Professional Documents
Culture Documents
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1 Malaysia — Background
Malaysia today comprises of Peninsular Malaysia (formerly known as
Malaya) and the states of Sabah and Sarawak in the island of Borneo.
‘Malaya’ is a European invention.1 It was a collection of isolated feudal
kingdoms separated by untouched wilderness.2 The feudal kingdom of
Malacca was once the dominant power. This ended with Malacca’s defeat at
the hands of the Portuguese in the sixteenth century. The Dutch occupied
Malacca in the seventeenth century, followed by the British in the eighteenth.
The British initially established settlements on the island of Penang and later
spread their influence in Malacca and Singapore.3 The primary reason for the
establishment of these settlements was to protect British trade — Penang was
founded as a naval base for this purpose. Early British policy was thus one of
non-interference in local affairs. This policy was reversed to better promote
British commercial interests.4
The first colonial court was officially established in 1807, the date of the
first Charter of Justice. This Charter paved the way for the establishment of a
Court of Prince of Wales on the island of Penang and conferred upon the court
limited liability as applied in Britain were made part of the law of the land.12
This and the landmark decision by the House of Lords in Salomon v Salomon
& Co Ltd13 had formed the basis of the company’s existence in Malaysia as
it has been in Britain.
In terms of corporate regulation, Malaysia was generally regarded as having
one of the best legal regimes in Asia, rivalling her closest neighbour Singapore
and also Hong Kong.14 She has excellent accounting standards.15 Auditing
standards complied with international standards, which was said to exceed
even US’ standards.16 Even to critical observers, Malaysia was seen to be
committed in improving her corporate legal environment. As far back as 1994,
the requirements for independent directors and independent audit committees
had been put in place.17 A new disclosure based regulatory regime was
introduced in 1996.18 The establishment of a Financial Reporting Foundation
to oversee corporate reporting standards was established a year later.
Despite having all these rules and legal structure, Malaysia was not spared
from the financial crisis which swept the region beginning 1997.19 In fact, the
crisis exposed some inherent problems in Malaysian corporate governance
regime, in particular those related to the protection of minority shareholders.
The government took the initiative to address this by establishing the High
Level Finance Committee on Corporate Governance in 1998 with a mandate
to enhance the standards of corporate governance in Malaysia. The committee
came up with the Report on Corporate Governance in early 1999, in which it
proposed a draft code on corporate governance, together with some proposals
for further reforms to improve governance.20 Since the publication of the
Report, new governance measures have been taken, among them the
publication of the Code of Corporate Governance in 2000: the requirement for
beneficial owners of securities to declare their status,21 quarterly reporting of
financial information,22 the requirement to include a director’s report in the
annual reports to shareholders, income statement, balance sheet, cash flow
12 Malaysian Companies Act 1965 ss 16(5), 18(3) and 214(1)(d). Section 16(5) of the Act
provides that the company ‘shall be a body corporate . . . capable forthwith of exercising all
the function of an incorporated company’.
13 [1897] AC 22.
14 Economic Analytical Unit, Department of Foreign Affairs and Trade Australia, Changing
Corporate Asia: What Business Needs to Know, Vol 2, Regional Economic Studies,
Canberra, 2002.
15 The Malaysian Accounting Standards Board reviews international accounting standards and
modifies them where necessary so that it suits local conditions.
16 Economic Analytical Unit, above n 14, p 144.
17 Bursa Malaysia, Listing Requirements, paras 15.10, 15.10(1)(a) and 15.11.
18 Securities Commission Act 1993. See M R Salim, ‘The Prospectus Disclosure Regulatory
Regime in Malaysia’ (2001) 1 UiTM L Rev 24.
19 The crisis started in Thailand and affected the currencies and stock market of several Asian
economies including Malaysia. The combination of the currency devaluation, depressed
share and asset prices resulted in a severe recession in the affected countries.
20 Malaysian High Level Finance Committee on Corporate Governance, Report on Corporate
Governance, 1999.
21 A 1998 amendment to the Securities Industry (Central Depository) Act 1991 now requires
securities accounts to be opened in the name of beneficial owners or authorised nominees.
22 Bursa Malaysia, Listing Requirements, para 9.22 amended in 1999.
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statement and detail equity changes,23 and new laws imposing stringent
disclosure standards for prospectuses and heavy sanctions for false or
misleading statements or material omission.24 All directors of listed
companies are now required to attend an accreditation program to ensure
competency and a limitation has been imposed on the number of their
directorships so that they might give better attention to their responsibilities.25
A shareholder watchdog group in the form of Minority Shareholder Watchdog
Group has been established by some large institutional investors, led by a
public institution, the Employees Provident Fund (EPF), to establish the
foundation for the growth of shareholder activism. These new governance
initiatives were further enhanced with the publication of the Capital Market
MasterPlan by the Securities Commission in 2001 with promises for
increased efficiency and creating a more conducive environment for
investors.26 The Companies Commission established a Corporate Law Reform
Committee in 2003 which has published five Consultative Documents.27
While reforms have resulted in improvement of corporate governance, this
article argues that there are some weaknesses. Law reforms have not been
grounded on local knowledge. Differences in shareholding structure, as well
as economic, political and cultural differences, mean that the nature of the
problems and the solutions to them vary across markets. In particular, a
governance regime which has as its focus the shareholder-director agency
conflict may not be wholly appropriate in a corporate environment where the
excessive powers of controlling shareholders creates the biggest agency
problem. Additionally, culture and value systems, the quality of legal
institutions, issues related to access to courts, and the influence of politics in
business, have so far undermined reform efforts.
2 Legal transplants
It was said that legal transplants was one of the most important sources of
legal development.28 Reception of laws occurred both voluntarily and
involuntarily. The European legal harmonisation project and the adoption of
corporate governance codes are examples of voluntary transplants. Forced
transplant occurred primarily through the imposition of colonial laws.29 In
Pacification in South Africa’ (1989) 2 Jnl of Historical Sociology 41; F Snyder, ‘Colonialism
and Legal Form: The Creation of “Customary Law” in Senegal’ (1981) 19 Jnl of Legal
Pluralism 49; B M Hooker, Legal Pluralism: An Introduction to Colonial and Neo-colonial
Laws, Clarendon, Oxford, 1975; Hooker, above n 6, pp 95–6. More recently researchers
have turned their attention to the ways the indigenous population has attempted to resist the
imposition of these laws: S E Merry, ‘Law and Colonialism’ (1991) 25 Law and Society
Review 889; F Snyder and D Hay, ‘Comparisons in the Social History of Law: Labour and
Crime’ in F Snyder and D Hay (Eds) Labour, Law and Crime, Tavistock, London, 1987.
30 S E Merry, ‘Legal Pluralism’ (1988) 22 Law & Society Rev 869 at 872–3.
31 M Chanock, Law, Custom, and Social Order: The Colonial Experience in Malawi and
Zambia, Cambridge UP, Cambridge, 1985, p 4.
32 S E Merry, Colonizing Hawai’i: The Cultural Power of Law, Princeton UP, Princeton, 2000.
33 D Harris, Fish, Law and Colonialism: The Legal Capture of Salmon in British Columbia
Toronto UP, Toronto, 2001, p 196.
34 Merry, above n 29, at 890.
35 A Watson, ‘Comparative Law and Legal Change’ (1978) 37 Cambridge Law Jnl 313. His
critics include Otto Kahn-Freund who asserted that it cannot be assumed that all laws are
transplantable. For Kahn-Freund, laws which are deeply embedded in a society will not be
suitable for legal transplants. It will be necessary to first determine the relationship between
the legal rule to be transplanted (whether mechanical or organic) and the socio-political
structure of the origin jurisdiction. It will also be necessary to compare the socio-political
environment of both the origin and the receiving jurisdiction. This two-pronged process is
necessary to determine the viability of the transplantation: O Kahn-Freund, ‘On Use and
Misuse of Comparative Law’ (1974) 37 Modern L Rev 1. Ann and Robert Seidman, drawing
from their experience in China where they were involved in a law drafting project concluded
that ‘save accidentally, no country can copy another country’s law and achieve similar
outcomes’: A Seidman and R B Seidman, ‘Drafting Legislation for Development: Lessons
from a Chinese Project’ (1996) 44 Am J Comp L 1 at 34. See also A Seidman and R B
Seidman, State and Law in the Development Process: Problem Solving and Institutional
Change in the Third World, Macmillan, Hampshire/London, 1994. Gunther Teubner claimed
that the essential question is how closely a particular area of law is ‘coupled’ to one or more
‘social processes’. He says that received ideas act as an ‘irritant’, resulting in distortion of
the ideas behind the law which is being transplanted: G Teubner, ‘Legal Irritants: Good Faith
in British Law or How Unifying Law Ends Up in New Divergences’ (1998) 61 Mod L Rev
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11. However, even Alan Watson acknowledged that transplanted laws will inevitably
develop. He compared it to a human body: it will grow in its new body. The development
of the law in the host country is a natural process which should not be seen as a rejection.
However, Watson said that this development should not always be viewed as an
improvement over the original transplanted laws. When the origin jurisdiction is much more
advanced, materially and culturally, to the receiving country, transplantation is possible and
easy, ‘though changes leading to simplification, even barbarization, will be great’: Watson,
above n 28, pp 27 and 99. For example, the strong influence of Scots law on the modern day
of Botswana, Lesotho and Swaziland because many of their lawyers, judges and legal
bureaucrats were trained in Scotland: A Watson, ‘Aspects of Reception of Law’ (1996) 44
Am J Comp L 335 at 339–40.
36 K Pistor, Y Keinan, J Klenheisterkamp and M D West, ‘Evolution of Corporate Law and the
Transplant Effect: Lessons from Six Countries’ (2003) 18 The World Bank Research
Observer 89 (particularly at 90, 93).
37 K Pistor, Y Keinan, J Kleinheisterkamp and M D West, ‘Innovation in Corporate Law’
(2003) Jnl of Comparative Economics 676.
38 K Pistor, Y Keinan, J Kleinheisterkamp and M D West, ‘The Evolution of Corporate Law:
A Cross-Country Comparison’ (2003) 23 Jnl of International Economic Law 791.
39 K Pistor and P Wellons, The Role of Law and Legal Institutions in Asian Economic
Development 1960-1995, Asian Development Bank, Manila, 1998. See also H Kanda and
C J Milhaupt, ‘Re-examining Legal Transplants: The Director’s Fiduciary Duty in Japanese
Corporate Law’ (2003) 51 Am J Comp L 887.
40 K Pistor, D Berkowitz and J F Richard, ‘Economic Development, Legality and the
Transplant Effect’, research paper, SSRN, 1999.
41 S Djankov, R La Porta, F Lopez de-Silanes and A Shleifer, ‘Courts: The Lex Mundi Project’,
research paper, Harvard Institute of Economic Research, 2002.
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assimilate with indigenous laws, at other times they conflict with these laws
which result in the indigenous laws either rejecting the received law outright,
or adapting it to preserve the cultural identity. Thus, Chiba argues that the
contemporary laws of Asian countries are found in ‘an ongoing process of
self-developing indigenous laws whether successful or not’.42 He also said
that the problem with the idea of law which was a product of long Western
history and was biased towards Western culture, resulted in not only
assimilation problems but also confining discussion to how Western law has
been adopted and little on ‘its conflict with or rejection by indigenous
systems’. The main concern, he argued, should be the whole structure of the
indigenous systems of the receiving people, which should focus ‘upon
assimilation of the received law while firmly maintaining their cultural
identities’.43
The foregoing provides some justification for the argument that law should
ideally be developed by the society and made ‘part of the institutional fabric
of society’.44 As Clifford Geertz famously puts it, law is ‘local knowledge’.45
To be sure, this is not to say that transplanted laws have no real value and
should be rejected outright. Given time it will evolve to accommodate the
specific needs and peculiarities of the society in the host country. However, at
the very least it cannot be assumed that laws across boundaries worked in the
exact same way and produced the exact same results.46
48 See A Berle, ‘Corporate Powers as Powers in Trust’ (1931) 4 Harv L Rev 1049 (arguing that
the agency problem be solved by regarding shareholders as beneficiaries, to whom the
managers, as trustees, must serve). But see M E Dodd, ‘For Whom Are Corporate Managers
Trustees?’ (1932) 45 Harv L Rev 1145; A Berle, ‘For Whom Corporate Managers Are
Trustees: A Note’ (1932) 45 Harv L Rev 1365. However, the view of directors as trustees,
at least in Britain, is flawed and has been rejected in part because directors’ duties of care
and skill permit directors to take reasonable risks in the exercise of their duties while trustees
are required to be cautious and avoid risks: see Re City Equitable Fire Insurance Co [1925]
Ch 407; Daniels v Anderson (1995) 37 NSWLR 438; 16 ACSR 607. For comments on Berle
and Means, see M L Weidenbaum and M Jensen, ‘Introduction to the Transaction Edition’
in Berle and Means, ibid, pp ix–xviii; W W Bratton, ‘Berle and Means Reconsidered at the
Century’s Turn’ (2001) 26 Iowa J Corp L 737; M S Mizruchi, ‘Berle and Means Revisited:
The Corporate Governance and Power of Large US Corporations’ (2004) 33 Theory and
Society 579.
49 Cohen Committee, Report of the Committee on Company Law Amendment, Cmnd 6659,
HMSO, London, 1945, para 7(e). This view was endorsed by the Jenkins Committee in
1962: Report of the Company Law Committee, Cmd 1749, HMSO, London, para 106.
50 See, eg, the American Law Institute, Principles of Corporate Governance: Analysis and
Recommendations, 1992. For a discussion, see S M Bainbridge, ‘Independent Directors and
ALI Corporate Governance Project’ (1993) 61 Geo Wash L Rev 1034.
51 For a comparison of the use of these two mechanisms in the United States and Britain, see
G Miller, ‘Political Structure and Corporate Governance: Some Points of Contrast between
the United States and England’ (1998) 51 Colum Bus L Rev 51.
52 H Demsetz, ‘Corporate Control, Insider Trading, and Rates of Return’ (1983) American
Economic Review 313; A Shleifer and R Vishny, ‘Large Shareholders and Corporate
Control’ (1986) 94 Jnl of Political Economy 461; R Morck, A Shleifer and R Vishny,
‘Management Ownership and Market Valuation: An Empirical Analysis’ (1988) 20 Jnl of
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ownership structure is very much the norm rather than the exception.53
There were also challenges to the problems identified by Berle-Means. One
area of study concentrated on social networks. This stream of research
accepted Berle-Means finding on the evolution of dispersed shareholding but
disputed that this resulted in the rise of the managerial class. The demise of the
capitalist class, it was argued, was a myth. Maurice Zeitlin, a prominent
advocate of this line of thought, found ‘discrepant findings on the alleged
separation of ownership and control’ and lamented on ‘the problems entailed
in obtaining reliable and valid evidence on the actual ownership interests
involved in a given corporation’, prompting him to challenge the very
foundation of the Berle-Means theory on managerialism as ‘unsupported
generalisations’ and lacking empirically.54
Another area in which Berle-Means theory has been challenged was the
evolution of the shareholding structure in the United States. It started with
Mark Roe’s thesis that it was the legal rules governing financial
intermediaries, brought about by political and ideological factors, which
contributed to dispersed shareholding in the United States.55 Others have
sought to examine the ownership structure of companies around the world.
The quality of the law, the protection of property rights and the effectiveness
of legal institutions are alternative theories why corporate structures in some
countries are dispersed while others are concentrated.56
Financial Economics 293. See also P D Hall, ‘A Historical Overview of Family Firms in the
United States’ (1988) 1 Family Business Review 51.
53 R La Porta et al, (1998), (1999), above n 46; S Claessens, S Djankov and L Lang, ‘The
Separation of Ownership and Control in East Asian Corporations’ (2000) 58 Jnl of Financial
Economics 81.
54 M Zeitlin, The Large Corporation and Contemporary Classes, Rutgers UP, NJ, 1989,
pp 36–7. See also Pt II Ch 5, ‘Who Owns America? The Same Old Gang’, pp 142–61 and
his work in ‘Corporate Ownership and Control: The Large Corporation and the Capitalist
Class’ (1974) 79 American Jnl of Sociology 1073. For a summary of the sociological work
based on Berle-Means work, see Mizruchi, above n 48. Continuing with this theme, British
sociologist John Scott found that in both US and British companies, strategic control resides
not with managers but through a ‘constellation of interests’, in which institutions, primarily
financial intermediaries, play a major part. This constellation of interests is further
strengthened through the extensive networks of inter-corporate business relations and
business powers either formally in the form of business cooperations or informally in the
form of interlocking shareholdings and interlocking directorates. Like Zeitlin in the United
States, Scott maintained that propertied capitalist classes still existed in Britain. They are
however ‘no longer merely collections of individually powerful families’, but have ‘spread
their shareholdings across a large number of companies, rather than holding controlling
blocks in particular companies, and they form a pool from which the top corporate managers
are recruited’: J Scott, Corporate Business and Capitalist Classes, Oxford UP, Oxford, 1997,
pp 19–20 and Ch 3. See also J Scott, ‘Networks of Corporate Power: A Comparative
Assessment’ (1991) 17 Annual Review of Sociology 181 at 182.
55 M J Roe, ‘Some Differences in Corporate Structure in Germany, Japan, and the United
States’ (1993) 102 Yale LJ 1927; Strong Managers, Weak Owners: The Political Roots of
American Corporate Finance, Princeton UP, Princeton, 1994.
56 La Porta et al (1998), above n 46; (the law matters theory); C J Milhaupt, ‘Property Rights
in Firms’ (1998) 84 Va L Rev 1145 (the property rights theory); and K Pistor, ‘Patterns of
Legal Change: Shareholder and Creditor Rights in Transition Economies’, working paper,
European Bank for Reconstruction and Development, 2000 and K Pistor, M Raiser and
S Gelfer, ‘Law and Finance in Transition Economies’, working paper, European Bank for
Reconstruction and Development, 2000 (the quality of institutions theory).
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many companies.65 To the extent that the state benefits as direct and indirect
beneficiaries of businesses, it cannot be considered as merely an impartial
intermediary seeking to benefit the whole populace by implementing
appropriate development strategies and ensuring free competition and
fair-play to all.66
In view of the fact that real control of Malaysian companies is exercised by
majority or controlling shareholders and not directors, the focus on the
regulation of directors is misplaced.67 Therefore the theory of the separation
of ownership and control and the problems caused by such separation should
be of limited relevance in Malaysia. In countries in which concentrated
shareholding is the norm such as Malaysia, the shareholder-director conflict is
only secondary to the controlling shareholder-minority shareholder conflict.
Even though it has not been conclusively proven that companies with
concentrated ownership have a higher incidence of corporate misappropriation
or other forms of abuse, there is certainly more opportunity for such conduct
where control rights are not matched with cash-flow rights. There will also be
less incentive for controlling shareholders to maximise the interests of
shareholders generally, and not merely their own or their families. There is
also a persistent danger that controlling shareholders in companies with
concentrated shareholding may transfer resources out of the company to
benefit themselves or their associates.68 They are able to do this because of
include industrial and infrastructure companies in which the state continues to hold
substantial stakes (eg, the Proton group and Time group); media and communications
companies (eg, Media Prima Bhd, although not directly owned, but is widely believed to be
controlled by the political elites, as it is imperative to the state’s control over information);
and companies in industries which are the backbone of the nation’s economy (eg, plantation
based Guthrie group which were acquired by the government backed investment company
Permodalan Nasional Berhad through a ‘dawn raid’ of the London Stock Exchange.
Permodalan Nasional Berhad still own over 45% of Guthrie’s shares).
65 The Articles of Association of the privatised national utility company Tenaga Nasional
Berhad, for example, has a provision for a ‘Special Share’ held by a ‘Special Shareholder’,
a representative of the state. The Special Shareholder has the right to appoint a number of
directors, including the Chairman of the Board and the Managing Director. The Special
Shareholder also has extensive veto rights.
66 Privatisation projects in Malaysia are examples of the politic-business nexus. See, eg, K S
Jomo, ‘Privatisation in Malaysia’ in T Clarke and C Pitlelis (Eds), The Political Economy of
Privatisation, Routledge, London, 1993, pp 437–54; K S Jomo, ‘Overview’ in K S Jomo
(Ed), Privatisation Malaysia: Rents, Rhetorics, Realities, Westview Press, Boulder, 1994.
See also generally E T Gomez and K S Jomo, Malaysia’s Political Economy: Politics,
Patronage and Profits, Cambridge UP, Cambridge, 1999; P Searle, The Riddle of Malaysian
Capitalism: Rent-Seekers or Real Capitalists, Allen & Unwin/University of Hawai’i Press,
NSW/Honolulu, 1999.
67 To be sure, it is not always the province of the majority to control, as there could well be
circumstances in which the minorities could take control, although this situation would arise
only in the most exceptional cases.
68 See, eg, the UEM/Renong saga discussed below. There are many other tales of
misappropriation which for one reason or another was not proven simply because court
actions are extremely rare. Misappropriation could be implemented through a variety of
ways: ‘intra-group shifting of assets, cross-lending, smoothing company decisions
(inter-company transfers designed to adjust the volume or the price of inter-group trade, the
level of inter-firm dividend payout, cross-lending either to avoid taxes, to exploit the
government’s fiscal incentives, or to lock in private benefits linked to corporate control over
technological or other decisions), cross-lending and co-insurance’: N Attig, K Fischer and
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their influence over the board and dominion in general meeting. Also as
shareholders they are under no duty to act in the interests of the company or
the other shareholders. The mismatch between control rights and cash flow
rights, a phenomenon which is wide-spread in East Asia,69 and the absence of
a real market for takeovers which may otherwise discipline directors,70
exacerbates this problem.
In view of the fact that family businesses, in particular Chinese family
businesses are the backbone of Malaysia’s economy,71 an understanding of
these companies is vital to appreciate the underlying corporate governance
issues. It has been said that kinship ties in family businesses are control
relations which form the foundation of power networks.72 In Asia, it has been
repeatedly said that characteristics such as paternalism, personalism,
opportunism and flexibility mean that Chinese family companies are tightly
controlled by individuals or family members, even where the company is
publicly listed.73 In these companies, ‘there is no real separation between
family and company interests and a resulting lack of clarity as to where
corporate boundaries lie’.74 Often, the controlling families have failed to
distinguish between the interests of the company and those of the family.75
Y Gadhoum, ‘On the Determinants, Costs, and Benefits of Pyramidal Ownership: Evidence
on Expropriation of Minority Interests’, paper presented at the 2nd Asia Corporate
Governance Conference organised by Asia Institute of Corporate Governance, 16–17 May
2002, Seoul. The lower rate of dividends paid by Asian group-affiliated companies compared
to their European counterparts may also exacerbate this problem: M Faccio, L H P Lang and
L Young, ‘Dividends and Expropriation’ (2001) 91 American Economic Review 54. See also
D Wolfenzon, A Theory of Pyramidal Ownership, Mimeo, Harvard University, 1999; L H P
Lang, ‘Introduction’ in L H P Lang (Ed), Governance and Expropriation, Elgar,
Cheltenham, 2005.
69 Bebchuck, Kraakman and Triantis termed the use of cross-holdings, pyramids and dual-class
shares which allow control though a small shareholding as ‘controlling-minority structure’
(or CMS). They argued that CMS insulates the controllers from the market for corporate
control, a problem associated with dispersed shareholding, but further places control on an
insider who holds a small fraction of the company’s cash-flow rights, a problem faced by
companies with concentrated shareholding. As such, they argued that CMS may possibly
suffer from both incentive problems associated with both the concentrated shareholding and
dispersed ownership: L A Bebchuck, R Kraakman, and G Triantis, ‘Stock Pyramids,
Cross-Ownership and Dual-Class Equity: The Mechanisms and Agency Costs of Separating
Control From Cash-Flow Rights’ in R Morck (Ed), Concentrated Corporate Ownership,
University of Chicago Press, Chicago, 2000. However, even in countries with concentrated
shareholdings, the problem is far from universal. In Japan, and to a lesser degree Germany,
despite having concentrated shareholding, managers and not major shareholders wielded
great powers, which are exercised not so much for the benefit of shareholders but the
company’s constituents, of which the most important is the company’s employees. For a
comparative study of the Japan/Germany and Anglo Saxon system of corporate governance,
see R Dore, Stock Market Capitalism: Welfare Capitalism: Japan and Germany versus the
Anglo-Saxons, Oxford UP, Oxford, 2000.
70 Only 25% of shares in listed companies need be in the hands of the public: Bursa Malaysia,
Listing Requirements, para 3.05
71 See, generally, E T Gomez, Chinese Business in Malaysia, Curzon, Surrey, 1999.
72 See M Zeitlin and R E Ratcliff, Landlords and Capitalists: The Dominant Class of Chile,
Princeton UP, Princeton, 1988.
73 P Lawton, ‘Berle and Means, Corporate Governance and the Chinese Family Firm’ (1996)
6 Aust Jnl Corp Law 348.
74 Lawton, ibid, at 357.
75 Lawton, ibid, at 367; R I Tricker, ‘Corporate Governance: A Ripple on the Cultural
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from Britain) were used to guide local reforms. In particular, questions should
be asked whether the British approach was the best approach for Malaysia.
Specifically, questions should be asked whether self-regulation and non-legal
sanctions are the best way to deter bad governance in Malaysian companies,
especially since the efficacy of self-regulation has yet to be proven in
Malaysia.86 Also doubtful is the ability of the market to sanction state-owned
or controlled companies and the ability and courage of the regulators to take
action against these companies or their controllers.87 These questions were
never raised, let alone considered and addressed by the committee. Also,
despite stating the need to recognise local conditions, the Code on Corporate
Governance drew heavily on similar work done in Britain, namely, the
Cadbury, Greenbury and Hampel Committees. Similarly, the Corporate Law
Reform Committee’s first consultative paper, the Strategic Framework for the
Corporate Law Reform Programme borrowed extensively upon similar
reform programmes in Britain, a fact which is apparent even from the title of
the paper.
The Code on Corporate Governance borrowed from the Anglo-American
concept of independent non-executive directors and recommended that a third
of the board must be composed of these directors. The committee should be
recommended for expanding the concept of ‘independent’ to include
independent from significant shareholder as well as from management,88
which is evidence of awareness of local conditions, but has failed to consider
whether there is a sufficient pool of talents from where these directors may be
recruited. The utility of independent director provisions has yet to be
conclusively proven, and in Malaysia this is compounded by the scarcity of
good talents who fit the definition of ‘independence’, brought about by the
high degree of wealth concentration and the propensity for networking.89
Additionally, there is no real market for takeovers90 and a negligible risk of
86 Malaysia’s capitalist class may not be as cohesive as those in advanced capitalist economies
such as United States and Britain. Corporate interlocks in Malaysia were more of a
pragmatic response to socio-political landscape rather than for the purpose of networking or
providing the foundation of corporate powers: see Gomez, above n 71; E T Gomez,
‘Governance, Affirmative Action and Enterprise Development: Ownership and Control of
Corporate Malaysia’ in E T Gomez (Ed), The State of Malaysia; Ethnicity, Equity and
Reform, RoutledgeCurzon, London/New York, 2004, pp 175–6; J V Jesudason, ‘Chinese
Business and Ethnic Equilibrium in Malaysia’ (1997) 28 Development and Change 119
at 138. For interlocks in the United Kingdom and Britain, see Zeitlin, above n 54 and Scott,
above n 54. See also M S Mizruchi, ‘What Do Interlocks Do? An Analysis, Critique, and
Assessment of Research on Interlocking Directorates’ (1996) 22 Annual Review of Sociology
271. For the Hong Kong experience, see B M Ho, ‘Rethinking the System of Sanctions in
the Corporate and Securities Law of Hong Kong’ (1997) 42 McGill Law Jnl 603.
87 See above n 65 and 66 and accompanying text.
88 The Report on Corporate Governance, above n 20, p 83 para 4.25. Compare with the
concept ‘unrelated director’ used in the Toronto Stock Exchange Guideline, which is defined
as a director who is independent of management and is free from any interest and business
which could, or could reasonably be perceived to materially interfere with the director’s
ability to act in the best interests of the corporation: Toronto Stock Exchange, Corporate
Governance: A Guideline to Good Disclosure, Guideline 2.
89 For the wealth concentration and networking in Malaysia see Lim, above n 63; cf. Gomez,
above n 86.
90 Hostile takeovers are almost unheard of in Malaysia due to the presence of controlling
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shareholders in most companies. The last attempt was made in 2001 when Sime Darby Bhd,
Malaysia’s largest conglomerate, attempted to take over Palmco Holdings Bhd. It ended as
an embarrassing failure for Sime Darby.
91 The derivative action in Malaysia, as in Britain, is ineffective due to numerous procedural
limitations imposed by the courts. The other main remedy, the oppression remedy provided
under s 181 of the Companies Act 1965, has limited use for shareholders in public
companies. In the only reported case involving a public company the action was dismissed,
see Tuan Haji Ishak Ismail v Leong Hup Holdings (1996) 1 MLJ 661.
92 See Lawton, above n 73, at 53; S G Redding, The Spirit of Chinese Capitalism, Walter de
Gruyter, Berlin, New York, 1993, pp 218–19.
93 See M G Peletz, Islamic Modern: Religious Courts and Cultural Politics in Malaysia,
Princeton UP, Princeton, 2002, p 262 (writing in the context of Anwar Ibrahim’s challenge
of the Prime Minister Mahathir Mohamed).
94 R M Haniffa and T E Cooke, ‘Culture, Corporate Governance, and Disclosure in Malaysian
Companies’ (2002) 38 ABACUS 317 at 343 (suggesting that a non-executive chairperson
gains greatest utility by keeping private information secret and questioning the utility of
having a non-executive chairperson in Malaysia).
95 These changes were attributable to the Code on Corporate Governance which has resulted
in some changes to Bursa Malaysia’s Listing Requirements. Although the Code was
described as a voluntary Code, changes to the Bursa Malaysia rules means that listed
companies must comply. One thing which must be emphasised is that the Code and Bursa
Malaysia’s rules apply only to listed companies. The Securities Commission has fully
implemented the Disclosure Based Regulations regime which, together with Bursa
Malaysia’s improved disclosure requirements, should result in better corporate transparency.
A shareholder watchdog group in the form of the Minority Shareholder Watchdog Group has
been established by some large institutional investors, led by EPF to establish the foundation
for the growth of shareholder activism. An overview of these changes is available at the
Malaysian Securities Commission’s website: see <http://www.sc.com.my>. Thus, so far as
listed companies are concerned, these changes should result in better shareholders protection
(despite the limitations of reform efforts highlighted in this article). A joint survey by Bursa
Malaysia and PricewaterhouseCoopers showed that this was indeed the case. This survey
revealed a perception of a raise in Malaysia’s corporate governance standards of listed
companies: The Kuala Lumpur Stock Exchange and PricewaterhouseCoopers, Malaysian
Corporate Governance Survey 2002, 2002.
96 See Pistor et al, above n 36.
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97 To be clear, the Committee on Corporate Governance did make some suggestions to improve
some aspects in the Companies Act. In some matters, the committee did recommend a more
detailed study to be conducted. For example, the committee had recommended for the
removal of s 132E of the Companies Act (that allows for ratification by the general meeting
of related party transactions); amendments to s 132 to extend the duties and liabilities of
officers to include senior executive officers as well as directors and to s 132G (the regulation
of a specific related party transaction) to require errant persons to indemnify the company,
to allow innocent parties to recover their losses and to remove a certain ambiguity in the
provision; and other recommendations which include the increase in penalties for breach of
related party transactions; to allow voting by mail; to introduce a statutory method by which
shareholders can obtain access to company records without the need to have prior approval
by the board or general meeting. See also the proposals by the Companies Commission of
Malaysia in its Consultative Document, On Clarifying and Reformulating the Directors’
Role and Duties, 2006.
98 R S Milne, Government and Politics in Malaysia, Houghton Mifflin, Boston, 1967, p 3. See
also F K W Loh and B T Khoo (Eds), Democracy in Malaysia: Discourses and Practices,
Curzon, Surrey, 2002; A Harding, Law, Government and the Constitution in Malaysia,
Kluwer Law International, London, 1996.
99 Chinese businesses are often closely held; therefore its ethnic identification will often persist
even after the shares have been listed. Malay owned companies are a more recent
phenomenon, brought about because of the state’s economic policies. For discussion on
these companies, see Gomez, above n 71 (a breakdown of equity ownership of Chinese
companies in Malaysia is presented at 4–5); P Sloane, Islam, Modernity and
Entrepreneurship Among the Malays, MacMillan, Hampshire, London, 1999 (an
anthropological perspective of Malay entrepreneurship).
100 J Osland and A Bird, ‘Beyond Sophisticated Stereotyping: Cultural Sense-making in
Context’ (2000) 14 Academy of Management Executive 65.
101 The works by Geertz Hofstede are famous examples: see, eg, G H Hofstede, Culture’s
Consequences: International Differences in Work Related Values, 2nd ed, Thousand Oaks,
London, 2001; G H Hofstede, ‘A Case for Comparing Apples with Oranges: International
Differences in Values’ (1998) 39 International Jnl of Cultural Studies 17.
102 A Abdullah, ‘Influence of ethnic values at the Malaysian workplace’ in A Abdullah and
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119 See, eg, D W Augsburger, Conflict Mediation Across Cultures: Pathways and Patterns,
Westminster/John Knox, Louisville, 1992; J P Lederach, Preparing for Peace: Conflict
Transformation Across Cultures, Syracuse UP, Syracuse, 1995. See also W J Karim,
Emotions of Culture: A Malay Perspective, Oxford UP, Oxford, 1990; Peletz, above n 93.
120 J A Wall Jr and R R Callister, ‘Malaysian Community Mediation’ (1999) 43 Jnl of Conflict
Resolution 343 at 364. See also Geertz, above n 45.
121 G B Chan, Law without Lawyers, Justice without Courts: On Traditional Chinese
Mediation, Ashgate, Hampshire, 2002, p 70.
122 B M Hooker, ‘Law and the Chinese outside China: A Preliminary Survey of the Issues and
the Literature’ in B M Hooker (Ed), Law and the Chinese in Southeast Asia, Institute of
South East Asian Studies, Singapore, 2002, pp 9–10.
123 A survey on reported decisions on shareholders remedies since the introduction of the
Companies Act in 1965 to December 2004 reveal only 20 decisions, excluding those which
deal solely with issues of procedure and standing. This averages to half a case a year. For
comparison, an average of 2.2 cases a year was reported in Australia (for Australian data see
I Ramsay, ‘An Empirical Study of the Use of the Oppression Remedy’ (1999) 27 Aust Bus
L Rev 23). Another survey conducted at the Commercial Division, High Court of Malaya in
Kuala Lumpur for petitions filed during a period of over four years (January 2000 to
February 2004) revealed an average of 8.5 petitions a year in Kuala Lumpur (data on file
with author). In contrast, an average of 78 petitions was filed a year in London: Law
Commission Consultation Paper No 142, Shareholders Remedies, HMSO, London, 1996. It
should however be noted that Malaysia has about a third the number of registered companies
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compared to Britain (Malaysia’s Companies Commission Annual Report 2003 and British
Companies House data, accessible at <http://www.companieshouse.gov.uk>).
124 See, generally, the World Bank’s resource page for institution reforms at
<http://www1.worldbank.org/publicsector/legal/index.cfm>.
125 For literature on the subject, see F A Trinidade, ‘The Removal of the Malaysian Judges’
(1990) 106 LQR 51–86; H P Lee, ‘A Fragile Bastion Under Siege — the 1988 Convulsion
in the Malaysian Judiciary’ (1990) MULR 386–417; A Harding, ‘The 1988 Constitutional
Crisis in Malaysia’ (1990) 39 International and Comparative Law Quarterly 57–81; R H
Hickling, ‘The Malaysian Judiciary Under Crisis’ (1990) Public Law 20–7; M S Abas and
K Das, May Day For Justice, Magnus Books, Kuala Lumpur, 1989; Lawyers’ Committee on
Human Rights, Malaysia: Assault on the Judiciary New York, 1990; T A Aziz, ‘Malaysia
Incorporated: Ethics on Trial’ (1999) 58 Australian Jnl of Public Administration 19. Dato’
VC George, a retired judge, said that as a result of this episode, ‘standards of morality and
integrity plunged’: ‘Interview with Dato’ VC George’, Relevan, 2004, May issue, p 16.
Relevan is a publication of Kuala Lumpur Bar.
126 Some aspects of Anwar’s trial were covered by the International Commission of Jurists at
<http://www.icj.org>.
127 See C Hector, ‘The Judiciary During the Mahathir Era’, Aliran Monthly, 2003, issue 8.
Aliran Monthly is a publication of Aliran, a Malaysian non-governmental organisation.
128 See ‘Editorial: Derailed’, Relevan, 2003, September issue.
129 Bar Council Press Statement, ‘A Change to an Inquisitorial System’, 13 October 2004.
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competence.130 It has been said that the best way of maintaining judicial
competency is by appointing competent judges.131 The great majority of
judges in Malaysia were from the judicial and legal service, which
unfortunately do not represent the cross-section of talent in the legal
profession.132 The training of judges and improved research facilities are other
areas which may help improve the quality of decision making.133
There are perhaps several reasons for the lack of judicial independence in
Malaysia. One is that judges seem to have difficulty with their role as the
protector of the Constitution, especially during the early phases of the
Constitution. Rais Yatim attributed the deterioration in the protection of rights
immediately after independence to the judicial inability to recognise
constitutional supremacy.134 Another factor which may also contribute to a
relative lack of independence is the value systems and political orientation of
the judges themselves. Acceptance of social rank and loyalty to ruler are
established cultural traits.135 Harold Crouch said that the judges are
‘essentially conservative custodians of a political system dominated by the
Malay elite to which most judges belong’, who ‘rarely showed interest in
reinterpreting the law in ways that might restrict the prerogatives of the
government and its bureaucracy’, the reason being that they ‘shared the broad
conservative outlook of the rest of the Malay elite’.136
The acute shortage of judges and support staff, backlog of cases caused by
a sharp rise in the number of new cases,137 high levels of procedural
formalism138 and poor implementation of a comprehensive computerised
system have had a negative impact on efficiency.139 The lack of an extensive
130 See Editorial, ‘Appointment of Judges — the Way Forward’, Relevan, 2004, September
issue. See also G Seah, ‘Crisis in the Judiciary, Part 5: Colonels Judging the Generals’,
Aliran Monthly, issue 8, 2004. Also, a new provision in the Federal Constitution, Art 122AB
was inserted in 1994 to allow the appointment of Judicial Commissioners who had all the
powers of a judge but without security of tenure. This has implications for judicial
independence.
131 G J Samuels, ‘Judicial Competency: How Can it be Maintained’ (1980) 54 ALJ 581 at 585.
132 For discussion of the appointment of judges in the Australian context, see the references in
M Spry, Executive and High Court Appointments, Research Paper, Parliament of Australia
Parliamentary Library, 2000.
133 For a discussion on judicial training, see M Kirby, Modes of Appointment and Training of
Judges — A Common Law Perspective, speech given at the ICJ/CIJL and CAJ Seminar on
Legal Institutions in Transition, Belfast, 8 June 1999.
134 R Yatim, Freedom under Executive Powers in Malaysia — A Study of Executive Supremacy,
Endowment Publications, Kuala Lumpur, 1995. One reason for this was their training in
England in which parliament, and not the Constitution, is supreme. A Malaysian
constitutional expert Abdul Aziz Bari openly criticised the judiciary who he said when asked
to resolve a conflict between the individual and public authorities, ‘invariably chose to
abdicate themselves; citing lack of power and that the matter is beyond their purview’: A A
Bari, Malaysian Constitution: A Critical Introduction, The Other Press, Kuala Lumpur,
2003, p 243.
135 See, eg, G H Hofstede, Culture’s Consequences: International Differences in Work Related
Values, 2nd ed, Thousand Oaks, London, 2001.
136 H Crouch, Government and Society in Malaysia, Allen & Unwin, NSW, 1996, pp 138–42.
137 Bar Council Press Statement, ‘Shortages of Judges and Judicial Commissioners’, 13 January
2003 and ‘Clearing Backlog in the Courts’, 24 December 2003.
138 Djankov et al, above n 41. In this study, Malaysian courts did not perform as well as the
courts in some other common law countries.
139 Although an e-court project was first announced as far back as 1996, it has yet to be
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implemented. The tender has now been awarded to a company, but irregularities in the
tender process and the allegation of cronyism (due to the participation of a son of the then
Prime Minister Mahathir Mohamed in the company) aroused scepticism whether the tender
was appropriately awarded. See L C Wee, ‘Transparency in the Creation of the Malaysian
E-Court’, Relevan, 2004, February issue, p 8.
140 For use of caseload statistics, see World Bank ‘Introduction: Using Caseload Statistics’,
available at <http://www1.worldbank.org/publicsector/legal/CourtStatistics.pdf> (accessed
12 January 2005).
141 The World Bank, ‘The Purpose of the Courts’, at
<http://www1.worldbank.org/publicsector/legal/purpose.htm> (accessed 13 January 2005).
142 J A Jolowicz, ‘General Ideas and the Reform of Civil Procedure’ (1983) 3 Legal Studies
295–314; On Civil Procedure, Cambridge UP Cambridge, 2000.
143 A Zuckerman, ‘Reforming Civil Justice System: Trends in Industrial Countries’ the World
Bank PREM Note 46, 2000, available at <http://www1.worldbank.org/
prem/PREMNotes/premnote46.pdf> (accessed 13 January 2005). See also S Shavell, ‘The
Fundamental Divergence between the Private and Social Motive to Use the Legal System’
(1997) 26 Jnl of Legal Studies 575; A Zuckerman (Ed), Civil Justice in Crisis: Comparative
Perspectives of Civil Procedure, Oxford UP, Oxford, 1999.
144 The Law Commission Report No 245, Shareholder Remedies, HMSO, London, 1997.
145 To qualify for state legal aid, a person’s disposable income must not exceed RM3000
(approximately £450) a year. In any case, legal aid is only given for a limited range of cases
(shareholder suit is not one) unless the relevant Minister gives special permission. Even
then, there is the issue of competence of the legal aid solicitor to handle this type of
litigation.
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146 The Star, ‘Over half of private firms’ directors breach rules’, 13 July 2004.
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The price which UEM paid for Renong’s shares amounts to 86.6% of the UEM’s
shareholders funds at that time and raised UEM’s debts from RM300 million to
RM2.7 billion, which the Rating Agency Malaysia said would significantly drain UEM’s
cash flow. UEM’s share price fell 48% in the week following the announcement of the
purchase. In a related event, Halim Saad failed twice to make payments for a put option he
had made for Renong’s shares (he agreed to re-purchase the Renong’s shares bought by
UEM by way of a put option in an apparent attempt to appease public anger). No action was
taken against him and he appeared to have been released of his obligations without having
to compensate UEM. Both companies have now been de-listed from Bursa Malaysia. See
generally Searle, above n 66, pp 143–6; R Pura, ‘Confidence erodes in Malaysia’s ability to
carry out corporate damage control’, AWSJ, 21–22 September 1997, p 1; R Nathan, S L
Chiew and W F Soo, ‘Country Paper for Malaysia’, 2nd Asian Roundtable on Corporate
Governance, ADB/OECD/World Bank, 31 May–2 June 2000, Hong Kong; Far Eastern
Economic Review ‘Undone Deal’ 11 December 1997; ‘Renong Calls Draw Warning’, The
Asian Wall Street Journal Weekly, 8 December 1997; H Nesadurai, ‘In Defence of National
Economic Autonomy? Malaysia’s Response to the Financial Crisis’ (2000) 13 The Pacific
Review 73 at 90–1.
150 The Agency is headed by a Director-General, appointed by the Yang di-Pertuan Agong on
advice by the Prime Minister. Officers of the Agency are members of the general public
service: Anti-Corruption Act 1997 ss 3(2) and 4(3).
151 Eric Chia was finally arrested and charged in court for corruption not long after Abdullah
Badawi took over from Mahathir Mohamad as Prime Minister.
152 See Rodan (2004), above n 83, at 123. Other public bodies such as the state investment arm
Khazanah Nasional Berhad, EPF, Petronas (the state oil company), MISC (the national
shipping company owned by Petronas), and even Tabung Haji (National (Muslim) Pilgrims
Fund) have been accused of spending public funds to rescue selected companies. For the
many allegations of crony capitalism, bailouts and corruption, see Transparency
International’s Malaysian chapter website at <http://transparency.org.my>. Another source is
the online newspaper, Malaysiakini, at <http://www.malaysiakini.com>. See also generally
Gomez and Jomo, above n 66 and Searle, above n 66.
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10 Conclusion
It is commonly accepted that transplanted laws will evolve as they interact
with elements in the local environment. This evolution need not necessarily
result in changes in the substantive law. Often, there will be differences in the
way the law is used, administered and enforced. The Japanese corporate
governance system provides a good example. The basic governance rules are
borrowed from the United States. It adopts a single tier board and separates
control from ownership. However, unlike the United States, the Japanese
ownership structure is concentrated: banks play a major governance role,
employees are given a strong voice in corporate decision-making and there
exists a stable inter-organisational relationship through horizontal
cross-shareholdings. The reason for this evolution was explained by Curtis
Milhaupt, as the US corporate law, when imported to Japan, was ‘severed
from its intellectual moorings . . . the atomized, depersonalized
shareholder-manager relationship that animates US laws and colours our view
of the corporate contract has never resonated among Japanese institutions’.153
When the British companies legislation was imported into Malaysia, it too
was severed from its intellectual moorings. The transplanted system which has
as its focus the agency problem of directors-shareholders conflict is
inappropriate for the concentrated nature of Malaysia’s companies.154 This
concentration is highly complex as it occurs at various levels and is enhanced
by the use of interlocks. The problems caused by this, ie, the powers of
controlling shareholders, be it the state, the family or even individuals, and
corporate structures which enhance control rights in excess of ownership
rights, should be the target of corporate governance reform in Malaysia.
Additionally, questions may be asked as to the extent that cultural traits and
value systems impact on corporate governance. Equally pertinent is the role
and influence of the state and politicians in businesses. The importance of
political and institutional transparency in corporate governance should not be
underestimated. The effectiveness of the judicial and other legal institutions,
including the law enforcement agencies, as well as the issue on access to
courts, are also valid concerns. A proper understanding of these issues is
critical for effective and comprehensive governance reform.
While learning from the experiences of others can be useful, legal
transplants have their limitations. It has been said, quite rightly, that the
process of lawmaking is as important as the law itself. The reform process is
part of the lawmaking process. It may be stating the obvious but a good reform
programme should first identify the problem and then proceed to address it.
This has not been done in any meaningful way. There are also other issues
which fall outside of the mandate given to the law reform committee but are
imperative to an efficient and effective operation of law, such as procedural
efficiency and entitlement to legal aid. This calls for the establishment of a
body with the necessary powers to affect a comprehensive law reform
programme, perhaps a Law Reform Commission of Malaysia. There are also
issues which fall outside of the scope of the law (using the narrow meaning
of the word) while still remaining a corporate governance issue, such as the
quality of legal institutions, the independence of the judiciary and the role of
politics in business. These, however, require a reform programme much wider
than even a Law Reform Commission can perhaps undertake.
Finally, Malaysians can draw from their own history and experiences.
Mediation is more compatible to Malaysian culture compared to the inherited
adversarial system. The prevalence of family businesses provides further
justification for this form of dispute resolution mechanism. Mediation is not a
novelty even in the formal legal system in Malaysia as it has been used in the
Syaria (Islamic) courts. The system is not perfect,155 but perhaps it is far more
useful to draw from our own experiences and learn our own lessons.