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The introduction of a new and voluntary code of corporate governance will not only drive the expansion of Malaysia’s capital markets but also nurture ethically self-reliant businesses that take responsibility for building sustainable and value-creating operations

This article was first published in the January 2013 Malaysia edition of Accounting and Business magazine.

As Malaysia strives to become a key capital market in the region, efforts by the country’s regulators to bring the regulatory frameworks up to speed have been ongoing.

In July 2011, the Securities Commission launched its corporate governance blueprint to nurture the culture of good governance in Malaysia and take it to a new level. The objective was to encourage listed companies to focus on strong leadership through board effectiveness while also promoting checks and balances such as shareholder activism and institutional investor leadership.

In March 2012, the Securities Commission launched the Malaysian Code on Corporate Governance (MCCG) 2012. It takes effect on 31 December 2012 and supersedes the MCCG 2007.

Market-driven governance

The new corporate governance code sets out eight broad principles and specifies the best practices of good corporate governance at a higher level than that expected by regulations. Each principle is accompanied by a series of recommendations, which include the formalisation of a board charter, the capping of the tenure of independent directors to nine years, and the separation of chairman and CEO roles. It also elaborates on the need for boards to recognise and manage risks and for companies to encourage shareholder participation.

BDO Malaysia managing partner Datuk Gan Ah Tee says the new code lays stress on the effectiveness of the boards of listed companies because boards are at the core of upholding corporate governance standards. It does this by strengthening board composition, reinforcing the independence of directors and fostering the commitment of directors. ‘At the same time, it touches on the all-important area of upholding integrity in financial reporting and the need for listed companies to recognise and manage risks,’ he says.

While the MCCG 2012 will not be a panacea for all corporate governance matters in the capital markets – that will depend on the interplay between self-discipline, market discipline and regulatory discipline – it is certainly the central document for listed companies to base and showcase their corporate governance standards on, he adds.

In her speech at the launch of the MCCG 2012 in March, the then Securities Commission chairman Tan Sri Zarinah Anwar called on those with leadership responsibilities in PLCs to buck up their governance practices and take a more proactive role in putting in place standards rather than depending too much on the regulators.

‘Good corporate governance cannot be achieved merely on the strength of regulations,’ she said. ‘Directors have a duty not just in setting strategic direction and overseeing the conduct of business in compliance with laws, they should also be effective stewards and guardians of the company in respect of ethical values, and ensuring an effective governance structure for the appropriate management of risks and level of internal controls.’

Voluntary not mandatory

Like all corporate governance codes, the MCCG 2012 advocates the adoption of standards that go beyond the minimum prescribed by regulation. The code declares: ‘The observance of the MCCG 2012 by companies is voluntary. Listed companies are, however, required to report on their compliance with the MCCG 2012 in their annual reports.’

Paul Chan, deputy president of the Malaysian Alliance of Corporate Directors (MACD), who was involved in formulating the Securities Commission’s 2011 corporate governance blueprint, recalls there was intense discussion over whether to make it mandatory.

In the end, it was felt that making the code voluntary would better serve the regulators’ objective of encouraging companies to embrace the spirit of good practice rather than just complying with rules.

A local fund manager noted that smaller PLCs, especially those controlled by a family or a founder, still have issues in rising above the ‘form over substance’ mentality.

Market observers say that a box-ticking mentality will not take companies very far and what is needed is the internalisation of good values and integrity by embedding them into corporate culture.

Malaysian Institute of Corporate Governance president Tan Sri Megat Najmuddin Megat Khas is critical of the obsession with form as satisfying the letter of the law rather than the spirit. He says: ‘While there is compliance, there is no sincerity. There can be a temptation for firms to work their way around it to attain goals in dishonest ways, but if they believe in good values they would refrain from such behaviour at the outset because they know that it is wrong.’

Chan adds: ‘The tone for the internalisation of good values has to be set from the top.’

Gan welcomes the Securities Commission’s call for greater self-discipline in corporate governance. He believes that governance is not the sole preserve of regulators and that all participants are responsible for exercising greater care and responsibility in promoting value creation and sustainability.
‘Companies that exercise strong and high standards of self-discipline, and treat their shareholders and other stakeholders with respect, will stand out in the marketplace and be rewarded for their exemplary corporate behaviour,’ he says. ‘Companies with these traits augur well for corporate Malaysia and the economy as a whole.’

Role of accountants

The work of accountants is clearly crucial to effective governance, says Gan, especially in relation to the focus on financial performance and accounting integrity. The fundamental role of the accountant is to provide transparency in reporting, financial or otherwise, to shareholders and the broader stakeholder groups who have an interest in the performance of the business.

Gan says: ‘Accountants in listed companies are in a position to provide an independent challenge to practices they observe within those companies. It is within their professional skill-set to have this role and to dispute practices that are not in the interests of the long-term sustainability of the company and its stakeholders.’

Given their role, accountants can support the boards of listed companies by providing input on the company’s annual and long-term performance, he adds. This will assist the company and its stakeholders with a truer and more robust reflection of business performance.

Chan adds that, as the organisation’s financial gatekeepers, accountants play an important role in ensuring MCCG compliance. He says: ‘As the code seeks to move towards more market-driven discipline as opposed to regulator-driven compliance, accountants are in a good position to act as advisers to the board on these matters due to their knowledge and skills in operational and financial matters.

‘While they do not have to be involved in every aspect of the implementation of the code, they have the professional skills and knowledge to ask relevant questions and highlight key areas where governance principles must be upheld.’

‘Accountants cannot just be technically competent; their knowledge will have to be more well rounded to include requirements of the code.’
He points out that, given their professional skills and knowledge of financial information and operations, accountants will also be able to contribute meaningfully to PLCs.

Wider engagement

Although corporate governance has traditionally been the responsibility of company secretaries, accountants will have to work more closely with them to ensure a smooth transition to comply with requirements of the new code, Chan says.

He adds that accountants can no longer operate within silos where all they have to do is take care of the finance function.

Indeed, with the introduction of the new code and the need to create a more self-disciplined market environment, it becomes imperative for accountants to spearhead a higher level of engagement among internal stakeholders, including company directors. Everyone needs to be on the same page if the standard of corporate governance in Malaysia is to be enhanced.

The MCCG 2012

The Malaysian code on corporate governance 2012 (MCCG 2012) is the first deliverable under the Securities Commission’s 2011 corporate governance blueprint – a five-year plan by the regulator to address key components of the corporate governance ecosystem and strengthen self-discipline and market discipline.

The MCCG 2012 comes into effect on 31 December 2012. It focuses on enhancing the board effectiveness of listed companies by strengthening the composition of the board, reinforcing the independence of directors and fostering their commitment to steering PLCs effectively.
Under the new code, listed companies are required to report on their compliance with the principles and recommendations of the MCCG 2012 in their annual reports.

The Securities Commission encourages companies to put in place corporate disclosure policies that embody principles of good disclosure and make public their commitment to respecting shareholder rights.

The first MCCG was issued in March 2000 and was hailed as a significant milestone in corporate governance reform in Malaysia. Newer versions of the code were introduced in 2007. The MCCG 2012 is the latest version for PLCs to comply with and supersedes the MCCG 2007.

Asha Gopalan, journalist

 

Last updated: 24 Jul 2014