should be amended to enable auditors to reportmatters that in “his professional opinion” constitute breach of the CA. Thisprovision should be supplemented with a provision in the SIA placing a similarobligation on auditors in respect of breaches of securities laws and listingrequirements of Exchanges. The advantage to this phrasing is essentially thatauditors are held to a more objective standard by which a decision to or not toreport is assessed against.

3.1.15 The Committee was asked to consider if this provision should be extended tocover fraud and other serious offences. Section 207(9A) of the SingaporeCompanies Act provides that in the case of a public company or its subsidiaries,the auditor is obliged to report to the Minister of Finance if he has reason tobelieve that a serious offence involving fraud and dishonesty is being or hasbeen committed against the company by its officers or employees.

3.1.16 The auditor is then protected by law against suits for defamation if he actedwithout malice. This protection is necessary to enable an auditor to perform hisfunction as a watchdog fearlessly.


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3.1.17 It is submitted that auditors in Malaysia should be placed under an obligationto report fraud, dishonesty and other serious breaches to the relevant authority.The provision should additionally protect them from defamation suits if theauditor acted without malice, not unlike section 174A(1)CA. Additionally, therelevant professional bodies should develop guidelines in consultation with therelevant regulators to provide guidance to their members as to the scope of theduty.

3.1.18 Following from the increased responsibility in respect of compliance with therequirements of the SIA and Listing Requirements, the relevant professionalorganisations should arrive at a standard benchmark fee increase uponconsultation with all relevant parties.

RecommendationsThat subsection 174(8) CA should be amended to enable auditors to reportmatters that in his professional opinion constitute breach of the CA. Thisprovision should be supplemented with a provision in the SIA placing a similarobligation on auditors in respect of breaches of securities laws and listingrequirements of Exchanges.

That auditors in Malaysia should be placed under an obligation to reportfraud, dishonesty and other serious breaches to the relevant authority. Theprovision should additionally protect auditors from defamation suits inrespect of this reporting obligation. Additionally, the relevant professionalbodies should develop guidelines in consultation with the relevant regulatorsto provide guidance to their members as to the scope of the duty.

Following from the increased responsibility in respect of compliance withthe requirements of the SIA and Listing Requirements, the relevantprofessional organisations should arrive at a standard benchmark feeincrease upon consultation with all relevant parties.

Removals, resignations and re-elections of auditors

ISSUE

Removal of auditors

3.1.19 Section 172(4) CA provides that an auditor may only be removed from office byresolution of a company at a general meeting, of which special notice has beengiven.

3.1.20 Subsection 172(5) requires such special notice to be sent to the auditor inquestion as well as the Registrar. The auditor is then given the right to makerepresentations in writing to the company and request that copies of therepresentations are sent out to every member prior to the meeting at which theresolution is to be considered, be heard orally or require that his representationsare read out at the meeting190. Once removed, the company must notify theRegistrar in writing of the removal191.

190 Subsection 1729(5)(b) and (6) CA

191 Subsection 1729(8) CA

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3.1.21 The provisions do not require the company to furnish to the ROC a copy of thewritten representations made by the auditor. Therefore, the ROC is not madeaware of the circumstances surrounding the removal, which may be informationbeneficial to the ROC in its enforcement efforts. It is submitted that amendmentsshould be made to section 172 to require the company to forward a copy of thewritten representations of the auditor, and to require auditors to makerepresentations to the ROC of the circumstances surrounding his removal. Thisis purely to aid the ROC in this enforcement effort and not for purposes ofreinstating the auditor.

3.1.22 A similar provision, should also be inserted in the Listing rules of Exchanges, torequire listed companies to report all removals of auditors and reasons for theremoval, as well as representations by the auditor to be made to the Exchange.

RecommendationsThat amendments should be made to section 172 to require the companyto forward a copy of the written representations of the auditor, oralternatively to allow the auditor to make representations to the Registrarof the circumstances surrounding his removal. This is purely to aid the Registrarin its enforcement efforts and not for purposes of reinstating the auditor.

That a similar provision to this effect should also be inserted in the Listingrules of Exchanges, to require all removals of auditors and reasons for theremoval, as well as representations by the auditor to be made to theExchange.

ISSUE

Resignations of auditors

3.1.23 Under section 172(15) CA 1965, directors are required to call a general meetingas soon as it is practicable upon receipt of notice in writing from its auditor thathe desires to resign. The meeting is for the purpose of appointing another auditorand there is no requirement that the circumstances surrounding the auditor’sdecision to resign be disclosed.

3.1.24 It was suggested that perhaps a change should be effected along the lines ofsection 392 British Companies Act 1985 which gives power to auditors to requiredirectors to convene an extraordinary general meeting when they resign and tobring notice to the shareholders the circumstances which the resigning auditorsthink ought to be made known to the shareholders.

3.1.25 However, in view of the tremendous costs that could potentially be incurred bya company for purposes of calling such a meeting, the Committee felt that sucha provision should not be allowed here. Rather, if the objective is notification,this could be achieved by inserting a provision in the Listing rules of Exchangesrequiring the company to circulate the auditor’s representations stating reasonsfor his resignation, at the companies’ expense. This should be furthersupplemented by a provision in the CA requiring auditors to inform the Registrarand in the case of listed companies, the Exchange, of the reasons surroundinghis resignation.


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3.1.26 Another variant of removals and resignations is essentially in respect of re-elections and declination to stand for re-election by auditors after completionof an existing audit. This may in certain circumstances amount to a substantiveact of removal or resignation. The notification requirement should apply equallyhere.

Recommendation

That in the case of resignations and declinations to stand for re-election byauditors, a provision should be inserted in the rules of the Exchanges requiringcompanies to circulate to the shareholders, the auditors’ representationsin respect of his reasons for resignation or declination to stand for re-elections.

The provision should be inserted into the CA and the SIA requiring auditorsto inform the Registrar and in the case of listed companies, the Exchange,of the reasons surrounding his resignation or declinations to stand for re-election.

The notification requirement should be extended to embrace failure to re-elect or declinations to stand for re-election by auditors.

3.2 Corporate advisers

3.2.1 Company advisers such as merchant bankers advising a company on a particulartransaction, have the potential to play a key role especially in protecting therights of minority shareholders when advising a company on a particulartransaction. The responsibility of corporate advisers in such transactions iswidened to ensure that the transactions are not done to the detriment of theminority shareholder.

3.2.2 The Committee endorses amendments in July 1998 to Rule 118 of the ListingRequirements that now require the appointment of independent corporateadvisers in related or interested party transactions which exceed a pre-determinedmateriality threshold. The independent corporate adviser’s role is to advise theminority shareholders of the company by commenting on the fairness andreasonableness of the transaction. A similar requirement exists in otherjurisdictions. For example, in Australia, the report of an independent expert onwhether a transaction is fair and reasonable is required under the AustralianStock Exchange Listing rules.192 The same requirements are echoed in the HongKong Stock Exchange Listing Rules and the Singapore Stock Exchange ListingManual. This amendment enables a minority shareholder to be apprised ofpertinent details of the transaction and to be given an objective view that thetransaction is fair and reasonable and not to his detriment.

192 Rule 10.10

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3.3 Regulatory authorities

3.3.1 This has been the subject of much criticism in recent times. Regular andconsistent enforcement is crucial in inculcating discipline amongst corporateparticipants. There should be significant effort to strengthen the enforcementfunction of the regulators. In this respect, the enforcement function of theregulator may be divided into two broad headings:-

• Enforcement of legislation/rules

• Indirect enforcement mechanisms - Incentives for compliance

Enforcement of laws and rules

3.3.2 There is overwhelming public opinion that regulators are not effectivelydischarging their duties in enforcing the law. There have been questions as tothe will and ability of regulators to ensure transparency and protect investors -the cornerstone of any modern regulatory system. In this respect the perceptionthat enforcement has not been at the level it should be, whether legitimate ornot, should be addressed forcefully in order to set about regaining confidencein the Malaysian capital markets. Some of the main concerns highlighted arethe following:-

• Lack of autonomy on the part of regulators to enforce laws;

• Fragmented regulatory framework and enforcement powers;

• The need for the right experience and skills in enforcement efforts;

• The need for more accountability and transparency by regulators.

ISSUE

Autonomy to enforce laws

3.3.3 A fundamental pre-requisite to an efficient and transparent market is thatregulators must be allowed to enforce laws without interference or fear or favour.The autonomy of powers granted to regulators to enforce laws is a fundamentalpre-requisite to taking on the mandate of investor protection. Regulators mustbe allowed to get on with their job, so that what is provided in rules, regulationsand laws, are backed up with action, which in itself reinforces the credibility ofthe entire regulatory framework. Consistency in enforcement of laws andregulations ensures a level playing field for all participants. When there in nolevel playing field and the market is perceived as not being fair, investors willnot be attracted to it while those already in it will be unjustly treated and sufferloss. The regulator cannot countenance this and must be allowed to enforcelaws and regulations to protect the investor and the integrity of the system and,where these are not sufficient, to improve and enhance them.


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3.3.4 The UEM-Renong debacle is an oft-cited example of such a problem. The publicoutcry that followed demonstrated how markets can swing so significantly undervolatile and angry conditions. While there is no point in indulging inrecriminations, all steps should be taken to ensure that the loss of confidence inregulation causing the controversy is not repeated. The Committee urges thehighest levels of government to give full co-operation towards this effort.

Recommendation

That regulators should have sufficient autonomy to enforce laws withoutinterference or fear or favour.

ISSUE

Rationalisation of the regulatory framework

3.3.5 The need for rationalisation cannot be stressed enough, especially in light ofthe inefficiencies brought to light by the financial turmoil of 1997 and, namelyin the area of enforcement. Fragmentation obstructs enforcement in two broadways:-

• First, it confuses jurisdiction over laws that often lead to regulators strugglingto react to situations, often a little too late. Often, the response tojurisdictional problems is duplication, which does not solve the problem,quite aside from being an unnecessary regulatory burden on the industry.Fragmentation also causes confusion with the public, which then leads tounwarranted but inevitable blame being laid on a regulator not responsiblefor regulating that activity, thus further entrenching public perception thatregulators are not enforcing the law.

• Second, it results in unco-ordinated enforcement activity. This hastremendous consequences, namely in relation to access to information orintelligence in investigations. A fragmented framework relies heavily onarrangements between regulators and the crisis highlights the inadequacyof co-ordination between regulators. In respect of inter-agency arrangements,experience suggests that there is always the potential for something to fallbetween the cracks. This is a discussion that has preoccupied financialservices regulators in recent times, and the trend has been to re-organisethemselves along “functional lines” to among other things, minimise theneed for inter-agency arrangements. The argument takes on greater force incrisis management situations, where the speed at which information needsto be exchanged intensifies.

3.3.6 In short, the benefits of rationalisation are clear:-

• better management of financial crisis;

• effective systemic risk surveillance;

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• lower regulatory costs; and

• greater confidence in regulation.

3.3.7 The Committee urges the government to take active steps towards thedevelopment of a coherent and rationalised framework for the Malaysian capitalmarkets.

Recommendation

That the government should take active steps towards the developmentof a coherent and rationalised regulatory framework governing companies.

ISSUE

The need for the right skills in enforcement efforts

3.3.8 No regulatory system will operate effectively without the right regulatoryresources. This translates into having high quality people with the right skills inthe various regulatory bodies.

3.3.9 Staff training is key. There should be throughout the regulatory system, asystematic approach to the identification of skills and qualities needed to dothe different regulatory jobs more effectively, and rapid development of trainingprogrammes to develop skills and competence. This should include not just“study” training but on the job training, staff interchanges between regulatorsand secondments to the industry. The approach both to training and secondmentsmust also reflect today’s altered priorities from rules’ orientated policy, towardssupervision and enforcement work. Investigatory and other qualities areincreasingly going to be in demand.

3.3.10 Inter-regulator cooperation - Each regulator will naturally need to address itsown particular needs. But there is likely to be added value from joint efforts -for example, from the development of common courses for regulatory personneldoing a similar job in different bodies, the development of training curricula tointer-regulator recruitment and secondment.

3.3.11 One other aspect of getting the right skills is that the regulators must be in aposition to attract the right talent. This includes conferring on regulators sufficientflexibility to put in place the right incentive schemes to attract such personnel.

3.3.12 We need to aim to achieve for regulators the standing that has been required byregulators in the United States and other developed economies, and to takespecific action with that in view.


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Recommendations

That steps should be taken to enhance training and secondment. In thisrespect such training and secondment should reflect today’s alteredpriorities from rules orientated policy, towards supervision and enforcementwork.

That there should be inter-regulator cooperation in respect of training andsecondment.

That regulators should have in place the right incentive schemes to attractsuch personnel.

ISSUE

Exercise of exemptive powers by regulators

3.3.13 One critical issue on the regulation of takeovers as demonstrated by the UEM-Renong case was the perceived arbitrary exercise of discretionary power ingranting waivers from the obligation to make a mandatory general offer. Thefact that UEM and its related parties had been granted a waiver from having tomake a general offer for the remaining shares in Renong by the FIC under Rule34.2 of the Code on Takeover and Mergers gave the impression that the perceived“bail out” of Renong and its substantial shareholders was supported by theauthorities. Whilst the SC administers the Code, the FIC has the sole prerogativeto grant general offer exemptions on grounds of national interest. This is not asatisfactory situation as demonstrated by the widespread dissatisfaction on thepart of minority shareholders and the investing public. The Committee believesthat exemption powers must be subject to clear and transparent criteria asstipulated in the statute so that the authority that exercises such discretionarypower can be checked by statute as well as by investors who would have recourseto the court if the discretionary power has been arbitrarily exercised. This is acritical issue that must be resolved at the highest levels of government in thereform of the Code on Takeovers & Mergers.

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RecommendationThat exemption powers must be subject to clear and transparent criteriaas stipulated in the statute so that the authority that exercises suchdiscretionary power can be checked by statute as well as by investors whowould have recourse to the court if the discretionary power has beenarbitrarily exercised.

UpdateThe new Malaysian Code on Takeovers and Mergers brought into effect on1st January, 1999 makes the SC the sole authority to grant exemptions fromprovisions of the Code. The amendment to the Code also subject theexemptive powers conferred on the SC to a clear and transparent criteriaas set out in subsection 33A(5) SCA. In this respect, the SC will have to ensurethat:-

• the shareholders and the directors of an offeree and the market forthe shares that are the subject of the take-over offer are aware of theidentity of the acquirer and offeror, have reasonable time in which toconsider a take-over offer, and are supplied with sufficient informationnecessary to enable them to assess the merits of any take-over offer;

• all shareholders of an offeree have equal opportunity to participate inbenefits accruing from the take-over offer, including in the premiumpayable for control;

• shareholders, in particular, minority shareholders, are treated fairly andequally; and

• directors of the offeree and acquirer act in good faith to meet theobjectives that are specified in subsection 33A(5) of the SCA and thatminority shareholders are not oppressed or disadvantaged by thetreatment and conduct of the directors of the offeree or the acquirer.

ISSUE

Accountability and transparency of regulators

3.3.14 The issue of accountability is taken up specifically in relation to the exercise ofbroad exemptive powers by regulators. However, there is general consensus onthe need for more transparency by regulators. Transparent conduct enhancesthe credibility and standing of the agencies concerned. Transparent conductmay begin with disclosures in the annual report by regulators of their activitiesfor the year, including enforcement activities.

3.3.15 The credibility and standing of regulators become crucially important in timesof crisis, when confidence is fragile. There is a natural tendency for investors toreact hastily and irrationally. A device that is often employed by some countriesin the wake of a major crisis such as a bank failure for example, is the appointmentof an independent commission. Guidelines should be developed to set out thecircumstances that would warrant such a commission, though this should be


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utilised only in extreme situations. Too frequent appointments of independentcommissions only serves to undermine confidence in regulators and theregulatory system.

Recommendations

• That regulators should be transparent, namely in relation to theirenforcement activities.

• That guidelines should be developed outlining circumstances thatwould justify the appointment of an independent commission as amechanism to preserve investor confidence in times of crisis.

ISSUE

Range of enforcement powers of the regulator

3.3.16 The range of enforcement powers of regulators should be modernised. Regulatorsshould have various range of sanctions to counter corporate abuse. The range isimportant bearing in mind that company frauds and illegal acts of directors,especially if it involves forgery, collusion or management override of controlsystems, are getting increasingly harder to detect. This, coupled with a criminalstandard of proof, sometimes makes it difficult to gain a conviction against anoffender.

3.3.17 Some of the various actions now open to regulators in other jurisdictions topursue are as follows:-

• Power to institute civil action on behalf of an aggrieved investor

3.3.18 The new sections 90 and 90A SIA have been inserted to provide for the recoveryof losses caused by insider trading, by way of civil actions instituted either bythe SC or by an investor. However, there is no general right for a regulator totake action on behalf of an aggrieved investor for breach of companies legislation,breach of duty, fraud, negligence and the like.

3.3.19 In this respect, section 50 of the ASIC Act 1989 allows ASIC193 to take action ina person’s name, where as a result of an investigation, it appears to ASIC to bein the public interest for a person to begin or carry proceeding for the recoveryof damages for fraud, negligence, default, breach of duty committed in connectionwith a matter related to the investigation or for recovery of property of the person.

3.3.20 ASIC first used its powers in the 1980s as a result of continued concern thatASIC had not done enough to protect the interests of shareholders in thecompanies whose funds were lost in the 1980s. Section 50 has now been usedby ASIC in a number of cases and in some, auditors were joined as defendantsin the action.

193 The ASIC is the designated regulator over the Australian equivalent of the CA.

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• On-the-spot fines/Penalty notices

3.3.21 The ASIC has the power under section 1313 Compensation Law to impose ‘on-the-spot’ fines, or penalty notices. Under this section, ASIC may serve a noticeon a person if there are breaches in relation to certain prescribed offences. Personsreceiving such a penalty notice may either pay the fine or ask that the matter betried in court. However, if an ‘on-the-spot’ fine is paid no criminal proceedingcan later be initiated for that particular offence. However, the payment of suchon-the-spot fines will not reduce the impact of the offence upon disqualificationif there is persistency or repetition in the commission of such offences.

RecommendationThat the range of enforcement powers of the regulator should bemodernised which should include among other things the power to instituteaction on behalf of an aggrieved investor.

ISSUE

Range of enforcement powers of Exchanges

3.3.22 One particular issue that arises in this context is in respect of the enforcementpowers of the Exchange over directors of companies. Section 11 SIA places onstatutory footing the power of the Exchange to enforce obligations required ofcompanies under the listing rules. In this respect, there are two areas of reviewunder the rules:-

• First, that the range of sanctions for breach are limited to directing a personto observe the requirements of the listing rules, impose a penalty notexceeding RM 250,000 or reprimand a person in default. It is submitted thatsubsection 11(2)(b) SIA should be amended to increase the fines and therange of sanctions that may be imposed for breach.

• Second, the KLSE has expressed difficulty with section 11 SIA in enforcingthe provisions of the Listing Requirements against directors of listedcompanies, on the basis that the obligations under the Listing Requirementsare directed at the company and not the directors. It has been brought toour attention that there is a similar provision to section 11 SIA in theAustralian Corporations Law, i.e. section 777. Despite the existence of theprovision, the courts in Australia have not been sufficiently clear on whetherit is sufficient to impose a positive obligation on directors to comply withthe Listing Requirements. The Committee regards it as crucial that listedcompanies should have the power to enforce rules against directors of listedentities. Therefore, to the extent that there are ambiguities in their existingpowers, this area should be reviewed and clarified.


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Recommendations194

That subsection 11(2)(b) SIA should be amended to increase the penaltiesand the range of sanctions that may be imposed by Exchanges for breach.

That to the extent that there are ambiguities in the existing power of theKLSE to enforce its Listing Requirements against directors, this should beclarified.

Update

Recent amendments to the SIA (Securities Industry (Amendment) (No. 2)Act 1998) now:-

• increase the fine that an Exchange may impose for breach of listingrequirements to a maximum of one million ringgit; and

• clarify the Exchange’s right to enforce its listing rules against directorsand additionally against any person to whom the rules or listingrequirements of the stock exchange are directed at.

ISSUE

Incentives for compliance

3.3.23 These are essentially non-penal sanctions that a regulator may employ to “force”companies to take cognisance of corporate governance issues. Regulators shouldapply their minds to consider other possible incentives to enhance the level ofgovernance practised in these companies. In particular, the Committee has hadthe opportunity to consider a merit/demerit scheme that favours companiespractising high standards of corporate governance when approving corporateexercises proposed by these entities.

The scheme in brief

3.3.24 The statutory authority for this scheme is essentially derived from section 32SCA. This gives the Commission power to approve companies seeking listingon an Exchange as well as any corporate issue proposal under subsection 32(2)SCA. Under the scheme, listed companies will be categorised into grades,essentially favouring companies practising high standards of corporategovernance. The scheme affects all listed companies applying to undertakeproposals under subsection 32(4) SCA. The advantages of receiving a favourablegrading may manifest itself in various forms:-

• Easier access to the capital markets – for example, shorter prospectusesespecially in respect of repeat issues of securities;

• First in line in respect of capital market developments – for example,companies that consistently make accurate and timely disclosures, may be

194 See update.

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permitted to move to a full disclosure regime whilst those that are not willbe held back. This is to ensure that good and compliant companies are notheld back by those that are not.

3.3.25 The purpose of the scheme in this respect is not to offer investors guidance inrelation to investment but as a device by the SC to force listed companies totake issues pertaining to disclosures and corporate governance seriously.

3.3.26 The Committee is in support of such a scheme. It, however, seeks to highlightcertain matters for consideration by the SC when developing the scheme:

a) That there should be a definite criteria or benchmark by which companiesmay be assessed. The criteria will need to be largely objective, though therewill be some subjective elements that are essentially based on the entities’previous dealings with the regulator. Some of the more objective standardsby which these companies may be assessed include, the accuracy andtimeliness of disclosures by companies, the level of corporate governancedisclosures of companies, the compliance history of the entity and the qualityof its management.

b) That there should be a mechanism by which companies that fall on theborderline may be dealt with.

c) Standard periods for assessment. Companies that do not fall within the highergrade should be given time to establish a compliance track record that wouldenable them to be promoted to a higher grade at the next assessment.

d) Transparency of the system – this is crucial in ensuring that the system remainscredible and free of accusations of bias and abuse. The SC should makepublic both the criteria of assessment as well as its reasons for grading acompany in a particular way.

Other possible incentives

3.3.27 The Committee considered other possible incentives that could encouragecompliance with corporate governance. They include, for example:-

• Factoring in the level of governance practised by companies into credit ratingsof companies. It is recommended that the relevant rating agencies examinethe feasibility of this proposal.

• Joint ventures with members of the financial press in undertaking evaluationsof corporate governance practices of listed companies. An active financialpress has a crucial role to play in complementing disclosures of the extentof compliance with the Code.

Recommendation

That the SC’s proposal for the introduction of a merit-demerit scheme, wherelisted companies will be categorised into grades favouring companiespractising higher standards of disclosure and corporate governance, shouldbe supported.

Chapter 7

TRAINING AND EDUCATION

TRAINING AND EDUCATION

Introduction

This Chapter deals with the education and training programmes required to

be developed and introduced on corporate governance matters. The Chapter

identifies the participants targeted for this training and education, such as

directors, company secretaries, members of audit committees and investors.

Although each category of participants have different needs, all of them

generally require education on their duties, obligations, responsibilities, rights

and liabilities in respect of the governance of companies, and on the

application of the Code sought to be introduced herein. The Chapter also

discusses the agencies identified to conduct the programmes, the timing of

the implementation as well as the performance evaluation and funding of the

programmes.

Chapter 7 – Training And Education

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1. Introduction

1.1 Domestically, media attention has done much to make “corporate governance”buzzwords, to be bandied around in boardrooms and over business lunches. However,understanding of its practical application still leaves much to be desired.

1.2 The previous chapters of this Report have attempted to remove this haziness by clarifyingin great detail the duties, obligations, rights and liabilities of corporate participants aswell as touching on regulators and the judiciary, who all have their respective roles toplay in the governance of companies in Malaysia.

1.3 It is quite telling that the Price Waterhouse Survey of Public-Listed Companies (Survey),stated that 62% of the respondents put education about existing rules at the top of thelist of matters requiring improvement. The thrust of training and education would notonly be focused on the introduction of the Code and the accompanying regulatory reformssuggested in this Report, but also on the existing regulatory framework as they affectcorporate participants involved in the governance of companies.

2. Target Participants

ISSUE

To whom should training and education be targeted?

2.1 It has been said that “[c]orporate governance is not about government regulation - it isabout directors, officers and shareholders being responsible for their company’s fate”1 .Although regulators and the judiciary have a role to play in providing the legal, regulatoryand enforcement framework for the governance of companies, it is ultimately thecompany directors, company advisers and the shareholders who determine theequilibrium between management flexibility and controls.

2.2 Therefore, as the Report has earlier highlighted in Chapter 6, the need for educationand training for regulators and the judiciary, this Chapter will therefore only centre onthe training and education needs of corporate participants, namely:-

• directors, both executive and non-executive;

• company secretaries;

• audit committees; and

• shareholders/investors, both individual and institutional.

Recommendation

The targeted participants in the training and education programmesrecommended here are directors, company secretaries, members of auditcommittees and shareholders/investors.

1 Address by Alan Cameron, Chairman, Australian Securities Commission (ASIC), 9

th June 1995 at Corporate Governance ’95 held at

RMIT, Melbourne, Australia.


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3. Target Areas

ISSUE

The target areas for training and education

3.1 Training and education for the target participants would focus on the following areas:-

• their general duties, obligations, responsibilities, rights and liabilities under law,both common law and under statute, rules, regulations and guidelines;

• the application of the Code; and


3.2 The courses can be conducted for ethnic groups with medium of instruction in therespective local languages and dialects as desired, in order to reach the widest audiencepossible.

Recommendation

It is recommended that the training and education of the targeted participantsfocus on the following:-

• their respective rights, duties, obligations, responsibilities and liabilities underlaw, both common law and under statute, rules, regulations and guidelines;

• application of the Code; and


4. Directors

ISSUE

Should directors (both executive and non-executive) be subject to compulsoryeducation and training?

4.1 The general thrust of the proposed regulatory changes and the Code is to create a bodyof directors who undertake their role in the governance of companies in a professionalmanner. The fulfilment of this role requires them to be fully cognisant of their duties.They should also be sufficiently informed of the operations of their companies. It isessential that directors have a grasp of these matters to fulfil their role of providingstrategic leadership and vision to the company.

4.2 The Survey had also highlighted this need for a clearer definition of directors’responsibilities.

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Accreditation programmes

4.3 If the target of training and education is to inculcate professionalism in directors, thequestion is whether we leave it to voluntary professionalism, i.e. allow directors tovoluntarily enrol themselves in training courses, or require director accreditation.

4.4 Director associations in Australia, the UK and the US all have programmes for directoreducation. However, only the Australian programme offers an accreditation course.The Australian Institute of Corporate Directors (AICD) offers a Company Directors’Course Diploma.

4.5 The Royal Melbourne Institute of Technology offers a two-year part-time Master ofBusiness by Coursework, which is intended for people wishing to, practice as directorsor fill senior management positions, act as advisers to senior corporate executives andboards, work as professionals in regulatory and other professional bodies, and/or manageinstitutional investment and financial activities. This course was developed with supportfrom the AICD and the Chartered Institutes of Company Secretaries.

4.6 The US has adopted a wait-and-see attitude, where they would only require directoraccreditation only if it is found that voluntary professionalism fails. It is argued that theincreasing demands on directors would by natural progression increase interest in self-education and would lead to board’s selecting similarly trained persons to join them,thereby resulting in self-certification.

4.7 The state of corporate governance in Malaysia however, necessitates a more heavy-handed approach. It is recommended that all existing and future directors of public-listed companies be required to undertake a programme broadly covering the followingmatters:-



• the Code.

Directors legal rights and responsibilities

4.8 Although it is incumbent upon directors to inform themselves of their rights, duties,obligation, responsibilities and liabilities under law, both personally and on behalf ofthe company, a formalised training programme would simplify and accelerate this process.

4.9 The programmes should be formulated to educate directors on their powers and dutiesunder common law and statute as well as the disclosure requirements of the companyand the directors personally. In addition, directors should be educated on the conductof general meetings. Directors should also be aware of the accompanying penalties fornon-compliance with the relevant laws.

4.10 A public-listed company is also subject to additional obligations, and the directors andofficers of the company should be educated on these obligations, which include listingand continuous listing requirements set out in the Listing rules of Exchanges and in theSC’s Policies and Guidelines on Issue/Offer of Securities.


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4.11 In addition, once a company issues securities to the public, it is also subject to theprovisions of the securities laws such as the SIA, the SCA and the SICDA.

4.12 The provisions range from disclosure requirements, to provisions to combat insiderdealing and market manipulation.

Operation of the board

4.13 In the board’s role to manage or supervise the management of the board, board membersshould understand the division of responsibility between management and ownershipand the board’s role in creating value for shareholders. Independent directors should bemade aware of their role in bringing independence to the board and protecting theinterests of shareholders, particularly minority shareholders.

4.14 The critical issues to be tackled by this programme, should as a minimum, include:-

• board composition;

• director selection and compensation;

• chief executive officer evaluation, compensation and succession;

• board’s role in strategic planning and positive change;

• officer performance review and compensation;

• board’s role in creating shareholder value;

• ways to deal with unexpected crisis, trouble shooting; and

• effective use of committees.

4.15 As a guide, the initiatives in this area can be modelled after programmes undertaken inthe US which uses case studies, such as the Harvard Law School programme on “MakingCorporate Boards More Effective”, or role playing, such as that offered by the Wharton/Spencer Stuart Directors’ Institute, which places participants on a fictitious board andallows the participant to serve on key board committees and participate in a meeting ofthe full board.

The Code

4.16 Directors should be educated to apply their minds to the need for corporate governanceby the company and to use the Code as a guide, rather than a checklist by which “tickingthe boxes” would absolve them of any proper analysis of the recommendations in theCode. A checklist mentality would encourage an attitude of form over substance and dolittle to enhance the credibility of those people entrusted with the management of thecompany.

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4.17 The introduction of the Code must be accompanied by guidances on complianceobligations.

Induction as a pre-requisite to listing

4.18 Prior to the company being listed on the Exchange, it is recommended that its directorsattend the mandatory training programme as developed above.

4.19 Such training is to be made a pre-requisite to listing by including a provision to thateffect in the Listing Requirements and in the SC’s Guidelines.

In-house director orientation

4.20 As recommended in Chapter 6, the board of directors collectively have a duty to manageor supervise the management of the business and the affairs of the corporation.

4.21 Currently, directors learn the business on the job, oftentimes in a haphazard fashion asand when the relevant matters arise. The effectiveness of information absorption alsodepends on the initiative taken by the individual director i.e. whether he takes a pro-active stance to learn about the company and the industry, or he is passive about seekingsuch information. Directors may study published materials and other documents aboutthe company, as well as meeting with other directors before appointment. However, therole of directors to manage the company requires all directors to understand the businessof the company and the industry.

4.22 Therefore to accelerate the learning process, it is recommended that a formal orientationprogramme be established to familiarise directors with information about the company’score businesses, competitive posture and strategic plans and objectives. The content ofthe training is a matter best left to the company, via the existing board of directors, todetermine, but should at the very least include information on the products, customers,suppliers and market conditions, with visits to key operating sites, and meetings withcompany executives who are not board members, as well as the company’s keyprofessional advisers.

4.23 This training should preferably commence as soon as a person is appointed as a directorof the company, to ensure that he can make meaningful contributions to board decisionsas soon as possible.

4.24 This need for organised training is even more crucial in the case of non-executive directorswho are brought in to the company to tap their skills and expertise derived from theirdiverse backgrounds, or to represent the interests of substantial shareholders, and oftenhave no experience in the company’s line of business. More so, when the Coderecommends that non-executive directors bring independent judgement to bear on theissues of strategy, performance and resources, including key appointments in thecompany.


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Continuing education programmes

4.25 Professionalism requires that the members of the professional body keep abreast ofdevelopments in its field. Consequently, this push for professionalism in directors alsorequires that directors should continually educate themselves.

4.26 Hence, there should also be a continuing requirement for directors to retain theiraccreditation only if they undertake a prescribed minimum period of training annuallyin approved education programmes.

4.27 Aside from the relevant regulatory bodies, the course content for the initial as well asthe continuing education programmes should be developed in consultation with theMalaysian Institute of Directors (MID) and the Malaysian Institute of Management(MIM).

Recommendations

It is recommended that accreditation be introduced for all existing and futuredirectors of public-listed companies, by requiring them to undergo formal training.This training is mandatory for individuals seeking to serve as directors.

The training would cover:-



• the Code.

Further, that this programme be made a pre-requisite for directors of companiesseeking listing on the Exchange.

Directors must also undertake continuing education in approved courses as acondition of accreditation.

In addition, companies must develop in-house orientation programmes for directorsto familiarise themselves with the company.

5. Company Secretaries

ISSUE

What training is required for company secretaries to take on their advisorialrole on compliance?

5.1 Unlike directors, company secretaries must be duly qualified and are members ofprofessional bodies, such as the Malaysian Association of the Institute of CharteredSecretaries and Administrators (MAICSA), the Malaysian Institute of Accountants(MIA), the Malaysian Association of Certified Public Accountants (MACPA), theMalaysian Bar or the bar councils of Sabah and Sarawak, and the Malaysian Associationof Company Secretaries (MACS).

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Compliance obligations

5.2 As the training structure for company secretaries is already well-established, any initiativesfor their training and education should be via the existing structure. However, the focusof such programmes should move beyond the company secretary’s purely administrativerole to an advisorial one. Company secretaries now have a crucial role to play in advisingthe board of its compliance obligations under the law, and not merely the routine filingrequirements and other administrative requirements under the CA. They should beupdated on changes in the law, administrative and disclosure requirements as well asbest practices. Since company secretaries are generally well-versed with compliancerequirements under the CA, the programmes must provide clarification on all disclosureobligations affecting the company, particularly those contained in the securities laws,the Listing rules of Exchanges and in the SC’s guidelines and releases. There must beclear guidance on the timeliness of the disclosures and the extent of information requiredin the circumstances.

5.3 The Chairman and the board should be entitled to look to the company secretary forguidance as to the responsibilities of the board and the discharge of those responsibilities.

5.4 Programmes should also be created to cater for industry specific matters, such as theextra disclosure requirements for financial institutions under the Banking and FinancialInstitutions Act, 1989.

The Code

5.5 In keeping with this advisorial role on compliance, company secretaries also have a keypart to play in advising the board and the chairman on the implementation of the Code.It is imperative that a programme be implemented to guide company secretaries in thisnew but crucial role.

5.6 Since they advise directors, company secretaries must be aware of the purpose of theCode and to impress upon the board to take an analytical approach to compliance withthe Code, rather than a “checklist” approach.

Independence

5.7 They also have to be educated on their independence from the board, and be givenguidance on how such independence can be asserted without fear of reprisals. Forexample, the Code recommends that the removal of company secretaries be a matter forthe board as a whole, and not on the capricious whims of any single person.

In-house orientation

5.8 It is recommended that an orientation programme be introduced to company secretariesto familiarise themselves with the company. This is to overcome concerns that companysecretaries, particularly external ones, do not have a hands-on role in the daily workingsof the company, and therefore cannot effectively fulfil their compliance role.

5.9 There is of course a concern that these programmes should not be as comprehensive asthat advocated for directors to protect company secrets, especially in the case of externalcompany secretaries.


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Continuing education programmes

5.10 The profession itself recognises the whilst qualification is an important pre-requisite, itis also important for company secretaries to have continuous education to develop thenecessary skills for the proper discharge of their duties. In fact, the company secretariallicence issued by the ROC often contains the condition that company secretaries areencouraged to undertake continuous professional education during the term of theirlicence. Company secretaries can undertake a variety of courses so long as they relate totheir work as company secretaries.

5.11 Such courses are organised by several institutions. For example, MAICSA has a Technicaland Research Department as well as the Training and Professional Development Sub-Committee to upgrade the skills of members on company secretarial practice throughworkshops, seminars and publications.

5.12 All the other initiatives recommended for directors, such as an induction course uponlisting, continuing education of legal duties, rights, responsibilities, and the Code shouldequally apply to company secretaries.

5.13 Suitable ongoing training programmes and continuing professional development coursesconducted by professional bodies like MAICSA, MIA, MACPA, MACS etc., shouldalso be made available to company directors, shareholders and other corporateparticipants.

Recommendations

It is recommended that existing and future company secretaries be required toundergo formal training on compliance obligations under all the laws relevant tothe company, and the Code, as well as ways to assert their independence toproperly fulfil their advisorial role.

In addition, companies must also develop in-house orientation programmes forcompany secretaries, similar to that developed for directors, to familiarise companysecretaries with the company.

6. Audit Committees

ISSUE

What do audit committees need to perform their duties?

6.1 Audit committees primarily ensure proper internal controls for the financial andaccounting system, as well as the preparation of the company’s published financialstatements.

In-house orientation

6.2 A formal in-house training programme should be established to educate newly appointedmembers to the audit committee of a company. The programme must operate beyondthat of a mere orientation manual into the financial operations of the company. New

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audit committee members should be walked through the financial control system, andin the process, familiarise themselves with not only the system, but with the individualsresponsible for the system, particularly the finance director and the internal auditdepartment. In addition, they should be introduced to the external auditors of thecompany to establish a good working relationship at the outset.

The Code

6.3 A training programme should be developed to explain the recommendations under theCode as they relate to audit committees, for example, their support of the oversightfunction of the board and the conduct of audits.

Independence

6.4 As with company secretaries, it is crucial that the members of the audit committee beeducated to understand the importance of their independence from the board, to beable to effectively review the company’s internal controls and financial policies, as wellas reinforcing the objectivity of the internal audit department.

Continuing education

6.5 Members of the audit committee should be kept up-to-date on changes in accountingpolicies and practices, particularly with changes in accounting standards and other legalrequirements pertaining to financial matters.

6.6 It is proposed that all training programmes be developed in association with MIA andMACPA.

Recommendations

It is recommended that audit committees undergo formal training on therequirements of the Code and the importance of their independence, as well ascontinual updates on accounting and financial matters.

In addition, newly appointed members to the audit committee should undergo in-house orientation to familiarise themselves with the financial system of the company.

7. Investors

ISSUE

What do investors need to know to participate more effectively in corporategovernance?

7.1 Education of investors should include information on:-

• their rights and remedies under law;


• the Code.


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7.2 The bulk of efforts in this area would concentrate on retail investors, who unlikeinstitutional investors, are not sophisticated investors with access to superior resourcesand expert opinions. However, institutional investors must not be ignored given theweight of their voting power to influence the standards of corporate governance.

Rights and remedies under law

7.3 Efforts must be made to remedy investors’ lack of awareness of the rights and remediescurrently available to them. Investors are oftentimes ignorant of their rights under law,and as such, often fail to be an effective check against poor corporate governance practicesin companies.

7.4 These rights include their voting rights and general meeting procedures, particularly thefact that investors have a responsibility to make considered use of their votes. In addition,shareholders should also be aware of the possible legal remedies available to them forwrongs done to themselves and wrongs done to the company in which they hold shares.

Financial statement analysis

7.5 Investors should have an avenue by which to be educated on the rudimentary points offinancial statement analysis to better comprehend the annual reports of public-listedcompanies.

The Code

7.6 Education of investors on the Code should parallel the efforts undertaken for the othercorporate participants. Investors should be made aware that they should give due weightto all the relevant factors which are drawn to their attention by the Code. They mustalso be wary of using the Code as a mere checklist, that having all the boxes ticked doesnot mean that the company is a shining example of good corporate governance Thecompany should still be judged on its merits. The programme must also stress that theCode gives flexibility to companies and shareholders should, therefore, pay close attentionto departures from the Code and the company’s explanation for such departures. Anotherkey matter is that the programme should educate investors in paying particular attentionto the composition of the boards of the companies in which they invest.

Investor education

7.7 Because of the spread of investors across the country, a broad range of methods must beemployed. One recommended method is to organise roadshows in major cities andtowns around the country to reach the widest range of investors possible. Bookletsencapsulating the content of such roadshows can be produced for investors to takehome and peruse at their leisure.

7.8 The mass media can also be roped in to publish or broadcast investor education andinvestor protection segments.

7.9 The existing Malaysian Investors Association is another conduit by which informationrelevant to investors can be disseminated.

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Recommendations

An education programme should be established for investors on the followingmatters:-• their rights and remedies under law;


• the Code.

8. Timing And Performance Evaluation Of The Programmes

ISSUE

When and how should the proposed training and education programmes beimplemented?

8.1 Work on all areas of training and education recommended above should commenceimmediately, to reap the full benefit of the push to introduce high standards of corporategovernance in Malaysia.

8.2 More importantly, active steps must also be taken to evaluate the performance andeffectiveness of the initiatives introduced above. Surveys of and consultations withcorporate participants can provide valuable feedback to further improve and refine thetraining and education programmes recommended above.

Recommendations

It is recommended that work on the programmes proposed herein commenceimmediately upon their approval. In addition, continual surveys and consultationshould be used to evaluate the effectiveness of the programmes and torecommend changes where required.

9. Training Agencies

ISSUE

Which agency should run the training and education programmes?

9.1 The training and education initiatives would be both private and public sector driven.However, since market forces require time for purely commercial programmes to develop,the government and other relevant regulatory agencies can kick-start efforts in this areato create benchmark programmes. Commercial programmes can supplement this bycatering to industry niches where the corporate participants would benefit from a moreindustry-specific focus. This is not to ignore the importance of in-house training whichcompanies have the responsibility to organise.


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9.2 With regard to external training and education providers, utilising existing trainingagencies, with existing structures, expertise and experience would not only be practicalbut would also prevent duplication of efforts. Training and education on corporategovernance, therefore, need not commence in a vacuum. There already exists trainingfacilities such as:-

• Institut Bank-Bank Malaysia (IBBM) for financial institutions;

• Securities Industry Development Centre (SIDC), the training arm of the SC and theResearch Institute of Investment Analysts in Malaysia (RIIAM), the research andtraining affiliate of KLSE for capital market participants; and

• a host of other professional bodies which undertake training and education fortheir members.

9.3 Where relevant, MICG will collaborate with these institutions to co-ordinate the trainingand education programmes.

9.4 Nevertheless, it is recommended that the Committee oversees the implementation oftraining and education programmes to ensure that the programmes are implemented ina coherent, centralised and focused fashion in conformity with the recommendations ofthis Report. The syllabus or content of these programmes should be approved by therelevant regulatory bodies, for example, programmes involving banks should be approvedby Bank Negara Malaysia, public-listed companies in general, the SC, and companysecretaries, the ROC.

9.5 It is envisaged that MICG may ultimately in the long term undertake to provide moreproperly structured education and training programmes on corporate governance forall concerned.

First phase

9.6 As a training centre, MICG will have to be adequately financed to cover overheadsestimated to be at least RM50,000 per month. Initially, training resources may have tobe pooled from the various professional bodies and industry groups.

Second phase

9.7 The second phase of the development of MICG as a recognised corporate governancetraining centre (CGTC) will require engaging the services of local and internationalconsultants in the following areas of specialisation:-

(1) Corporate law;(2) Corporate finance;(3) Corporate governance and industrial economics;(4) Accounting and finance;(5) Corporate strategic planning;(6) Marketing and product development training specialist; and(7) General management training.

248

9.8 The initial budget for this centre is estimated to be at least RM500,000.

RecommendationsIt is recommended that training and education be both private and public sectordriven, using existing training facilities, in collaboration with MICG.

In the long term, it is envisioned that MICG will develop a corporate governancetraining centre to provide structured training on matters relating to corporategovernance.

It is proposed that the Committee oversees the implementation of the programmes,with the content and syllabus of these programmes to be approved by the relevantregulatory bodies.

10. Funding

ISSUEWhat are the potential sources of funding for these training and educationprogrammes?

10.1 In current times, training and education would be a further imposition on the financialresources of companies. It is recommended, therefore, that the programmes be madeaffordable for participants. This may require subsidisation of the programmes.

10.2 Should such funding be required, applications should be made to the Ministry of Finance.It is recommended that the Ministry be identified as the central body to co-ordinateapplication for grants by any relevant training agency undertaking the initiatives outlinedin this Chapter. This would include the funding for the proposed CGTC to be establishedunder the auspices of MICG.

10.3 In turn, the Ministry should be the central body to apply for technical grants from externalsources for disbursement to the relevant training agencies. The sources may include thefollowing:-

• ADB;

• WB; and/or

• Commonwealth Secretariat - Technical Policy on Corporate Governance.

10.4 This is to ensure proper distribution of resources to the various parties involved intraining and education.

Recommendations

It is recommended that the training and education programmes be provided atminimal cost to the participants.

It is proposed that the Ministry of Finance undertake the central co-ordinating role,to apply for funding from external sources, such as the ADB, the WB or theCommonwealth Secretariat, and to disburse such grants to the relevant trainingagencies

Chapter 8

IMPLEMENTATION PROGRAMME

IMPLEMENTATION PROGRAMME

Introduction

This Chapter deals with the strategy to implement the recommendations of

the Report. It recommends the continuing involvement of the Committee to

ensure proper implementation of its recommendations, as well as the

establishment of an Implementation Project Team comprising the relevant

regulatory bodies and industry and professional associations or institutions

to undertake this task.

Chapter 8 – Implementation Programme

251

252

1. Introduction

1.1 Should the recommendations in the report of the Committee be accepted byY.A.B. Minister of Finance, it is proposed that the implementation programme as setout below be similarly adopted. The proposed implementation plan is premised on thefollowing –

• That implementation of any of the recommendations can only be effectivelycarried out if there is “buying-in” by all relevant stakeholders.

• That while the responsibility of implementing the different aspects of therecommendations may fall on different authorities or organisations, theCommittee will be the central body that supervises and ensures the timely andeffective implementation of the recommendations.

• That the Committee, with senior representation from the public and privatesectors, will continue to be the committee through which all policyrecommendations relating to corporate governance are made to the government.

2. Phase 1 – Consultation

2.1 It is essential that the Report receives the widest possible airing and is subject to thoroughconsultation. This ensures that all views are considered, as wider consultation leads togreater acceptance of the recommendations by the private sector and the public in general.This phase will broadly involve the following:-

• Preparation and distribution of the consultation document (draft report)

The document should be made available to relevant persons or associations thathave an interest in the findings of the Committee.

• Consultation period

There should be enough time given for the industry to reflect and fully comment onthe recommendations. In this respect, we propose that a one-month consultationperiod be allowed.

3. Phase 2 – Collation and consideration of comments and preparationof final report

3.1 Given the wider consultation, diverse views and comments will be received. Furthermore,it is only to be expected that some groups may only view the recommendations fromtheir very narrow and specific interests. As such, it is absolutely essential that thecomments, should they differ materially from those in the first report, be reconsideredby the Committee, and if deemed necessary, additional submissions may be made.

Chapter 8 – Implementation Programme

253

3.2 This phase involves the following:-

• Collation and consideration of comments by the Committee;

• Re-submission to Y.A.B. Minister of Finance where the recommendations differmaterially from the original recommendations.

4. Phase 3 – Implementation

4.1 This is a crucial phase of the process and while it can start immediately, theimplementation of the recommendations will be over a considerable period of time.Given that the recommendations vary from amendments to laws, regulations and listingrules to the introduction of the Code and conduct of training, it is crucial that this planbe tightly supervised by the Committee.

4.2 The implementation of this Report will essentially involve amendment to legislation, tolisting rules, and publication of new documentation, such as a Code of Best Practices incorporate governance and various guidelines by professional and other organisationsas exhorted by the Code. It will also involve intangible changes in approach and attitude,in working relationships, in regulatory techniques, in organisation, in priorities and inactivities. Implementation priority should be given to changes in supervision andenforcement, disclosure requirements and training. The following is proposed:-

• The implementation exercise may be carried out via an implementation projectteam set up under the Committee, comprising representatives from every regulatoryauthority and organisation relevant to the recommendations of the Report.

• Monitoring and Reporting – The successful implementation of the recommendationsof the Committee is a function not only of timely and effective implementation ofthe same but also of systematic reporting to and monitoring by the Committee. Theimplementation project team should make the following reporting to the Committeeso it may ensure rapid implementation of recommendations. To ensure that theattention to corporate governance continues and that all relevant participants mayprepare for the impending changes, such participants should also be apprised ofprogress. This involves:-

■ three-monthly reporting to the Committee; and

■ six-monthly bulletin of progress to the industry generally.

Implementation Project Team Membership

4.3 It is proposed that an implementation project team be established under the auspices ofthe Committee. The team will comprise representatives from the regulatory authoritiesand organisations relevant to the recommendations of this Report including the ROC,the SC, the KLSE, Bank Negara Malaysia and the relevant industry and professionalassociations or institutions. The relevant regulatory bodies are tasked with augmentingthe recommendations with additional requirements where it is deemed necessary.

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Implementation targets

4.4 The team will establish detailed target timetables, monitor and manage theimplementation programme in the following areas:-

• Law reform

It is proposed that all draft provisions arising from the recommendations containedin this Report be tabled before the Committee.

• Training and education

The general direction of training and education in corporate governance is to bedetermined and co-ordinated by the Committee. However, the relevant members ofthe Implementation Project Team have the responsibility to examine the contentand syllabus of the training and education programmes undertaken by participantssubject to the relevant laws, rules, regulations and guidelines under its purview.

5. Conclusion

5.1 Should the recommendations be accepted by Y.A.B. Minister of Finance, andconsultations on this Report concluded, a more detailed implementation plan will bedrawn up with the approval of the Committee.

Appendix I

THE KLSE/PRICE WATERHOUSE JOINTSURVEY OF THE CORPORATE GOVERNANCEPRACTICES IN PUBLIC-LISTED COMPANIES

– EXECUTIVE SUMMARY

1. Introduction

Malaysia, as an emerging capital market in Asia, is keen on participating in the currentglobal debate on Corporate Governance. A key initiative is Malaysia’s recent leadingrole in conjunction with the WB and the ADB in coordinating an Asia Pacific EconomicCooperation (APEC) to examine ways to improve Corporate Governance to avert afuture Asian financial crisis.

Effective Corporate Governance and increased transparency have in recent years beena subject of focus by the Government as part of its aims to promote a conducive businessenvironment for an efficient capital market. However, the enormous financial marketpressures in the last year and the financial distress faced by several companies haveadded urgency to an examination of the effectiveness of Corporate Governance.

It is with this intention that the KLSE in conjunction with Price Waterhouse haveconducted this study on Corporate Governance amongst Malaysian corporates withthe intention of improving the corporate governance framework to ensure that companiesconduct their businesses with the highest possible standard of “best practice”.

The key issues examined include:-

• Board Structure, Composition and Organisation;

• Structure and State of Corporate Governance and Business Ethics policy;

• Structure and Organisation of Audit and Remuneration Committees;

• Structure and State of Internal Controls;

• Structure and State of Investor Communication; and

• Perception of Malaysia’s Corporate Governance and Business Ethics and proposedreforms.

The survey is designed to be quantitative rather than qualitative and is a major steptowards improving understanding of the Corporate Governance regime in Malaysia.

Appendix I

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258

2. The Study Methodology

The study was conducted in five stages:-

1. Current Price Waterhouse Global Group and international public and privatestudies on the subject were reviewed;

2. The survey questionnaire was jointly designed by the research team of the KLSEand Price Waterhouse;

3. The postal survey method was conducted amongst directors and seniormanagement of all Public-Listed Companies, both Main Board and Second Board;

4. The survey results were processed by independent market research company,Insight Research (Malaysia) Sdn Bhd (“Insight”) to ensure confidentiality; and

5. Aggregated data from Insight were analysed by the KLSE and Price Waterhousestudy team.

3. The Study Sample

Overall, the response achieved represented 42% of the companies listed on the KLSE.

Main Board representation was at 55% of responses whilst Second Board at 45%.

The profile of respondents are as follows:-

% of respondents

Managing Director/Chief Executive Officer 47

Chairman 15

Finance Director/Financial Controller 11

Other Directors 10

Company Secretary 9

Others 8

Appendix I

259

4. Sample Profile

The profile of the respondent companies are as follows:-

Main Board (Total number of respondents = 167 companies)

% of Total % of RespondentsRespondents achieved per sector

Consumer products 12.7 22.8

Industrial products 21.4 41.7

Construction 6.5 34.5

Trading/services 16.7 40.0

Finance 13.6 44.3

Properties 15.4 40.6

Plantations 8.5 36.8

Others 5.2 21.7

Total 100.0 NM

Second Board (Total number of respondents = 137 companies)

% of Total % of RespondentsRespondents achieved per sector

Consumer products 19.3 60.4

Industrial products 46.3 48.0

Construction 12.8 37.1

Trading/services 21.2 53.4

Finance 0.0 0.0

Total 100.0 NM

Note : NM – not meaningful

260

5. Key Findings

• Board Structure, Composition and Organisation

There is a reasonably proportionate mix of independent non-executive director,non-executive director and executive director in the composition of the Board asshown below:

Average Number

Independent non-executive directors 2.6

Non-executive directors 2.6

Executive directors 2.9

Total number of directors 8.0

Almost all (90%) companies have two (2) or more independent non-executivedirectors, of which half (49%) have two (2) independent non-executive directorsand nearly a quarter (23%) have three (3) independent non-executive directors.Only 5% have one (1) independent non-executive directors and the remaining 5%do not have any independent non-executive directors.

Only 20% of companies have a structured process for selecting independent non-executive directors. Amongst them, the majority (81%) involved the Board as awhole.

• Number of Full Board meetings in a year

Most (63%) companies held four (4) or more full Board meetings a year and overone-third (37%) held three (3) or less full Board meetings a year. Some 5%, however,held only one (1) meeting a year.

• Formal Code of Conduct and/or Business Ethics policy

Although most (61%) companies indicated that they have a formal Code of Conductand/or Business Ethics policy, a significant proportion (39%) do not have it.

This code is communicated mainly:-

To new employees during orientation 62%To existing employees by annual affirmation 27%

However, 22% did not publicise the codes.

Appendix I

261

• KLSE Corporate Disclosure Policy

Most (80%) companies had formal policies and procedures to monitor compliancewith the KLSE Corporate Disclosure Policy. More than half (56%) of the companiesdelegated the task for ensuring compliance to the Company Secretary with a quarter(23%) to the Chief Financial Officer and some 9% to the Managing Director.

• Audit Committees

Frequency of meetings

More than half (58%) of the companies had three (3) or more Audit Committeemeetings a year whilst 42% had two (2) or less meetings a year. It is interesting tonote that some 1% had Audit Committee meetings once a month.

Composition

The profile of the Audit Committee members are as follows:-

Representation Majority About Minority None NoHalf answer

Financial professionals 20% 17% 37% 21% 5%

Legal professionals 6% 8% 23% 52% 11%

Retired industry leaders 7% 6% 17% 61% 9%

Retired seniorgovernment officials 9% 6% 32% 45% 8%

• Remuneration Committees

Whilst the concept of Remuneration Committees is relatively new in Malaysia, it isencouraging to note that one in five of the companies already have a RemunerationCommittee.

• Internal Controls

Internal Audit Department

Most (68%) companies have internal audit functions but some 32% do not. Amongstthose who do not have, 33% outsourced its internal audit functions.

262

Maintenance of procedure manuals

The most common areas where companies maintained procedure manuals were infinancial accounting (78%) and human resource (77%).

Half (52%) have procedure manuals on ‘health and safety’.

The type of procedure manuals in ranked order of availability are:-

(%)

Financial accounting 78

Human resource 77

Health & safety 52

Quality assurance/ISO 47

Code of conduct 42

Treasury management 29

Data security 27

Environment protection 20

Related party transactions 20

Responsibilities for internal controls and fraud detection

There is a clear lack of understanding that the whole Board of Directors is ultimatelyresponsible for ensuring an effective system of internal control is in place and forlimiting and detecting fraud. Only 11% managed to identify that the whole Board isultimately responsible for internal controls and 13% on the whole Board’s role to‘limit and detect’ fraud.

In fact, a significant proportion of respondents viewed that the Managing Director/Chief Executive Officer was ultimately responsible for ensuring internal controlsare in place (51%) and for limiting and detecting fraud (36%).

• Investor communication

Most companies (62%) have formal investor communication policies with the keyresponsibilities largely delegated to one person. For all three group enquiry segments,be it, media, analysts and shareholders, the Managing Director was the key contactperson followed by the Chairman and Corporate Affairs and/or Communicationsdepartment personnel.

Appendix I

263

The majority (77%) of companies reminded their staff and directors of the companies’investor and communication policies at least once a year.

• Perception of Malaysia’s Corporate Governance Regime

Call for reforms

The call for reforms to the current Corporate Governance regime is undoubtedlystrong and almost unanimous with 94% regarding it as necessary.

Only a small proportion (6%) viewed reforms to be unnecessary.

Reasons for reforms

Key reasons identified for reforms revolved around four (4) key issues, namely:-

• the need to maintain and restore investor’s interest and confidence in the equitymarket;

• the need to increase transparency including more disclosures in the accountson related party transactions and directors dealings;

• the need to protect minority shareholders’ interest; and

• the need to make directors and management more accountable to shareholdersand the investing public.

Regulatory Reforms

Existing regulatory areas cited for reforms in ranked order were identified as follows:-

• SC Policies and Guidelines (58%);

• KLSE Listing Requirements (56%);

• KLSE Rules Relating to Member Companies (46%);

• Code of Ethics for Company Directors issued by the ROC (43%).

In addition, 41% of respondents wanted voluntary self-regulation whilst just a quarter(27%) identified the need to introduce new legislation.

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• Other suggested areas for reforms

In addition to the proposed regulatory reforms, respondents also suggested otherareas where they wanted to see improvements. The areas indicated in ranked orderinclude:-

(%)

Improved education about existing rules 62

Improved enforcement of existing rules 55

Clarification and simplification of existing rules 49

More disclosure of related party transactions 41

Clearer definition of director’s responsibilities 40

More disclosure of directors dealings 39

Greater separation of company ownership &management 38

Compulsory establishment of procedures tominimise fraud 38

Compulsory establishment of procedures forreleasing price sensitive information 37

Compulsory introduction of internal auditors 34

Clearer definition of the role of internal auditors 25

Clearer definition of the role of external auditors 18

Separation of roles of Chairman 17

Compulsory introduction of remunerationcommittees 16

Increase the number of non-executive directors 8

Shareholders approval of directors’ remuneration 8

Compulsory introduction of nomination committee 8

Appendix I

265

• Malaysia’s perceived standard of Business Ethics and Corporate Governance

Malaysia’s standard of Business Ethics and Corporate Governance is largely perceivedto be on par with Taiwan but better than China, India, Indonesia, Philippines andThailand. However, Malaysia’s perceived position fell short when compared toAustralia, Hong Kong, Japan and Singapore.

6. Conclusion

Based on the survey findings, it is apparent that greater emphasis and attention willhave to be given to reforms to the current Corporate Governance regime.

The unanimous acceptance by our Public-Listed Companies on the need forimprovements in Corporate Governance paves the way for reforms to the currentCorporate Governance regime.

Appendix II

TERMS OF REFERENCE FOR THEFINANCE COMMITTEE ON

CORPORATE GOVERNANCE

– MEMBERSHIP OF THE FINANCE COMMITTEE– JPK WORKING GROUP I

– JPK WORKING GROUP II

TERMS OF REFERENCE FOR THEFINANCE COMMITTEE ON CORPORATEGOVERNANCE

Mission

1. The Committee will seek to promote high standards of corporate governance in theinterests of strengthening investor protection (and in doing so, aim to restore investorconfidence in the fairness and transparency of the Malaysian capital markets) andenhancing the standing of Malaysian companies.

Terms Of Reference

2. The Committee’s agenda in corporate governance is the following:-

Definition

a) to develop an acceptable definition of corporate governance for Malaysiancompanies;

Clarification of responsibilities of key participants in the corporate sector

b) to identify and clarify the following:-

(i) the objectives and duties of a company (as distinct from that of its officers);

(ii) the principal role and responsibilities of the board of directors, it’s legal duties,the interests it represents and it’s relationship with management;

(iii) the principal responsibilities of directors (both executive and non-executive)and of officers of a company and their legal duties and obligations;

(iv) the principal responsibilities of auditors and their legal duties and obligations;

(v) the role and responsibilities of shareholders and other stakeholders;

Appendix II

269

270

(vi) the role, responsibilities, duties and obligations of all other key corporateparticipants; and

(vii) to provide guidelines for discharging these duties, obligations andresponsibilities in an efficient and effective manner.

Raise standards of corporate governance

c) to recommend appropriate measures in order to address deficiencies in standardsof corporate governance in Malaysian public-listed companies. This includes thefollowing tasks:-

• to review the role of board of directors, executive and non-executive directors,including a review of:-

(i) the structure and composition of the board;

(ii) the requisite procedures to assess the collective and individualperformance of directors;

(iii) the definition of independent directors;

(iv) the types of governance related functions and the way in which theyshould be carried out by boards and directors (whether or not throughboard committees) including:-

■ the process of constituting the board;■ the selection, remuneration, re-election and resignation of directors;■ the process of assessing and monitoring management;■ the administration of the company’s system of governance generally.

• to review the role of other officers of a company (e.g. company secretaries,financial controllers) in relation to corporate governance issues;

• to review the role of shareholders (including institutional shareholders) andother stakeholders in corporate governance issues including an analysis ofissues relating to the relationship between the board and shareholders andthe board and other stakeholders, the accuracy and timeliness of informationdisclosed to shareholders, barriers to shareholders’ participation in thegovernance of a company, fair treatment of minority shareholders and therepresentation of their interests on the board;

• to review the role of auditors including an analysis of issues relating to theframework within which auditors operate, the extent and value of audits andthe linkages between shareholders, boards and auditors;

• to review the role of government and regulatory authorities in corporategovernance issues;

Appendix II

271

• to review issues relating to the creation and maintenance of effective andappropriate internal control systems in public-listed companies and effectiveimplementation and monitoring of these controls;

• to review developments in corporate governance internationally so as to ensurethat standards set for Malaysian companies do not fall short of internationalstandards; and

• to improve and enhance the transparency of corporate governance practicesof Malaysian companies.

The recommendations of the committee may come in any form it considersappropriate including recommending changes to legislation, regulations or rulesor prescribing best practices or standards in corporate governance.

Promote training and education

d) to identify and recommend training and education for directors (namely non-executive directors), other officers of a company, shareholders and other relevantcorporate participants and identify possible candidates or structures to undertakesuch training and education as well as potential sources of funding for the same;

Ensure effective enforcement

e) to identify and recommend effective enforcement mechanisms including incentivestructures that will encourage compliance with the recommended standards ofcorporate governance;

f) deal with any other relevant matter.

Approach Of The Committee

3. The Committee will always keep in mind the need to minimise the regulatory burden oncompanies (so as to allow them to operate efficiently) and to ensure to the extent possible,that corporate governance standards developed apply to all companies, regardless ofsize.

4. In carrying out its review the committee may invite submissions and seek commentsfrom a broad spectrum of interests and may similarly disseminate its draftrecommendations for external comments prior to submitting its final report to theY.A.B. Minister of Finance.

5. A final report is to be provided to the Y.A.B. Minister of Finance no later than 30th June1998.

272

MEMBERSHIP OF THE COMMITTEE

Y.Bhg. Datuk Dr Aris bin OthmanSecretary General of Treasury, Ministry of Finance – Chairman

Encik Ali bin Abdul KadirChairman, Securities Commission


Y.M. Dato’ Raja Arshad Tun UdaChairman, Malaysian Accounting Standards Board

Y.Bhg. Dato’ Idrus bin HarunRegistrar of Companies

Y.Bhg. Dato’ Mohd Azlan bin HashimChairman, Kuala Lumpur Stock Exchange

Y.Bhg. Tan Sri Dato’ Seri Ali Abul Hassan bin SulaimanGovernor, Bank Negara Malaysia

Y.Bhg. Tan Sri Azman bin HashimChairman, Association of Merchant Banks, Malaysia

Y.Bhg. Dato’ Megat Najmuddin Megat KhasChairman, Federation of Public-Listed Companies

Ms Wong Suan LyeExecutive Director, Association of Banks, Malaysia

Ms Mohayani bt ShamsudinChairman, Association of Stockbroking Companies, Malaysia

Prof. Abdul Manap SaidImmediate Past PresidentThe Malaysian Association of The Institute of Chartered Secretaries and Administrators

Secretariat – Securities Commission.

Appendix II

273

JPK WORKING GROUP ION CORPORATE GOVERNANCE IN MALAYSIA

Y.Bhg. Dato’ Megat Najmuddin KhasChairman, Federation of Public-Listed Companies Bhd – Chairman


Y.Bhg. Dato’ Kok Wee KiatPresident, Business Council For Sustainable Development Malaysia

Y.Bhg. Dato’ J.J. Raj (Jr)Director General, Malaysian Institute of Directors

Dr Nordin Mohd ZainBoard Member, Malaysian Accounting Standards Board

Puan Al-Baishah Hj Abdul MaranDeputy Registrar of Companies

Mr Khoo Beng ChitSenior Assistant Registrar of Companies

Ms Wong Sau NganSpecialist (Legal & Regulatory Policy,) Securities Commission

Ms Shanthi KandiahSenior Executive, Securities Commission

En. Izlan IzhabExecutive Vice-President, Kuala Lumpur Stock Exchange

Cik Latifah Hj YusofSenior Vice President, Listing, Kuala Lumpur Stock Exchange

Ms Qua Gek KimSenior Vice PresidentResearch & Publications, Kuala Lumpur Stock Exchange

Ms Selvarani RasiahLegal Advisor, Listing, Kuala Lumpur Stock Exchange

Mr Inderjit SinghListing Manager, Kuala Lumpur Stock Exchange

274

Ms Koay Lean LeeSenior Listing Officer, Kuala Lumpur Stock Exchange

Encik Nik Hassan bin Nik Mohd AminCouncil Member, Association of Merchant Banks In Malaysia

Cik Zeti Marziana MohamedExecutive Secretary, Association of Merchant Banks in Malaysia

Ms Joanne WongManager, Association of Banks in Malaysia

Mr Lee Siang ChinManagement Committee Member, Association of Stockbroking Companies Malaysia

Prof. Abdul Manap SaidImmediate Past President, The Malaysian Association ofThe Institute of Chartered Secretaries and Administrators

Mr Cheah Foo SeongTechnical Director, The Malaysian Association ofThe Institute of Chartered Secretaries and Administrators

Mr Lee Leok SoonTechnical Director, Malaysian Institute of Accountants

Encik Ali Tan Sri Abdul KadirVice President, The Malaysian Association of Certified Public Accountants

Encik Adnan AriffinExecutive Director, National Chamber of Commerce and Industry of Malaysia

Mr Chris Lee Wai KitManager, Ins., Mining & Services RatingRating Agency Malaysia Berhad

Puan Rohana YusofAssistant Director, International Movement for a Just World

Mr Tommy ThomasRepresenting, Bar Council, Malaysia

Dr. P.H.S. LimPresident, Malaysian Investors Association

Cik Khadijah AbdullahSecretary, Federation of Public-Listed Companies Bhd

Appendix II

275

JPK WORKING GROUP IION CORPORATE GOVERNANCE IN MALAYSIA

Dr. Nik Ramlah Nik MahmoodDirector, Securities Commission – Chairman

Y.Bhg. Datuk Ramly bin Hj. AliRegistrar of Companies

Y.Bhg. Dato’ C.RajendramExecutive Director, Rating Agency Malaysia Berhad

Cik Khadijah AbdullahSecretary, Federation of Public-Listed Companies Bhd (FPLC)

En. Abdul Samad bin Haji AliasSenior Partner, Arthur Andersen & Co

Ms. Loh Lay ChoonDirector, Price Waterhouse

Ms. Chia Lee KeeDirector, Public Bank Berhad

Mr. Cheong Kee FongSenior Partner, Cheong Kee Fong & Co

Mr. S.K. DuttPartner, Ernst & Young

Mr. Philip T.N.KohDirector, Phileo Allied Berhad

Ms Selvarany RasiahLegal Advisor, Listing, Kuala Lumpur Stock Exchange

Mr. Leong Eng YeePresident, The Malaysian Association of The Institute ofChartered Secretaries and Administrators

ISBN 983-9386-12-3

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