Ramesh Ruben Louis looks at the changes in the new Malaysian Code on Corporate Governance, which was issued in April, and what they will mean for companies
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This article was first published in the July/August 2017 Malaysia edition of Accounting and Business magazine.
The Securities Commission of Malaysia (SC) issued the new Malaysian Code on Corporate Governance (MCCG 2017) on 26 April. This sets out best practices to strengthen corporate culture pillared on accountability and transparency. The new code takes effect immediately and supersedes the previous 2012 code. The MCCG 2017, which is now the fourth version (with previous ones in 2000, 2007 and 2012), is the result of a comprehensive review by the SC in 2016 with inputs from local and international stakeholders, lessons from corporate governance failures and changes in market structures and business needs.
The MCCG 2017 is applicable to all public listed companies and the first batch of companies that are expected to report their application of the practices set out in the new code will be those with financial year ending 31 December 2017. It is worth noting that non-listed entities – including state-owned enterprises, small and medium-sized enterprises (SMEs) and licensed intermediaries – are also encouraged to embrace the code.
The code contains 36 practices to support three core principles with regard to a company’s board, audit and risk management and stakeholders. It takes on a new approach to promote greater internalisation of corporate governance culture and encompasses a number of new features (see diagram 1). The structure is outlined in diagram 2 and is as follows:
The three principles are:
- board leadership and effectiveness
- effective audit and risk management
- integrity in corporate reporting and meaningful relationship with stakeholders.
These are the cornerstones of good corporate governance and the pillars that guide the practices and the intended outcomes when those practices are applied effectively.
These enable companies to visualise what they would achieve by applying the respective practices.
Practices are actions, procedures or processes that companies are expected to adopt to achieve the intended outcome. They were designed taking into consideration existing or prevailing regulatory requirements, Bursa Malaysia listing requirements and varying sizes and complexities of Malaysian companies as well as international best practices in corporate governance.
Certain areas of the MCCG 2017 have also incorporated ‘step-up’ practices that encourage companies to elevate their governance practices and processes. Companies that aspire to achieve excellence in corporate governance, particularly large companies, should consider applying the prescribed step-ups.
The guidance that follows each practice provides assistance or additional information for companies to apply the practice in order to achieve the intended outcome.
The MCCG 2017 acknowledges that all listed companies are not the same and therefore provides flexibility and proportionality in the application of certain best practices. Certain practices are applicable only to large companies.
Section 2.6 of MCCG 2017 defines large companies as:
- on the FTSE Bursa Malaysia Top 100 Index or
- with market capitalisation of RM2bn and above at the start of the companies’ financial year.
Once a company is under the ‘large’ category, it will remain as one for the entire financial year despite any changes in its status during the financial year. Such companies should continue applying the practices even if they fall out of the FTSE Bursa Malaysia Top 100 Index or their market capitalisation decreases below the RM2bn threshold.
Other listed companies may consider adopting the practices set out for large companies if they want to achieve a higher level of corporate governance in their organisation.
Perhaps the most distinct feature of the new code is the comprehend, apply and report (CARE) approach, where companies have to set out the processes involved in practising good corporate governance, including providing fair and meaningful explanation of how the company has applied the practices laid out in the code. Under the MCCG 2017, it’s no longer sufficient for companies to merely explain the reasons for non-compliance; they will also have to provide alternative steps or actions that have been taken if the requirements have not been adhered to.
The ‘comprehend’ element asserts that boards should understand and incorporate the integral role of economic, environmental and social responsibilities towards the company’s performance and long-term sustainability into their core decision-making processes to ensure that companies operate successfully and sustain growth. The board should understand that the key principles of corporate governance such as effective controls, corporate culture grounded on ethical behaviour and transparency can reduce risk, corruption and mismanagement. Besides that, the board and management should play their part by ensuring that they and their employees understand corporate governance (CG) requirements, seek guidance on CG if necessary and attend necessary training and development.
Under the ‘apply’ element, the MCCG 2017 adopts the ‘apply or explain an alternative’ approach, which is a shift from the previous ‘apply or explain’ approach. Under this new approach, boards should apply the practices based on the environment that their companies operate in, the size and risk related to their business/operations. This means that if the board finds that it is unable to implement any of the MCCG practices, the board should apply a suitable alternative to meet the intended outcome.
The driver behind the ‘report’ element is the provision of informative disclosure for shareholders and potential investors for them to assess the stewardship of management, valuation of the company and the ownership structure, and consequently enable companies to attract capital and maintain confidence in the capital market. To facilitate this, companies must therefore provide meaningful explanation on how it has applied each practice. Where there is a departure from a practice, the company would have to provide an explanation for the departure, and disclose the alternative practice it has adopted and how this achieves the intended outcome.
In addition, large companies that depart from a practice are also required to disclose the actions that they have taken (or intend to take) and the timeframe required for them to be able to apply the prescribed practice. When doing this, companies must consider and be closely guided by the guidance.
Companies are also strongly encouraged to adopt the step-up practice(s) and, when they do, to disclose their application to demonstrate their commitment to the higher standards of corporate governance.
Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory