Cgreport

Front
FINANCE COMMITTEE ON CORPORATE GOVERNANCE
REPORT ON
CORPORATE GOVERNANCE
FEBRUARY 1999
REPORT ON
CORPORATE GOVERNANCE
FEBRUARY 1999
CONTENTS
Foreword Membership Of The Committee Abbreviations ii iv v 1 7 39 49 55 67 69 74 75 103 106
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5
Introduction To The Report Executive Summary Setting The Scene Corporate Governance In Malaysia Meaning Of Corporate Governance Malaysian Code On Corporate Governance Part 1 Principles of Corporate Governance Part 2 Best Practices in Corporate Governance Part 3 Principles and Best Practices for other Corporate Participants Part 4 Explanatory Notes Reform of Laws, Regulations And Rules ISSUE ONE Review of Provisions dealing with Duties, Obligations, Rights and Liabilities of Directors, Company Officers and Controlling Shareholders 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 involve the Waste of Corporate Assets ISSUE THREE Enhancing the Quality of General Meetings ISSUE FOUR Provisions dealing with Shareholders Rights and Remedies ISSUE FIVE To develop Effective Governance and Enforcement Mechanisms within the Regulatory Framework
Chapter 6
143
171 183 199
Chapter 7 Chapter 8 Appendix I
Training And Education Implementation Programme Executive Summary Of The KLSE/Price Waterhouse Joint Survey Of The Corporate Governance Practices In Public-Listed Companies Membership And Terms Of Reference Terms of Reference Finance Committee Working Group I Working Group II
233 249 255
Appendix II
267 269 272 273 275
HIGH LEVEL FINANCE COMMITTEE REPORT ON CORPORATE GOVERNANCE

FOREWORD
1. I wish to express my heartfelt thanks to members of the High Level Finance Committee on Corporate Governance and other relevant persons and industry groups for their continuous contribution, co-operation, invaluable support and assistance in the preparation of this Report. The Report on Corporate Governance (the Report), which sets out the current state of corporate governance in Malaysia and recommendation of measures to raise corporate governance standards, reflects the on-going effort of the Government and the private sector to re-establish investor confidence in the Malaysian capital market. 2. The East Asian economic crisis in 1997/98 has generated a substantial amount of analysis and debate largely focused on macro-economic issues, systemic stability as well as issues pertaining to the regulation of international investors, the role and functions of regulators and the need for improved disclosure and good corporate governance. While investments are required to generate growth, the interests of stakeholders are to be protected. The maximisation of benefits to stakeholders is assured by good corporate governance so that decisions on investment, lending, and the manner of utilisation of resources are in the interests of stakeholders, including minority shareholders, and not abused by and for the benefit of corporate insiders. 3. In recognition of the clear need to enhance standards of corporate governance in Malaysia, 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 establishing a framework for corporate governance and setting best practices for the industry. The Committee on Corporate Governance is a partnership effort, between the government and 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 proposed Code sets out a set of principles and best practices for good governance. The recommendations in the Code are directed principally at boards of listed companies. They are aimed at increasing the efficiency and accountability of boards to ensure that their decision-making processes are not only independent but are seen as independent. Second, reform of laws, regulations and rules The recommendations for reform seek to strengthen the overall regulatory framework for public-listed companies. They embrace key aspects of corporate regulation which include:
s s
s s s s
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.
ii
Third, training and education A significant challenge for the corporate sector arising from implementation of the recommendations above is to expand the pool of qualified persons, namely directors to undertake the responsibilities expected of them. The recommendations, among other things, identify training and education programmes, target participants for these programmes as well the agencies to conduct these programmes.
5. The report was circulated to selected bodies for consultation to elicit the views of those not 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 this country. The private sector has an important role to play in the development of the nation as 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. As good corporate governance promotes this objective, the Government will take steps in this direction. Private sector involvement in promoting good corporate governance is crucial too. They have the ability to set standards beyond those that can be imposed by statute, and the business sensitivity to implement standards that are workable and beneficial. 7. Good corporate governance is a shared vision.
Thank you.
(DATUK DR. ARIS OTHMAN) Secretary General of Treasury And Chairman of the High Level Finance Committee On Corporate Governance 9 Mac 1999.
iii
MEMBERSHIP OF THE COMMITTEE

Y.Bhg. Datuk Dr Aris bin Othman Secretary General of Treasury, Ministry of Finance Chairman Encik Ali bin Abdul Kadir Chairman, Securities Commission Y.Bhg. Tan Sri Wan Azmi bin Wan Hamzah Chairman, Financial Reporting Foundation Y.M. Dato Raja Arshad Tun Uda Chairman, Malaysian Accounting Standards Board Y.Bhg. Dato Idrus bin Harun Registrar of Companies Y.Bhg. Dato Mohd Azlan bin Hashim Chairman, Kuala Lumpur Stock Exchange Y.Bhg. Tan Sri Dato Seri Ali Abul Hassan bin Sulaiman Governor, Bank Negara Malaysia Y.Bhg. Tan Sri Azman bin Hashim Chairman, Association of Merchant Banks, Malaysia Y.Bhg. Dato Megat Najmuddin Megat Khas Chairman, Federation of Public-Listed Companies Ms Wong Suan Lye Executive Director, Association of Banks, Malaysia Ms Mohayani bt Shamsudin Chairman, Association of Stockbroking Companies, Malaysia Prof. Abdul Manap Said Immediate Past President The Malaysian Association of The Institute of Chartered Secretaries and Administrators Secretariat Securities Commission.
Acknowledgment
The Finance Committee would like to acknowledge the outstanding contribution extended by three invaluable ex-members since the inception of the Committee in March 1998. We sincerely 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)
iv
Front
ABBREVIATIONS
ADB AGM ASIC CA CL CLERP Code Committee ESOS FIC FY KLSE Listing Requirements M&A MICG ROC SC SCA SEC SIA SICDA TSE UK US WB Asian Development Bank Annual General Meeting Australian Securities and Investment Commission Companies Act, 1965 Australian Corporations Law Corporate Law Economic Reform Programme of Australia Malaysian Code on Corporate Governance Finance Committee on Corporate Governance Employee Share Option Scheme Foreign Investment Committee Financial Year Kuala Lumpur Stock Exchange KLSE Main Board Listing Requirements Mergers and Acquisitions Malaysian Institute of Corporate Governance Registrar of Companies Securities Commission Securities Commission Act, 1993 Securities Exchange Commission Securities Industry Act, 1983 Securities Industry (Central Depositories) Act, 1991 Toronto Stock Exchange United Kingdom United States World Bank
Chapter 1
INTRODUCTION TO THE REPORT
Chapter 1 Introduction To The Report
INTRODUCTION TO THE REPORT

1.
1.1
Background to the Report

On 24th March 1998, in announcing to the Dewan Rakyat a series of measures to further boost and stabilise the Malaysian economy, the Honourable Minister of Finance announced the establishment of a high level committee that would look into establishing a framework for corporate governance and setting best practices for the industry. This timely announcement was clearly made in recognition of the crucial role that enhanced standards of corporate governance can play in boosting investor confidence. The economic turmoil had, within less than a year, taught corporate Malaysia that corporate governance or rather the lack thereof, can exact a heavy toll from the markets. 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, the Chairman of the KLSE, the Chairman of the Financial Reporting Foundation and representatives of various industry organisations. The Committee was asked by the Minister of Finance to submit its findings and proposals by 30th June 1998. The report was subsequently released for consultation on 13th November, 1998 to selected bodies, namely those bodies not represented on the Committee. The bodies identified for 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.
1.2
1.3
1.4
1.5
A revised report incorporating feedback received from consultation, was submitted to the Minister of Finance on the 5th of February, 1999.
2.
2.1
The Preparation of the Report

The Committee at its first meeting on 10th April 1998, agreed that the work of the Committee is to be carried out through two Working Groups: Working group on best practices in corporate governance and training and education (JPK 1). This working group will essentially seek to develop best practice standards for the industry and identify training programmes for all corporate participants. Consistent with approaches adopted internationally where the standard setting process is led by industry, this working group is chaired by the Chairman of the Federation of Public-Listed Companies. Regulators are, however, represented on the working group to ensure that self-interest elements are addressed and that standards set do not fall short of international standards1 . Working group on law reform issues in corporate governance (JPK 2). This working group is chaired by the SC. The membership of this working group includes representatives from ROC, KLSE, practising accountants, lawyers and members of the corporate sector. The task of this working group is to identify and make recommendations for reform of certain key aspects of corporate regulation for strengthening the governance structure of companies and to identify effective enforcement 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 the SC would also act as the secretariat to the Committee. In attempting to put together the recommendations of the 2 Working Groups, the Secretariat has had to make numerous editorial changes and adjustments. Every effort has however been taken to ensure that the substance of all recommendations remains intact. For instance, while detailed discussions on the recommendations of Working Group 2 on Reform of Laws, Regulations and Rules are found in Chapter 6, it was felt that no meaningful examination of any aspect of corporate governance can be made without at least a brief attempt to describe the legal landscape against which all of these recommendations must be viewed. Hence, the need for Chapter 3 which sets the scene and provides an overview of the legal framework. Similarly, although Training and Education is part of the mandate of Working Group 1, it was felt that Recommendations on Training and Education can be more meaningfully made after all other aspects of Corporate Governance have been discussed. The report has since received the benefit of wider feedback from bodies identified for consultation as alluded to in para 1.4 above. Their comments were carefully studied and in some instances their feedback has resulted in revisions and additions to the original report. In the main, consultees agreed with the scope, approach and recommendations of the report.
2.3
2.4
1 2
For full list of members of JPK 1, see Appendix II For full list of members of JPK 2, see Appendix II
Chapter 1 Introduction To The Report
3.
3.1
Layout of the Report

This report comprises eight chapters, inclusive of this chapter. Chapter 2 provides the Executive Summary of the report. All the key recommendations of the Committee to the Ministry of Finance are highlighted in this chapter. Chapter 3 sets the scene for the entire report. It attempts to provide a brief overview of the state of Corporate Governance in Malaysia. While efforts to enhance standards of corporate governance may not necessarily or primarily take a legislative route, an understanding of the legal historical landscape against which principles, best practices and standards of corporate governance are to be introduced, is vital to ensure that these standards, principles and best practices when introduced, are properly juxtaposed against the existing legal framework. 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 at defining this phrase. Chapter 4 discusses the Meaning of Corporate Governance. The Code is in Chapter 5. Explanatory notes and justifications are provided to every section of the Code. In Chapter 6, a detailed study is made on Reform of Laws, Regulations and Rules that affect Corporate Governance in Malaysia and the issues relating thereto. Recommendations for changes to these laws, regulations and rules together with their justifications are found in this Chapter. A comprehensive code on Corporate Governance together with state of the art legislative provisions will not achieve much by way of enhancing standards of corporate governance unless company directors, shareholders, senior management, members of audit committees etc., are aware of their roles and responsibilities. Training and Education is therefore of paramount importance. Chapter 7 focuses on this. A report is only as good as the paper it is written on, until and unless concrete measures are taken to implement the proposals, and thereafter, to monitor the implementation. Finally, Chapter 8 looks at the Implementation Programme for the Recommendations in the report.
3.2
3.3
3.4
3.5
3.6
3.7
Chapter 2
EXECUTIVE SUMMARY
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 2. 3. 4. 5. Meaning of Corporate Governance Chapter 4 Code Chapter 5 Reform of Laws, Regulations and Rules Chapter 6 Training and Education Chapter 7 Implementation Programme Chapter 8
1.
Meaning of Corporate Governance

The definition of corporate governance that we have developed from this exercise is as follows Corporate governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value, whilst taking into account the interests of other stakeholders.
2.
2.1. 2.2
Code
The discussion on the Code is divided into two sections. In section 1, we stress the importance of the Code as an initiative of the private sector to lead a review and establish reforms of standards of corporate governance at a micro level. It is based on the belief that in some aspects of corporate regulation, self-regulation is preferable and the standards developed by those involved may be more acceptable and thus more enduring. Additionally, it allows for a more constructive and flexible response to raise standards in corporate governance as opposed to the more black and white response engendered by statute or regulation. A particularly important feature of codes on corporate governance is the aspirational and evolutionary way in which codes influence the expectations of society, that are eventually reflected in the law. The attention generated on corporate governance issues has already had an impact on evolving judicial interpretations of directors duties, internationally. Compliance with the Code
2.3
2.4
The recommendations set out in the Code are premised on a prescriptive approach to corporate governance. The proposed Code sets out four forms of recommendations and the compliance responsibilities in respect of these recommendations are as follows: Principles Part 1 sets out broad principles of good corporate governance for Malaysia. The objective of principles is to allow companies to apply these flexibly and with common sense to the varying circumstances of individual companies. Companies will be required by the Listing Requirements to include in their annual report a narrative statement of how they apply the relevant principles to their particular circumstances. This is to secure sufficient disclosure so that investors and others can assess companies performance and governance practices and respond in an informed way. Best practices in corporate governance Part 2 sets out best practices for companies. It identifies a set of guidelines or practices intended to assist companies in designing their approach to corporate governance. While compliance with these guidelines is not mandated, companies will be required, as a provision of the Listing Requirements, to explain any circumstances justifying departure from such best practices.
10
Exhortations to other participants Part 3 is not addressed to listed companies but to investors and auditors to enhance their role in corporate governance. These are purely voluntary. Explanatory notes and mere best practices - Part 4 provides explanatory notes to the principles and best practices set out in Parts 1 and 2 and exhortations set out in Part 3. Part 4 also sets out best practices directed at listed companies that do not require 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 on the basis that standards of corporate governance in Malaysia are lacking and that there is a need to raise these standards. The statement of best practices is designed to guide companies 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 that require companies to include in the annual report, a narrative account of how they apply 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 listed companies on the KLSE. Statement of compliance 2.8 It is proposed that all listed companies reporting in respect of years ending after the implementation date of the report should state in the reports and accounts how they have applied the principles set out in Part 1 of the Code and a statement of compliance in respect of the best practices set out in Part 2 and identify or give reasons for any areas of non-compliance. In this respect, boards are not expected to comment separately on each item of the Code with which they are complying, BUT areas of non-compliance will 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 that good corporate governance rests firmly with the board of directors. Shareholders and auditors necessarily only play secondary roles. This is in recognition of the fact that there are limitations to shareholders and auditors taking on a leading role in corporate governance.
11
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), 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). Principal responsibilities of the board 2.11 The approach we have taken in the Code is to identify what we regard as the principal responsibilities of the board of directors. These are as follows - reviewing and adopting a strategic plan for the company; overseeing the conduct of the companys business to evaluate whether the business is being properly managed; identifying principal risks and ensuring the implementation of appropriate systems to manage these risks; succession planning, including appointing, training, fixing the compensation of and where appropriate, replacing senior management; developing and implementing a communications policy for the company; and reviewing the adequacy and the integrity of the companys internal controls and management information systems as well as other applicable laws and regulations. Board constitution 2.12 We then address issues pertaining to the constitution of the board. The composition of the board of directors is one of the most important issues in corporate governance. We 1 propose that at least _ of the board should be independent. We accept the definition of 3 independence as provided for in the Listing Requirements which broadly set out two elements of independence - independence from a controlling shareholder and independence from management. In circumstances where a company is controlled by an significant shareholder (which we define to mean a shareholder who is able to exercise a majority of votes for the election of directors), we recommend a form of proportional representation by providing that the board should comprise a number of directors which fairly reflect the investment in the company by the shareholder other than the significant shareholder. We then recommend that boards should disclose its analysis of the application of best practices set out above to the circumstances of the board. We then make recommendations relating to the boards process for assessing existing directors and identifying, nominating, appointing and orienting new directors. With the exception of the responsibility for orienting new directors, we recommend as a matter of best practice that this function is performed by a nominating committee in recognition of the need for a formal and transparent procedure for appointments to the board. We also recommend that boards conduct an annual review of its required mix of skills and experience and other qualities including core competencies which non-executive directors should bring to the board. This should be disclosed in the annual report. This is a crucial pre-requisite to the next recommendation we make and that is, for the nominating committee to annually assess the effectiveness of the board as a whole, the committees of the board and the contribution of each individual director to effective decision making on the board.
2.13
2.14
12
2.15
We also identify the company secretary as the person who should undertake the task of handling all of the preparatory work that has to be completed and information to be gathered prior to directors taking up their posts. Board processes. We also propose certain governance-related structures and processes of the board that contribute to its effectiveness. The effectiveness of the board is buttressed by its structures and procedures. We respond to concerns emanating from the survey1 about the regularity of board meetings by recommending that boards should meet regularly and requiring boards to disclose the number of board meetings held a year and the details of attendance of each director. This enables the shareholders to evaluate a directors commitment to the company and to satisfy himself as to whether the board is in control of the company. We also consider the board process of assessing management which would entail a meeting with management, namely the chief executive officer, to establish the objectives of the company and meeting independently of management to monitor its progress in relation to the objectives. We then prescribe a number of governance-related functions to be carried out via board committees namely the remuneration and audit committees. Relationship between the board and shareholders
2.16
2.17
2.18
We then address the relationship between the board and shareholders. Although this relationship is less complex than the relationship between the board and management, it is nevertheless important. We identify the AGM as a crucial mechanism in shareholder communication and recommend that a best practices guide should be prepared for the specific purpose of improving the quality of AGMs. We encourage two-way communication between the company and the shareholders. We also caution investors, in evaluating the companies governance arrangements, particularly those related to board structure and composition, to give due weight to all relevant matters drawn to their attention.
3.
3.1
Law Reform Issues in Corporate Governance

Issue 1 reviews provisions dealing with the duties, obligations, rights and liabilities of directors, company officers and controlling shareholders. The Board of Directors 3.1.1 Codification of the functions of the board and clarification of the collective duty of the board to manage the business and affairs of a company
Price Waterhouse/KLSE Joint -Survey of Public-Listed companies, 1998 (See Appendix I)
13
Recommendation There should be a statutory formulation of the minimum functions of boards of public companies. In this respect, a provision should be introduced to clarify the responsibilities of the board to oversee the conduct of the companys business to evaluate whether the business is being properly managed. The provision should be sufficiently flexible to allow for wide variations in the structuring of the relationships between the board and management taking into account the various types and sizes of companies regulated by the CA.
The belief is that codification of the minimum functions of the board will give clear direction to the courts as well as directors of their minimum collective duties. The recommendation also clarifies that boards of large listed companies do 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 within the board structure be clarified and in particular, the unique capacity of independent non-executives to provide a balanced and independent view onto the board
Recommendation That the role of non-executives to bring a balanced and independent view onto the board should not be legislated.
Regardless of recent emphasis and reliance internationally on the role of independent directors to oversee the executive members of the board and abuses by controlling shareholders, this specific aspect of their duty should not be codified. Codification would detract from the fact that the overall responsibility for supervision of management lies with the board as a whole and hence every director. It may further dissuade persons from taking up non-executive directorships. This is an appropriate matter to be dealt with by the Code, for the Code 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-formulated to require a director to act bona fide in the best interests of the company. The term should not be statutorily defined.
14
The reformulation of the duty to act honestly in section 132 to read the duty to act bona fide in the best interests of the company, removes the misconception that 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 of some directors that they are there to represent the best interests of the shareholder responsible for their election. The difficulty with clarifying this phrase is that it has different meanings in different contexts. In some cases it means interests of the 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 the interests 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 nominee directors primary obligation is to act in the best interests of the company and that his duty to his principal is always subject to his duty to act in the best 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 position vis--vis his principal. 3.1.5 Codification of the fiduciary duty of directors to avoid conflicts of interest and the duty to act for a proper purpose
Recommendation There should be codification of the statutory fiduciary duty to avoid conflicts of 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 put himself in conflict with the company. Case law is voluminous but there is difficulty in deriving clear principles because the rules operate in relation to the particular facts of cases. A bigger problem is enforcement. The power to sue in the companys name rests with the board. Where the board is controlled by the defaulting director, it is practically very difficult for the board to commence action. A minority shareholder can commence action in the companys name BUT there are insurmountable procedural and substantive difficulties in instituting an action under exceptions to the rule in Foss v Harbottle. Codification adds to clarity and aids enforcement. The statutory fiduciary duty should embrace conflicts of interests arising from misuse of corporate information, property or position, the taking of corporate opportunities and engaging in business in competition with the company. Additionally in the spirit of clarifying the duties and obligations of directors, section 132(1) CA should be amended to state explicitly the duty of directors to act for a proper purpose.
15
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 the existing duty to use reasonable diligence, the duties of skill and care. Section 132(1) CA should not be amended to clarify that the standard of care imposed is with reference to the particular circumstances of the director.
There is a tendency to lump together the duties of skill, care and diligence. But they 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-executive directors, is not only because it is fairly well settled law in Malaysia already but that it may impede the development of a higher standard of care being practised by directors. Controlling shareholders 3.1.7 Extension of fiduciary duty to embrace controlling shareholders and shareholders with significant influence over the control of the company.
Recommendation That the proposal to deem significant shareholders of a certain shareholding threshold and above as directors is necessary and should be considered further by the relevant authority and upon sufficient consultation with the industry.
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 a corporation are accustomed to act i.e. shadow directors. The problem with this definition is proof. It is almost impossible to establish that a particular director is acting under the control of another, and even more so to establish that he is also accustomed to act in this way. It is suggested that one way around the problem of enforcement is to deem significant shareholders of a certain shareholding threshold and above as directors. The issues that have to be decided on are the following: What is the appropriate threshold? What should be the constituents of this threshold i.e. does it include interest in shares defined under section 6 and 6A, CA? What should be the ambit of such a provision? Only disclosure and related party transactions or should it also extend to embrace the duties required under section 132?
16
3.1.8
Abuses by controlling shareholders in respect of their right to vote

Recommendation That controlling shareholders should be prohibited from voting in transactions that they have an interest in. The relevant regulator should define the circumstances under which such a prohibition should apply.
This recognises that the right to vote cannot be abusively or capriciously exercised against the companys interest. Where a controlling shareholder is interested in a transaction he must satisfy the requirement that the transaction is fair to the company when entered into and that the transaction was authorised in advance or 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 section 132 should extend to include senior management or principal executive officers of companies.
This recognises that there may be persons within a company who are not directors but 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, should not be codified nor should directors be required to take the advice of a company secretary. Rather it should take the form of an indirect requirement of the director informing himself to the extent he deems appropriate about the subject matter in question.
The Committees concerns relate to the need to ensure that directors are appropriately advised of their compliance obligations and the companys compliance obligations. It is not possible to impose an obligation on a company secretary to advise the board, in recognition of the fact that there may be persons other than the company secretary who may undertake this task. For the same reason, directors should not be required to take advice from a company secretary. A more meaningful approach would be to require the director to inform himself to the extent he deems appropriate about the subject matter in question.
17
Defences 3.1.11 Reliance on others

Recommendation The ability to rely on others to perform the duties associated with the office of a director should be included as a defence in the CA, subject to necessary safeguards, to ensure that this right is not abused.
This is necessary. If directors are unable to rely on others, directors would be forced to make detailed and exhaustive enquiries into every matter thus holding up 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 is necessary in tandem with the extensive codification of fiduciary duties and the duties of skill and care and the introduction of a statutory derivative action. The statutory provision should additionally explicitly preserve the application of other common law defences.
The business judgement rule creates a safe harbour for directors who make honest, informed and rational business judgements, from personal liability for breach of their duties. 3.2 In Issue 2, the Committee reviewed the provisions of law and other requirements and assessed the adequacy of disclosures and conflicts of interests with respect to transactions that involve the waste of corporate assets. In making its recommendations, the Committee has kept in mind the need to balance the principle of providing the market with adequate information, with the need to keep price sensitive information confidential. The Committee considered that disclosures and rules with regard to conflicts or potential conflicts of interests with the interests of the companies are of great importance in order to maintain integrity and confidence in the Malaysian capital market. The recommendations of the Committee in relation to Issue 2 are as follows. 3.2.1 Rationalisation of prospectus requirements and enhancement of sanctions for disclosure
Recommendation The regulatory regime for prospectuses should be simplified and rationalised. Statutory powers and duties in relation to prospectuses should also be centralised within one agency.
18
A rationalised and simplified regulatory regime will facilitate compliance with its requirements. This, together with the centralisation of powers and duties in relation to prospectuses will ensure more rigorous and effective regulation.
Recommendation Legislation should permit damages to be claimed for false or misleading dissemination of information, as well as for criminal and civil sanctions in relation to deliberate, reckless or negligent failure to comply with the obligations to disclose under Listing Requirements.
This is to impose greater responsibilities and to provide civil remedies for persons who have suffered damages as a result of misleading and deceptive information, as well as to lend greater weight to the disclosure requirements under the listing rules, where these have been ignored. 3.2.2 Directors statements on internal controls, going concern and statement of responsibilities
Recommendation The Listing Requirements should require directors to make a statement about the internal controls. Auditors should be required to review the statement and report results of its review to directors.
This is to ensure that audit committees and boards give more time to the consideration of both operational and financial risks of the company and their control.
Recommendation The Listing Requirements should require the directors to state in the report and accounts that the business is a going concern with supporting assumptions or qualifications. Auditors should be required to report on this statement in its report.
This is intended to ensure that the directors focus their minds on whether the company can be properly regarded as a going concern.
Recommendation The Listing Requirements should require the directors to explain their responsibility for preparing accounts next to a statement by the auditors about their reporting responsibility.
This is to ensure that the respective responsibilities of directors and auditors for preparing and reporting on financial statements of companies will be made explicit and clarified.
19
3.2.3
International reporting standards

Recommendation Measures should be taken to harmonise financial reporting requirements with international standards by the Malaysian Accounting Standards Board.
The Committee considered that these measures should be dealt with by accounting 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 person within the company to undertake the responsibility that all relevant disclosures are made.
This is to encourage strict compliance with the Listing Requirements. 3.2.5 Prohibited transactions in respect of directors, persons connected and substantial shareholders.
Recommendation Directors, substantial shareholders and persons connected with a director or a substantial shareholder should be prohibited by statute from voting in respect of particular transactions in which he has an interest.
Allowing directors, and substantial shareholders, to enter into transactions which may be to the detriment of the company or in which then have interests undermines the directors or substantial shareholders integrity, as well as having the potential to subject the company to financial loss. The recommendation is to maintain confidence by ensuring that relevant persons are prohibited by law and 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, namely sections 132C, 133, 133A, 131 and 134.
The proposed amendments would enhance the scope and effectiveness of these provisions. Section 132C was found to be impractical in that shareholders
20
approval was only required where a relevant acquisition or disposal would materially and adversely affect the performance or financial position of the company. The approval of shareholders was not in most cases obtained, since directors would not be prepared to take the view that any proposals they made would adversely affect the company in such a manner. Additionally, the scope of the section is unclear, creating the need for a better defined criteria such as that set out in Rules 111 to 120 of Part IV of the Listing Requirements. Amendments will resolve this ineffectiveness and give practical effect to the section. Sections 133 and 133A should be extended to prohibit directors from obtaining quasi-loans or other financial benefits, arrangements, gifts or quasigifts received or receivable, save in exceptional circumstances. The disclosure duties under section 131 and 134 would be extended to require the disclosure of interests of directors spouses and children. 3.2.7 Related party transactions
Recommendation The relevant regulator will be amending section 132G of the CA to clarify ambiguities and impose liabilities on errant directors and vendors aware of the illegality to indemnify the company for expenses incurred in entering into the illegal transaction and will review the necessity for the absolute prohibition in section 132G.
This will clarify the law and enhance the effectiveness of section 132G which seeks to prohibit asset shifting between companies by relevant persons, and to ensure that innocent parties are able to recover damages suffered as a result of the illegal transaction. There is also a strong case for section 132G transactions to be made subject to prior approval of shareholders, with interested parties abstaining from voting (instead of the absolute prohibition) in view of the fact that the drafting of the section can sometimes have the effect of capturing genuine transactions.
Recommendation The provision in section 132E of the CA that allows for ratification of a transaction falling within the section should be removed. Section 132E should be reformulated to reflect the criteria set out in Rules 111-120 of Part IV of the Listing Requirements.
Practically speaking, shareholders may be unwilling to vote against a transaction that has already been entered into, particularly in view of the difficulties that would be involved in unwinding such a transaction. As such, the recommendation is to ensure that the shareholders prior approval is obtained for such transactions. Additionally, the scope of section 132E CA should be better defined.
21
Recommendation The penalties for breach of related party transaction provisions should be modernised and substantially increased.
This is to amplify the deterrent value of the legislation and to ensure that the penalty commensurates with the offence and is seen to commensurate with the offence. An example of modernisation could be the introduction of a provision allowing the SC to institute civil proceedings to recover up to three times the profit 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 the primary objective of discouraging requests for prolonged periods of suspension and for the purpose of maintaining an orderly and fair market.
Requests for voluntary suspensions have been made, for instance, for the purposes of majority shareholders who wish to avoid the sale of their securities held by other persons as collateral. The revised policies of the Exchange will enable the Exchange to consider each application on its merits, and avoid lengthy and unjustified suspensions which have in the past been requested by some companies for improper purposes. 3.3 Under Issue 3, the Committee reviewed and discussed methods of enhancing the quality of general meetings. The committee recognises the fact that the AGM is an important mechanism in shareholder communication, as it gives shareholders the opportunity to have direct public access to the boards. Recommendations are made with a view to enhancing AGMs, so that investors see the value of attending meetings. Some of recommendations of the committee in relation to this matter have already been incorporated under the proposals for the Code. 3.3.1 Notice of AGM
Recommendation The Listing Requirements should be amended to require companies to ensure that the notice calling the meeting contains sufficient information to enable a reasonably prudent member to decide whether or not he will attend a meeting.
This is a duty of the company at common law. The amendment of the Listing Requirements makes this duty explicit.
22
3.3.2
Statement of directors standing for election or re-election

Recommendation The Listing Requirements should require that the notice of the meetings state 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 nominated for election or re-election. 3.3.3 Notice period for AGM
Recommendation The CA and the Listing Requirements should be amended so that the period of notice which should be given to shareholders calling for an AGM will be increased from 14 to 21 days.
Shareholders who hold shares through nominees may not receive the notice of the meeting within the 14-day period, since the address for service will usually be their nominees address. The proposed extended notice period is to give more time for nominees to obtain and submit proxy votes and assist in greater participation at such meetings. 3.3.4 Proxy solicitations
Recommendation The relevant regulator should conduct a study to ascertain the level and breadth of regulation to be imposed on proxy solicitations.
While the committee considers that there is merit in regulating the quality of disclosures accompanying proxy solicitations, the effect of imposing such regulation may have the effect of imposing excessive costs on companies. A further study will therefore be necessary to determine the level and breadth of such regulation. 3.3.5 Shareholder communications
Recommendation The handling of questions at AGMs is best left out of the statutory provisions and should be dealt with in the development of best practices by the company.
23
Recommendation The CA should allow for voting by mail.
This is to provide a cheaper, more efficient and more practical voting procedure than currently exists, and to generate greater shareholder involvement in the companys affairs. 3.3.6 Summary of meetings
Recommendation A resume of discussion to be sent to shareholders upon request should be dealt with as a matter of best practice, as referred to in the Code and not the law.
3.4
Under Issue 4, the Committee assessed the efficacy of the existing law in providing shareholders remedies. The review encompassed the available remedies to shareholders and the company both under statute and common law. 3.4.1 Derivative actions
Recommendation There should be alternative forms of statutory remedies which may be instituted by regulators on behalf of individuals or companies to provide redress where the individuals have been treated unfairly or where wrongs have been effected on the company.
This is to allow regulators to bring actions for a wrong done to individuals or to the company, where it is in the public interest to do so. It will provide an alternative form of redress for individuals or companies who/which may not otherwise enforce their rights because of the cost implications and other legal impediments.
Recommendation In the longer term, it is recommended that a statutory derivative action may be introduced to facilitate actions by individuals themselves, with the necessary safeguards.
This is to overcome the inadequacies of common law and to allow individuals to bring action for a wrong done to themselves, or to the company. Making remedies more readily available, with the appropriate safeguards against bad faith and improper use of the process, will enhance corporate governance and maintain investor confidence.
24
Recommendation Statutory provisions should simplify civil procedures and permit shareholders to undertake representative or class actions to obtain a pro-rata share of damages.
Simplification of the civil procedures will assist representative actions, where a representative sues on behalf of a class of persons suffering a common wrong. Damages or restitution of profits in a representative action would currently accrue to the company and not the individual shareholders. The recommendation would thus remove this existing impediment to the recovery of damages by individual shareholders. 3.4.2 Injunctions to halt breaches of law
Recommendation There should be statutory provisions to allow shareholders or a regulatory body to make applications to court to seek injunctions to halt or prevent breaches of company law.
This will allow a member to restrain directors or any other persons from breaching express provisions of company law and its regulations. 3.4.3 Access to information
Recommendation There should be statutory methods to assist shareholders to obtain access to company records for the purposes of a court action, subject to the court being satisfied that the shareholder is acting in good faith and the inspection is made for proper purposes.
This is to remove the current difficulty of gaining access to the company records for 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 of dispute resolution for the corporate and commercial sector, manned by specialists, who will be able to respond to the needs of the business community and provide efficient and impartial dispute resolution.
25
This is to provide easy access, and quick and decisive resolutions to company law disputes. The speed of dispute resolution will reduce costs and encourage shareholders or other persons to enforce their company law rights. Confidence in such a specialist system will also encourage the use of the laws and courts of Malaysia 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 watchdog group with technical assistance from the WB or the ADB.
This is to encourage shareholder activism, increase adherence to corporate governance standards and help to minimise abuses by insiders against minority shareholders. 3.5 In Issue 5, the Committee seeks to address concerns expressed over enforcement, or its lack thereof in the Malaysian capital markets. We divide the potential enforcers of good corporate governance into two categories - internal and external enforcers. The term enforcers is used in the widest possible sense to mean any person who may have a 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 directors to effectively monitor management and abuse by controlling shareholders. Our review involves an examination of the following areas with a view to strengthening their independence. Appointment, removals, resignations and re-election of non-executive directors
Recommendation That removal or non-re-elections of directors under the Listing Requirements should be made a reportable condition applying to both the listed entity and the director being removed or not re-elected. In cases of resignations and circumstances where a director declines to stand for re-election, the Listing Requirements should allow the resigning director or the director refusing to stand for re-election, to bring to the notice of the KLSE, circumstances which such director thinks ought to be made known to the authorities.
3.5.3
26
This amendment essentially ensures that where a director of a listed company is being removed or not re-elected, the circumstances surrounding the removal should be made a reportable condition to the KLSE. In the case of a resigning director, or a director refusing to stand for re-election, the Committee considered it unnecessarily burdensome for a director to be placed under a positive obligation to disclose reasons for his resignation. Instead the Committee recommends that the Exchange (through its Listing Requirements) should make the channels for communicating 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 of income that is independent of the company. One method of incentivising active non-executive participation on boards, is through encouraging equity participation by the non-executive directors.
In response to suggestions that non-executives should be subject to a source of income that is independent of the company, the Committee considered this to be unwise as it over-emphasises their monitoring role. Boards must not be confrontational and must be able to work together in a cohesive team. Equity participation by non-executive directors provides an incentive for these directors to 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 exclude substantial 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 (because of their large, albeit minority shareholding) to ensure that the rights of the shareholders 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 participation on the board should be supplemented by the Listing Requirements providing for a minimum number of independent directors on the board. This figure should not be fewer than two.
27
The prescriptions in the Code should be supplemented with a provision in the Listing Requirements requiring every board to have at least two independent directors. This recognises that it is practically very difficult for a single voice to form an effective check against non-independent elements on the board.
Recommendation That the relevant regulator studies further the issue of the introduction of cumulative voting for directors.
This is to consider the possibility of strengthening the monitoring power of large minority shareholders by giving them cumulative voting powers which entitles shareholders to cast all their votes for one candidate standing for election on 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 certain limits and subject to other applicable laws, every director in discharging the duties of his office, has the right to inspect and copy all books, records and documents of a company and to inspect the physical properties of a company. Where he is denied this right, he is able to enforce this right in court. The provision should allow for such applications to be heard expeditiously.
All directors have the same right to information. This provision seeks to ensure that where a director is denied access to the information, he is entitled to enforce this right in court. The provision must allow for applications to be dealt with expeditiously, in recognition of the fact that substantial delay in the delivery of information 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 independent directors of a company, acting as a body or board committee, the right to retain experts to advise them on problems arising in the exercise of their functions and powers.
Under present law, a full board has all kinds of powers flowing from the power to manage the business of a company. Occasions may arise, where independent members of the board or board committees may need some form of expert advice to discharge their duties. This provision recognises such a power in a subset of directors.
28
Audit committees 3.5.9 In response to the general perception that audit committees are ineffectual, the Committee 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 of the external auditors to attend meetings. Other board members shall attend meetings at the invitation of the audit committee. However at least once a year, the audit committee should meet with the auditors without members of the executive present. Additionally, the term of office of each member should be subject to review every three years.
This ensures that the necessary calibre, expertise and accountability are available at audit committee meetings. However, at least once a year, the audit committee should meet with the external auditors without members of the executive present to ensure that there is a forum for auditors to broach sensitive problems in an uninhibited and private fashion. The 3-year review of the members of the audit committee 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 of the audit committee to consider, and where it deems necessary, investigate any matter referred to it or that it has come across in respect of a transaction that raises questions of management integrity, possible conflicts of interests or abuse by a significant or controlling shareholder. This should be supplemented with a statement as to the possible courses of action open to the committee.
The Committee felt it necessary for this duty to investigate to be a mandated function of the audit committee. It is essential that the duty to investigate is supplemented by a statement as to the possible courses of action open to the audit committee. Where the audit committee concludes that a questionable practice has occurred, it should normally report this matter to the board. Where the board does not take action, the directors making up the audit committee should be required under the Listing Requirements to report the matter directly to the KLSE.
29
3.5.12 Access to information and professional advice

Recommendation That the recommendations in respect of access to information and professional advice in relation to non-executive directors should be extended to board committees.
The discussion in respect of access to information and advice by non-executive directors 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 of removal or resignation of a company secretary should set out the requirement for the countersignature of the company secretary being removed 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 removal or resignations of company secretaries. The value in this provision is not only that regulators are made aware of suspicious removals, but as a result, directors are conscious of the fact that they cannot abuse their power to remove company secretaries. However, such a provision may have the negative effect of undermining the directors ability to remove incompetent company secretaries. External enforcers 3.5.14 External enforcers of good corporate governance for the purpose of this discussion 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 include reporting on whether the information given in the directors report is consistent with the accounts. Second, that the Listing rules of Exchanges should require auditor agreement of the content of preliminar y announcements of financial results consistent with the aim of ensuring the integrity and credibility of publicly reported information.
30
The first recommendation is in recognition of the fact that the directors statement is generally regarded as the most widely read part of the financial report. The existing statutory duty only requires reporting on the accounts. The second recommendation seeks to ensure the credibility and integrity of all publicly reported information. 3.5.16 Auditor objectivity and independence
Recommendation First, that there should be disclosure of fees paid to audit firms for non-audit work. In this respect, subparagraph 1(q) of the 9th Schedule CA requirements in respect of disclosures in profit and loss accounts, should be extended to include fees paid in respect of non-audit work. Second, that a periodic change of audit partners should be arranged to bring a fresh approach to the audit.
The Committee considered various issues such as that of placing a percentage limit on the total income of an audit firm from a single client, the issue of quarantining audit from other services, and that of compulsory rotation of audit firms. However, the Committee found that there would be immense difficulties in implementing these recommendations which may result in loss of trust and experience and increased costs to the listed entity. The Committee focused on enhancing the disclosure requirements for fees paid to auditors and called on the relevant professional bodies to provide guidance to facilitate the periodic change of audit partners. 3.5.17 Auditors as watchdogs Duty to report breaches of law or reasonable suspicions of breaches to the regulatory authority
Recommendation First, that subsection 174(8) CA should be amended to enable auditors to report matters that in his professional opinion constitute a breach of the CA. A similar provision should be included in the SIA and Listing rules of Exchanges in respect of breaches of securities laws. Second, auditors should be placed under a further obligation to report fraud, dishonesty and other serious 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 in consultation with the relevant regulator to provide guidance to their members as to the scope of the duty. Finally, following from their increased responsibility, the relevant professional organisations should arrive at a standard benchmark fee increase upon consultation with all relevant parties.
31
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 duty to report. Second, he has to be satisfied that a breach has occurred. The subjectivity of the test is a disincentive to the auditor to conclude that a breach has occurred. The advantage to the phrasing in his professional opinion is that auditors are held to a more objective standard against which a decision to or not to report is assessed. Similar provisions should be inserted in the SIA and listing rules to embrace the main sources of corporate law. The duty to report fraud replicates section 207 (9A) Singapore Companies Act. The relevant professional bodies should in consultation with regulators develop guidelines on the scope of the duty. The final recommendation is essentially to ensure that auditors 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 a reportable condition to the Registrar and the Exchange. Section 172 should be amended to require auditors to make representations to the Registrar on the circumstances surrounding his removal. In the case of resignations and circumstances where auditors decline to stand for reelection, a provision should be inserted in the Listing rules of the Exchanges requiring companies to circulate to shareholders, the auditors representations in respect of his reasons for resignation or his refusal or to stand for re-election.
Regulatory authorities 3.5.19 This has been the subject of much criticism in recent times. Significant efforts should be made to strengthen this function. The discussion is divided into two sections: Enforcement of legislation/rules; and Indirect enforcement mechanisms - incentives for compliance.
32
3.5.20 Enforcement of laws and rules

Recommendation: That regulators should have sufficient autonomy to enforce laws without interference or fear or favour; That government should take active steps towards the development of a coherent, rationalised framework for regulations governing companies; That efforts should be made to ensure that the right experience and skills exist in enforcement; That there should be increased accountability and transparency of regulators which should include meaningful disclosure of their enforcement activities for the year; That the range of enforcement powers of regulators should be modernised which should include, among other things, the power to institute action on behalf of an aggrieved investor; That guidelines should be developed outlining circumstances that would justify the appointment of an independent commission as a mechanism to preserve investor confidence in times of crisis.
The Committee considers these to be necessary to ensure the will and ability of the regulators exists to enforce laws as well as to promote transparency and investor protection - the cornerstone of any modern regulatory system. 3.5.21 Incentives for compliance
Recommendation That the SCs proposal for the introduction of a merit-demerit scheme, where listed companies will be categorised into grades favouring companies practising higher standards of disclosure and corporate governance, should be supported.
The advantages of receiving a favourable grading may manifest itself in various forms: Easier access to the capital markets - for example, shorter prospectuses especially 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 be permitted to move to a full-disclosure regime whilst those that are not will be held back. This is to ensure that good and compliant companies are not held back by those that are not.
33
The criteria by which companies will be assessed include, the accuracy and timeliness of disclosures by companies, which will include the level of corporate governance disclosures of these companies, the compliance history of the entity and the quality of its management. Other suggested incentives include factoring in the level of governance practised by companies into credit ratings of companies. It is recommended that the relevant rating agencies examine the feasibility of this proposal. One other incentive includes joint-ventures with members of the financial press in undertaking evaluations of corporate governance practices of listed companies.
4.
Training and Education

This section examines the training and education programmes required to be developed and 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 under law, both common law and under statute, rules, regulations and guidelines; application of the Code; and where necessary, industry and company specific information.
34
Directors 4.3 Should directors (both executive and non-executive) be subject to compulsory education and training?
Recommendations Accreditation should be introduced for all existing and future directors of publiclisted companies, requiring them to undergo formal training. This training is mandatory 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 companies seeking listing on the Exchange. Directors must also undertake continuing education in approved courses as a condition of accreditation. In addition, companies must develop in-house orientation programmes for directors to familiarise themselves with the company.
The reason for the onerous requirement of formal training for directors is as a result of the state of corporate governance in Malaysia. Formal training would accelerate the move towards increasing professionalism in directors. Further, in-house orientation is required because of the directors heavy responsibility to manage or supervise the management of the company. This requires them to provide strategic leadership which is not possible without in-depth knowledge of the companys business. Company secretaries 4.4 What training is required for company secretaries to take on their advisorial role on compliance?
Recommendation Existing and future company secretaries are to be required to undergo formal training 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 their advisorial role. In addition, companies must also develop in-house orientation programmes for company secretaries, similar to that developed for directors, to familiarise company secretaries with the company.
Company secretaries are already duly qualified and are generally well-versed with the routine filing requirements and other administrative requirements under the CA. However, they now have a crucial role to play in advising the board of its compliance obligations under all laws and rules, particularly securities and banking laws (where relevant) and Listing rules of the Exchange, as well as compliance with the Code. The
35
company secretaries must also be educated on their independence which is necessary for them to properly perform their role as adviser on compliance matters. All company secretaries, particularly external ones, should also have an understanding of the workings of 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 Code and the importance of their independence, as well as continual 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.
Newly appointed members to the audit committee should be walked through the financial system of the company, as well as familiarise themselves with key individuals involved in accounting and financial matters of the company. They should also be comfortable with their function of oversight over the board and the importance of their independence to effectively carry out this function. Consequently, they must keep themselves up-todate with accounting policies and standards. Investors 4.6 What do investors need to know to participate more effectively in corporate governance?
Recommendation An education programme should be established for investors on the following matters: 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 governance of companies. In addition, they often do not obtain the full value of annual reports because of their lack of knowledge in interpreting financial statements. Education will, therefore, be focused on giving investors tools with which to increase their participation in the running of companies. Investors must also be informed that the introduction of the Code does not allow them to abdicate their duty to analyse each company on its merits. The Code should only be used as a guide from which the investor should make his own evaluation of the company.
36
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 upon their approval. In addition, continual surveys and consultation should be used by the Committee to evaluate the effectiveness of the programmes and to recommend 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, using existing training facilities, in collaboration with the MICG. In the long term, it is envisioned that MICG will develop a corporate governance training centre to provide structured training on matters relating to corporate governance. 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 relevant regulatory 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 of efforts and waste of resources. The Committee should oversee the implementation of the programmes to ensure coherence and focus, in particular, conformity with the recommendations of the Committee, although the details of the programmes can be left to the relevant regulatory bodies.
37
Funding 4.9 What are the potential sources of funding for these training and education programmes?
Recommendations Training and education programmes should be provided at minimal cost to the participants. It is proposed that the Ministry of Finance undertake the central coordinating role to apply for funding from external sources, such as the ADB, the WB or the Commonwealth Secretariat, and to disburse such grants to the relevant training agencies. In current times, training and education would be a further imposition on the financial resources of companies, which would, therefore, require subsidisation of the programmes.
Centralising the funding of these programmes would ensure proper distribution of resources.
38
Chapter 3
SETTING THE SCENE CORPORATE GOVERNANCE IN MALAYSIA
Chapter 3 Setting The Scene Corporate Governance In Malaysia
SETTING THE SCENE CORPORATE GOVERNANCE IN MALAYSIA

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.
41
1.
1.1
Background
Almost a 100 years after the entry of the first public-listed company in Malaysia, Kuala Kangsar Plantations Limited, the KLSE has now grown to have more than 700 companies listed on the Main Board and Second Board. 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 UK companies, in the post-NEP decades, two categories of companies have became dominant. The first category are the large privatised entities such as Tenaga Nasional, Telekom Malaysia, Petronas Dagangan, etc., while the second category comprises smallersized companies which are mainly owner-dominated enterprises, seeking new avenues for raising capital. The listing of small family-owned enterprises became almost de-rigueur after 1988, when the KLSE launched its Second Board to encourage smaller companies with good growth prospects to gain access to the capital market. Overnight, the owner-entrepreneur who used to be the alter-ego of his private company, now finds himself the director of a public-listed company subject to a web of regulatory requirements the significance of which, he neither understands nor appreciates. Throughout this period, the roles and responsibilities of directors, shareholders and auditors, as well as the relationships between them are governed mainly by company law. The statutory framework governing these roles, responsibilities and relationships were further strengthened with the subsequent introduction of rules and guidelines such as the Listing Requirements and SCs Policies and Guidelines on Issue/Offer of Securities, as well as the introduction of certain relevant provisions in the SCA. The same regulatory framework governed directors, shareholders, auditors, etc., of all public companies, notwithstanding their origins, size and level of maturity. While there are quite a number of public-listed companies which are well-governed and exhibit a relatively high standard of corporate governance, there have been, nevertheless, several instances of corporate abuse and in some cases breakdown, attributable in part to ineffective governance structures. Under difficult economic circumstances, corners were cut and rules were bent. Instances of abuse that have been extensively reported in the media include the following: Related party transactions and incidences of capricious decision making by corporate leaders; Asset shifting, as well as blatant and abusive conflict of interest transactions without proper disclosure by directors; and Poor financial management by directors.
1.2
1.3
1.4
1.5
1.6
These problems have been exacerbated in part by ineffectual enforcement, and in part by the presence of significant shareholders, i.e. shareholders whose holdings are such that they can exercise or influence the control of the company.
42
1.7
Various issues have also been thrown up in the context of enforcement, including issues pertaining to the autonomy of regulators to regulate, confusion over jurisdictional boundaries and the transparency of regulators in regulating the markets. In companies with significant shareholder presence, there is immense scepticism within the shareholding community about the ability of boards to represent the interests of all shareholders, especially in the context of related party transactions, as a result of abuses witnessed in recent times. This has resulted in a massive loss of confidence by investors in the Malaysian capital markets. The questions often asked have been Where were the directors?, Where were the regulators?. We have sought to answer these questions by taking a prospective look at corporate governance of companies, by making recommendations to clarify, and where necessary, strengthen the broad legal framework under which companies operate AND by making proposals for restructuring Malaysian boards, to strengthen their control over companies and ensure their accountability. In identifying the critical areas for change, the Committee has relied to some extent on feedback received from the KLSE/Price Waterhouse Joint Survey of Corporate Governance Practices in Malaysian Public-Listed Companies.1
1.8
1.9
1.10
1.11
2.
2.1
Overview of the legal framework

Malaysian corporate law is derived primarily from the CA, Companies Regulation 1966, the Listing Requirements, the Malaysian Code on Take-overs and Mergers, 1987 and are supplemented by the following legislation and regulatory directives the SIA, the SCA, the Guidelines for the Regulation of Acquisition of Assets, Mergers and Takeovers of Companies and Business (FIC Guidelines) and the SCs Policies and Guidelines on the Issue/Offer of Securities. These legislative provisions and regulatory rules co-exist with the provisions of common law and equity emanating from judicial decisions from Malaysian courts as well as Singapore, Australia, Canada, New Zealand and the UK. In this respect, almost every rule of corporate law and its practice are related to corporate governance. Some of the more pertinent areas are laws relating to the duties of directors and principal officers, shareholder remedies, shareholder participation at AGMs, disclosure obligations and the like.
2.2
2.3
See Appendix I.
43
Corporate law contribution to corporate governance 2.4 A consequence of incorporation is that a company is a separate legal entity with an existence independent of its members. It remains an artificial person; its policies can only be formulated and decided upon by individual human beings and can only be put to effect and carried out by human agencies. The company in this respect operates through two agencies the board of directors and shareholders at the general meeting. Historically, the primary corporate body for decision-making was the general meeting an assembly of the members, therefore the company- who made decisions. It soon became apparent that this form of decision-making was cumbersome and inefficient for routine administrative matters. The structure of these companies, therefore, evolved into a demarcation between the members and directors. The CA in recognition of the inconvenience associated with having to assemble shareholders together to debate upon every decision or to conduct business on a daily basis as well as the necessity for there to be a definite body of individuals upon whom the law can impose responsibility or enforce compliance with statutory provisions, makes it mandatory for all companies to have at least two directors2 . The members in meeting consider major policies and changes, and leave the daily conduct of the business to a group selected from amongst their ranks as directors. Directors are generally left unfettered in their actions, although they are mindful of the fact that they were still subject to the members in meeting. Today, despite the formal supremacy of the members in meeting, directors often prevail through control of the general meeting agendas and the electoral process3 . Broadly, there are four means by which powers are divided between the general meeting and the board common law, the memorandum and articles of association, the CA and in the case of listed entities, the Listing rules of the relevant Exchange. Of the four sources, the articles of association play the most significant role in determining the 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 Act and the articles of association generally, come into play in the absence of provisions in the 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 shareholders themselves or to require shareholder approval6 . From the corporate governance view point, two things need to be noted. Between the company and the board and the officers, there is a relationship akin to agency, but there is none between the company and its members. The relationship between the company and its members is essentially a contractual relationship set out in the articles and memorandum of the company.
2.5
2.6
2.7
2.8
2.9
2.10
(s122 of the CA). Redmond, Paul, Companies and Securities Laws Commentary and Materials, 2nd ed.,p.229 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.
3 4
44
2.11
In respect of general meetings, the CA requires all companies to hold an AGM7 where the profit and loss account, balance sheet, auditors and directors report must be presented. It sets out the requirement to send out a notice of meeting which provides a series of resolutions for approval by members. Bearing in mind that broad powers are conferred by the articles on the board, the law then regulates the conduct of directors by imposing on them extensive duties which include 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 civil and criminal penalties. In this respect, the directors basic duty expressly provides that: A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office Section 132 CA
2.12
2.13
The Act does not, however, set out the functions of the board. These are essentially provided for in the articles of a company. Shareholder rights
2.14
Ownership of shares in a company, confers on shareholders several basic rights, which are 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 misappropriation by directors, managers and controlling shareholders;13 and The right to enforce these rights;14
Section 143. 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 for securities of companies listed with the KLSE to be deposited with the Malaysian Central Depository. Section 107B CA provides that any name that appears on the record of depositors, maintained by the Malaysian Central Depository under the SICDA is deemed a member of the company. Crucially, any rectification of the register of depositors must be taken to Court and the Courts discretion to rectify is limited to the circumstances set out in section 107(2) CA. 10 See section 98 CA. 11 The CA guarantees a shareholders right to vote on the election of directors, on amendments to the constitutional documents of the company and on key corporate transactions which include transactions where an insider has an interest in the transaction, sale of all or a substantial part of the companys assets, mergers and liquidations. In this respect, the one-share-one-vote rule is entrenched and observed strictly in Malaysia. Section 55 CA provides that in the case of public companies and their subsidiaries, each equity share (and this includes preference shares with voting rights) may carry only one vote, thereby prohibiting the existence of both multiple voting and non-voting ordinary shares and does not allow companies to set a maximum number of votes per shareholder in relation 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 requisition a general meeting. Any expenses incurred in calling a meeting are to be reimbursed by the company. Shareholders also have an independent 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 controlling shareholders. 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 and section 218 the right to petition a winding up order against the company) and common law. There are three forms of action that are capable 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.
8
45
Regulating the conduct of directors 2.15 The efficacy of the governance mechanism depends on whether shareholders can monitor directors. This is a concern with respect to minority shareholders. Majority shareholders can always call a meeting to remove directors. The law attempts to impose a check on the powers of directors by specifically reserving certain powers in the general meeting e.g. the power to alter the companys constitution, the power to remove directors, and by providing shareholders the avenue to enforce their rights in court. There are, nevertheless, limitations on shareholder action. Shareholder remedies through common law and statute are not without problems. Court actions are generally costly and time consuming. As a result, investors find it easier to cut their losses through sale rather than be entangled in court litigation. And while there is a discernible trend in Malaysia to increase the range of matters requiring the approval of the general meeting, the general meeting is generally regarded as 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 most cases will not attend general meetings, unless their investment has proved to be so disappointing that they use that opportunity to tell management what they think of it. But aside from the fact that this may operate as a mild deterrent against directorial excesses (for directors of public-listed companies will not relish the prospect of facing embarrassing questions from shareholders at AGMs), as a means of making the board answerable to an informed membership or of ensuring that members have an effective veto 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 difficulties posed by ownership concentration and the issue of fair treatment of minority shareholders. There are a number of provisions in our laws that are designed to curb abusive behaviour by controlling shareholders. These range from provisions requiring disclosure of ownership, shareholder approval of transactions in circumstances where the controlling shareholders have an interest in the transaction and absolute prohibition in respect of certain transactions. Proposals have been made in Chapter 6 of this report to strengthen controls against misuse or misappropriation by controlling shareholders, which include the imposition of a duty of fair dealing on controlling shareholders and some strengthening of the laws on 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 ameliorate deficiencies in legal structures. The recommendations of the codes are directed principally
2.16
2.17
2.18
2.20
46
at boards of public-listed companies. In particular, they make best practices prescriptions relating to the presence of independent elements on the board, the use of board committees, relationship with management, training of directors, and how boards should appraise their own performance. These essentially relate to the composition and workings of the board. 2.22 In the UK, the mix between self-regulation and formal regulation has in the past leaned more 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 influenced by common law have substantially strengthened the duties of company directors and shareholder 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 the appropriate balance and content of regulation. We essentially proceeded on the basis that there are aspects of corporate governance where statutory regulation is necessary and effective and others where self-regulation is more appropriate. For example, the responsibilities of directors, officers and other corporate participants need to be defined in law. The law reform proposals that we propose, essentially seek to clarify their duties in such a way that they are readily understood by these directors, officers and other corporate participants. However, the process or system of governance is harder to capture in legal terms. Issues such as the presence of independent elements on the board, the use of board committees, relationship with management, training of directors and how boards should appraise their own performance, all relate to the composition and workings of the board. These are difficult to legislate. The aim of the Code is to encourage disclosure and the provision of information to investors about board composition and structures, in order that investors can monitor the way the companies to which they have entrusted their funds are being run. Such a provision also affords companies a certain amount of flexibility in implementing the provision of the Code. In certain respects, we have chosen to opt for legislation where it was considered necessary to bring home to a wider public, the significance which the government attaches to preventing such conduct. A specific example, is in relation to the need to regulate abuses by controlling shareholders in respect of their right to vote. The Codes approach would have been to ensure that there are sufficient independent elements on the board to provide an effective check. We have instead, chosen additionally to take a direct approach by prohibiting such shareholders from voting in transactions that they are interested in. Our efforts, therefore, have involved a re-look of the entire regulatory structure - laws and best practices.
2.24
2.25
2.26
2.27
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.
15
47
Chapter 4
MEANING OF CORPORATE GOVERNANCE
Chapter 4 Meaning Of Corporate Governance
MEANING OF CORPORATE GOVERNANCE

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.
51
MEANING OF CORPORATE GOVERNANCE FOR MALAYSIA 1.

1.1
The definition
The definition of corporate governance that we propose is as follows:Corporate governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value, 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 just about accountability. Its importance lies in its contribution to both business prosperity and accountability. Business prosperity, however, cannot be dictated. To quote the Hampel report1 People, teamwork, leadership, enterprise, experience and skill produce prosperity. There is no single formula to weld all of these together and it is dangerous to encourage the belief that rules and regulations about structure will.
2.2
Accountability This is key to the legitimacy of the entire corporate system. Companies have power and the use of that power can only be legitimised through its exercise within an accepted governance framework. Accountability, by contrast, does require appropriate rules and regulations. The ultimate objective of directing and managing the business and affairs of the company is that of enhancing shareholder value. Ultimately, the owners of the business - the shareholders expect to receive an appropriate return on their investment. Notwithstanding the primary responsibility of the board to shareholders, the longer term interest of shareholders will not be well served, if the interests of other stakeholders are not addressed. Creating shareholder wealth in a market economy will usually be in the best interest of stakeholders generally.
2.3
2.4
Chapter 1, para 1.2 Final report of the Hampel Committee on Corporate Governance (January 1998)
52
Chapter 4 Meaning Of Corporate Governance
Structure and process 2.5 The definition acknowledges that the business and affairs of every company must be directed and managed. Direction and management are effected through a set of rules which creates the structure and are effected through a process directed at persons who have the power to direct and manage the business. The structure is created by the legal and administrative framework within which companies operate, including companies legislation, securities legislation, listing rules, the companies memorandum and articles of association, resolutions of the board and shareholders, laws of general application and community standards. The process refers to the system for decision making by the parties charged with directing and managing the business of a company and for making these decision-makers accountable.
2.6
2.7
53
Chapter 5
THE MALAYSIAN CODE ON CORPORATE GOVERNANCE
Chapter 5 The Malaysian Code On Corporate Governance
THE MALAYSIAN CODE ON CORPORATE 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).
57
SECTION 1
1.
1.1
The significance of a Code on Corporate Governance for Malaysia

We stress the importance of the Code as an initiative of the private sector. The need for a Code was inspired in part by a desire for the private sector to initiate and lead a review and to establish reforms of standards of corporate governance at a micro level. This is based on the belief that in some aspects, self-regulation is preferable and the standards developed by those involved may be more acceptable and thus more enduring. The Code essentially aims at setting out best practices on structures and processes that companies may use in their operations towards achieving the optimal governance framework. These structures and processes exist at a micro-level which include issues such as the composition of the board, procedures for recruiting new directors, remuneration of directors, the use of board committees, their mandates and their activities. The significance of the Code is that it allows for a more constructive and flexible response to raise standards in corporate governance as opposed to the more black and white response engendered by statute or regulation. It is in recognition of the fact that there are aspects of corporate governance where statutory regulation, is necessary and others where self-regulation, complemented by market regulation is more appropriate. 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 statutory code would have to focus on governance structure. Yet, more important than the structure is the way in which boards work within it and the quality of people who make it work. The impact the Code will have in raising standards of corporate governance can be seen from the experiences of other jurisdictions. To quote the Hampel Committee1, it is generally accepted that implementation of the Codes (Cadbury Code of Best Practices) provisions has led to higher standards of governance and greater awareness of their importance. it is clear that Greenburys primary aim - full disclosure - is being achieved.
1.2
1.3
1.4
1.5
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 committees recommendations2. Greater awareness of corporate governance issues is a first step towards good corporate governance. The level of awareness and attention generated by the Cadbury report has been phenomenal. The report has struck a chord internationally, and it has provided a yardstick against which standards of corporate governance are being measured.
1 2
Paragraph 1.8 and 1.9 Final report of the Hampel Committee on Corporate Governance 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?
58
1.7
Of significance, is the aspirational and evolutionary way in which codes influence the expectations of society, that are eventually reflected in the law. The attention generated on corporate governance issues has already had an impact on evolving judicial interpretations of directors duties. There is an increasing trend (internationally) to hold directors liable to a higher objective standard. The Australian case of Daniels v Anderson3 which deals with the tortious duty of care owed by directors, is a clear instance of non-executive directors being increasingly held to an objective standard of care. The English case of Dorchester Finance v Stebbings4, is another such example. The need for a code also results from economic forces and the need to re-invent the corporate enterprise, so as to efficiently meet emerging global competition. The worlds economies 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 by the year 2001 is such an example. Hence there is the need for companies to be more efficient and well-managed than ever before to meet existing and anticipated worldwide competition. The role of directors then increases in importance. The role of the board in hiring the right management, compensating, monitoring, replacing and planning the succession of senior management is crucial, as management undertakes the key responsibility for the enterprises efficiency and competitiveness. The role of the Code is to guide boards by clarifying their responsibilities, and providing prescriptions strengthening the control exercised by boards over their companies. In developing the Code we have been mindful of developments in other jurisdictions. We have endeavoured to keep the discussion at an international level. Standards developed for Malaysia must measure up to international thinking on this subject.
1.8
1.9
2.
2.1
Compliance
It must be recognised that no system of control, whether statutory or not, can eliminate the risk of fraud without shackling companies so as to impede their ability to compete in the market place. To be effective, the Code will require some form of backing. And therefore not unlike the approach in the UK and Canada it is proposed that the Code be backed by the listing rules of the KLSE. The proposed approach essentially calls for voluntary compliance with the Code coupled with a requirement in the listing rules which mandates disclosure of the extent of compliance with the best practice set out in the Code, while allowing for some flexibility in its implementation by companies. The aim of the Code is to encourage disclosure and provide information to investors in order that they can monitor 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 to hasten its widespread adoption, while allowing for some flexibility in implementation. The KLSE plays a key role in giving corporate governance a lead in Malaysia. Without the KLSEs authority behind the Code, through making disclosure of Code compliance a listing obligation, the Committees recommendations necessarily will only have limited impact.
2.2
2.3
3 4
(1995) 37 NSWLR 438 [1989] BCLL 498
59
2.4
The KLSE, or any Exchange for that matter, has advantages to reap from backing such a 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 geographical location immaterialThe competitive advantage for which stock exchanges around the world are aiming is that of a reputation for high standards of financial reporting and commercial probity. Those seeking to raise capital and those investing funds will turn to financial 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 respect the role of shareholders, namely institutional shareholders, to apply pressure to hasten the widespread adoption of the Code is essential. Shareholders should take a positive interest in the composition of the board of directors, with checks and balances and other governance-related issues to influence standards of corporate governance practised by 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 give the necessary lead. Compliance under the Malaysian Code
2.6
The recommendations set out in the Code are premised on a prescriptive approach to corporate governance. In this respect, the proposed Code sets out four forms of recommendations Principles Part 1 sets out broad principles of good corporate governance for Malaysia. The objective of principles is to allow companies to apply these flexibly and with common sense to the varying circumstances of individual companies. Companies will be required by the Listing Requirements to include in their annual report a narrative statement of how they apply the relevant principles to their particular circumstances. This is to secure sufficient disclosure so that investors and others can assess companies performance and governance practices, and respond in an informed way. Best practices in corporate governance Part 2 sets out best practices for companies. It identifies a set of guidelines or practices intended to assist companies in designing their approach to corporate governance. While compliance with these guidelines is not mandated, companies will be required as a provision of the listing rules of the KLSE to explain any circumstances justifying departure from such best practices. Exhortations to other participants Part 3 is not addressed to listed companies but to investors and auditors to enhance their role in corporate governance. These are purely voluntary. Explanatory notes and mere best practices Part 4 provides explanatory notes to the principles and best practices set out in Parts 1 and 2 and exhortations set out
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).
60
in Part 3. Additionally, Part 4 also sets out best practices directed at listed companies that do not require companies to explain circumstances justifying departure from best practices - mere best practices.
3.
3.1
Principal parties in corporate governance

The power for governing a company is allocated amongst the shareholders, the board of directors and management. The recommendations of the Committee under the Code is premised on the fact that good corporate governance rests firmly with the board of directors. Shareholders and auditors necessarily only play secondary roles. The board of directors is legally and practically charged with the responsibility of directing and managing the business of the company on behalf of the owners. The board delegates aspects of this responsibility to management. What are the aims of those who direct and manage companies? The single overriding objective by all listed companies, whatever the size or type of business, is the preservation and enhancement over time of their shareholders investment. All boards have this responsibility and their policies, structure, composition and governing processes should reflect this. At the same time, the company must develop relationships relevant to its success. These depend on the nature of the companys business; but they will include the interests of creditors, employees and customers. It is managements responsibility to develop policies that address these matters. However, in doing so they must have regard to the overriding objective of preserving and enhancing the shareholders investment over time. Broadly, the boards task is to approve appropriate policies and to approve the performance of management in implementing them. It is worth stressing, however, that the directors relationship with the shareholders is different in kind from their relationship with the other stakeholders interests. While directors as a board are responsible for relations with stakeholders, they are accountable to the shareholders. The policy considerations underlying such a definition of board responsibility 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 make decisions reflecting the best interests of the company and its owners. To define board responsibilities to act in the interests of a broader group than the companys shareholders would confuse board responsibilities and significantly undermine the accountability of the board. However, in making decisions to enhance shareholder value, boards must develop and sustain these stakeholder relationships. 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, shareholders cannot 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 and governance practices, and can and should hold the board accountable. In practice, however, the idea of shareholder democracy is difficult.
3.2
3.3
3.4
3.5
3.6
61
One issue that we have chosen to focus on relates to the relationship between the board and the controlling shareholders of a company. A distinguishing feature of the Malaysian corporate landscape is the number of public companies which have a significant shareholder, that is to say a shareholder whose holdings are such that it can exercise or influence the control of the company. Control is ultimately exercised by electing or influencing the election of the board of directors. Many Malaysian companies are members of groups of companies under the common influence of one shareholder or group of shareholders. A frequent result is related-party transactions within these groups of companies. We detect an immense degree of scepticism within the shareholder community about the ability of directors to represent the interest of all shareholders in the context of a related-party transaction. We also detect an extension of this scepticism to the ability of boards to effectively represent the interests of all shareholders in other circumstances. One of the objectives of this Code has been to address the perceptions that give rise to this scepticism and to improve the contribution of directors to the governance of companies. 3.7 The statutory role of auditors is to provide shareholders with independent and objective assurance on the reliability of the financial statements and of certain other information provided by the company. This is a vital role; it justifies the special position of auditors under the CA. But, to quote the Hampel report, auditors do not have an executive role in 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. For these reasons it is clear that the responsibility for good corporate governance rests primarily with the board of directors. Shareholders and auditors can, therefore, necessarily only play secondary roles. The recommendations in the Code reflect this balance.
3.8
4.
4.1
The approach
There are three broad approaches to the issue of corporate governance that have been undertaken by jurisdictions around the world A prescriptive approach where the standard of corporate governance is set by specifying desirable practices coupled with a requirement to disclose compliance with them. For example, the London Stock Exchange adopts a standard best practice benchmark for all listed companies. A non-prescriptive approach This approach simply requires corporate governance practices in a company to be disclosed. The emphasis here is on the disclosure of actual corporate governance practices. The thinking behind this approach is that each companys corporate governance needs may be different and directors of companies should apply their minds to addressing these needs. The Australian Stock Exchange 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 all concerned should then apply these flexibly and with common sense to the varying
62
circumstances of individual companies. Good corporate governance is not just a matter of prescribing particular corporate structures and complying with a number of hard and fast rules. The need for principles surfaced from the review the Committee conducted of the Cadbury and Greenbury Codes, where the original intention of the committees has been largely ignored. To quote the Hampel report, Companies experience of the Cadbury and Greenbury codes has been rather different. Too often they believe that the codes have been treated as sets of prescriptive rules. The shareholders or their advisers would be interested only in whether the letter 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 corporate governance and more detailed guidelines like the Cadbury and Greenbury Codes. To quote the Hampel report6 , With guidelines, one asks, how far are they complied with?; with principles, the right question is How are they applied in practice? It was recommended that companies should include in the annual report and accounts a narrative statement of how they apply the relevant principles to their particular circumstances. 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 of corporate governance represents a key part of the process. The Hampel committee therefore recommended that the current requirement for companies to confirm compliance with Cadbury prescriptions should be superseded by a requirement to make a statement to show how they (i) apply the principles, and (ii) comply with the combined code7 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 Malaysian context for two reasons First, that best practice prescriptions are necessary. The work of the Committee has proceeded on the basis that standards of corporate governance in Malaysia are lacking and that there is a need to raise these standards. Therefore to go to the other extreme of merely requiring disclosure of existing corporate governance practices of Malaysian companies (such as that required by the Australian Stock Exchange in respect of its listed companies) is not sufficient. To take this route, one would have to be fairly comfortable with the standard of corporate governance practised in public listed companies. In this respect it is equally important that these prescriptions are accompanied by a rule requiring disclosure of the extent to which listed companies have complied with the prescriptions and where they have not, the reasons why. It is not proposed that companies should be required to comply strictly with the prescriptions developed. Each
4.4
4.5
6 7
Paragraph 2.1 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.
63
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 the prescriptions set the standard that companies must measure up to. Such a rule also ensures that the investment community receives an explanation for the companys approach to governance so that it is in a position to support the approach or work to influence change. 4.6 Second, that companies must nevertheless be encouraged to consciously address their governance needs. This was the thrust of the Cadbury report. But as alluded to earlier, the experience in the UK suggests that too often companies comply with the strict letter of the best practice prescriptions without regard to the spirit of it. The biggest problem with a prescriptive approach is that it would encourage directors to concentrate on form rather than on exercising their judgement on what corporate governance practices are best for their companies. Directors may then adopt a practice of ticking a series of boxes to indicate that they have complied with the prescribed best practices. This can be seized on as an easier option rather than the diligent pursuit of corporate governance objectives. Additionally, the checklist method of ticking every box may be perceived by investors as implying endorsement by the regulator9 of the companys corporate governance practices. Shareholders or their advisers would be interested only in whether the letter of the rule has been complied with yes or no. A yes would receive a tick. Perhaps most worrying is the fact pointed out by the Hampel committee that under such a box ticking system, it would not be difficult for lazy or unscrupulous directors or shareholders, to arrange matters so that the letter of every governance rule is complied with but not the substance. It might even be possible for the next disaster to emerge in a company with, on paper, a 100% record of compliance. The true safeguard for good corporate governance lies in the application of informed and independent judgement by experienced and qualified individuals executive and non-executive directors, shareholders and auditors. Box ticking is neither fair to companies, nor likely to be efficient in preventing abuse. We have the very real experience in Malaysia in the form of audit committees, where companies merely comply in form by setting up such committees without giving heed to the spirit of the requirement by ensuring, for example, the quality of the people within the committee. The Hampel recommendations seek to address this issue by requiring companies to include in the annual report a narrative account of how they apply the broad principles set 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 the companys performance and governance practices, and can respond in an informed way.
4.7
4.8
4.9
In this case the Exchanges
64
The recommendations 4.10 As alluded to above, the recommendations of the committee come in broadly four forms Principles Part 1 sets out broad principles of good corporate governance for Malaysia. The objective of principles is to allow companies to apply these flexibly and with common sense to the varying circumstances of individual companies. Companies will be required by the Listing Requirements to include in their annual report a narrative statement of how they apply the relevant principles to their particular circumstances. This is to secure sufficient disclosure so that investors and others can assess companies performance and governance practice, and respond in an informed way. Best practices in corporate governance Part 2 sets out best practices for companies. It identifies a set of guidelines or practices intended to assist companies in designing their approach to corporate governance. While compliance with these guidelines is not mandatory, companies will be required as a provision of the Listing rules of the KLSE to explain any circumstances justifying departure from best practice. In developing the best practices, we have relied on the breadth and experience of the committee members and of working group members. We have also had the benefit of the joint survey conducted by Price Waterhouse and the KLSE which provided valuable insight into board composition, structure and organisation, 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 but to investors and auditors. These are entirely voluntary to enhance their role in corporate governance. Explanatory notes and mere best practices Part 4 provides explanatory notes to the principles and best practices set out in Parts 1 and 2 and exhortations in Part 3. Additionally Part 4 also sets out best practices that do not require companies to explain 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 listed companies on the KLSE.
65
Statement of compliance 5.2 It is proposed that all listed companies reporting in respect of years ending after the implementation date of the report should state in the reports and accounts how they have applied the principles set out in Part 1 of the Code and a statement of compliance in respect of the best practices set out in Part 2 and identify or give reasons for any areas of non-compliance. In this respect, boards are not expected to comment separately on each item of the Code with which they are complying, but areas of non-compliance will have to be dealt with individually. The committee recognises that smaller listed companies may initially have difficulty in complying with some aspects of the Code. The boards of smaller listed companies who cannot, for the time being comply with parts of the Code should note that they may instead give reasons for non-compliance. Sanctions for non-disclosure 5.4 Where a company fails to comply with the mandatory disclosure requirements under the Listing rules, it is open to the Exchange to take any action against the listed entity or its 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 immediate attention. The situation however is developing. We believe that a successor committee should be appointed in 2 years to monitor developments in corporate governance, and to review the continued relevance of the recommendations in the Code. This effort should be led by the industry as it is important for the corporate sector to prove to investors, other stakeholders and the public sector that the governance of companies is a top priority.
5.3
5.6
66
SECTION 2
THE PROPOSED MALAYSIAN CODE ON CORPORATE GOVERNANCE

PART 1
A
PRINCIPLES OF CORPORATE GOVERNANCE
Directors
I The Board. Every listed company should be headed by an effective board which should lead and control the company. Board Balance. The board should include a balance of executive directors and non-executive directors (including independent non-executives) such that no individual or small group of individuals can dominate the boards decision making. Supply of Information. The board should be supplied in a timely fashion with information in a form and of a quality appropriate to enable it to discharge its duties. Appointments to the Board. There should be a formal and transparent procedure for the appointment of new directors to the board. Re-election. All directors should be required to submit themselves for reelection at regular intervals and at least every three years.
II
III
IV
Directors Remuneration
I The Level and Make-up of Remuneration. Levels of remuneration should be sufficient to attract and retain the directors needed to run the company successfully. The component parts of remuneration should be structured so as to link rewards to corporate and individual performance, in the case of executive directors. In the case of non-executive directors, the level of remuneration should reflect the experience and level of responsibilities undertaken by the particular non-executive concerned. Procedure. Companies should establish a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. Disclosure. The companys annual report should contain details of the remuneration of each director.
II
III
67
Shareholders
I Dialogue between Companies and Investors. Companies and institutional shareholders should each be ready, where practicable, to enter into a dialogue based on the mutual understanding of objectives. The AGM. Companies should use the AGM to communicate with private investors and encourage their participation.
II
Accountability and Audit

I Financial Reporting. The board should present a balanced and understandable assessment of the companys position and prospects. Internal Control. The board should maintain a sound system of internal control to safeguard shareholders investment and the companys assets. Relationship with the Auditors. The board should establish formal and transparent arrangements for maintaining an appropriate relationship with the companys auditors.
II
III
68
PART 2
AA
BEST PRACTICES IN CORPORATE GOVERNANCE
The Board of Directors

I Principal responsibilities of the Board The board should explicitly assume the following six specific responsibilities, which facilitate the discharge of the boards stewardship responsibilities: Reviewing and adopting a strategic plan for the company; Overseeing the conduct of the companys business to evaluate whether the business is being properly managed; Identifying principal risks and ensure the implementation of appropriate systems to manage these risks; Succession planning, including appointing, training, fixing the compensation of and where appropriate, replacing senior management; Developing and implementing an investor relations programme or shareholder communications policy for the company; and Reviewing the adequacy and the integrity of the companys internal control systems and management information systems, including systems for compliance with applicable laws, regulations, rules, directives and guidelines.
Constituting an effective board II Chairman and Chief Executive Officer There should be a clearly accepted division of responsibilities at the head of the company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the roles are combined there should be a strong independent element on the board. A decision to combine the roles of Chairman and Chief Executive should be publicly explained. Board balance Non-executive directors should be persons of calibre, credibility and have the necessary skill and experience to bring an independent judgement to bear on the issues of strategy, performance and resources including key appointments and standards of conduct. To be effective, independent non-executive directors need to make up at least one third of the membership of the board.
III
Size of non-executive participation IV In circumstances where a company has a significant shareholder, in addition 1 to the requirement that _ of the board should comprise independent directors, 3 the board should include a number of directors which fairly reflects the investment in the company by shareholders other than the significant shareholder. For this purpose, a significant shareholder is defined as a shareholder with the ability to exercise a majority of votes for the election of directors.
69
In circumstances, where the shareholder holds less than the majority but is still the largest shareholder, the board will have to exercise judgment in determining what is the appropriate number of directors which fairly reflects the investment in the company by the remaining holders of the shares.
1 The board should disclose on an annual basis whether _ of the board is 3 independent and in circumstances where the company has a significant shareholder, whether it satisfies the requirement to fairly reflect through board representation, the investment of the minority shareholders in a company. The board should disclose its analysis of the application of the best practices set out above, to the circumstances of the board.
VI
VII
Whether or not the roles of Chairman and Chief Executive are combined, the board should identify a senior independent non-executive director of a board in the annual report to whom concerns may be conveyed. Appointments to the board The board of every company should appoint a committee of directors composed exclusively of non-executive directors, a majority of whom are independent, with the responsibility for proposing new nominees for the board and for assessing directors on an on-going basis. The actual decision as to who shall be nominated should be the responsibility of the 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 by the shareholders or the board. Consider, in making its recommendations, candidates for directorships proposed by the Chief Executive Officer and, within the bounds of practicability, by any other senior executive or any director or shareholder. Recommend to the board, directors to fill the seats on board committees.
VIII
IX
The board, through the nominating committee, should annually review its required mix of skills and experience and other qualities, including core competencies which non-executive directors should bring to the board. This should be disclosed in the annual report. The board should implement a process, to be carried out by the nominating committee annually for assessing the effectiveness of the board as a whole, the committees of the board and for assessing the contribution of each individual director. Boards should be entitled to the services of a company secretary who must ensure that all appointments are properly made, that all necessary information is obtained from directors, both for the companys own records and for the purposes of meeting statutory obligations, as well as obligations arising from the Listing rules of Exchanges or other regulatory requirements.
XI
70
XII
Size of boards Every board should examine its size, with a view to determining the impact of the number upon its effectiveness. Directors Training As an integral element of the process of appointing new directors, each company should provide an orientation and education program for new recruits to the board.
XIII
Board structures and procedures XIV The board should meet regularly, with due notice of issues to be discussed and should record its conclusions in discharging its duties and responsibilities. The board should disclose the number of board meetings held a year and the details of attendance of each individual director in respect of meetings held. The board should have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the company is firmly in its hands.
XV
Relationship of the board to management XVI The board, together with the Chief Executive Officer, should develop position descriptions for the board and for the Chief Executive Officer, involving definition of the limits to managements responsibilities. In addition, the board should approve, or develop with the Chief Executive Officer, the corporate objectives, which the Chief Executive Officer is responsible for meeting. Quality of information The board should receive information that is not just historical or bottom line and financial-oriented but information that goes beyond assessing the quantitative performance of the enterprise and looks at other performance factors such as customer satisfaction, product and service quality, market share, market reaction, environmental performance and so on, when dealing with any item on the agenda.
XVII
XVIII The chair of the board shall undertake primary responsibility for organising information necessary for the board to deal with the agenda and for providing this information to directors on a timely basis. If the chair is also the Chief Executive Officer, the board should also have in place a procedure to ensure that its agenda items are placed on the agenda and for providing this information to directors. XIX Access to information Directors should have access to all information within a company whether as a full board or in their individual capacity, in furtherance of their duties. Access to advice There should be an agreed procedure for directors, whether as a full board or in their individual capacity, in furtherance of their duties to take independent professional advice at the companys expense, if necessary. All directors should have access to the advice and services of the company secretary.
XX
XXI
71
XXII
Directors should appoint as secretary someone who is capable of carrying out the duties to which the post entails and their removal should be a matter for the board as a whole. The board should recognise that the Chairman is entitled to the strong and positive support of the company secretary in ensuring the effective functioning of the board.
XXIII Use of board committees Where the board appoints a committee, it should spell out the authority of the committee, and in particular, whether the committee has the authority to act on behalf of the board or simply has the authority to examine a particular issue and report back to the board with a recommendation. XXIV Remuneration committees Boards should appoint remuneration committees, consisting wholly or mainly of non-executive directors, to recommend to the board the remuneration of the executive directors in all its forms, drawing from outside advice as necessary. Executive directors should play no part in decisions on their own remuneration. Membership of the remuneration 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 own remuneration.
BB

The audit committee I The board should establish an audit committee of at least three non-executive directors, a majority of whom are independent, with written terms of reference which deal clearly with its authority and duties. The Chairman of the audit committee should be an independent non-executive director. The duties of the audit committee should include the following:(i) (ii) To consider the appointment of the external auditor, the audit fee and any questions of resignation or dismissal; To discuss with the external auditor before the audit commences, the nature and scope of the audit, and ensure co-ordination where more than one audit firm is involved;
II
(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 legal requirements.
72
(iv) To discuss problems and reservations arising from the interim and final audits, and any matter the auditor may wish to discuss (in the absence of management where necessary); (v) To review the external auditors management letter and managements response;
(vi) Where an internal audit function exists, to ensure that it is adequately resourced and has appropriate standing within a company, and to review the internal audit programme. (vii) To consider any related party transactions that may arise within the company or group; (viii) To consider the major findings of internal investigations and managements 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 audit committee. However, at least once a year the committee shall meet with the external auditors without executive board members present. The audit committee must have explicit authority to investigate any matter within its terms of reference, the resources which it needs to do so and full access to information. The committee should be able to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary. The audit committee should meet regularly, with due notice of issues to be discussed and should record its conclusions in discharging its duties and responsibilities. The board should disclose in an informative way, details of the activities of audit committees, the number of audit meetings held a year and details of attendance of each individual director in respect of meetings.
IV
VI
CC
Shareholders
The relationship between the board and shareholders I Boards must maintain an effective communications policy that enables both the board and management to communicate effectively with its shareholders, stakeholders and the public generally. This policy must effectively interpret the operations of the company to the shareholders and must accommodate feedback from shareholders, which should be factored into the companys business decisions.
73
PART 3
PRINCIPLES AND BEST PRACTICES FOR OTHER CORPORATE PARTICIPANTS

Shareholder Voting. Institutional shareholders have a responsibility to make considered use of their votes. Dialogue between Companies and Investors. Institutional investors should encourage direct contact with companies including constructive communication with both senior management and board members about performance, corporate governance and other matters affecting shareholders interest. Evaluation of Governance Disclosures. When evaluating companies governance arrangements, particularly those relating to board structure and composition, institutional investors and their advisers should give due weight to all relevant factors drawn to their attention. External Auditors. The external auditors should independently report to shareholders in accordance with statutory and professional requirements and independently assure the board on the discharge of its responsibilities under D.I and D.II above in accordance with professional guidance.
II
III
IV
74
PART 4
EXPLANATORY NOTES
PRINCIPLES OF CORPORATE GOVERNANCE

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

I The Board. Every listed company should be headed by an effective board which should lead and control the company.
4.1
This endorses the unitary board structure for Malaysian companies. It stresses the dual role of the board - leadership and control - and the need to be effective in both. Within the context of a Malaysian board, this means a board made up of a combination of executive directors, who with their intimate knowledge of the business take on primary responsibility for leadership of the company and non-executive directors, who can bring a broader view to the companys activities, under a Chairman who accepts the duties and responsibilities that the post entails. A crucial pre-requisite to creating an effective board is the explicit assumption by the board of its principal responsibilities, which facilitate the discharge of the boards stewardship responsibilities. II Board Balance. The board should include a balance of executive directors and non-executive directors (including independent non-executives) such that no individual or small group of individuals can dominate the boards decision making.
4.2
This highlights the need to avoid the board being dominated by one individual. It is important that there should be a sufficient number of independent directors who are not only independent but seen to be independent; and that these individuals should be able both to work co-operatively with their executive colleagues and to demonstrate objectivity and robust independence of judgement when necessary. The risk is perhaps greatest where the roles of Chairman and Chief Executive are combined. It is here that the presence of a sufficient number of independent directors is crucial. III Supply of Information. The board should be supplied in a timely fashion with information in a form and of a quality appropriate to enable it to discharge its duties.
4.3
Information is power. The effectiveness of non-executive directors (indeed, of all directors) 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 information from the company, relevant to the proposed board decision. There should be procedures in place to ensure that the board is supplied in a timely fashion with information.
75
IV
Appointments to the Board. There should be a formal and transparent procedure for the appointment of new directors to the board.
4.4
The boards process for assessing existing directors and identifying, recruiting, nominating, appointing and orienting new directors is central to enhanced governance. This function can be performed by the board as a whole. But we endorse the view that the adoption of a formal procedure for appointments to the board, with a nomination committee making recommendations to the full board, should be recognised as good practice. This is dealt with in more detail in Part 2. V Re-election. All directors should be required to submit themselves for reelection at regular intervals and at least every three years.
4.5
We endorse the view that it is the boards responsibility to appoint new directors and the shareholders responsibility to re-elect them. Re-election at regular intervals not only promotes effective boards but affords shareholders the opportunity to review the directors performance in turn and where necessary, to replace them. This is consistent with Rule 309 of the Listing Requirements which requires that a public listed company must have provisions in its articles of association for election of directors to take place every year.10 The Listing Requirements go on to require all directors, except the managing director, to retire from office once at least in each three years, but shall be eligible for reelection. This principle goes beyond the listing rule by including the managing director to submit himself for re-election at least every three years.
B
4.6
Directors Remuneration
Directors remuneration should be embraced in the corporate governance process; the way in which directors remuneration is handled can have a damaging effect on a companys public reputation, and on morale within the company. We suggest the following broad principles I The Level and Make-up of Remuneration. Levels of remuneration should be sufficient to attract and retain the directors needed to run the company successfully. The component parts of remuneration should be structured so as to link rewards to corporate and individual performance, in the case of executive directors. In the case of non-executive directors, the level of remuneration should reflect the experience and level of responsibilities undertaken by the particular non-executive concerned.
4.7
This wording makes it clear that those responsible should consider the remuneration of each director individually, and should do so against the needs of the particular company for talent at board level at the particular time. The remuneration of executive directors should be linked to performance while the remuneration of non-executives should be linked to their experience and level of responsibilities undertaken. II Procedure. Companies should establish a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors.
10
Articles 63-66 Table A of the CA contain provisions relating to retirement by rotation.
76
4.8
Whatever the procedure, directors, whether executive or non-executive, should not participate in decisions on their own remuneration packages. III Disclosure. The companys annual report should contain details of the remuneration of each director.
4.9
Investor concern on remuneration practices in Malaysia is not at the level that it is in the United Kingdom, Australia and the United States. Nevertheless this disclosure requirement recognises and promotes important principles of fairness and accountability. Also, this principle implies that the report would be in the name of the board, rather than of the remuneration committee. The companys annual report should therefore contain the details of remuneration of each director. Standards should be set which provide a rational and objective remuneration policy. For example, the objective of determining remuneration for a director might be to ensure that the company attracts and retains the directors needed to run the company successfully or linking remuneration rewards to corporate and individual performance.
4.10
Shareholders
I Dialogue between Companies and Investors. Companies and institutional shareholders should each be ready, where practicable, to enter into a dialogue based on the mutual understanding of objectives.
4.11
This gives general endorsement to the idea of dialogue between companies and major investors. II The AGM. Companies should use the AGM to communicate with private investors and encourage their participation.
4.12
Private investors are able to make little contribution to corporate governance. The main way of achieving greater participation is through improved use of the AGM. We discuss a number of suggestions for this purpose in Part 2 of the Code.

I Financial Reporting. The board should present a balanced and understandable assessment of the companys position and prospects.
4.13
This follows the Cadbury Code. It is not limited to the statutory obligation to produce financial statements. The wording refers mainly to the annual report to shareholders, but the principle also covers interim and other price-sensitive public reports and reports to regulators.
77
II
Internal Control. The board should maintain a sound system of internal control to safeguard shareholders investment and the companys assets.
4.14
This covers not only financial controls but operational and compliance controls, and risk management, since there are potential threats to shareholders investment in each of these areas. III Relationship with the Auditors. The board should establish formal and transparent arrangements for maintaining an appropriate relationship with the companys auditors.
4.15
The duties of the audit committee required by the Listing Requirements should include keeping under review the scope and results of the audit and its cost effectiveness, and the independence and objectivity of the auditors.
78
PART 2
BEST PRACTICES IN CORPORATE GOVERNANCE
The enumerated text below (e.g. I,II, III) represents best practice benchmarks as set out in Part 2 of the Code. Part 2 is directed at boards of listed companies. Boards are required to justify significant variances with the best practices set out here, in the annual report. Boards are not expected to comment separately on each item of best practice with which they are complying but areas of non-compliance will have to be dealt with individually. Other best practice recommendations (mere recommendations) may be found in the text of the discussion below. Boards are not required to justify significant variances with mere best practices in the annual report. These are italicised and in bold for ease of reference.
AA
4.16

The key to good governance lies in getting the right board in place. A company with a properly balanced board and effective independent directors should be left to run its business, with the board being accountable for its stewardship. Our analysis of the role of the board involves a discussion of the responsibilities of the board, the constitution of the board and the structures and processes within the board. Boards should assume responsibility over all of the principal responsibilities set out below to effectively lead and control the company. I Principal responsibilities of the Board The board should explicitly assume the following six specific responsibilities, which facilitate the discharge of the boards stewardship responsibilities. Reviewing and adopting a strategic plan for the company Modern organisational theory posits that defining a corporate goal or mission and defining the strategy to achieve it, are integral to corporate success. The leadership for this process comes from management. Management have the primary responsibility for articulating strategy because they have the greatest knowledge of the firm and its competetive environment and they ultimately execute the plan. The role of the board is clear in that they are to review, approve or disapprove managements proposal. In doing so they should bring an objectivity and breadth of judgement to the strategic planning process as they are not involved in the day to day management of the business. If the board is to independently judge the merits of a managements proposal concerning strategic or business plans, boards need to evaluate elements which should be taken into account in the process of creating the strategic plan for the company. These elements vary from company to company, but generically they include factors such as the existing and potential rivals of a company; the companys external environmental factors (economic, social and political); and the internal characteristics of an organisation (goals, assets, liabilities and structure).11 The board should properly satisfy itself that management has taken into account all the appropriate elements.
4.17
11
Sharon Oster, Modern Competitive Analysis (2nd Ed., 1994)
79
The board is also responsible for monitoring managements success in implementing the strategy. In this respect it should identify and understand the benchmarks that will inform it of the plans progress after implementation. Overseeing the conduct of the companys business to evaluate whether the business is being properly managed A basic function of the board is to oversee the performance of management to determine whether the business is being properly managed. The boards obligation to oversee the performance of senior management does not imply an antagonistic relationship between the board and the executives. Rather it contemplates a collegial relationship that is supportive yet watchful. In this respect the board must ensure that there are, objectives in place against which managements performance can be measured. Identifying principal risks and ensure the implementation of appropriate systems to manage these risks The board must understand the principal risks of all aspects of the business that the company is engaged in and recognising that business decisions require the incurrence of risk. The target is to achieve a proper balance between risks incurred and potential returns to shareholders. This requires boards to ensure that there are in place systems that effectively monitor and manage these risks with a view to the long term viability of the company. Succession planning, including appointing, training, fixing the compensation of and where appropriate, replacing senior management; This reflects the fact that the board functions through delegation to management. The board must ensure management of the highest calibre in appointing, training, assessing and providing for succession. The key to the effective discharge of this job is to provide for the best Chief Executive Officer for the job as the Chief Executive Officer is the companys business leader. The board will assess the Chief Executive Officers performance against the objectives established by the board in cooperation with the Chief Executive Officer and will assess his or her contribution on corporate strategy. The board must also be satisfied that there are programmes in place to train and develop management and must also provide for the orderly succession of management. Developing and implementing an investor relations programme or shareholder communications policy for the company; and The responsibility of the board here is to ensure that the company has in place a policy to enable the company to communicate effectively with its shareholders, other stakeholders and the public generally. The policy should ensure that it effectively interprets the operations of the company to the shareholders and must accommodate feedback from shareholders, which should be factored into a companys business decisions.
80
Reviewing the adequacy and the integrity of the companys internal control systems and management information systems, including systems for compliance with applicable laws, regulations, rules, directives and guidelines. This is a responsibility that firmly rests in the hands of the board. The results of the survey indicate that the majority of boards of Malaysian public-listed companies do not consider themselves ultimately responsible for ensuring that an effective system of internal control is in place. Boards have to ensure that there is a satisfactory framework of reporting on internal financial controls 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 crucial issues in corporate governance. Every public-listed company should be headed by an effective board which can both lead and control the business. Within the context of a unitary 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 companys activities, under a Chairman who accepts the duties and responsibilities that the post entails. The discussion here relates to the constitution of the board which is both capable of exercising independent judgement and which is perceived as capable of exercising independent judgement. II Chairman and Chief Executive Officer. There should be a clearly accepted division of responsibilities at the head of the company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the roles are combined there should be a strong independent element on the board. A decision to combine the roles of Chairman 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 board and the executive responsibility for the running of the companys business. In respect of the 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 that directors, especially non-executive directors receive timely, relevant information tailored to their needs and that they are properly briefed on issues arising at board meetings; and ensuring that executive directors look beyond their executive function and accept their full share of responsibilities of governance. The Chief Executives task is to run the business and implement the policies and strategies adopted by the board.
81
4.20
The Chairmans role in securing good corporate governance is crucial. Given the importance and particular nature of the Chairmans role, it should in principle be separate from that of the Chief Executive. If the two roles are combined in one person, it represents a considerable concentration of power. One issue that surfaces in the Malaysian context in respect of the role of the Chairman is 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 consensus more 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 role of the independent Chairman becomes crucially important in two respects. First, he should encourage a healthy debate on the issue and bring to the board a healthy level of scepticism and independence. Second, he should ensure that every board resolution is put to a vote to ensure that it is the will of the majority and not that of the 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 independent judgement to bear on the issues of strategy, performance and resources including key appointments and standards of conduct. To be effective, independent non-executive directors need to make up at least one third of the membership of the board.
4.21
4.22
The calibre of non-executive members of the board is of special importance in setting and maintaining standards of corporate governance. Non-executive directors are appointed onto boards for various reasons to make positive contribution as equal board members to the development of the companys strategy; to tap on their skills and expertise derived from their diverse backgrounds12, to represent their interests on the board in the case of substantial shareholders and to provide a balanced and independent view onto the board. However, a special quality that non-executive directors, particularly independent non-executive directors, should bring to board deliberations is that of independence of judgement. Hence the requirement that independent non-executive directors need to make up at least one third of the membership of the board. This recognises that there may be non-executive directors who are not independent who may 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 as follows The composition of the board of directors should reflect the ownership structure of the company. Every listed company should have independent directors, that is, directors that 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.
82
concentrated or family holdings of its shares; who, in the view of the companys board of directors, represent the interests of public shareholders, and are free of any relationship that 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 practicable to lay a more precise criteria of independence.13 It should be for the board to take a view as to whether a particular director is independent in the above sense. The corollary is directors should be prepared to disclose in the annual report as well as in the notice of meetings embodying the resolution for their re-election, which of the directors are considered to be independent and prepared to justify their view if challenged. Second, the term independence refers to two crucial aspects independence from management and independence from a significant shareholder. The concept of independence varies from country to country. The Cadbury definition of independence essentially focuses on independence from management. This reflects the shareholding structure of companies in the UK where it typically involves a separation of management and control. Therefore, efforts are generally directed towards strengthening controls over management. The TSE Committee report on the other hand, requires two types on independent elements on the board. First, the concept of unrelated directors who are essentially directors independent of management. The second type of independent element that was considered necessary by the TSE Committee essentially relates to independence from a significant or controlling shareholder. The purpose of this constraint on the significant shareholders ability to elect the board, is to ensure in general terms that there is a component of the board, at least in numbers, generally reflecting the investment of the public or the minority shareholder in the company, which is not related to either the significant shareholder or the company. The Listing Requirements definition of independent similarly requires independence from concentrated and family holdings of shares. Size of non-executive participation 4.26 Even where an independent non-executive chooses to take a stand against management he is 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. The number of independent non-executives is significant and it should be such that their views will carry significant weight in board decisions. There are divergent views internationally on the size and number of independent nonexecutive directors on the board. The Cadbury Committee suggested that there be at least three non-executive directors on the board of which a majority should be independent. The Hampel Committee were of the opinion that if non-executive directors 1 are to be effective on the board, they should make up not less than _ of the board, again 3
4.25
4.27
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. The Hampel 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 an individual director is independent in the above sense. The TSE Committee report adopts a similarly imprecise definition.
13
83
a majority of which should be independent. The Report of the TSE Committee on Corporate Governance in Canada, proposes as a Guideline that every board should be constituted 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 of independent non-executive directors (average number 2.6), non-executive directors (average number 2.6) and executive directors (average number 2.5). The average board size was found to be 8 persons. On average therefore independent non-executive 1 directors constitute about _ of the board. This is the methodology by which the committee 3 arrived at this prescription. The committee preferred this approach as opposed to that of prescribing a figure because the figure must correspond to the board size and in this respect the size of companies listed on the KLSE and, therefore, their board sizes vary 1 significantly. The requirement that _ of the board must be independent takes into account 3 the varying board sizes of these companies. IV In circumstances where a company has a significant shareholder, in addition 1 to the requirement that _ of the board should comprise independent directors, 3 the board should include a number of directors which fairly reflects the investment in the company by shareholders other than the significant shareholder14 . For this purpose, a significant shareholder is defined as a shareholder with the ability to exercise a majority of votes for the election of directors.
4.29
This recommendation introduces a form of proportional representation. For example, if 2 2 the significant shareholder holds shares representing _ of the equity and _ of the votes 3 3 for the election of the directors of the company which has a board of 9 directors and which wishes to satisfy this best practice, the holder can elect up to 6 directors who have interests in or relationships with the significant shareholder. However this recommendation only extends to circumstances where the significant shareholder is also the majority shareholder, i.e. the shareholder able to exercise majority votes for the election of directors. It is not extended to cover situations where the significant shareholder holds less than the majority but is still the largest shareholder. V In circumstances, where the shareholder holds less than the majority but is still the largest shareholder, the board will have to exercise judgement in determining what is the appropriate number of directors which fairly reflects the investment in the company by the remaining holders of the shares.
4.30
4.31
1 If the proportional representation requirement is applied, the holder of _ of the shares 3 of the company with a 9 director board could only elect three directors not related to the holder. Proportional representation in this respect may compromise the ability of the significant shareholder to exercise control and execute his or her strategy for the company. Also, practically speaking, the committee found it impossible to believe that independent 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 not unlike ours where there are a number of companies which have a significant shareholder - a shareholder whose holdings are such that it can exercise or influence the control of the company.
84
amount of time thinking about the future of the company as would such a majority shareholder. In any case investors acquire shares in a company with a significant shareholder, generally aware of the shareholding and relying in many cases on the significant 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 determining what is the appropriate number of directors, which fairly reflects the investment in the company by the remaining holders of the shares. VI
1 The board should disclose on an annual basis whether _ of the board is 3 independent and in circumstances where the company has a significant shareholder, whether it satisfies the requirement to fairly reflect through board representation, the investment of the minority shareholders in a company. The board should disclose its analysis of the application of the best practices set 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, with checks and balances, and to the appointment of a core of non-executive directors of the necessary calibre, experience and independence. VII Whether or not the roles of Chairman and Chief Executive are combined, the board should identify a senior independent non-executive director of a board in the annual report to whom concerns may be conveyed.
4.34
This essentially adopts the recommendation by the Hampel committee. This applies even where the roles of Chairman and Chief Executive are separate in recognition that every board needs vigorously independent non-executive directors. There can, in particular, be occasions, when there is a need to convey concerns to the board other than through the Chairman and Chief Executive. Such a situation could arise where an autocratic Chairman is closely allied to a powerful Chief Executive. Although in such a situation the roles of Chairman and Chief Executive were separated, there would be a need for a mechanism whereby directors could take a concern to an identified independent figure. The identification of such a non-executive is generally regarded as an essential safety valve. It is not envisaged that such an individual would for this purpose need special responsibilities or an independent leadership role. VIII Appointments to the board The board of every company should appoint a committee of directors composed exclusively of non-executive directors, a majority of whom are independent, with the responsibility for proposing new nominees for the board and for assessing directors on an on-going basis. The actual decision as to who shall be nominated should be the responsibility of the 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 by the shareholders or the board. Consider, in making its recommendations, candidates for directorships proposed by the Chief Executive Officer and, within the bounds of practicability, by any other senior executive or any director or shareholder. Recommend to the board, directors to fill the seats on board committees.
85
4.35
The boards process for assessing existing directors and identifying, nominating, appointing and orienting new directors is central to enhanced governance. This function can be performed by the board as a whole but as a matter of best practice we recommend that this responsibility be delegated to a committee. The nomination committee removes from the Chief Executive Officer, the general responsibility for constituting the board. A director who is beholden to the Chief Executive Officer will have difficulty in acting independently, at least in assessing management. The nominating committee should not have the delegated power from the board to implement its recommendations but should be obliged to report its recommendations back to the full board for its consideration and implementation. This is in recognition of the importance of chemistry within 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, rather than secretive and confrontational, either in discussions between themselves or in their discussions with management. IX The board, through the nominating committee, should annually review its required mix of skills and experience and other qualities, including core competencies which non-executive directors should bring to the board. This should be disclosed in the annual report.
4.36
The board should at least annually identify the mix of skills and experience and other qualities it requires for it to function completely and efficiently. It is of course possible for a board to access particular skills and experience either within the company or from external advisers. However, depending on the companys business it is likely that there will be certain skills and experience which are so strategic and fundamental to success that they should exist at the board level itself and in particular amongst the independent directors. X The board should implement a process, to be carried out by the nominating committee annually for assessing the effectiveness of the board as a whole, the committees of the board and for assessing the contribution of each individual director.
4.37
Assessing the contribution of individual directors is not as assessment related to the performance of the company nor is it an assessment designed to relate director compensation to company performance. The assessment of directors is an examination of each individual directors ability to contribute to the effective decision making of the board. Each board will have its own approach to assessing its effectiveness and the contribution of members. In the latter respect companies should identify a criteria for individual contributions and should be willing to provide feedback to directors in respect of their individual performance. This process of assessment is necessary for it will make directors aware that their performance is being reviewed by their fellow directors and should enhance each directors contribution. The process may also provide constructive input to each individual director as to how he or she may better contribute to the functioning of the board. XI Boards should be entitled to the services of a company secretary who must ensure that all appointments are properly made, that all necessary information is obtained from directors, both for the companys own records and for the purposes of meeting statutory obligations, as well as obligations arising from the Listing rules of Exchanges or other regulatory requirements.
86
4.38
It is crucial that company secretaries undertake the task of handling all of the preparatory work that has to be completed and information that has to be gathered prior to the directors taking up their posts. This includes ensuring that the appointments are correctly made and that all relevant information that the company requires from directors are obtained. The amount of information required from new directors is vast. It covers information that is required for the companys own records, that which is required to meet statutory obligations and information for Exchanges and the regulators. Failure to provide this information speedily may result in fines and late filing penalties being imposed on directors, the company or both and in some cases criminal liability on directors. It is not just the company that requires information from its directors. If directors are to make a speedy and effective contribution, then they also require information. Company secretaries should be in a position to provide every new director with essential information that he will require to undertake his functions and such additional information as and when appropriate. In this respect, the relevant professional organisations should develop a best practices guide to provide a useful checklist for the more experienced company secretary to ensure that appointments are properly made and provide checklists of all information required from and by a new director. This will also act as an invaluable guide for the less experienced company secretary. XII Size of boards. Every board should examine its size, with a view to determining the impact of the number upon effectiveness.
4.39
4.40
4.41
The number of directors constituting a board is an important factor in determining the effectiveness of the board. The problem with boards that are too big is that the individual directors may feel constrained about actively participating in board decisions and hence have little sense of personal accountability. There also may be difficulty in individuals functioning within time constraints and their ability to make effective decisions. Some boards 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 responsibilities and perform those functions. XIII Directors Training As an integral element of the process of appointing new directors, each company should provide an orientation and education program for new recruits to the board.
4.42
The program could be a one or two day event which would involve educating the director as to the nature of the business, current issues within the company and the corporate strategy, the expectations of the company concerning input from directors, and the general responsibilities of directors. Some companies have developed orientation manuals. However, the manual is just a beginning. The program should include the opportunity to discuss with experts the responsibilities of a director and of the board as a whole as well as the opportunity to visit facilities and to meet with corporate officers to discuss and better understand the business which will allow the director to contribute effectively from the outset of the appointment.
87
4.43
It is equally important that directors should receive further training from time to time, particularly on relevant new laws and regulations and changing commercial risks. Number of Directorships
4.44
The committee concluded that it would not be practicable to prescribe a maximum number of directorships that a person should be entitled to hold. However, we recommend that the nominating committee in assessing the suitability of an individual to be elected to the board will take into account the individuals other commitments, 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 discussed and should record its conclusions in discharging its duties and responsibilities. The board should disclose the number of board meetings held a year and the details 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 full board meetings a year. While 5% of companies surveyed only held one. The Committee considered 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 meets less than four times. We recommend instead that the directors should be required to disclose the number of board meetings held a year and the details of the attendance of each individual director to enable shareholders to evaluate the commitment of a particular director to the affairs of the company. It is then for the shareholder to satisfy himself whether the board is in control of the company. XV The board should have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the company is firmly in its hands.
4.47
This acts as a safeguard against misjudgements and possible illegal practices. A schedule of 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 material to the company; Investments in capital projects, authority levels, treasury policies and risk management policies.
Boards should lay down rules to determine materiality for any transaction and should establish clearly which transactions require multiple board signatures. Boards should also agree on the procedures to be followed when exceptionally, decisions are required between 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.
88
Relationship of the board to management 4.48 Many of the responsibilities of the board are delegated by the board to management. A key principle to the effective functioning of the board is that it is able to function independently of management. There should be an adequate degree of independence and a process or practice in place to allow directors to meet and actively exchange views. In the absence of this ability, a board cannot effectively assess the direction of the company and the performance of management - one of the boards principal responsibilities. The chair or the committee or other director assigned this responsibility, is responsible for managing the processes of the board and for ensuring that the board discharges the responsibilities we have previously defined for it. Appropriate procedures may involve the board meeting on a regular basis without management present or may involve expressly assigning the responsibility for administering the boards relationship to management to a committee of the board. XVI The board, together with the Chief Executive Officer, should develop position descriptions for the board and for the Chief Executive Officer, involving definition of the limits to managements responsibilities. In addition, the board should approve, or develop with the Chief Executive Officer, the corporate objectives, which the Chief Executive Officer is responsible for meeting.
4.49
4.50
It is important for the board and management to undertake this exercise. The allocation should reflect the dynamic nature of the relationship necessary for the company to adapt to changing circumstances. There will be no one correct prescription for the allocation of responsibilities; it will depend on the circumstances of every company. The allocation of responsibility can be expressed by defining the limits to managements authority on the assumption that corporate action beyond this authority is the responsibility of the board. Position descriptions should also be prepared for the chair of the board. XVII Quality of information The board should receive information that is not just historical or bottom line and financial oriented but information that goes beyond assessing the quantitative performance of the enterprise and looks at other performance factors such as customer satisfaction, product and service quality, market share, market reaction, environmental performance and so on, when dealing with any item on the agenda.
4.51
This is a point stressed by the TSE Committee on corporate governance. We wish to underscore the importance of the board receiving information that is not just historical or bottom line and financial oriented. An effective board of directors will seek information that goes beyond assessing the quantitative performance of the enterprise and looks at other 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 organising information necessary for the board to deal with the agenda and for providing this information to directors on a timely basis. If the chair is also the Chief Executive Officer, the board should also have in place a procedure to ensure that its agenda items are placed on the agenda and for providing this information to directors.
89
4.52
All boards should specifically allocate the responsibility for setting the board agenda and for organising and circulating the information relevant to the agenda on a timely basis. XIX Access to information Directors should have access to all information within a company whether as a full board or in their individual capacity, in furtherance of their duties.
4.53
We endorse the view of the Cadbury report, when they say that the effectiveness of nonexecutive directors turns to a considerable extent on the quality of information that they 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 inside knowledge of the company of the executive directors, but they have the same right to information 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, whether as a full board or in their individual capacity, in furtherance of their duties to take independent professional advice at the companys expense, if necessary.
4.54
Occasions may arise when directors have to seek legal or financial advice in the furtherance of their duties. They should always be able to consult the companys advisers. If however they consider it necessary to take independent professional advice, it is recommended that they should be entitled to do so at the companys expense, through an agreed procedure laid down formally. To impose some discipline upon the engagement of outside experts, we recommend that the engagement by an individual director of an outside 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 company secretary.
4.55
The company secretary has a key role to play in ensuring that board procedures are followed regularly and are reviewed. It should be standard practice for company secretaries to administer, attend and prepare minutes of board proceedings. The proximity that a company secretary has to the board of directors also makes them the perfect candidate for undertaking an advisorial role in relation to the board in respect of compliance issues. This then follows through into a crucial role in encouraging compliance with the law. The Chairman will look to the company secretary for guidance to the board on what their responsibilities are under the rules and regulations to which they are subject and how those responsibilities should be discharged. The compliance advice should extend to embrace all laws and regulations and not merely the routine filing requirements and other administrative requirements of the CA. The Cadbury Committee considered it the role of the company secretary to advise the chairman and the board on the implementation of the Code of Best Practice. XXII Directors should appoint as secretary someone who is capable of carrying out the duties to which the post entails and their removal should be a matter for the board as a whole. The board should recognise that the Chairman is entitled to the strong and positive support of the company secretary in ensuring the effective functioning of the board.
4.56
90
4.57
The responsibility for ensuring that the secretary remains capable and any questions as to the secretarys removal should be a matter for the board as a whole. XXIII Use of board committees Where the board appoints a committee, it should spell out the authority of the committee, and in particular, whether the committee has the authority to act on behalf of the board or simply has the authority to examine a particular issue and report back to the board with a recommendation.
4.58
In addition to the audit committee, which is required to be established by the listing rules of the Exchange, typical issues to be delegated to committees of larger public companies will include Nominating directors, assessing the effectiveness of the board and the contribution of 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 the board. Smaller companies will have fewer committees with some of them having responsibility for more than one area of the companys activities. Sometimes boards delegate important powers to an executive committee. Where the executive committee approves important corporate plans and actions on an ongoing basis, the composition of such an executive committee should approximate the composition of the full board. There should be enough independent elements to approximate the proportion of such directors on the full board.
4.60
B
4.61
Director remuneration
Board remuneration is an important aspect of effective corporate governance. The remuneration of directors should be appreciable and should reflect the responsibility and commitment which goes with board membership. This applies to both executive as well as non-executive directors. If directors are paid a token amount there may be a tendency to think that the job is not important. On the other hand, if remuneration is excessive, the director may lose his or her independence. He or she will be perceived as someone 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 the board the remuneration of the executive directors in all its forms, drawing from outside advice as necessary. Executive directors should play no part in decisions on their own remuneration. Membership of the remuneration 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 own remuneration.
91
BB

The audit committee An independent audit committee serves to implement and support the oversight function of the board in several ways. Such a committee provides a means for review of the companys processes for producing financial data, its internal controls, and the independence of the companys external auditor, and a forum for dialogue with the companys external and internal auditors. In theory, the full board might execute these functions itself, because the board is obliged in any event to be conversant with those matters. In practice, however, there are several reasons why an audit committee would normally constitute a preferable location for these functions. For one thing, a focused review and detailed discussion of the companys processes for producing financial data, its internal controls, and independence of its external auditor might be too time-consuming for the full board. For another, because the companys financial data concerns the performance 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 companys external auditor, and thereby helps assure that the auditor will have free rein in the audit process. This reinforcement is achieved in part by conferring, on an organ that is independent of the management whose financial results are being audited, a vital role in the retention, discharge, and compensation of the external auditor. An independent audit committee provides a forum for regular, informal, and private discussion between the external auditor and directors who have no significant relationships with management. In the absence of such a forum, an external auditor would often be reluctant to call for a meeting at the board level unless a problem of great magnitude had arisen. In contrast, the provision of an institutionalised forum facilitates and indeed encourages the external auditor to raise potentially troublesome issues at a relatively early stage, allows the auditor to broach sensitive problems in an uninhibited and private fashion, and gives the auditor assurance that it can readily get a hearing in the event of disagreement with management. An independent audit committee reinforces the objectivity of the internal auditing department (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 board committee, it may encounter resistance to recommendations that do not meet with managements approval. Regular access to an audit committee may help ameliorate such resistance. A working relationship with an audit committee is also likely to increase the status and therefore the effectiveness of the internal auditing department.
4.62
The requirement for audit committees are set out in the Listing Requirements which require all listed companies to have audit committees comprising 3 members of whom a majority shall be independent16. The Listing Requirements also set out the minimum functions of the audit committee. The objective of the Code is to flesh out the specific duties of the audit committee within the general functions set out in the rules.
16
Rule 344A KLSE Listing Requirements
92
The board should establish an audit committee of at least three non-executive directors, a majority of whom are independent, with written terms of reference which deal clearly with its authority and duties. The Chairman of the audit committee should be an independent non-executive director.
4.63
This essentially sets out the existing requirement under the Listing Requirements. The appointment of a properly constituted audit committee is an important step in raising standards of corporate governance. Their effectiveness depends on their having a strong chairman who has the confidence of the board, the auditors and on the quality of nonexecutive directors. Membership of the audit committee is a demanding task requiring commitment, training and skill. The directors concerned need to have a sufficient understanding of the issues to be dealt with by the committee to take an active part in its proceedings.
4.64 One issue that the committee was asked to deal with is the issue relating to the presence of controlling shareholders and substantial shareholders, who are also the non-executive directors of a company, on the audit committee. These persons would have a vested interest in ensuring that the financial affairs of the company are properly handled. It is a powerful monitoring tool in ensuring that the interests of management are at all times aligned with that of the owners. In this respect, we recommend that such persons should be encouraged to participate in audit committees, subject to the requirement that the majority of the non-executive directors presence should, nevertheless, remain independent 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 and any questions of resignation or dismissal; To discuss with the external auditor before the audit commences, the nature and scope of the audit, and ensure co-ordination where more than one audit firm is involved;
(ii)
(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 legal requirements.
(iv) To discuss problems and reservations arising from the interim and final audits, and any matter the auditor may wish to discuss (in the absence of management where necessary); (v) To review the external auditors management letter and managements response;
93
(vi) Where an internal audit function exists, to ensure that it is adequately resourced and has appropriate standing within a company, and to review the internal audit programme; (vii) To consider any related party transactions that may arise within the company or group; (viii) To consider the major findings of internal investigations and managements 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 audit committee. However, at least once a year the committee shall meet with the external auditors without executive board members present. The audit committee must have explicit authority to investigate any matter within its terms of reference, the resources which it needs to do so and full access to information. The committee should be able to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary. The audit committee should meet regularly, with due notice of issues to be discussed and should record its conclusions in discharging its duties and responsibilities.
IV
4.65
The committee endorse the recommendations of PRO NED, UK, in its Guidelines for Audit Committees. It is essential to time meetings and plan their agendas so that issues which have an impact on the companys prepared figures and published statements are discussed early enough to allow changes to be considered. The number of meetings required in a year depends on the companys terms of reference and the extent of the complexity of the companys financial operations. What is usually required is the three or four meetings planned to coincide with the audit cycle and the timing of the published financial statements. Additionally, there may be ad hoc meetings in response to special circumstances as the companys affairs demand. The PRO NED Guidelines state that the main meetings are often planned as follows Between the end of one years audit and the beginning of the next Where the committees remit extends to internal accounting systems as well as the audit process, a meeting early in the companys FY is necessary to discuss the content of the management letter in the presence of the auditors, the approach to the current years audit and any significant problems that can be foreseen, either as a result of the past years experience or because of new accounting standards or other changes in statutory or listing requirements. Any discussion with the Finance Director as to the cost effectiveness of the audit should also take place at this stage.
4.66
94
Before the issue of the Interim Statements In companies where the audit committee is responsible for reviewing these, this meeting will take place at an appropriate point before their release. After the Interim Results This may be a convenient point to review the companys systems of internal control in light of the interim report, and possibly also to discuss major reports prepared by the internal audit department. After the year end, but before the accounts are finalised This review of the annual financial statements should be timed so that checks and adjustments recommended as a result of the meeting can be carried out before the board meeting at which the accounts are adopted. The board should disclose in an informative way, details of the activities of audit committees, the number of audit meetings held a year and details of attendance of each individual director in respect of meetings. Currently, companies generally disclose the identities of their audit committee members and essentially set out the terms of reference of the company. Directors should be required to disclose the number of audit committee meetings held a year and the details of the attendance of each individual director to enable shareholders to evaluate the commitment of a particular director. This best practice also clarifies that the obligation to disclose the activities of the audit committee lies with the board as a whole and not the audit committee separately. Preparation for membership of the audit committee Where a new member is appointed to the audit committee, the process for inducting a director, set out in XIII above should be supplemented, in consultation with the Finance director, by meetings with other members of management below board level responsible for the financial control system and those responsible for internal audit where there is one. Knowledge of the people concerned is as valuable as knowledge of the systems they operate.
VI
Internal audit 4.67 It is good practice for companies to establish internal audit functions to undertake regular monitoring of key controls and procedures. The function of the internal auditors is complementary but different from that of outside auditors. Such regular monitoring is an integral part of a companys system of internal control and helps to ensure its effectiveness. An internal audit function is well placed to undertake investigations on behalf of the audit committee and to follow up any suspicion of fraud. It is essential that heads of internal audit should have unrestricted access to the chairman of the audit committee to ensure the independence of their position. Companies which do not already have a separate internal audit function should from time to time review the need for one.
4.68
95
CC
Shareholders
The relationship between the board and shareholders
4.69
The intimacy of the relationship between the board and management generally does not exist between the board and shareholders even though the directors are elected by and are accountable to the shareholders. The important exception is the significant shareholder 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. In some ways, the presence of a controlling interest on a board is a check in that in such cases the controlling owners can provide the oversight that an independent board should provide in the absence of a controlling owner. However, in recognition of the fact that non-controlling shareholders need special vigilance at board level it has been recommended that the definition of independence should include independence from such controlling interest and the fact that the board should ensure that its composition reflects the ownership structure of the company. Beyond this the Committee finds it very difficult to control the activities of these persons through best practices. The Committee nevertheless sought to clarify the confusion that exists in terms of the interests represented by the board. As alluded to earlier, the expression of interests which must be reflected in board decisions is often extended from the interests of the company to the interests of the shareholders generally, on the theory that the ultimate responsibility for the board is to create value for shareholders and therefore what is in the best interests of the company should also be in the best interest of the owners. 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 of the best interest of any single shareholder or any shareholder group. Perhaps most worrying is the fact that there are some directors who erroneously believe that if a particular shareholder is responsible for their election, the director should represent the best interest of that shareholder in his or her corporate decision making. It is not unheard of for some directors to reflect the best interest of a significant shareholder rather than the best interest of the company in a corporate decision. Directors must be scrupulous in identifying what they regard as the best interest of the company or its shareholders generally. The problem is particularly acute in the case of nominee directors. A person who has a major stake in a company will often appoint some one that he trusts to the board in order to keep an eye on his investment. The nominees relationship with his principal is a fiduciary one.17 There is an issue therefore with regard to the competing fiduciary responsibilities of these persons. However, it must be highlighted that it is fairly well
4.71
4.72
4.73
4.74
17
Re Syed Ahmad Alsagoff [1960] MLJ 147, where Tan Ah Tah J decided that a nominee director is a trustee for his principal.
96
settled under law that a crucial aspect of the duties of nominee directors is that he is not entitled to sacrifice the interests of the company in favour of that of his principal. In this respect, Winslow Js dicta in Raffles Hotel Ltd. v Rayner18 is instructive. A company is entitled to the undivided loyalty of its directors. A director who is the nominee of someone else should be left free to exercise his best judgement in the interests of 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 usually employees 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 conflicts of interest by simply refraining from participating in a decision where the interests of his principal and the company conflict. But where the nominee is also an executive director, where he actually runs the business of the company, the instances of conflict are numerous and he may find it difficult to refrain from participating in 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. In this regard, it is recommended that there must be strong independent elements on the board to provide such a check against the conduct of preferring the interests of the principal to the interests of the company. Apart from this circumstance, the allocation of decision-making authority between the board and shareholders is generally not an issue. Decisions made by shareholders relate to the election of directors, the election of auditors, and generally to fundamental changes to the companys constitution or business. Good governance also requires shareholder votes 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 is important for boards to maintain an active and constructive shareholders communications policy both through following the minimum requirements of the CA and voluntarily maintaining principles of good practice in handling shareholders affairs. I Boards must maintain an effective communications policy that enables both the board and management to communicate effectively with its shareholders, stakeholders and the public generally. This policy must effectively interpret the operations of the company to the shareholders and must accommodate feedback from shareholders, which should be factored into the companys business decisions. We encourage this relationship provided that information which a company provides to an investor should not qualify as undisclosed material information about the corporation.
4.76
4.77
18
[1965] 1 MLJ 60
97
The AGM 4.78 The AGM is a crucial mechanism in shareholder communication. The AGM gives all shareholders, 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 in attending it. We believe that the AGM can be made a more meaningful and interesting occasion for all participants. To enhance the value of general meetings, our main recommendation is that there should be a specific effort to develop best practices in general meetings not unlike the best practices guide prepared by the Institute of Chartered Secretaries in the UK. Some recommendations in the context of improving the quality of AGMs are the following:i. Boards should ensure that each item of special business included in the notice must be accompanied by a full explanation of the effects of a proposed resolution. In the case of re-election of directors, boards should ensure that the notice of meetings state which directors are standing for election or re-election with a brief description to include matters such as age, relevant experience, list of directorships, date of appointment to the board, details of participation in board committees and the fact that a particular director is independent. The Chairman should provide a reasonable time for discussion at the meeting. The Chairman should not attempt to limit discussion of genuine questions and the practice of discouraging shareholders from asking questions or being dismissive of questions is discouraged. Where appropriate, the Chairman should also undertake to provide the questioner with a written answer to any significant question which cannot be answered on the spot. He should exercise his discretion wisely in entertaining questions from shareholders. The Chairmans role in sifting the genuine questions from vexatious ones is crucial. Again a best practices guide to guide the Chairman in discharging this role is invaluable. In companies whose AGMs are well-attended, companies, boards and/or management should conduct a business presentation with a question and answer session. Companies should count all proxies lodged with them in advance of the meeting, and without a poll being demanded, should announce the total proxy votes for and against each resolution once it has been dealt with by the meeting on a show of hands. This will indicate publicly the proportion of total votes in respect of which proxies were lodged and the weight of shareholders opinion revealed by those proxy votes. Publication could potentially see an increase in proxy votes.
ii.
iii.
iv.
v.
98
vi.
Companies should provide shareholders upon request, with a summary of the discussion at the AGM. The Cadbury Committee recommended19 that companies should after the event, send shareholders a brief summary of points raised at the AGM. The cost of doing this, either by a separate mailing or with the next financial report circulated to shareholders will be borne by the companies. 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 case of companies with very large registers. The Hampel committee suggested instead that companies should prepare a resume of discussion at the meeting (but not a full detailed record), together with the voting figures on any poll or a proxy count where no poll was called and send this on the shareholders request. The Committee recommends that companies should prepare a resume of discussion 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 the conclusions and not the discussions.
vii.
viii.
19 20
Paragraph 6.8 which is a statutory requirement under section 156(1) CA
99
PART 3
PRINCIPLES AND BEST PRACTICES FOR OTHER CORPORATE PARTICIPANTS
These are not addressed to listed companies but are addressed to investors and auditors in recognition of the crucial role they play in corporate governance. I Shareholder Voting Institutional shareholders have a responsibility to make considered use of their votes.
4.79
Institutional shareholders include insurance companies, pension funds and professional fund managers. An important degree of common interest between a private investor and institutional investors is that they largely hold shares on behalf of individuals. In particular they have the same stake in standards of financial reporting and of governance in companies in which they have invested. Given the weight of their votes, the way in which institutional shareholders use their power to influence the standards of corporate governance is of fundamental importance. The wording above does not make voting mandatory; i.e. abstention remains an option; but these shareholders should, as a matter of good practice, make considered use of their votes. In this respect, institutional shareholders should take a positive interest in the composition of boards, with checks and balances, and to the appointment of a core of non-executives of necessary calibre, experience and independence. In this respect, local institutional shareholder associations should formulate guidelines for the development of a constructive relationship between the company and the owner. II Dialogue between Companies and Investors. Institutional investors should encourage direct contact with companies including constructive communication with both senior management and board members about performance, corporate governance and other matters affecting shareholders interest.
4.80
Shareholders receive reports and accounts and other explanatory circulars from companies which are required by statute or, for example by, the stock exchange. They also have the right to attend company meetings where they can raise questions about the affairs of a company. In addition some companies have a practice of making presentations to institutional or other shareholders. While these communications are necessary, they may not be sufficient to allow companies and shareholders to gain a full understanding of each others aims and requirements. A direct dialogue gives investors a better appreciation of a companys objectives, its potential problems and the quality of its management, while also making a company aware of the expectations and concerns of the shareholder. Two way communication between companies and institutions is an important aspect of corporate governance because corporate managers need full information about the assessments of institutions that hold their shares. Two way communication such as this helps create a more stable shareholder base. The belief is that shareholders will be willing to maintain their shareholding and take a longer term view of their investment if they have a better understanding of the corporate strategy.
4.81
100
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 as undisclosed material information about the corporation. Companies should endeavour to ensure that the same opportunity should be available to all shareholders.
4.83
In this respect the best practice above clarifies that neither side should be required to enter into dialogue. Individual companies and investors must remain free to abstain from dialogue; the sheer numbers on both sides may make comprehensive coverage difficult. III Evaluation of Governance Disclosures. When evaluating companies governance arrangements, particularly those relating to board structure and composition, institutional investors and their advisers should give due weight to all relevant factors drawn to their attention.
4.84
This follows from the discussion earlier on the importance of considering disclosures on their individual merits, as opposed to box ticking. Shareholders should show flexibility in the interpretation of the Code and should listen to directors explanations and judge them on their merits. IV External Auditors. The external auditors should independently report to shareholders in accordance with statutory and professional requirements and independently assure the board on the discharge of its responsibilities under D.I and D.II under Part 1 of this Code in accordance with professional guidance.
4.85
This points up the dual responsibility of the auditors - the public report to shareholders on the statutory financial statements and on other matters as required by the Listing Requirements; and additional private reporting to directors on operational and other matters.
101
Chapter 6
REFORM OF LAWS, REGULATIONS AND RULES
Chapter 6 Reform Of Laws, Regulations And Rules
REFORM OF LAWS, REGULATIONS AND 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.
105
ISSUE ONE
REVIEW OF PROVISIONS DEALING WITH DUTIES, OBLIGATIONS, RIGHTS AND LIABILITIES OF DIRECTORS, COMPANY OFFICERS AND CONTROLLING SHAREHOLDERS
1.
1.1
Overview
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 an unnecessary fetter on the operations of companies?
1.2
In respect of the need to raise standards, our review indicates that while directors are already subject to extensive laws and regulations regulating their conduct, their awareness of the extent of responsibilities attaching to their office appears to be minimal. Among other things, perhaps this fact is attributable to two main reasons: The complexity of these laws results in the duties not being readily apparent to a person without legal training. The laws governing the duties of directors are encapsulated in various sources, legislation, rules, common law fiduciary duties and negligence to name a few. Of these various sources, legislation receives the highest amount of recognition and awareness. The aim of the Committee in this respect has been to clarify their duties and obligations in such a way that they are readily apparent to most participants. To some extent, the lack of recognition of these laws and rules has been perpetuated by ineffectual enforcement. Issues pertaining to the role of regulators in enforcing laws are taken up in detail in issue 5 below. However in examining the duties and obligations of directors and the various sources they emanate from, we have also been cognisant of the enforceability of these provisions and attempted to identify solutions to these problems.
1.3
We have nevertheless remained conscious of the need to maintain an acceptable balance between the need for entrepreneurial energy by directors and management and the need for controls. Any reform introduced in this area should not unduly fetter the exercise of their judgment or their enterprise nor discourage persons from taking on directorships or key management positions in companies because of concerns relating to personal exposure to liability. The other area of review essentially relates to abuses by controlling shareholders at the expense of minority shareholder rights. Many Malaysian companies are members of groups of companies under the common influence of one shareholder or group of shareholders. A frequent result is related party transactions within these groups of companies. There has been extensive coverage of the abuses by controlling shareholders
1.4
106
both at board level as well as in respect of their right to vote. The Committee attempts to deal with and recommend some form of regulation of their activities. In short, they are the following: Enforcing obligations of controlling or significant shareholders as directors where they effectively control a company - the Committee considered the existing difficulties in enforcing directors duties on these persons using the concept of shadow directorships 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 and Controlling Shareholders
2.1
ISSUE Clarification of the collective duty of the board to manage the business and 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 the board actually participates in the day-to-day running of the business. In small and medium-sized companies generally, the directors are also shareholders of the company who conduct the management of the company and are involved in the operational decision-making2 . But when a company reaches the size and complexity of a large listed entity, the board as a whole is unlikely to be involved in the day-to-day business of the company. In large companies, the actual management of a business is usually delegated to managing director(s)3 and other salaried employees4. It is common for such principal executive officers of these companies to have a seat on the board. For example, chief executives of companies are now invariably the managing directors of companies. There may be other members of the executive (aside from the managing director) who are also members of the board, for example directors in charge of finance, production etc. The non-executive members of a board include nominees of major shareholders and other independent board members5.
2.1.2
2.1.3
Reg. 73 of Table A, CA 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 is largely in name only and to fulfil the statutory requirement of two directors. However in the case of incorporated partnerships or family 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.
2
107
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 under the guidance of a chief executive or the managing director) will implement the decisions of the board. This is however a generalisation and it must be said that there are extremely wide variations in the structuring of the relationships between the board and management. However in the main, the power of executive officers in the management of large listed companies is undeniable and is well described in the Submission by the Staff of the National Companies and Securities Commission (now the ASIC) to the Senate Standing Committee on Constitutional and Legal Affairs regarding Company Directors Duties (1989) i.e., Recognition has been given in recent years to the considerable power which executive officers can exercise in the management of companies vis--vis that of directors. This trend appears to have increased in recent years as directors, particularly of large corporations, have become more concerned with broadbrush issues and executives are employed for their expertise in particular areas of management. [t]his suggests, the real power to manage a company lies with its executive officer6.
2.1.5
2.1.6
Also, in the US, judicial refinement of the duty further explains that directorial management does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies7. To date, there has neither been statutory nor judicial recognition in Malaysia of the boards collective duty to oversee management in the event they delegate their management powers. There is, therefore, a case for revising the language, to accommodate a more realistic definition of the responsibilities of todays board of directors in large companies. The question is, therefore, whether there should be 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). In both the UK and Toronto, this duty of oversight is described in the form of best practices through the Code of Best Practices of the Cadbury Committee and the Report of the TSE Committee, respectively8. This is based on the notion of a gradual and incremental approach towards raising awareness in corporate governance, which in turn may result in judicial recognition of these concepts and/or codification in the law. New Zealand, on the other hand, has given statutory recognition to the role of the board to monitor management. The approach adopted has been essentially to retain the boards flexibility to delegate management powers whilst giving statutory recognition to the monitoring function of the board if and when they
2.1.7
2.1.8
2.1.9
at paragraph 4. Francis v United Jersey Bank, 87 N.J. 15, 432 (New Jersey Supreme Court). 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 todays board of directors.
7 8
108
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 it the responsibility for the exercise of the power of the delegatee, via a belief on reasonable grounds before the exercise of the power that the delegatee would exercise the power in conformity with the duties imposed on directors either by the NZCA or the companys constitution, and that the board has a duty to monitor, by reasonable means, the exercise of that power. This not only imposes a duty to monitor but places an obligation on the board to be cautious in their delegation and their choice of delegatee. 2.1.10 The Ontario Business Corporation Act, s115(1) has also recognised the limitations on the ability of the board to manage the business of the company and has revised the general duty of the board to mean manage or supervise the management of the business and affairs of a corporation. 2.1.11 As stated earlier, the power of management of boards is provided for in the articles of association of companies. It is nevertheless submitted that a provision should be inserted in the law, clarifying the responsibilities of the board to oversee the conduct of the companys business to evaluate whether the business is being properly managed. The advantage of codification in this respect is that, first, it offers clear statement of responsibilities to boards and second, 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 wide variations in the structuring of the relationships between the board and management taking into account the various types and sizes of companies regulated by the CA. For example, there may be smaller listed companies where boards actually manage the company9. The provision in the American Law Institutes restatement of corporate law is instructive. It recommends the codification of boards functions and powers as part of the general modernisation of corporate statutes10. In this respect it recommends the following provisions for 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 perform the following functions:(1) Select, regularly evaluate, fix the compensation of, and where appropriate replace principal senior executives; Oversee the conduct of the corporations business to evaluate whether the business is being properly managed;
(2)
10
Refer to footnote 2. Principles of Corporate Governance Analysis and Recommendations Paragraph 3.02.
109
(3)
Review and, where appropriate, approve the corporations financial objectives and major corporate plans or actions; Review and, where appropriate, approve major changes in, and determinations of other major questions of choice respecting, the appropriate auditing and accounting principles and practices to be used in the preparation of the corporations financial statements; Perform such other functions as are proscribed by law or assigned to the board under the standard of a corporation.
(4)
(5)
(b)
A board of directors has also the power to:(1) (2) (3) (4) Initiate and adopt corporate plans, commitments, and actions; Initiate and adopt changes in accounting principles and practices; Provide advice and counsel to principal senior executives; Instruct any committee, principal senior executive or other officer, and review the actions of any committee, principal senior executive or other officers; Make recommendations to shareholders; Manage the business of the corporation; Act as to all other corporate matters not requiring shareholder approval.
(5) (6) (7)
(c)
Subject to the boards ultimate responsibility for oversight under subsection (a)(2), the board may delegate to its committees the authority to 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 board are dealt with under paras 2.1.14 to 2.1.20. For purposes of this discussion, the relevant provisions of the restatement by the American Law Institute are paragraphs 3.02(a)(2) and 3.02(b)(6). Paragraph 3.02(a)(2) provides as one of the functions of boards of public companies, the duty to oversee management. This is then supplemented by subsection 3.02(b)(6) which provides that the board has always the power to manage the business of the company. This provision does two things. First, it preserves the existing delineation of powers between the board and the general meeting. Article 73 Table A of the CA, as alluded to in paragraph 2.4 above, confers general powers of management on the board and this allows the board to carry out transactions which the company itself is empowered to do, in the absence of articles or statutory provisions qualifying 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.
110
structuring of the relationships between the board and management taking into account the various types and sizes of companies regulated by the CA.
Recommendations That a provision should be inserted in the law, clarifying the responsibilities of the boards of public companies to oversee the conduct of the companys business to evaluate whether the business is being properly managed. That the provision should be sufficiently flexible to allow for wide variations in the structuring of the relationships between the board and management as well as the various types and sizes of companies regulated by the CA. In this respect, it is proposed that the provision should clarify that, subject to the 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 state explicitly the functions and responsibilities of the board. For example, the Cadbury Code of Best Practices recommends that boards should have a formal schedule of matters specifically reserved to them for their collective decision, to ensure that the direction and control of the company remains firmly in their hands. Cadbury recommends that the schedule should at least include: Acquisitions and disposals of assets of a company or its subsidiaries that are material to the company; and Investments, capital projects, authority levels, treasury policies and risk management policies.
2.1.15 The TSE Committee on corporate governance lists as the five specific responsibilities 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 management information systems.
111
2.1.16 Both approaches above are in the form of best practices. The advantage to best practices is the flexibility with which board functions and responsibilities, may be described. The proposed Code sets out the principal responsibilities of the board12. 2.1.17 The Committee however, went on to consider whether the functions and powers of the board should be set out in legislation. As alluded to in paragraph 2.1.12 above, the American Law Institutes restatement of corporate law13 recommends the codification of a boards functions and powers as part of the general modernisation of corporate statutes. The provision is repeated here for easy reference. 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 perform the following functions:(1) Select, regularly evaluate, fix the compensation of, and where appropriate replace principal senior executives; Oversee the conduct of the corporations business to evaluate whether the business is being properly managed14; Review and, where appropriate, approve the corporations financial objectives and major corporate plans or actions15; Review and, where appropriate, approve major changes in, and determinations of other major questions of choice respecting, the appropriate auditing and accounting principles and practices to be used in the preparation of the corporations financial statements16; Perform such other functions as are prescribed by law or assigned to the board under the standard of a corporation17 .
(2)
(3)
(4)
(5)
Part 2, Best practice AA- I 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. This oversight function is not performed directly by actively supervising the principal senior executives, but indirectly, by evaluating the performance 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 would normally 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 or reacquisition 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 its judgement 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 functions that is prescribed by law or assigned to it under the articles of association of a company.
13
12
112
(b)
A board of directors has also the power to:(1) (2) (3) (4) Initiate and adopt corporate plans, commitments, and actions; Initiate and adopt changes in accounting principles and practices; Provide advice and counsel to principal senior executives; Instruct any committee, principal senior executive or other officer, and review the actions of any committee, principal senior executive or other officer; Make recommendations to shareholders; Manage the business of the corporation; Act as to all other corporate matters not requiring shareholder approval.
(5) (6) (7)
(c)
Subject to the boards ultimate responsibility for oversight under subsection (a)(2), the board may delegate to its committees the authority to 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 minimum functions of the board, and then goes on in subsections (a)(5) and (b)(1)(7) to permit complete flexibility in board executive relationships, subject only to the performance of those minimum functions. Thus section 3.02 permits extremely wide variations in the structuring of relationships between the board and senior executives.
2.1.19 The advantage of codification is that it is a clear signal to both corporate participants as well as the courts of the minimum functions of boards. To quote the American Law Institutes 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 the courts deem it appropriate to weigh. Section 3.02 is not intendedto enlarge the scope of a directors legal obligation and liability, the performance expected of directors to comply with the duty of care or the role and accountability of directors concerning the corporations compliance with the law. Rather it is intended to clarify the applicable concepts that are relevant to delineating, in particular cases, the scope, performance and the role of directors.
This term is defined in section 1.31 of the American Law Institutes 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 securities and US$5 million or more of total assets; but a corporation shall not cease to be a publicly held corporation because its total assets fall below US$5 million, unless total assets remain below US$5 million for two consecutive years.
18
113
2.1.20 It is submitted that in expansion of the recommendation in 2.1.11 and 2.1.12 above, there should be a statutory formulation of the minimum functions of the board. This formulation should only apply to public companies, as it is only in these larger companies where one witnesses a separation of the role of the board from management. This formulation should also permit complete flexibility in board - executive relationships, subject only to the performance of those minimum functions.
Recommendations That in expansion of the recommendation in 2.1.11 and 2.1.12 above there should 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 minimum functions.
ISSUE Should the specific duties of executive and non-executive directors within the board structure be clarified?
2.1.21 Regulations 91-93 of Table A, CA provide that the board of directors may appoint one of their own to the office of managing director upon whom they may confer their management powers. The managing director is responsible for the day-today operations of the company. In contrast with previous practice of having a general manager who would be the chief executive of the company, chief executives are now invariably the managing directors of companies. There may be other members of the executive (aside from the managing director) who are also members of the board, for example directors in charge of finance, production, etc. Executive directors make valuable contributions to boards, and it is from them that the primary drive to make a company succeed must come. 2.1.22 Non-executive directors are appointed for various reasons to make positive contributions as equal board members to the development of the companys strategy, to tap on their skills and expertise derived from their diverse backgrounds19, to represent their interests on the board in the case of substantial shareholders, and to provide a balanced and independent view onto the board. This latter role is increasingly being construed as a duty on the non-executive members 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 this monitoring role of non-executive directors in Malaysia. The general attitude is that 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.
114
or to acquaint himself with all the details of the running of the company. Recent developments and increased awareness in respect of corporate governance issues indicate that this view is outdated. 2.1.24 The attention generated by the various Codes of Best Practice in corporate governance has raised the profile of the non-executive director, particularly one that is independent. Independent non-executive directors are said to provide a monitoring mechanism of the executive directors management practices, because of the fear that an executive directors decisions on the board may be clouded by his role in management. 2.1.25 The Codes on corporate governance highlight the need for some independent element on the board. They generally look to non-executive directors to provide this independence20. The Cadbury Code of Best Practice requires a majority of non-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 must be able to contribute enterprise as much as integrity, and to support the enterprise of the executive team. The Hampel Committee stress this point when they say that an unintended side effect of the Cadbury report has been to over-emphasise this monitoring role21 . 2.1.27 The issue to be considered is whether there is a need to legislate the monitoring role of non-executive directors, particularly independent non-executive directors? The approach internationally has been to highlight this aspect of their role through a Code of Best Practices. It is submitted that the latter approach is the appropriate step to take in view of the fact that setting out their duties statutorily may: First, detract from the fact that the overall responsibility for supervision of management lies with the board of directors as a whole, and hence, with every director; Second, to do otherwise may dissuade persons from taking on non-executive directorships; and Finally, standards set out in the Code are aspirational and are an ideal way of requiring change in a gradual and incremental manner.
Recommendations That the role of non-executive directors to bring a balanced and independent view onto the board should not be legislated.
20 21
Executive directors are part of management and therefore very little credibility in terms of independence. Paragraph 3.7 Report of the Hampel Committee on Corporate Governance.
115
2.2
Directors Duties 2.2.1 The duties of directors vis--vis the company and shareholders in general are comprehensive. Directors are subject to a myriad of statutory and general law duties, in contract (for executives), equity, tort, statute and other regulatory requirements. What is perhaps lacking is an acceptable level of awareness by directors of the duties that they are subject to. Section 132(1) CA imposes upon directors the general duty To act honestly and use reasonable diligence in the discharge of the duties of 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 addition to and not in derogation of any other written law or rule of law relating to the duty or liability of directors or officers of a company. Accordingly cases reflecting the common law and equitable rules relating to directors are still relevant. In this respect a director has three broad categories of duties: fiduciary duties, the duties of skill, care and diligence and statutory duties. 2.2.3 Other sources of duties of directors include duties arising out of the articles of association of companies and contract. The articles form a statutory contract between the shareholders of the company. Therefore, the scope of equitable and common law duties must be read in the context of the way in which the articles are drafted. Courts would only intervene in cases where there is an abuse of power and they are loath to impinge on the freedom to contract by rewriting contracts for the parties. The contractual duties of directors are in addition to other duties generally applicable to directors. Managing directors are often appointed under a written service contract, which among other things, articulate their duties. The approach of the Committee in this respect has not been to impose further duties and obligations of directors. Rather the Committee has sought to clarify their duties and obligations in such a way that directors are made to take notice of and understand clearly the obligations required of them. This has to some extent involved a codification of common law provisions. First fiduciary principle - Section 132(1) CA The duty to act honestly
2.2.2
2.2.4
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 case of Marchesi v Barnes & Keogh22 as follows:To act honestly refers to acting bona fide in the interests of the company in the performance of functions attaching to the office of the director.
22
[1970] VR 434, 438 per Gowans J (Supreme Court of Victoria)
116
2.2.6
The Courts generally ask whether the directors have done what they honestly believe to be right and they normally accept that they have, unless the court is satisfied that they have not behaved as honest men of business might be expected to act. Even if the directors did not act with conscious dishonesty, the law would impose on them, a duty to direct their minds to the question whether the transaction was in fact in the interests of the company. The test is a subjective one, as it is for the directors and not the court to consider what is in the best interests of the company.23 There is however evidence of some tendency on the part of the courts to apply a more objective test. It has been held in this respect that the proper test is whether an intelligent and honest man in the position of a director of a company could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company24. The companies legislation of both New Zealand and Canada contain a provision corresponding to subsection 132(1) CA, though in a different form. In New Zealand, 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 interests of the company. In Canada, a director, in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the corporation25. The Australian Corporations Law also has an equivalent duty which is almost identical to the Malaysian provision26. Australia has recently undertaken a law reform programme i.e. the CLERP27 which suggests a re-formulation of this duty to act honestly to capture the fiduciary duties of good faith in the best interests of the corporation. The problem with the existing formulation of the duty to act honestly is that it could be read to require some element of wrongdoing or fraud. The CLERP proposal seeks to clarify the duty by adopting the general interpretation of this duty under common law, i.e. to act bona fide in the best interests of the company.
2.2.7
2.2.8
2.2.9
2.2.10 It is submitted that the duty to act honestly in section 132(2) CA should be reformulated to require a director to act bona fide in the best interests of the company. This will not only lend clarity to the obligation of a director under this rule but go some way towards addressing the erroneous belief on the part of some directors that they are there to represent the best interests of the shareholder responsible for their election.
Recommendation 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 interest of the company.
Per Lord Greene M R in Re Smith & Fawcett Ltd [1942] Ch. 304 at 306, C.A. 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
24
23
117
ISSUE Is there a need for statutory clarification of the term best interests of a company?
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 rarely defined. It seems quite likely that it is sometimes misunderstood and it is possible that 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 with unpredictable situations which may arise from an infinite variety of circumstances or 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 the matters which directors of companies are to have regard to in the performance of their functions. They are said to include interests of the companys employees in general30, as well as the interests of members. Section 309(2) of the same is quick 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 other fiduciary duty owed to a company by its directors. Section 159 of the Singapore Companies Act similarly allows directors to have regard to the interests of the companys employees generally as well as the interests of members when exercising their powers. 2.2.13 The Committee considered the provision in the UK and Singapore to be too narrow. There are various other interests that directors may take into account depending on circumstances. For example, there is already a well established body of law to say that interests of the company may at times mean interests of creditors especially where a company is insolvent or approaching insolvency31. There has also been dicta to the effect that in considering the interests of the company, directors may take into account the interests of both present and future shareholders32. It is therefore submitted that bearing in mind the 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.
(1988) BCLC 20 (Court of Appeal) 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 Cullens obiter statements in Dawson v International Coats Paton [1989] BCLC 233.
29
28
118
ISSUE Clarification of the position of nominee directors

2.2.14 The expression best interests of the company which must be reflected in a boards decision is often extended from the interests of the company to the interests of the shareholders generally on the theory that the ultimate responsibility 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 best interests 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 extension to define its obligations in terms of the best interests of a significant shareholder as opposed to the best interests of the company. Directors must be scrupulous in identifying what they regard as the best interests of the company and of a particular shareholder, especially in conflict of interest situations. 2.2.16 Also section 132(3) CA states that a director who breaches the duty to act honestly and use reasonable diligence or misuse company information is liable to the company, therefore underscoring the fact that duties are owed to the company and not the individual shareholders. 2.2.17 This appears to be an area of general confusion. There are some directors who erroneously believe that if a particular shareholder is responsible for their election, the director should represent the best interests of that shareholder in his or her corporate decision making. 2.2.18 The Code clarifies that where the extension is made from acting in the interests of the company to mean shareholders generally, the board cannot use this to define its obligations in terms of the best interests of any single shareholder or shareholder group or for that matter, the shareholder responsible for his election. The Code also encourages directors to be scrupulous in identifying what they regard as the best interests of the company whether or not this interest conflicts or coincides with the best interests of a controlling or significant shareholder. 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 appoint someone whom he trusts onto the board in order to keep an eye on his investment. The nominees relationship with his principal is a fiduciary one34. He represents his principals interest, but is not an agent for whom his principal is vicariously liable35. Nevertheless, the principal is liable to indemnify the nominee against liabilities entered into as nominee.
33 34 35
Allen v Gold Reefs of West Africa Ltd. [1990] 1 Ch 656, Greenhalgh v Arderne Cinemas (1951) Ch 286. Re Syed Ahmad Alsagoff [1960] MLJ 147, where Tan Ah Tah J decided that a nominee director is a trustee for his principal. Kuwait Asia Bank EC v National Mutual Life Nominees Ltd. [1990] 3 WLR 297.
119
2.2.20 A crucial aspect of the duty of nominee directors is that he is not entitled to sacrifice the interests of the company in favour of that of his principal. In this respect, Winslow Js dicta in Raffles Hotel Ltd. v Rayner36 is instructive. A company is entitled to the undivided loyalty of its directors. A director who is the nominee of someone else should be left free to exercise his best judgement in the interests of the company he serves and not in accordance with the directions of his patron. 2.2.21 This rule is difficult in practice as they are usually employees of the principal. In this respect there are two types of nominee directors - executive and nonexecutive. The latter functions as a watchdog. He does not participate in the management of the company. He can quite easily avoid conflicts of interest by simply refraining from participating in a decision where the interests of his principal and the company conflict. But where the nominee is also an executive director, where he actually runs the business of the company, the instances of conflict are numerous and he may find it difficult to refrain from participating in 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 company cannot stop a nominee from examining the company accounts38. But it may be disloyal 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 nominee directors bearing in mind their peculiar position, i.e. the parallel fiduciary obligations owed both to his principal as well as the company. Statute should make clear that a nominee directors primary duty is to act in the best interests of the company and that his duty to his principal is always subject to his duty to act in the best interest of the company. A re-statement of such a duty in the law potentially places a nominee in a far stronger position vis--vis his principal. 2.2.24 The prescriptions in the Code then supplement the statutory provision by identifying ways in which situations of conflict, between the duty to his principal and his duty to the company may be managed. The Code suggests that the nominee should refrain from participating in a decision where the interests of his principal and the company conflict or in situations where the nominee in conflict holds an executive position in the company, to ensure that there is a strong independent element on the board to bring independent judgement to bear on decisions of the board.
Recommendation That there should be statutory clarification of the fact that a nominee directors primary obligation is to act in the best interests of the company and that his duty to his principal is always subject to his duty to act in the best interests of the company.
[1965] 1 MLJ 60. 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 principal 38 Berlei Hestia (NZ) Ltd. v Fernyhough [1980] 2 NZLR 150 (Supreme Court of New Zealand) 39 Raffles v Rayner [1965] 1 MLJ 60
37
36
120
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 has been numerous criticisms leveled against the practices of directors that give rise to conflict. These include for example, the practice of operating businesses in competition with the listed entity, taking advantage of contracts belonging to the listed entity, disposition of non-performing assets into the listed entity while taking over performing assets at below market value and the practice of interested parties voting on transactions in obvious conflict of interest, to name a few. These practices have played a significant role in undermining confidence in the Malaysian capital markets. The Committee, therefore, considered the adequacy of present laws to address this problem. 2.2.26 To some extent there are already provisions in the law to address some of the abuses mentioned above. The common law rule that directors cannot enter into a contract with his company without disclosing the fact that he is a party at interest41, is reinforced by several provisions of the Act. For example, section 132E CA prohibits a director from entering into substantial property transactions with a company without the approval of members, sections 131 CA makes certain disclosures of interest mandatory, section 133 of the CA prohibits companies (other than exempt private companies) from making loans to its directors. Also section 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 abuses such as the practice of operating businesses in competition with the listed entity or taking advantage of contracts belonging to the listed entity save under the general category of the duty to act honestly. There are however numerous fiduciary principles under common law to deal with these abuses. 2.2.28 To counter the abuses mentioned above, the Committee considered it inappropriate for this matter to be left purely to case law. The problem with case law in this area is that it is difficult to distill a set of clear rules for directors to operate by. The rules operate by reference to the particular facts of the case in question. As Laskin J said in Canadian Aero Services Ltd. v OMalley43 new fact situations may require a reformulation of an existing principle to maintain its vigour in the new setting. 2.2.29 The problem is essentially enforcement. As a general rule, directors do not owe fiduciary duties to members44. For this reason a member cannot sue to enforce a companys rights against the directors45. The power to institute action in the companys name generally rests with the board46. It is practically very difficult
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 136,139 42 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 421 45 Foss v Harbottle (1843) 2 Hare 41 46 John Shaw & Sons v Shaw (1935)
40
121
to cause the company to commence action against the defaulting director especially where he controls the board. So it is not uncommon to find that a company commences court action after there has been a change in management or where the defaulting director has left the company. There is an avenue for minority shareholders to institute action in the companys name, but to do so he would have to fall within one of the four exceptions to the rule in Foss v Harbottle. In practice, the practical legal costs of funding an action and the complexity of both the substantive and procedural requirements have proved to be almost insurmountable to minority shareholders. The advantage of codification is that a breach entails criminal action. Once criminal proceedings commence, this may exert enough pressure on boards to institute civil action for 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 listed companies today, and the need for a clear set of rules stating the obligations of directors and officers in these situations, as well as the practical problems associated with enforcement of common law fiduciary duties, this is a matter worthy of legislative action. 2.2.31 Legislation should set out clearly the obligations of directors in their dealings with the company in conflict situations, and the ways in which such conflicts may be managed without detriment to the company.
Recommendation That the common law fiduciary duty to avoid conflicts of interest should be codified.
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 the elements of the statutory fiduciary duty to avoid conflicts of interest. Rather it attempts to set forth generally, a minimum number of rules that should regulate the conduct of a director acting with an interest in a matter, and highlight areas for further consideration in developing this statutory duty. 2.2.33 Under common law, directors must not place themselves in a position where their duties to the company conflict with their personal interests and duty to others47. The duty which has been described as inflexible is there for reasons of expediency rather than morality. A classic exposition of this rule is that of Lord Herschell in Bray v Ford48.
47 48
Chua Boon Chin v JM McCormack [1979] 2 MLJ 156, 158. [1869] AC 44,51 (House of Lords).
122
It is an inflexible rule of the Court of Equity that a person in a fiduciary positionis 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 interest may conflict. It does not appear to me that this rule isfounded on principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is a danger in such circumstances, of the person holding the fiduciary position being swayed by interest rather than by duty, thus prejudicing those whom he is bound to protect. It has therefore been deemed expedient to lay down this positive rule. 2.2.34 By laying down this positive rule, temptation is placed out of the reach of the directors. However directors are not required to be insensible to their own interests. They do not live in an unreal world of detached altruism49 in which their own interests are forgotten. Being in a position of conflict is not per se a breach of fiduciary duties. It is the failure to disclose material facts to the members and to obtain their sanction that constitutes the breach. The standard by which this duty is measured is an objective one, i.e. would a reasonable man when looking into the relevant facts and circumstances of a particular case think that a conflict is possible? 2.2.35 The conflict of interests situations dealt with by cases generally take the following forms: Use information acquired by virtue of position as director to make a profit for himself50 ; In this respect it must be noted that section 132 (2) CA provides that an officer or agent of a companyshall not make improper use of any information acquired by him by virtue of his position as officer or agent of the company to gain directly or indirectly an advantage for himself or for any 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 in which this rule applies and therefore difficult to offer clear guidance to directors
per Latham CJ Mills v Mills (1937) 60 CLR 150, 164 (High Court of Australia) Regal Hastings v Gulliver (1942) 1 All E.R. 378 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 the companys 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 opportunity where it had been rejected by the board on the companys behalf, where he had specifically obtained the assent of the shareholders.
50 51
49
123
of the rules they are expected to operate by. Internationally, the manner in which the courts have interpreted the duty of loyalty has evolved over the years; from the position that transactions are voidable without regard to fairness, to the modern view that if the transactions are fair and that fair procedures have been observed, such transactions will be allowed to stand. The Committee has sought, therefore, to identify broadly, aspects of the rules or fair procedures by which directors should observe in conflict situations, while preserving the ability of the 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 require revision for the following reasons: First, it is only limited to misuse of information. It does not include other crucial aspects of conflict highlighted above for example, the misuse of corporate property, the taking of corporate opportunities and issues pertaining to directors engaging in business in competition with the company. Second, as the prohibition is against making improper use of information acquired by virtue of his position to gain an advantage for himself or to cause detriment to the company, the duty is absolute. However, this is unnecessarily restrictive and case law does allow for a more facilitative approach by allowing it where there has been full disclosure and ratification of the transaction. A more commercially realistic approach would be to allow for a cure for such transactions.
2.2.38 For this reason the Committee submits that the statutory formulation on conflicts of interest in section 132(2) CA should reflect the following minimum elementsa) That the provisions should embrace the following conflict situations: b) Misuse of corporate information, property or position; The taking of corporate opportunities; and Engaging in business in competition with the company.
That there should be full disclosure of the conflict of interest as well as material facts of the transaction. That the transaction should be authorised following disclosure concerning the conflict of interest and the transaction by disinterested directors. Great emphasis should be placed on the desirability of providing a company with disinterested representation as a technique for dealing with conflicts of interest. Issues pertaining to the presence of independent elements in board composition have been taken up in the Code. In the case of authorisation by disinterested directors, there should be clear guidance as to the minimum standards of conduct expected of him in exercising his business judgement. For example, that he: is not interested in the subject of the business judgement;
c)
124
is informed in respect of the subject of the business judgement to the extent that the director or officer reasonably believes to be appropriate under the circumstances; and rationally believes that the business judgement is in the best interests of the company55.
d)
That the ability of the court to enquire as to the fairness of a transaction should be preserved at all times. The effect should be such that even where a transaction has been approved by disinterested directors, the challenging party may hold the director liable if he is able to establish that the disinterested directors could not reasonably have concluded that the transaction approved by them was fair to the company. The advantage to such a provision is that it addresses issues pertinent to the Malaysian corporate landscape, where it is common to find the so-called independent members of the board to be friends and invitees of a controlling shareholder. It behooves directors to consider a transaction very carefully and fully document the reasons why they thought that the company should nevertheless enter into it. It was suggested that an incentive should be created within the framework to persuade directors to adopt these procedures. One such example would be through the burden of proof requirements. For example, where a transaction has been approved or ratified in the manner required, the burden of proving that the particular transaction is not fair should rest with the person challenging the transaction. Where, however, the transaction has not been approved or ratified in the appropriate manner, then the director in question should have 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 among other 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 conflict of interest situations which should include the procedures outlined in 2.2.38 (b) and (c ) above; and (c) Preserve the power of the court to enquire into the fairness of a transaction 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.
125
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 of the company, directors may still be liable if they have exercised the power for a purpose different from that which the powers were conferred upon them56. In Howard Smith v Ampol Petroleum, the Privy Council held that while the directors had acted in good faith (i.e. there was no purpose of personal gain, etc.) they nevertheless remained liable because they had exercised their powers for a collateral purpose. The fact that the directors have acted bona fide is irrelevant as the duty to act for a proper purpose is independent of the duty of good faith. 2.2.40 The statutory formulation of directors fiduciary duties in Canada includes, in addition to the duty to act honestly and in good faith with a view to the best interests of the company, the duty to act for a proper purpose. The CLERP proposal alluded to above recommends that this duty should be placed on statutory footing as well. 2.2.41 It is submitted that in the spirit of clarifying the duties and obligations of directors section 132(1) CA should be amended to state explicitly the duty to act for a proper purpose.
Recommendation That section 132(1) CA should be amended to state explicitly the duty to act for a proper purpose.
ISSUE Should section 132(1) CA spread its net wider and codify the requirement of skill and care?
2.2.42 There is a striking contrast between the directors heavy fiduciary duties and their relatively light obligations of skill and diligence. Unlike their robust approach when adjudicating on questions of loyalty and good faith, courts display a reluctance to interfere with directors business judgment and have generally taken a lenient view of the duties of care, skill and diligence of directors. Courts are also perhaps conscious of substituting their hindsight for a directors foresight and are therefore unwilling to condemn directors, though events have proved them wrong. 2.2.43 Section 132 (1) CA sets out the duty of the director to use reasonable diligence in the exercise of the duties of his office.
56
Howard Smith Ltd v Ampol Ltd [1974] A.C. 821. P.C. at 834.
126
2.2.44 The common law spreads a wider net with its requirement of skill and care. The duty of skill, care and diligence to be exercised by directors is set out in the landmark decision of Re City Equitable Insurance Company57. Traditionally, directors duties of skill have been treated as if they were the same as the duties of care and diligence. A directors duty to display skill is conceptually different from his duty to take care which is again different from his duty to exercise reasonable 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 be expected from a person with his knowledge and experience58.This comprises both an objective and a subjective test. The benchmark therefore is that of a reasonable person with his knowledge and experience. This seems fair considering that the CA does not prescribe any minimum qualifications before a person can become a director. It follows, however, that if a director possesses special qualifications, e.g. as a lawyer or accountant, he is expected to use that skill for the company. It will be no defence for a professionally qualified director to say that he is in fact a bad lawyer or an incompetent accountant. He is expected to show a reasonable amount of skill, commensurate with his qualifications and experience. Duty of care 2.2.46 While it may be unfair to expect an unqualified person to show much skill in the performance of his duties as a director, there is no excuse however for a person who accepts a directors post not to be careful. Developments in the law in respect of this duty increasingly indicates that directors are being held to an objective standard of care. The case of Daniels v Anderson59 dealt with the tortious duty of care owed by directors. The Court of Appeal, while recognising that the duty would vary with the size and business of the company, and the experience or skills of the particular director, held that it would be measured by an objective standard to which both executives and non-executives would be subject. 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 are under the articles and law60; Directors may delegate their powers and trust their delegates, in the absence of circumstances that would excite the suspicion of a reasonable man; and A director is generally not responsible for acts and omissions of his codirectors even if he did not attend board meetings. He is not responsible for
57 58
[1925] 1 Ch 407 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
127
loans made in his absence61 or things done in his absence from board meetings generally62. In the Marquis of Butes63 case, the learned judge64, drew a distinction to find that neglect and omission to attend meetings is not the same as neglect or omission of a duty that ought to be performed at those meetings. In the particular facts of this case, the defendant (the President of the Bank) had attended only one board meeting and had no involvement in the affairs of the company. There was a failure by management to observe bank rules relating to deposits and repayment, and this resulted in the perpetration of fraud upon the bank. The Marquis was held to be entitled to rely on those who did attend the meeting. The lesson to be gleaned from this decision is that a director who attends board meetings and rubber stamps recommendations without independently evaluating the merits of a particular recommendation, runs a far greater risk of breaching his duty of care as compared to one who doesnt attend meetings at all65. Duty of diligence 2.2.48 Following from the discussion above, while directors are generally not responsible for acts and omissions of his co-directors at times when he did not attend board meetings, he may nevertheless be liable under his duty to exercise diligence in performing his duties. Re City Equitable, however, also stands for the proposition that a director is not bound to give continuous attention to the affairs of the company. His duties are of an intermittent nature to be performed periodically 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 vacate his office if he absents himself from the meeting of directors for a period of 6 months without leave of absence from the board. This is to ensure that there are no sleeping directors on a companys board. Also in the case of executive directors, modern service contracts stipulate that directors should devote all their time to the companys affairs. With respect to non-executive directors, the general trend towards raising their profile has actually seen some increase in the expectations of the court with respect to their role. For example, in the case of Dorchester Finance v Stebbings66, one of the grounds under which Forster J found non-executives to be liable is that they had failed to perform any duties at all as directors of Dorchester Finance. This increases the duty of diligence required 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 for directors to exercise skill, care and diligence in the exercise of their duties is wider than that required under section 132(2) CA. The duty to exercise skill is conceptually different from his duty to take care which is again different from his duty to exercise reasonable diligence. The Canadian Business Corporations
61 62 63
Ramskill v Edwards (1885) 31 Ch D 100 (High Court, England) Re Montrotier Asphalte Co. (1876) 34 LT 716 [1892] Ch 100 64 Stirling J. 65 Selangor United Rubber v Craddock [1967] 2 All E.R. 1255 66 [1989] BCLC 498
128
Act67 incorporates the duties of care diligence and skill in statute. It is submitted section 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 and care.
ISSUE Should there be a clarification of the standard of care, skill and diligence required of executive and non-executive directors?
2.2.51 Directors with full time service contracts may be subject to the contract which may go beyond his duties as a director under statute and common law. For example, he may be required to devote all his time to the company, and if employed for skills, to provide the requisite skill. If he fails to do so, he is in breach of his contractual duty. 2.2.52 However, in the case of non-executive directors, there are no service contracts to 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 be measured against the same standard as that used for executive directors. The standard of care required of directors and officers have been judicially determined according to the particular circumstance of the officer concerned. The duty of care, skill and diligence required is measured against the standard of a person with his knowledge and experience68. 2.2.54 The application of the objective/subjective test on the standards of care to be discharged by non-executives as advocated by Re City Equitable Insurance Company69 has been lenient. The classic illustration of this lower standard can be found in the Marquis of Butes case70 alluded to above. 2.2.55 However, increasingly the courts have required a greater degree of care to be exercised by directors, including non-executive directors, partly as a result of the attention generated on their role in corporate governance. There is an increasing trend (internationally) to hold directors liable to a higher objective standard. 2.2.56 There is now dicta by the highest courts in Australia that supports the application of a more stringent duty on directors. In the case of Daniels v Anderson71 which deals with the tortious duty of care owed by directors, the judge at first instance clearly considered the content of the duties of executive and non-executive duties
67 68 69
Section 122(1)(b) Canadian Business Corporations Act Re City Equitable Fire Insurance Co Ltd [1925] Ch. 407 [1925] 1 Ch 407 70 [1892] Ch 100 71 (1995) 37 NSWLR 438
129
as the same. The Daniels case follows the same approach taken in cases that increasingly adopt a more objective standard for both executive and nonexecutive directors. The Court of Appeal did, however, recognise that the duty would vary with the size and business of the company, and the experience or skills of the particular director; although it would be measured by an objective standard to which both executives and non-executives would be subject. The case reflects the importance of the role of directors and officers in Australia. It is no longer acceptable for directors to be passive in company affairs and directors are 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 recognition to the distinction between the different types of directors. Their equivalent provision now reads in the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporations circumstances (s232(4) of the CL). The Explanatory Memorandum to the amendment indicated that the special background, qualifications and management responsibilities of the particular officer may be taken into account in evaluating their compliance with the duty of care and diligence. 2.2.58 There is currently a proposal to clarify this obligation even further. CLERP has proposed to reform s232(4) of the CL to incorporate the intention of the previous amendment such that the standard of care required by the duties of care and diligence of the director (and officer) of the company be assessed by reference to the particular circumstances of the officer concerned. The standard is to be measured against that of a reasonable person if they were: a director or officer of a corporation in the corporations circumstances; occupying the office within that corporation held by the director or officer; and had the directors or officers 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 directors office, rather than the directors personal qualities. 2.2.60 Unlike the position under common law, section 132 of the CA also makes no distinction between executive and non-executive directors. Although there has been a dearth of judicial interpretation of this section, it is not inconceivable that the interpretation of the standard of care would follow the approach under common law and would be applied in this context to adjust the standard of care according to the circumstances of the officer concerned. 2.2.61 If s.132 of the CA is interpreted in line with English precedents reasonable diligence in s.132 would then mean a degree of diligence and care which is reasonable in the circumstances and no more72, this of course applies whether a director has or does not have executive functions.
72
Byrne v Baker [1964] VR 443, 450
130
2.2.62 Although Australian cases are only persuasive in Malaysia, it may indicate a judicial trend in applying a more objective standard for all directors, i.e. without taking into account the particular circumstances of the director or officer concerned. These concerns prompted the CLERP proposals to amend the law to take into account the particular circumstances of the director or officer. This is to overcome concerns that using the same objective standard for both executives and non-executives may dissuade suitably qualified persons from being independent non-executive directors. 2.2.63 In light of the direction taken by Australian cases, do we wish to wait for the evolutionary development of the law by judicial interpretation, or pre-empt the same by introducing a clear statutory standard by which to measure the exercise of the powers of directors? 2.2.64 It is submitted that the trend towards holding non-executive directors to an increasingly higher standard should not be stopped. In fact, it should be encouraged. Judicial interpretations of directors duties have tremendous effect in influencing change in companies and it is generally regarded as one of the catalysts for change in developed countries, where the past decade has seen a remarkable movement away from complacent boards composed of company executives and CEOs friends and invitees towards actively involved and independent boards. 2.2.65 The background to the recommendations for reform in Australia should be appreciated. The Australia corporate law reform programme is driven by an agenda that is quite different from ours. Briefly, theirs is premised on the fact that there is already an acceptable level of governance practised in Australian companies and the law should now encourage directors to make entreprising decisions with the ultimate aim of making businesses in Australia more competitive. Malaysia is, however, at the initial stages of developing independent and effective boards, and in particular independent and effective directors. Therefore, amending section 132 CA to ensure that the standard of care imposed is with reference to the particular circumstances of the director, and to articulate the circumstances which should be taken into account in determining the duty of directors, may impede the development of a higher standard of care being practised by non-executive directors. In any case, it is fairly well settled law in Malaysia that the duties of directors are in reference to the particular circumstances of the director in question.
Recommendation That section 132 (1) CA should NOT be amended to clarify that the standard of care imposed is with reference to the particular circumstances of the director.
131
2.3
Controlling shareholders
ISSUE Should fiduciary duties imposed on directors be extended to embrace controlling shareholders or shareholders with significant influence over the control of the company.
2.3.1 The law applicable to fiduciaries does not apply to shareholders. Their right to vote is a right in property. Therefore, when a shareholder votes on his shares, he exercises a proprietary right and not a fiduciary power. Essentially, a controlling shareholder is able to exert his influence in two significant ways. First, by exercising his right to vote at a general meeting and second, by exerting his influence over the board. The first issue is dealt with in 2.3.13 below. It is the second issue that is being considered here i.e. shareholder control over the board and therefore board decisions. This is a very significant power in the hands of a controlling shareholder. As alluded to earlier, the articles of companies confer broad powers of management on directors73. These carry very significant powers, which include the power to institute action, the power to approve all transactions of a company not requiring the approval of the general meeting, access to confidential company information in pursuance of this function, to name a few. The section 4 definition of directors under the CA deems as directors persons in accordance with whose directions or instructions the directors of a corporation are accustomed to act i.e. shadow directors. Shadow directors are not de facto directors. In the case of the latter there is usually an active holding out by the company that a person is acting as a director, although never actually or validly appointed as such. The concept of a shadow director is explained 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, sheltering behind others who, he claims are the only directors of the company to the exclusion of himself. He is not held out as a director by the company. To establish that a defendant is a shadow director of a company, it is necessary to allege 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 the company 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.
2.3.2
2.3.3
73
Reg. 73, Table A, CA
132
Millet J in this case accepted implicitly that a body corporate could be a shadow director of another company. The effect of section 4 is that they are subject to the 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 under the control of another, and harder still that he is also accustomed to act in this way. It is almost too easy to conceal their control, under a system which relies entirely on the willingness of the boards to disclose the identity of the person pulling the strings. Technological advancements in communications render it almost impossible to trace a particular instruction with respect to a particular transaction. However, the potential harm that such conduct has on minority shareholder rights is tremendous. It is not uncommon to find controlling shareholders undertaking businesses in direct competition with that of the listed entity, or asset shifting at the expense of the listed entity. While the legislature has made attempts to control such transactions, the problem with prescriptive requirements are that a clever adviser will probably find ways around the requirement. Fiduciary duties, on the other hand, are based on principles of equity and there is, therefore, some consideration in respect of the fairness of a transaction. It has been suggested that one way around the problem of enforcement is to deem significant shareholders of a certain shareholding threshold and above as directors. This is in a sense a rebuttable presumption and it is for the particular director in question to establish that he is not a shadow director. Such a provision will assist in closing gaps in duties and obligations, including public disclosure obligations that directors are subject to. The all consuming question in this respect is what the appropriate threshold should 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 the voting power may result in a change of control. However in terms of commercial reality, the 33% band is conservative. In companies with a huge shareholding base it is believed that 15% - 20% control over voting rights is sufficient for control. The Committee is unable to decide on a threshold without further empirical study, and recommends that this issue be studied further by the relevant authority. The second question that the Committee is undecided on relates to the formulation of control. Should it be limited to shareholding or beneficial interests in voting shares or should the concept of effective control which embraces a wider range of transactions be adopted? Better yet, should the formulation of control include interests in shares as defined under section 6 and 6A of the CA?
2.3.5
2.3.6
2.3.7
2.3.8
2.3.9
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 far this should be extended? The concept of interest in shares extends beyond proprietary interest, whether legal or beneficial. It refers to the factual
133
circumstances under which a person is able or entitled to exercise or control the exercise of votes attached to shares regardless of how that result is achieved or how the interest is derived. Section 6(A)(4)(a) in this respect embodies the concept of shadow directors. The concept, however, goes much wider. For example, under section 6A(6) CA it is extended to include persons who have entered into a contract to purchase a share or have a conditional or unconditional right to have the shares transferred over, to name a few. The drawback to the provision is that the obligation under the section is very wide and it introduces an 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 of imposing 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 a controlling interest in B which has shareholding in C, As effective shareholding or control in C is achieved by multiplying As percentage shareholding in B with Bs percentage shareholding in C. It is much narrower in ambit than the concept of interest in shares. The advantage to this formulation is that it is certain, and that 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 by a person seeking to evade the obligations that this proposed requirement seeks to 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 this proposal be taken up for further consideration by the relevant authority and upon sufficient consultation with the industry.
Recommendation The Committee therefore recommends that the proposal to deem significant shareholders of a certain shareholding threshold and above as directors be considered further by the relevant authority and upon sufficient consultation 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 shareholder votes 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 shareholders right to vote, There isno obligation on a shareholder of a company to give his vote merely with a view to what other persons may consider to be the interests of the company at large. He has a right, if he thinks fit, to give his vote from motives or prompting of what he considers his own individual interest.
74
(1877) 12 AC 589
134
2.3.14 The proprietary nature of the right to vote is so well ingrained that even if directors, who are also shareholders, are bound as directors to take a particular course 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 in a directors meeting, he is voting as a person under a fiduciary duty to the company for the proposition that the company should take a certain course of action. When a shareholder is voting for or against a particular resolution, he is voting as a person, owing no fiduciary duty to the company who is exercising his own right in property to vote, as he thinks fit. The fact that the result of the voting at a meeting will bind the company cannot affect the position that in voting 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 voting power under common law. The justification for judicial interference with the principle of majority rule is based on the principle that both the company (as a direct consequence of incorporation) and minority shareholders have rights of their own, that the majority cannot deprive them of75. Examples of rights belonging to a company include corporate opportunities, the right to sue and the right to issue shares. Examples of rights of minority shareholders may take the 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 from undertakings or potential undertakings of the company). 2.3.16 The courts have essentially sought to control the exercise of majority voting power through the equitable doctrine that the law will not permit the fraudulent exercise of a power. The term fraud is understood to mean fraud in the wider equitable 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 of the phrase, bona fide in the interests of the company as a whole, and to categorise factors which would assist in determining the propriety of purpose behind the conduct of directors, as alluded to earlier, it is also difficult and undesirable to attempt to define or categorise in advance what conduct would constitute a fraud on a power. Therefore, each case is generally left to be decided on its own facts. The cases in which the doctrine of fraud on a power has been invoked 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 76 77
Peters American Delicacy v Health & Co. (1939) 61 CLR 457 Estmanco v Greater London Council [1982] 1 All E R 437 Loh Siew Cheang, Corporate Powers at page 110
135
2.3.18 Other than the obligations in relation to the disclosure of substantial shareholdings under the CA as well as disclosure obligations when participating in an interested transaction with the company, controlling shareholders are presently not precluded from voting in relation to any particular transaction in which 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 deal with directors in the event of the directors conflict of interest with regard to the company. 2.3.19 The Committee recommends that the concept of a duty of fair dealing not unlike what we have proposed directors should be subject to, should be extended to include controlling shareholders. This may entail, for instance, a general rule that a controlling shareholder that enters into a transaction with a company has a 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 disinterested shareholders, (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 the shareholder action.
2.3.20 The range of situations should not be limited to transactions involving acquisitions and disposals such as that embodied in section 132E CA. However, a determination will have to made by the relevant regulator of the circumstances under which such a duty should be imposed. A circumstance that may warrant imposition of such a duty is, for example, in conflict of interest situations where there is use by a controlling shareholder of corporate property, corporate information or corporate position. This matter requires further review and it is recommended that the relevant regulator determine the extent of the applicability of 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 to vote in certain defined circumstances. The relevant regulator should attempt to define the circumstances under which such a duty should be imposed.
136
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 to officers of companies. That is to say, officers of companies are subject to both fiduciary duties as well as the duties of care, skill and diligence that directors are subject to. While section 132 (1) is not extended to officers there are nevertheless provisions in 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 provisions such as section 99B SIA that impose disclosure obligations on chief executives of companies. Similarly, the CA imposes on both directors as well as managers the requirement to maintain proper accounts. Managers for purposes of the CA is defined as the principal executive officer of a company. The reluctance to extend the duties under the CA to embrace officers is to some extent attributable to the definition of the term officer in the CA which is defined widely to include all employees of a company. However, the argument for the imposition of duties on officers takes on greater weight if it is limited to principal executives of companies or managers, or in other words, persons who are in a position to make material decisions for a company and should, therefore, be subject to the duties and obligations imposed on directors. It is submitted therefore that the duties imposed under section 132 CA should be extended to embrace senior or principal executive officers of companies and so should the proposed amendments to section 132CA.
Recommendation That the duties under section 132CA should be extended to embrace senior or principal executive officers of companies.
2.4.2
2.4.3
2.4.4
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, who must be resident in Malaysia80. Section 139(3) provides that the company secretary shall be appointed by the directors.
78 79 80
Section 232(2) Corporations Law Section 122 (1)(a) Canadian Business Corporations Act 1975 Section 139(1) CA
137
2.5.2
Section 139 of the CA requires all company secretaries to be a member of a professional body prescribed by the Minister of Domestic Trade and Consumer Affairs or licensed by the ROC (s139B of the CA). The Minister of Domestic Trade and Consumer Affairs had also launched a Company Secretarys Code of Ethics (Code of Ethics) in an effort to instill professionalism and effectiveness in company secretaries. Section 4 of the CA considers the company secretary to be an officer of the company. He is subject to liabilities an officer, which include among other things liability under section 132(2) CA for misuse of corporate information and 132A CA for insider trading. The role of the company secretary is not an easy one to describe. Their duties to a large extent are not fixed by law but are generally those assigned to him by the articles or his contract of employment. Also, it is not uncommon for company secretaries to double up as legal officers, finance officers or even corporate finance officers. In smaller companies, one of the directors may concurrently act as the company secretary (if qualified). At its core, the secretarys function is basically to handle all the paperwork and procedural matters that running an incorporated company involves. They essentially undertake the companys responsibilities of keeping the registered office open and accessible to the public for the minimum hours specified each day (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 SCs Policies and Guidelines on the Issue/Offer of Securities also place a duty on company secretaries to receive and keep a record of disclosure by directors of public listed companies of their dealings in securities of such companies, as well as requiring the company secretary to table those disclosures at the meetings of the board of directors (Para 5.03(2)). However, he is today more than a glorified office manager. There has been judicial recognition of the increasing role of the company secretary in the day-to-day business of companies. He is the chief administrative officer of a company and clothed with ostensible authority to enter into contracts concerning administrative matters81. The company secretary is, however, not part of management and, therefore, has no power to make commercial decisions on the companys behalf82. There is also the developing role of the company secretary in terms of advising the board and the chairman of the companys and directors compliance obligations under the law. The Cadbury Committee looked to company secretaries to advise the chairman and the board on the implementation of the Code of Best Practice. Their role is, therefore, not purely administrative. They have a crucial advisory role as well, which then follows through into a crucial role in encouraging compliance with the law.
2.5.3
2.5.4
2.5.5
2.5.6
2.5.7
81 82
Panorama Development v Fidelis (1971) 2 QB 711; Mohamed b Othman v Abdul Shattar b Abdul Ibrahim [1987] 2 MLJ 695, 697 Mohamed b Othman v Abdul Shattar b Abdul Ibrahim [1987] 2 MLJ 695, 697
138
2.5.8
In a large listed company, the company secretary is usually an employee. In smaller companies, this function or the task may be farmed out to an independent company secretarial firm. However, various arrangements may exist dictated largely by commercial considerations. For example, some listed entities have both internal and external company secretaries; the external secretary in this respect is largely responsible for procedural matters that the running of an incorporated company involves, while the internal company secretary takes on a more administrative role. On the other hand, some companies may require the company secretary to handle administrative matters only, while the wider compliance issues are dealt with by a legal or other officer. The advantage of internal company secretaries is that their hands-on role in the daily workings of the company makes them the perfect candidate for undertaking a compliance role, as they have intimate knowledge of the administrative workings of the company to be able to comment on their compliance with laws and regulations. The problem, however, is that internal secretaries are employees of the company, appointed by directors, hereby casting doubt on their independence from the board.
2.5.9
2.5.10 In contrast, external secretaries are not involved in the management of the company, and therefore may have sufficient distance from the company to be independent of the board. However, there are reservations about their ability to meet the expectations of performing an advisory role because of their lack of proximity with the company. 2.5.11 The Committee considered whether company secretaries should be mandated by law to advise the board. It decided that it would be impossible to do so, in recognition of the fact that there are persons other than company secretaries that may undertake this task. Also, such a provision does not address the mischief that is intended to be addressed, i.e. that directors should take advice on their compliance obligations when deliberating on transactions on behalf of the company. 2.5.12 The Committee then considered if directors should be placed under a positive obligation under law to take the advice of company secretaries when deciding to undertake certain material transactions, which would include related party transactions. It was felt that such a duty does not recognise fully the fact that the role of an adviser to the company may be fulfilled by persons who are not company secretaries, but who are nevertheless competent to undertake such a role. It was, however, felt that a more meaningful approach would be to require a director to inform himself, to the extent he deems appropriate, about the subject matter of the business judgment. This is an element of the statutory business judgement rule that we allude to below. In this respect, the director is then open to 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 all directors should have access to the advice and services of a company secretary, may in time facilitate a gradual and incremental shift towards increasing their range of responsibilities into a wider advisory function.
139
Recommendations That there should be no codification of the advisorial role of company secretaries. That directors should not be placed under a positive obligation under law to take the advice of company secretaries when deciding to undertake certain material transactions. Rather it should take the form of an indirect requirement of informing himself, to the extent he deems appropriate, about the subject matter in question. This is consistent with the recommendation in paragraph 3.2.5 below on the inclusion of a statutory business judgement rule.
3.
3.1
Defences
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 in trusting an official to perform certain duties83 . But, the judgment of the majority of the New South Wales Court of Appeal in Daniels, indicated that directors cannot blindly rely on the judgments of others. Ignorance, a failure to inquire and a blind reliance on the judgment of others would not protect directors from liability for the breach of the duty of care and diligence. The court also required that directors be reasonably familiar with the business of the company. The CLERP proposal argues that the inability of directors to rely on others could lead to a conservative approach to decision-making, and has made a case for the introduction of legislation following the New Zealand approach. The NZCA allows directors to delegate powers in return for undertaking a supervisory role. In that role they may rely on reports, statements, financial data and other information supplied by employees, experts, professional advisers and other directors where the matters fall within their designated field of responsibility. This approach is preferable. If directors are unable to rely on others in order to glean information, directors would therefore be forced to make detailed and exhaustive inquiry into every matter, thus holding up the decision-making process. There should, however, be safeguards in place to ensure that this requirement is not abused.
3.1.2
3.1.3
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].
83
140
3.1.4
The safeguards should include the following: That the director must act in good faith The good faith test contemplates an inquiry into the directors state of mind. It recognises that the special skill, background or expertise of a director may render unwarranted reliance that would be proper for a director lacking such special skill, background or expertise. That the director should reasonably believe that the reliance or continuing reliance is warranted. The person relied on should be such that the director reasonably believes merits confidence.
Recommendation The ability to rely on others to perform the duties associated with his office should be included as a defence under the law subject to necessary safeguards 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 judgment by directors, should they be able to avail themselves of a defence from personal liability for breaches of duties in respect of such judgement? At common law, Courts are loath to substitute its judgment for the business judgement of directors or shareholders. However, the business judgement rule does not apply where the judgement was not arrived at bona fide in the interests of the company as a whole or has been precipitated by improper motives. Australia and the United States have attempted to formulate a business judgement rule. In the United States, the rule takes the form of judicial doctrine. CLERP, however, has proposed a statutory formulation of the business judgement rule. CLERP proposes that an officer of the corporation would have discharged his duty 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 the business judgement;
3.2.2
3.2.3
3.2.4
141
the officer informs himself about the subject matter of the business judgement to the extent that he thinks appropriate; and rationally believes that the business judgement is in the best interests of the corporation.
3.2.5
It is submitted that such a statutory safe harbour is necessary in tandem with the extensive codification of fiduciary duties and the duties of skill and care and the introduction of a statutory derivative action as recommended in chapter 6 para 4.24 of the Report. The statutory provision should additionally explicitly preserve the application of all other common law defences.
Recommendation That a statutory safe harbour in the form of the business judgement rule is necessary in tandem with the extensive codification of fiduciary duties and the duties of skill and care and the introduction of a statutory derivative action as recommended in chapter 6 issue 4 paragraph 4.24 of the Report. The statutory provision should additionally explicitly preserve the application of all other common law defences.
142
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 INVOLVE THE WASTE OF CORPORATE ASSETS.
1.
1.1
Background
Disclosure requirements exist for the following reasons To ensure that all investors have equal and timely access to information to preserve the integrity of the market (i.e. to ensure that market participants have equal opportunities and face equal risks and that market supply and demand is not distorted by information asymmetry). To provide the public with adequate information about the affairs of the company in order to enable them to make informed decisions about investing or whether to continue 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 time consuming or may place the company in a disadvantageous position with regard to its competitors. Accordingly, there needs to be a balance between the principle that the market should be provided with adequate information to avoid a false market and the need for the company to keep price sensitive information confidential. Disclosure in respect of conflicts or potential conflicts of interests with the interests of the company, are also relevant. With respect to directors, they are fiduciaries and any of their interests which compete with that of the company or with their duties, should be disclosed, so as to maintain the integrity and confidence in the directors. At present, there are certain prohibitions against particular transactions being effected without the approval of shareholders. The issue is whether the law should require that these interested parties such as directors, and controlling shareholders, should abstain from voting as shareholders in respect of such transactions. Sources of information to investors regarding the affairs of the company
1.3
1.4
Formal sources of information about a public listed company are: Announcements and circulars issued pursuant to the continuing disclosure requirements under the listing requirements of the relevant exchange 84 and Guidelines of the SC;
Listing Requirements and Chapter 7 of the SC Guidelines prescribe the matters which must be submitted to the exchange and the SC.
84
143
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.
2.1
Adequacy Of Disclosures
In reviewing the adequacy of disclosures, it would be useful to segment disclosures in relation to public offerings of securities, and continuous disclosure requirements in regard 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 the Minister of Finance) should administer matters relating to a proposal by any persons to make available, offer for subscription or purchase or issue an invitation to subscribe or purchase securities. Part IV of the CA, on the other hand, provides for another set of requirements governing the issue and offer of securities which is administered by the ROC. 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 have direct powers in relation to prospectuses under such circumstances. Without the power to administer these prospectus requirements, it would be difficult to undertake consistent regulation of the proposals to offer securities under section 32 of the SCA. In the interests of efficiency and providing legal and regulatory certainty, the relevant Ministries have recognised the need to rationalise this area in order to clearly delineate the responsibilities of the SC and the ROC (as the repository of prospectuses). The relevant Ministries have confirmed that steps will be taken towards rationalising the regulatory 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 prospectuses and other provisions concerned with issues and offers of securities while the ROC will have powers in relation to the lodgement of prospectuses after registration by the SC. In respect of primary market disclosures, steps have already been taken to increase the responsibilities of the directors and advisers85 with respect to submissions made to the SC. Under the provisions of the SCA, there are sanctions86 for false or misleading information 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 submit any information to the SC under such circumstances87. In addition, the CA has certain provisions that require the person who submits a prospectus for registration, to maintain the accuracy of prospectuses before the issue of the securities88. Work towards strengthening the rights of investors to take action for false and misleading statements
2.3
2.4
85 86
E.g. directors, underwriters, advisers and experts 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 not exceeding 10 years or both.
144
in respect of primary market disclosures will be dealt with in the transfer of powers from the ROC to the SC through the relevant amendments to the SCA and the CA. The amendments are premised on the fact that persons responsible for prospectuses must exercise 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 noncompliance with disclosure requirements may be enhanced
2.5 For the investing community to be vibrant, it must be confident of the accuracy and timeliness of the information upon which it must rely. Serious concerns exist about the ongoing disclosures of listed companies. The concerns focus both on the timeliness of the release of information and upon the content of releases. We regard the decision as to the timing of release of the information as of paramount importance in building shareholder confidence in corporate management. The benefit of ensuring continuing disclosure is that the market remains fully informed of developments of the company. This also ensures that the market operates efficiently and effectively. In principle, where the investors expectations of disclosures are met, confidence in the market will be bolstered, and this might be reflected in a reduction in costs of capital. Disclosures at the initial issue or offer of securities, and continuous disclosure must, therefore, be effectively regulated89. Malaysian law, primarily through the CA, Listing Requirements as well as the SC Guidelines on the Issue and Offers of Securities, spells out rules relating to the timing and content of disclosures. There are extensive provisions under the Listing Rules that provide for the policies of the KLSE with respect to continuing disclosures90 . Our continuous disclosure system includes timely disclosure releases regarding material changes, as well as half-yearly and annual reports. The SIA, prohibits a person from making a statement or disseminating information that is false or misleading in a material particular and is likely to induce transactions with respect to the securities, if he does so when he does not care whether the statement or information is true or false, or where he knows or ought reasonably to have known that it is false or misleading in any material particular91 . Civil remedies now exist in respect of such contraventions.
2.6
2.7
Section 46 of the CA. 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 and enforces corporate disclosure policy under Part 10 of the Listing Requirements. The policy is to ensure the perpetuation of a fair and orderly 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 the company, 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
89
88
145
2.8
Breach of the Listing Requirements essentially allows the Exchange to take action any of the penalties provided for in Part 12 of the Rules as well as Section 11 of the SIA. In this respect, we consider it necessary for securities laws to place a positive obligation on companies to disclose to the Exchange information that must be disclosed under its rules. It is submitted that92 there should also be civil and criminal consequences for intentionally, recklessly or negligently failing to notify the exchange of information that must be disclosed under its rules. One recent development in the context of disclosure of information in financial reports is the establishment of the Malaysian Accounting Standards Board under the provisions of the Financial Reporting Act 1997. This Act provides for the promulgation of accounting standards by this Board and for its application to reporting entities. Section 27 of this Act stipulates that where financial statements are required to be prepared and lodged under any law administered by the SC, the Central Bank or the ROC, such financial statements shall be deemed not to have complied with the requirement of such law unless they have been prepared in accordance with the relevant approved accounting standard. In pursuance of this requirement, amendments have been made to the CA to ensure that financial statements required to be submitted under this Act are 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 similar obligation is imposed upon listed companies. The Committee fully supports these initiatives to strengthen the quality of financial reporting. It must be noted that there are no statutory provisions attaching civil liability to decisions as to the timing and content of disclosures generally. Securities legislation does not provide for the recovery of damages by the investor against the person who has made the misleading or deceptive statement or information in respect of his continuing obligation to disclose information93. This right exists in respect of disclosures in prospectuses under section 46 CA. The difference between liability for statements included in prospectuses and secondary market type disclosures is essentially that in the case of the former, there is a well established process, to ensure that the statements are throughly vetted prior to release. 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 directors assume in respect of these statements, the relevant authority should determine the ambit of the provision. While a statutory provision imposing civil liability on directors for the content of continuous and timely disclosures is generally acceptable, there is difficulty in supporting civil liability of directors for the timeliness of releases. One of the most difficult decisions that companies face is the timing of releases concerning material changes in the affairs of the company. Where directors choose to err on the side of caution, it must be noted that the market can be harmed by both pre-mature and late disclosures.
2.9
2.10
2.11
92
Section 1001A of the Australian Corporations law provides, in summary, that a listed entity must not contravene ASXs 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.
146
2.12
One fundamental area that crops up in the area of enhancing timely and accuracy of disclosures is the need to rationalise the fragmentation that exists in the law regulating continuing disclosures of companies. It is important to ensure that there are clear lines of responsibility between the various institutions who regulate the market. This would enable market participants to clearly identify their disclosure obligations while ensuring that in the event of breach of the relevant requirements, swift and definitive action can be taken by the responsible authority. This rationalisation effort has already commenced in respect of the prospectus provisions as mentioned above and it is submitted that such an effort should also be regarded as being of prime importance in enhancing secondary market disclosures.
Recommendations Continue the exercise to enhance and rationalise disclosure requirements in respect of prospectuses. In addition, provisions should encourage directors and other corporate advisers to exercise a high duty of care in the discharge of their responsibilities. Also disclosures should be simplified and enable ready comparison 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 must be disclosed under the rules of the exchange. Sanctions: That securities legislation should provide for the recovery of damages by the investor against the person who has made any misleading or deceptive statement or information under such circumstances in respect of continuing disclosures.
Disclosures in directors statement and auditors report
ISSUE Directors statement on internal controls

2.13 Under section 167 of the CA, directors and managers are required to maintain adequate accounting 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 must in practice maintain some form of control system over the companys process of financial management. However, there is no explicit requirement in company law for them to maintain an effective system of internal financial control, let alone internal controls. Auditors in turn, as part of their usual audit procedures will consider how far they can rely on the companys internal control systems in carrying out their audit of the financial statements. As a normal part of their audit procedures the auditors thus evaluate the internal 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 usually comment to management on their findings in what is commonly known as the management letter. However, there is at present no requirement under the CA for auditors to report on the adequacy of internal controls.
2.14
147
2.15
Cadbury recommended that the directors should report on the effectiveness of the companys system of internal control94 and that this report should be reviewed by the auditors95. In respect of the latter, Cadbury left open the question of to whom the auditors should report, and whether their findings were to be made to the public. The Listing 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 auditors are to issue a report to the company and strongly recommends that such reports be included in the companys annual report and accounts. A survey conducted by KPMG Pete Marwick96 on this disclosure requirement revealed that two thirds of companies are including the auditors report on corporate governance matters in the companys annual report and accounts. Most companies not publishing the report make reference to the auditors review. The Hampel report recommends that three amendments be made to the requirement of the Code of Best Practices. They are as follows That the word effectiveness be dropped from the Code. The Hampel committee found that the word effectiveness has proved difficult for directors and auditors in the context of public reporting. It can imply that controls can offer absolute assurance against misstatement or loss; in fact no system of control is proof against human error or deliberate override. There has also been concern that directors and auditors who confirmed the effectiveness of a companys control system may be exposed to legal liability if unintentional misstatement or loss of any kind is found to have occurred. That the reporting on controls be widened to include reporting on all controls and not just financial controls. Not only is it difficult to distinguish financial from other controls but it is important for directors and management to consider all aspects of control. That auditors should not be required to report publicly on directors statements, but that they can contribute more effectively by reporting to directors privately. This would enable a more effective dialogue to take place; and allow best practice to continue to evolve in the scope and nature of such reports, rather than externally prescribing them.
2.16
2.17
It is also important to note that aside from the issues highlighted by the Hampel committee, this requirement has generally been regarded as beneficial. This requirement has forced audit committees and boards to give more time to considerations of risks (both operational and financial) and their control.
94 95 96
Item 4.5 Cadbury Code of Best Practice Footnote, Cadbury Code of Best Practice 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 the st year ending 31 December 1995 while the remainder were predominantly March 1996 year ends).
148
Recommendations That the Listing Requirements require directors to make a statement about the internal controls in a company. It is the descriptive statement that is most important from a readers point of view, as it is the information contained therein that will enable them to judge the directors approach to risk and control. In this respect, the reporting on controls is not merely limited to financial risk and controls 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 directors statements, but to report the results of the review to the directors privately. The recommendation proposed for the Code, which requires that directors maintain a sound system of internal controls to safeguard shareholders investments and the companys assets97 is an essential pre-requisite for purposes of fulfilling this reporting requirement.
ISSUE Directors going concern statement

2.18 This concept is defined in accounting standards (IAS 198 ) as the assumption that the enterprise will continue in operation for the foreseeable future. This means in particular that the profit and loss account and balance sheet assume no intention or necessity of liquidation or curtailing materially the scale of its operations. Whilst the requirement for directors to prepare financial statements giving a true and fair view creates a presumption that they will satisfy themselves that the company is not in financial difficulties and that the going concern basis is appropriate, there is no explicit obligation in company law that they should do so. There is similarly no requirement in law for the directors to report to shareholders that they have satisfied themselves about the going concern basis or the adequacy of financial resources. Auditors in turn, while obliged by auditing guidance to be satisfied that the going concern basis is appropriate are not obliged to perform any procedures specifically designed to identify any indications that the going concern basis may no longer be valid.
2.19
2.20
Part 2 AAI of the Code. 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
98
97
149
2.21
Cadbury recommended that directors should state in the report and accounts that the business is a going concern, with supporting assumptions or qualifications as necessary; that auditors should report on this statement; that the accounting professionshould take the lead in developing guidance for companies and auditors, and that the question of legislation should be decided in the light of experience. The London Stock Exchange subsequently incorporated the requirement to make a going concern statement within its rules99 effective for accounting periods beginning on or after 31 December 1995. The Committee was concerned that if this responsibility was made a requirement of the listing rules, directors may err on the side of caution in the case of doubt. The effect of cautious and perhaps negative statement may cause tremendous harm to a company and perhaps affect its position as a going concern. It is noted that the Hampel committee recommended that the guidance developed by a Joint Committee set up by the accountancy profession and issued in November 1994 is satisfactory and that there is no need for legislation. In response to suggestions that the accounting standards already require directors to prepare accounts on a going concern basis and that it is therefore unnecessary, the Committee found that this requirement obliges directors to focus on whether the company is properly regarded as a going concern and hence, it should remain. The Committee considered that the requirement for a public statement in respect of going concern will play an important part in maintaining good corporate governance practices. It is submitted that the Listing rules of Exchanges should require directors to state in the report and accounts that the business is a going concern with supporting assumptions or qualifications as necessary.
Recommendation That the Listing rules of Exchanges should require directors to state in the report and accounts that the business is a going concern with supporting assumptions or qualifications as necessary. That the Listing rules of Exchanges should require auditors report on this statement in their report.
2.22
2.23
2.24
ISSUE Statement of directors responsibilities

2.25 Cadbury recommended that directors should explain their responsibility for preparing accounts next to a statement by the auditors about their reporting responsibility.100 This recommendation was made to address the problem of the so-called expectation gap 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
2.26
99
100
Listing Requirements, paragraph 12.43(v) Item 4.4 Cadbury Code of Best Practice
150
expectations gap is to be clear about the respective responsibilities of directors and auditors for preparing and reporting on financial statements of companies and hence the reporting requirement.
Recommendation That the Listing Requirements should require directors to explain their responsibility for preparing accounts next to a statement by the auditors about their reporting responsibility.
ISSUE Whether the accounting standards are sufficient for the disclosure purposes and whether harmonisation of standards with international standards is necessary
Recommendation Measures must be taken to harmonise financial reporting requirements with international standards by the Malaysian Accounting Standards Board. The Committee does not consider that its terms of reference requires it to review the areas where the accounting authorities are closely involved.
ISSUE Who should be responsible for ensuring that continuing disclosure obligations of the listed company are complied with?
2.27 This relates to the issue as to whether or not there should also be disclosure of the extent of compliance by listed companies with respect to corporate governance standards prescribed. The existing non-financial disclosure requirements under companies and securities legislation and the disclosure policies of the KLSE are fairly extensive101 . However, methods of encouraging compliance as well as to enforce these requirements should be enhanced, for instance, by requiring a company secretary, or a person within the organisation to undertake the responsibility for ensuring that all proper disclosures are made. 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 a compliance person in respect of disclosures because of their lack of proximity with the
2.28
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 information necessary to informed investing; and to take reasonable steps to ensure that all who invest in its securities enjoy equal access to such information. The rule is essentially that a company must make timely and adequate disclosure of information which a reasonable or potential investor would want to know in order to decide on what course of action to take, and information must be given to preserve the integrity of the market.
101
151
company. It is submitted therefore that this responsibility should only be undertaken by a person within the company, who may or may not be the company secretary of the company102.
Recommendation That the Listing rules of the Exchanges should require every company to identify a person within the company to undertake the responsibility that all relevant disclosures are made.
3.
3.1
Directors Interests
The statutory principle is that directors must disclose all interests which may be in conflict with the interests of the company103 . Conflicts of interest may arise through either 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 director of 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 in transactions involving the company or derive any profit from his position, unless he declares the nature of his interest, and the shareholders in general meeting release him from the application of this principle. A breach of this principle would entitle the company to consider the transaction voidable, and the company may recover all benefits derived by the director. The purpose is not only to prevent financial loss to the company, but also to ensure integrity of management, which would have more information than others with respect to the company.
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 KLSEs Corporate Disclosure Policy, out of which more than half delegated the task of ensuring 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 his interest in securities of the listed corporation of which he is a director or chief executive or an associated corporation of the listed company. The consequence of a breach of this provision is criminal sanction of up to RM 1 million or imprisonment of up to 10 years or both. 104 Subsection 131(5) of the CA provides that every director who holds any office or possesses any property whereby directly or indirectly duties or interests might be created in conflict with his duties and interests as directors, shall declare at a meeting of the board of directors, the fact, nature and extent of the conflict. There are criminal sanctions for breach of this provision, also under subsection 131(8) of the CA. The effect of this subsection is that directors may create interests and duties in conflict with their duties and 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 contract with the company shall, as soon as practicable after the relevant facts have come to his knowledge, disclose the nature of his interest at a directors meeting. The consequences of a breach of this provision are criminal sanctions under section 131(8) of the CA - (7 years or RM 150,000 or both). It is not clear whether this affects the enforceability of the contract (except where it is clear from the articles of association).
102
152
ISSUE Whether a director should be forbidden to vote with regard to arrangements or transactions in which he is interested, or in relation to which he holds any property or 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 of association, 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 has declared his interest in the transaction, unless: 3.4 the articles provide otherwise106 ; or statute specifically prohibits him from voting.
Section 132E of the CA prohibits a company from entering into any arrangement or transaction with its director (or a director of its holding company or a person connected with the director) to acquire or dispose of any non-cash asset of requisite value107 unless prior approval of the company in general meeting has been obtained108 . The consequence of 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. The sanctions are as follows: a director or a connected person and any director who authorised the arrangement or transaction (each a defaulter) is liable to account to the company for any direct or indirect gains which might have been made by them and they are jointly and severally 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 RM 30,000/- or both.
3.5
3.6
However, it is noted that if the facts are fully disclosed, the transaction is still capable of being ratified. Under such circumstances, the defaulter may not only keep the profits but 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 require that a director, or substantial shareholder who is interested in a transaction, whether directly or indirectly, refrain from voting as a shareholder at a general meeting where the acquisition or realisation requires shareholders approval. The KLSE would also normally 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.
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 not mandatory for companies to adopt Table A, the terms of which may be expressly excluded. 107 As defined under section 132E(5) of the CA 108 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 resolution of the holding company. 110 See page 279, Low S.C. Corporate Powers.
106
153
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 method by which a member gets his voice heard in the companys affairs. The right is protected by statute (s.148 CA) and cannot be excluded by the memorandum or articles. In common law, 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 an interest 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 to exclude shareholders interested in the subject matter of the resolution, from voting, in order to arm rule 118 with statutory backing. Notwithstanding the removal of any ambiguity as to the legal basis for rule 118, the UEM-Renong debacle highlights the need to extend this exclusion to parties who are indirectly 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 in which they are directly involved. It was felt that as both Renong and UEM were managed by the same interested parties, that Renong should be disqualified from voting. Rule 118 should therefore be amended to require directors, substantial shareholders and also persons connected with such directors or substantial shareholders who are interested in a transaction, to abstain from voting. Efforts to widen and strengthen rule 118 preceded the Committee. Both the SC and KLSE initiated the review in response to the public outcry that followed the above mentioned deal and it is now in the final stages of completion.
3.9
3.10
111
North-West Transportation Co. Ltd. v Beatty (1887) 12 App Cases 589
154
Recommendation112 Directors, substantial shareholders or a person connected with a director or a substantial shareholder113 (relevant parties), interested in a transaction, should be required in the law to refrain from voting as a shareholder in respect of that transaction114 . The relevant regulatory bodies are already working on this matter, and steps will be taken to expedite the necessary amendments to give effect to this principle. The prohibition from voting would extend to relevant transactions which will be defined. These relevant transactions would include, for example, acquisitions and disposals of interests in companies, joint ventures, the release of profit guarantees which may have been given by the directors in favour of the 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 120 under Part 4 of the Main Board Listing Requirements and Rules 5.1 to 5.10 under Part 5 of the Second Board Listing Requirements. Under the revised rules of the KLSE, a director or substantial shareholder of a listed company or any person connected with the director or substantial shareholder, with any interest, direct or indirect, in the transaction, cannot vote in respect of the transaction. The other amendments to the KLSE rules: Widen the scope of the application of the rules beyond transactions involving the 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 circulars to 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 transaction is carried out on fair and reasonable terms; and Require the board of directors to state that the transaction is in the best interests of the company.
The enhanced disclosure in the announcement and circular also apply to other non-related party or interested party transactions which exceed prescribed materiality percentage ratios i.e. 5% where an announcement must be given to the 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 which would materially and adversely affect the company should be amended.
112 113
See update. Within the meaning of section 122A of the CA, i.e. a member of the director or substantial shareholders 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.
155
ISSUE Should section 132C be amended?

3.11 Section 132C of the CA provides that directors shall not carry into effect or execute any transaction for the acquisition of an undertaking or property of a substantial value, or the disposal of a substantial portion of the companys undertaking or property which would materially and adversely affect the performance or financial position of the company, unless the proposal or transaction has been approved by the company in general meeting. It is found that in practice, a director will not be prepared to say that a transaction would adversely affect the performance or financial position of the company, since that would mean that the director is not carrying out his duties as a director. Another problem with section 132C is that it gives rise to uncertainty as to the scope of the section, leading to doubts as to whether in any one transaction, approval of the general meeting is necessary. In this respect, the new rules 111-120 of Part 4 Listing Requirements set out a better defined criteria for the regulation of related party transactions. It introduces tests such as the assets test, profits test, consideration test, consideration to market capitalisation test and equity or capital outlay test. It is recommended that the criteria for materiality should be set out in the CA and should be formulated in the same manner as laid out in the Listing Requirements.
Recommendation Section 132C of the CA should be amended so that the prohibition relates only to a relevant acquisition or disposal which is material, and the removal of the requirement that it will adversely affect the performance or financial position of 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 laid out in Rules 111-120 of Part 4 of the Listing Requirements.
3.12
3.13
ISSUE Whether the disclosures of directors interests under sections 131 and 134 of the CA 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 way interested in a contract or proposed contract with the company shall, as soon as practicable after the relevant facts have come to his knowledge, disclose the nature of his interest at a directors meeting. Subsection 131(5) of the CA provides that every director who holds any office or possesses any property whereby directly or indirectly
156
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 the conflict. The committee considers that this should extend also to disclosure of interests of directors spouses and children115 . 3.15 Section 134 of the CA provides that a company shall keep a register showing with respect to each director, inter alia, particulars of shares in a company or related company in which he is director. The committee considers that the whole of section 134 should be applicable also to spouses and children of the directors116 . Under the SIA, the obligation of a chief executive and a director of a listed company to disclose to the SC his interest in securities of the listed corporation of which he is a director or chief executive or an associated corporation of the listed company, extends to those of his spouse, child or parent117 .
Recommendation In relation to section 131 of the CA, the directors disclosure duties should be extended to disclosure of interests of directors spouses and children. In relation to section 134 of the CA, this should also be extended to spouses and children of directors. Consideration should be given as to whether the provisions under the CA and the 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) from making loans to its directors or directors of companies which are related to it, or to guarantee or provide security in connection with a loan to such directors. Section 133A of the CA extends this prohibition to persons who are connected to its directors or the directors of the holding company. The transactions are in respect of loans only. This does not cover transactions with directors involving some form of financial benefit without the granting of a loan.
Recommendation Sections 133 and 133A to be amended to cover quasi-loans or other financial benefits, arrangements, gifts or quasi-gifts.
115 116
The Singaporean Companies Act section 156 provides for such disclosures. 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.
157
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 relevant person or the shareholders at large of the target company. The relevant person is:(a) (b) (c) a director; substantial shareholder of the acquiring company; or 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 this section is meant to address. The new section 132G seeks to prohibit the acquisition by a company of shares or assets of another company, where a shareholder or director of the company has a substantial shareholding in that other company unless the shares of that other company have been held by the shareholder or director, or the assets have been held for more than 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 indemnify the company for expenses incurred in acquiring the shares or assets and such further expenses as would be incurred in recovering the consideration. That innocent parties who have no knowledge of the transaction at the time of transaction and who have acted honestly and reasonably are able to recover. That the relevant regulator should review the necessity for the absolute prohibition with respect to section 132G transactions in view of the fact that the drafting of the section can sometimes have the effect of capturing genuine transactions. There is a case, therefore, for such transaction to be made subject to the prior approval of shareholders, with the interested parties abstaining from voting.
158
Recommendation The ROC is currently undertaking a study to amend Section 132G. It is recommended that section 132 G CA should be amended: to ensure that errant directors and vendors aware of the illegality should be made to indemnify the company for expenses incurred in acquiring the shares or assets and such further expenses as would be incurred in recovering the consideration; to ensure that innocent parties who have no knowledge of the transaction at the time of transaction and who have acted honestly and reasonably are able to recover; and to clear the ambiguity with regard to the phrases first held the shares in that other company118 .
The ROC should also review the necessity for the absolute prohibition with respect to section 132G transactions in view of the fact that the drafting of the section can sometimes 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 the company and its directors or persons connected with directors allows for these transactions to be ratified by the company in the general meeting. The Listing Requirements (Part IV, Rules 111-120) require that in respect of substantial transactions (i.e. where the size of the transaction is equal to or exceeds 25% of specified percentage ratios) directors should obtain the prior approval of shareholders at a general meeting. It is recommended that the provision in section 132E CA that allows for ratification of transactions falling within its purview should be removed. This is because in the more volatile market environment of today, undoing a transaction, especially one that is substantial in size may be impossible or may encounter considerable difficulties. A further amendment that should be made to section 132E is to remove ambiguities associated with determining whether or not the transaction is a substantial property transaction or not. There has been some uncertainty as to whether the section precludes the board from executing a conditional agreement given the wide language of the
4.5
4.6
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 acquiring company, or a person connected with such shareholder or director has a substantial shareholding as defined in section 69D whether or not for the benefit of such shareholder, director or connected person or for any other person unless the arrangement or transaction was entered into three years after such shareholder, director or connected person as the case may be first held the shares in that other 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 shareholder in the target company, and not the date any shares in general were first held.
118
159
provision. This has given rise to various devices e.g. execution of MOUs, Letters of Intent 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 set out a better defined criteria for regulation of material or substantial transactions. It is recommended that section 132E should be reformulated to reflect the criteria set out in Rules 111-120 of Part 4 of the Listing Requirements.
Recommendation That the provision in section 132E CA that allows for ratification of transactions falling within the purview of the section should be removed. That section 132E should be reformulated to reflect the criteria set out in Rules 111-120 of Part 4 of the Listing Requirements.
ISSUE Are the penalties for breach of the related party provisions under the CA sufficient?
4.8 Currently, the penalties for breach of the legal provisions in relation to substantial acquisitions and disposals (i.e. section 132C) and substantial property transactions (i.e. section 132E) involving the company and directors or persons connected with directors is 5 years imprisonment or a fine of thirty thousand ringgit or both. An additional penalty for breach of Section 132E is that the director or person connected with 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 for any loss or damage resulting from the transaction.
4.9
4.10
The insider trading provisions, under the SIA not only allow investors to seek full compensations for loss from offenders, but also allow the SC to institute civil proceedings against an insider to recover up to three times the profit or loss avoided by the insider and to impose a civil penalty of up to RM 500,000. As substantial or connected party transactions have the potential to inflict more harm on minority shareholders than even insider trading, the penalties for breach should be modernised and substantially increased.
Recommendation The penalties for breach of related party transaction provisions should be modernised and substantially increased.
160
5.
Other Matters
ISSUE Disclosure of Substantial Shareholding
5.1
The CA requires a person to notify119 the exchange and listed corporation of his substantial shareholding (ie. any person having 5% or more of the nominal value of the voting shares in the company120 ) and any changes121 thereto and the circumstances by which the change has occurred122 , or when he ceases to be a shareholder123 . The notices are required to be given within 14 days from the date on which he becomes a substantial shareholder, or there is a change in circumstances, or he ceases to be a shareholder, as the 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, a person is 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.
5.2
Failure to report as required subjects the defaulter to a penalty of RM 5,000/- with a default penalty of RM 500/- only124 . However, the courts have powers with respect to defaulting substantial shareholders125. The penalty for a contravention of the court order, is RM 3,000/- with a default penalty of RM 500. The Securities Industry (Reporting of Substantial Shareholding) Regulations which came into effect on the 1st of May 1998 now require that any person who is a substantial shareholder of a public company (where listed or not) is to provide notice of such interest to the SC. It should be noted that while these disclosure requirements mirror those which are provided under the Companies Act, breach of these regulations entail a fine of RM 500,000 or imprisonment for a term not exceeding 5 years or both. This is a substantially higher penalty than that provided for under the CA.
5.3
Section 69D of the CA 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 CA 122 Section 69F of the CA 123 Section 69G of the CA 124 Section 69M of the CA 125 Section 69N of the CA
120
119
161
5.4
Section 99B of the SIA now provides that a chief executive and a director of a listed company must disclose to the SC his interest in securities of the listed corporation of which he is a director or chief executive or an associated corporation of the listed company. The consequence of a breach of this provision is criminal sanction of up to RM 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 fact of, or changes in substantial shareholding, should be reduced. As a corollary to the reduction of this period, consideration may have to be given as to whether the reporting obligation should be based on knowledge by the shareholder that he has reached the 5% reporting threshold127 . The ROC has confirmed that 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 be rationalised, as well as the penalties for breaches of the provisions under the CA and the SIA.
Update The provisions relating to substantial shareholdings under the CA has been amended by the A1043, w.e.f. 1st November 1998. A new section 69P of the CA has been inserted. A person who becomes a substantial shareholder (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, within 7 days of becoming a substantial shareholder. Penalties for breaches have also been rationalised. The change in the definition of substantial shareholder and the period for reporting has also been incorporated into the Securities Industry (Substantial Shareholders Reporting) Regulations 1998, in relation to reporting to the SC. This also took effect from 1st November 1998.
See update. 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 percentage which triggers off the reporting obligation, in particular where the share capital is changed. In the UK, provisions make the obligation to notify based upon knowledge.
127
126
162
ISSUE Regime for voluntary suspension of trading of securities of public listed companies
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 where the Exchange may allow for a temporary halt in trading, pending an announcement of material information, as a mechanism to avoid rumours and market instability, as well as the unfairness to investors that may arise, when material information has reached parts but not yet all of the investing community. Rule 334 does provide some guidance as to the type of events that constitute material information. There has been considerable abuse, resulting in suspensions lasting for weeks and even months. This led to the Exchange issuing its Policy on the Period of Suspensions by Listed 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 the suspension; The Exchange has the power to lift suspensions on the 11th market day, regardless of whether or not the listed company makes an announcement or requests for the lifting of the suspension; and After the lifting of the suspension by the Exchange, no requests for suspension will be entertained, until a lapse of 10 market days.
5.6
5.7
While this went some way towards addressing the problem of lengthy suspensions, it did not address the abuses relating to reasons for requesting suspensions. The Exchange in this respect continued to entertain all requests for suspensions without enquiring into the reasons for it. The current practice, therefore, is for the Exchange to immediately grant 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 announcement following a 10 day suspension of the company undertaking an ESOS scheme or in some cases, purchase of a factory worth RM 2 million or announcing a joint venture.129 In recent times, and especially as a result of falling share prices, there has been a sharp increase in the number of requests for voluntary suspensions, reaching 36 within a single day at its peak. One reason offered by AWAS for the abuse is related to banks making margin calls on loans. Where a company defaulted in its obligation to top up its margins, banks purported to execute their rights in respect of the securities held by it as collateral on a default by a company to top up collateral. The majority shareholders of these companies, out of desperation, resorted to suspending their securities, buying time of 10 days to either renegotiate the loan with the bank, obtaining alternative sources of financing, or in many cases, simply hoped to see an improvement in the share price.
5.8
128 129
Unlike the Listing Rules of the Stock Exchange of Hong Kong (SEHK) and Australian Stock Exchange (ASX). Source: AWAS
163
5.9
Three aspects of KLSEs existing role in allowing suspensions merit mention: The KLSE does not evaluate the reasons for the request for suspension. It entertains all requests for suspension as a matter of course. When a request for suspension is made, the KLSE automatically grants the company a 10 day suspension. While the KLSE does not currently have a policy of granting extensions (except after a lapse of 10 market days from the last suspension), extensions are nevertheless allowed.
5.10
To protect the integrity of the market, the KLSE is proposing to revise its current policy on voluntary suspensions, with the primary objective of discouraging requests for prolonged periods of suspension and for the purpose of maintaining an orderly and fair market. As recent experiences amply demonstrate, the regime for voluntary suspensions is abused especially by majority shareholders at the expense of the investing public, since the reasons underlying the suspension can hardly be said to be in the interests of all parties concerned. 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 that are not. The KLSE will formulate a Practice Note on the information that it will require in order that it may come to a considered decision on whether or not to allow a suspension. Consideration will be given to the concept of material corporate activities to provide some clarity to the types of activities that would be allowed. The KLSEs surveillance and enforcement process is crucial in ensuring compliance by listed entities. The apparent ambiguity130 in section 11 of SIA with regard to the powers of the KLSE to take action against persons other than the company, in the event of default, will be clarified. There is also the potential abuse by applying for extensions. It is submitted that the KLSE 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 the KLSE and the SC.
Recommendation The KLSE should revise its current policy on voluntary suspensions, with the primary objective of discouraging requests for prolonged periods of suspension and for the purpose of maintaining an orderly and fair market.
130
This is discussed in Issue 5.
164
ISSUE Section 67A of the CA Share buybacks

5.11 Section 67A was introduced last year to allow any public-listed company to purchase its own shares or give financial assistance to any person for the purpose of purchasing its shares. Hitherto, the fundamental principle of company law is that a company cannot buy its own shares since this would result in an unauthorised reduction in capital. However this has changed rapidly in many countries including, the UK and Australia whilst in the US, the regime is even more facilitative of share buy-backs. Several benefits can be reaped from share buybacks: Companies with cash resources beyond their anticipated requirements can return surplus funds to their shareholders; Companies can improve earnings per share when surplus funds are not generating good returns; Companies have greater flexibility in ordering their capital structure and in matching that structure to their needs at any stage of their development; Quoted companies whose shares generally trade at a discount to net asset value may achieve an increase in the net asset value per share; and The marketability of shares in private companies may be increased since potential purchasers include the company itself. This affords greater flexibility to shareholders in private companies who might otherwise find it difficult to realise their investments.
5.12
5.13
5.14
Section 67A basically disapplies the prohibition on share buy-backs under section 67 of the CA. The section allows any public listed company to buy back its own shares provided it is authorised by the articles and that the company must be solvent at the date of the buy-back. The purchase is made through the stock exchange and the purchase must be done in the interest of the company. The new provisions, however, have generated controversy and confusion on several fronts: financial assistance
5.15
there is ambiguity as to the meaning of financial assistance and the treatment of shares purchased with the companys financial assistance. The confusion arises out of the possible interpretations of financial assistance. It hinges on whether it includes a person who has been given financial assistance, is acting as an agent for the company in purchasing 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 such shares must be cancelled.
165
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 give a mandate to the directors of the company to make such a purchase while ensuring that shareholders 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 to purchase its own shares although the Guidelines expressly requires that the purchase be 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 the supply 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 prohibit transactions which have the effect of raising, fixing or maintaining or stabilising the price of securities. the use of the share premium account
Under the present KLSE Guidelines, companies are allowed to use distributable profits only to finance any repurchase. However, not many of the companies have adequate distributable profits to embark on a meaningful exercise but they do have share premium account that may be utilised for the said purpose. Unfortunately Section 60 of the CA restricts the use of the share premium account for specific purposes only which does not include share repurchase. However, as share repurchase are restricted to a pro-rated offer to all existing ordinary shareholders in the ordinary course of trading, the shareholders are thus treated equally and fairly and so the use of the share premium account must not be restricted to those specifically mentioned under section 60 of the CA. The share premium account should be made available to finance the share repurchase program.
Recommendations131 The provisions of s67A be reconsidered in light of the ambiguities and lack of safeguards. In addition, the use of the share premium account for share buybacks must be considered.
Update Amendments to section 67A of the CA came into force on 1st October 1998. The amendments 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.
166
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 its retention within 14 days of the AGM; that the SC be informed of any change to the business or registered address of the company, together with any change in directorships, within 7 days of the same; that all interim reports and periodic financial reports be submitted to the SC immediately upon their becoming available, and that these be announced in accordance with the Listing requirements; that the company discloses the names of the substantial shareholders, as defined under section 69D of the CA to be any person who holds more than 5 percent of the aggregate voting shares in the company, and provides the SC and the KLSE with any notice of changes of substantial shareholdings, setting out the following information which it has received from such shareholders for public release, 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 terms and 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 absolute terms and expressed as a percentage of the issued capital.
2)
3)
4)
5)
that the shareholding spread must be set out in a particular format at a date no earlier than 42 days from the date of the issue of the audited annual accounts.
2.
2.1
Pertinent KLSE Disclosure Requirements

Part 2 of the Listing Requirements sets out the requirements expected in relation to announcements. It imposes an obligation on listed companies to immediately divulge any 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 market where: it intends, or does not intend, to recommend a dividend; calls for meetings to pass ordinary and special resolutions;
167
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 a subsidiary or where the consideration exceeds 5% of the net assets of the listed entity; acquires more than 10% of the paid up capital of another listed company, or where the 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 a subsidiary, or where its shareholding falling below 10% if the other company is a listed 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 the subsidiaries; undertakes a revaluation of its assets and/or those of its subsidiaries (unless it is in the 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 same class 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 FY setting 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 turnover and investment and other income, with comparative figures for the previous year; and include a statement of source and application of funds;
168
a statement as at the end of the FY showing the interest of each director of the company, or in a related corporation as appearing in the register required under the CA. particulars of material contracts involving directors interests, either still subsisting at the end of the FY or if not, then subsisting entered into, since the end of the previous FY. a statement made not earlier than 6 weeks from the date of issue of the annual audited accounts setting out:s s
names of substantial shareholders and their equity interest; number of holders of each class of equity securities and voting rights attached to each class; a distribution schedule; a statement of the percentage of the total holding of the 20 largest holders of each class of equity securities; and the names of the 20 largest holders of each class of equity securities and the number of equity securities of each class held.
s s
first year - principles of equity accounting. particulars of property.
Annual audited accounts are to be prepared in accordance with accounting standards of 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 the Listing Requirements. The policy is to ensure the perpetuation of a fair and orderly market, and the exchange requires all listed companies to 2.5 make available to the public information necessary to informed investing. all investors must have equal access to such information.
The exchange adopts 6 specific policies 2.5.1 A listed companies must make immediate public disclosure of all material information concerning its affairs, except in exceptional circumstances. A list of exceptional circumstances are found in the rules. A listed company is required to release material information to the public in a manner designed to obtain its fullest possible public dissemination.
2.5.2
169
2.5.3
The policy on clarification or confirmation of rumours and reports - Whenever a listed company becomes aware of a rumour or report, true or false, that contains information that is likely to have, or has had, an effect on the trading in the companys 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. Policy on response to unusual market action. The company is expected to make inquiry to determine whether the rumours or other conditions requiring corrective action exist, and if so, to take whatever action is appropriate. If, after the companys review, the unusual market action remains unexplained, it may be appropriate for the company to announce that there has been no material development in its business affairs nor previously disclosed, nor, to its knowledge any other reason to account for the unusual market action. Policy on unwarranted promotional disclosure. The company is to refrain from such disclosure activity which exceeds that necessary to enable the public to make informed investment decisions. Such activity includes inappropriately worded news release, public announcements not justified by actual developments in the companys affairs, exaggerated reports or predictions, flamboyant wording and other forms of overstated or overzealous disclosure activity which may mislead investors and cause unwarranted price movements and activity in a companys securities. Insider dealing. The insider should not trade on the basis of material information which is not known to the investing public. Moreover, the insiders should refrain from trading, even after the material information has been released to the press and 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 manner designed to maximise public dissemination. promptly and publicly clarify any rumour or report which may have an effect on trading of its securities. make inquiries into any unusual market activity in its securities and to thereafter make such appropriate announcements as may be necessary in the circumstances. refrain from unwarranted and unnecessary promotional disclosure.
2.5.4
2.5.5
2.5.6
In addition, the company is to provide the SC with information of all situations where conflicts of interest may arise in respect of any management or business agreements entered into between the company and its local or foreign associated or 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 relation to acquisitions and disposals by the company, and transactions entered into by the company with, or, involving connected persons.
170
ISSUE THREE
ENHANCING THE QUALITY OF GENERAL MEETINGS
1.
1.1
Background
The provisions in the CA on general meetings help to define the relationship between shareholders and the board of directors. The overall relationship was described by the Cadbury Committee as follows: The formal relationship between the shareholders and the board of directors is that the shareholders elect the directors, the directors report on their stewardship to the shareholders and the shareholders appoint the auditors to provide the external check on the directors financial statements. Thus, the shareholders as owners of the company elect directors to run the business on their behalf and hold them accountable for its progress.
1.2
This role, expressed through the voting power of ordinary shareholders, means that it is important for boards to maintain an active and constructive shareholders communications policy both through following the minimum requirements of the CA and voluntarily maintaining principles of good practice in handling shareholders affairs. The focus on disclosures in Issue 2 follows through into this discussion. Disclosure may come in various forms - disclosures in the annual report, their interim reports, announcements made through the Stock Exchange, circulars to shareholders and general communications to the market and the financial press. The AGM in this respect, is an important mechanism in shareholder communications. As the Cadbury Committee noted, the AGM gives all shareholders whatever the size of the shareholding, direct public access to the boards. However, the Committee also drew attention to the problems with the present practice132 : If too many AGMs are at present an opportunity missed, this is because shareholders do not make the most of them and in some cases the boards do not encourage them to do so.
1.3
1.4
It is fair to say that in Malaysia, attendance at general meetings is generally dominated by retail investors. This in itself makes a case for strengthening the quality of general meetings. 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 recently seeking views on shareholders rights to table resolutions, shareholders questions at the AGM, and on the right to appoint corporate representatives or proxies to speak at a general meeting. Following from the Cadbury report a City/Industry Working Group was established The Myners Group which published a report on Shareholder/Company relationships - Developing a Winning Partnership133 . Interestingly the Group had said
132 133
Paragraph 6.7 Cadbury Code of Best Practices Published in 1995
171
that virtually all participants in their consultation exercise viewed the AGM as an expensive waste of time and money. Criticisms referred to include poor attendance by institutional shareholders and questions from individuals which were irrelevant to the majority 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 proposing that current legislation should be amended to permit shareholders to opt out of the requirement to have an annual meeting, with a proviso that say that 10% or more shareholders by value could demand oneHowever we favoured a second option, which was to retain the statutory backing for the AGM but to change its format, so that major shareholders 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, questions specific to individual shareholders should be referred to the individual director for response after the meeting, the company should provide an updated trading statement, operational managers might make presentations and be available to answer questions outside the meeting. The Committee therefore considered how improvements on the conduct of general meetings might be achieved. The purpose of the AGM 1.8 Although all companies are required to hold AGMs under the law134 the event is not merely a legal formality. It is the principal forum in which directors account to shareholders for their stewardship of the company. In fact, it is the only certain opportunity that a member will have to meet and query directors on matters pertaining to the running of the company. The CA prescribes certain matters to be conducted at AGMs. The accounts of the company must be laid before the meeting135 . The CA does not require that the members approve the accounts; all that has to be done to satisfy the CA is that the accounts are laid before the general meeting. Appointment of auditors must also be done at the companys 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 auditors remuneration; and declaration of dividends.
1.7
1.9
134 135
Section 143 (1) CA Section 169 (1) CA 136 Section 172 (2) CA 137 Section 132D CA
172
1.10
The latter three are not required by law but generally made mandatory through the articles of association. All other matters are generally transacted as special business. The Committee believes that the shareholders relationship with their company can be developed significantly by enhancing the AGM. The discussion is divided into three areas: Section 1 Before the AGM Section 2 Proceedings at the AGM Section 3 After the AGM
1.11
2.
2.1
The Annual General Meeting

Before the AGM
ISSUE Content of the Notice of AGM

2.1.1 As far as shareholders are concerned, companies start the visible process of preparing for AGMs by sending the shareholders the Notice of the AGM and usually 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 gives details of the business to be transacted. Rule 26 of the Listing Rules sets out the basic requirements with respect to the contents of notice requirement. It provides for the notice to state the date, time and venue of the meeting138 . 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 information to 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 resolutions passed may be invalidated by a member. The test is, therefore, whether or not the member had fair warning of what was to be done at the meeting. At the very least the text of the resolution to be passed must be set out. Failure to do so may invalidate proceedings at the meeting139 . It is recommended that the Listing Requirements should be amended to embody a general requirement requiring listed companies to ensure that the notice calling a meeting contains sufficient information to enable a reasonably prudent member to decide whether or not he will attend a meeting.
2.1.2
2.1.3
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
138
173
Recommendation It is recommended that the Listing Requirements should be amended to embody a general requirement requiring listed companies to ensure that the notice calling a meeting contains sufficient information to enable a reasonably prudent member to decide whether or not he will attend a meeting.
ISSUE Election and re-election of directors

2.1.4 There has been concern expressed that too few boards currently make any real effort to persuade shareholders of the merits of directors nominated for election or re-election. When proposing the re-election of directors it is understood that many companies do not specify in the notice which directors are standing for election and reelection. The Committee recommends that the Listing rules of Exchanges should specify that notice of meetings should state which directors are standing for election and re-election. This should be accompanied by a brief description of the 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 the fact that they are independent.
2.1.5
2.1.6
The Singapore Stock Exchange Listing Manual requires the following additional information as regards directors appointments to be included which the Committee 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.
174
Recommendation The Committee recommends that the Listing rules of Exchanges should specify that notice of meetings should state which directors are standing for election and re-election. This should be accompanied by a brief description 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 mention of 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 general meeting. It requires a company to hold an AGM at least once in every calendar year 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 meetings other than a meeting to pass a special resolution (21 days)140 or requiring special notice141 (28 days). This means that there must be 14 clear days between the issue of the notice and the date of the meeting. This applies to both AGMs as well as extraordinary general meetings (EGMs). Notice of the meetings must be given by the company to every member142 . The companys auditor is also entitled to the notice of meetings143 . The notice and accompanying circulars should be sufficiently clear so that members may get a fair and reasonable intimation of what is actually proposed to be done without the necessity of painstaking reading. There is no actual legal requirement that an explanatory circular be sent out. The problem raised is in the context of institutional shareholders whose registered address of service is usually that of the custodian. There have been problems expressed with the fact that the notice of meetings at times do not get to these shareholders on time because of the additional layer of persons that it has to go through.
2.1.8
2.1.9
140 141
Section 152(1) CA 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.
175
2.1.10 Section 369 of the UK Companies Act 1985 provides for a longer notice period in respect of AGMs. The UK requires a 21 day notice period for AGMs and a 14 day notice period for EGMs. The ICSA Best Practices Guide for AGMs extends this period to at least 20 working days, excluding weekends and holidays. This recommendation is largely based on the fact that an increasing number of investors now hold shares through nominees. Allowing a longer circulation period recognises this, and gives more time for such nominees to obtain and submit proxy votes. 2.1.11 The fact that some investors do not get notice of meetings within the 14-day time period suggests that a longer circulation period may be necessary. It is submitted that, in recognition of this, the existing notice period under section 145(2) of the CA in respect of AGMs should be extended to 21 days in line with the position in the UK. The notice period in respect of EGMs may remain at 14 days. Similarly, the notice requirements in respect of special resolutions and special notices may remain at 21 days and 28 days respectively. The Listing Requirements144 which require notices to be circulated at least 14 days ahead of the meeting should be amended accordingly.
Recommendation The existing notice period under section 145(2) CA in respect of AGMs should be extended to 21 days in line with the position in the UK. The notice period in respect of EGMs may remain at 14 days. Similarly, the notice requirements in respect of special resolutions and special notices may remain at 21 days and 28 days respectively. That the Listing Requirements which requires notices to be circulated at least 14 market days ahead of the meeting should be amended accordingly.
ISSUE Proxy solicitations

2.1.12 Proxies play a vital role in modern day company meetings, namely listed companies. Its importance lies not only in the fact that it serves as a convenient medium through which busy shareholders and shareholders residing in different parts of the country may exercise their corporate rights at meetings, but also in its potential for being abused or utilised by directors to canvass for votes to endorse 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 and directors have at their disposal the entire corporate machinery to influence shareholders by giving their uncontradicted views or opinion through notices in the form of circulars or explanatory statements. 2.1.14 In contrast, shareholders access to the corporate machinery to put forward their views is minimal. In this respect, directors are not under a duty, whether legal or moral, to put forward the views of dissenting shareholders in any circular or explanatory statement that they decide to issue.
144
Rule 299
176
2.1.15 In Malaysia, proxy solicitations become particularly active during M&A, or where there is a threat of an impending take-over, and at times even in respect of large related party transactions. This inequality between directors and shareholders is particularly apparent, where the outcome of a proposal is likely to be determined by proxy votes. Disclosures 2.1.16 While statutory provisions regulating the use of proxies exist in Malaysia, these statutory provisions cannot, as such, be described as regulating proxy voting. These statutory provisions are aimed at curbing undue restrictions which may be inserted in articles of associations against voting by proxy. This may be contrasted 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 abuse of 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 prevent prohibition on the right to vote by proxy. That aspect of the law is already well regulated in Malaysia. In respect of solicitations, the Listing Requirements offer some 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 allow a shareholder to indicate how he would like his proxy holder to vote in relation to each resolution. 2.1.20 The United States has perhaps the most comprehensive set of rules on proxy solicitations. These came about as a result of the number of well-publicised corporate frauds which had been perpetrated through management solicitation of proxies without informing shareholders on the nature of matters to be voted on. The SEC proxy rules began in 1935 as a series of minimal disclosure requirements, and a prohibition against fraudulent statements that applied to materials asking shareholders directly for the vote. These relatively simple rules were designed to assure the security holders whose proxy or consent is solicited will 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 solicitor146 . While these rules imposed absolute informational and procedural requirements on soliciting parties, they left most aspects of the voting market undisturbed. That is to say, they did not limit the private provision of information about voting issues or prevent soliciting parties from making whatever arguments they wished, as long as no formal voting request was included in the same communication.
145 146
E.g. US and Canada SEC (1935 p,1)
177
2.1.21 By 1956, the rules specified extensive disclosure requirements, including specific rules for any dissident shareholder wishing to challenge management, set out pre-registration requirements and SEC review of all communications with respect to the voting arena147 . The main criticism is essentially that the framework imposes major costs and procedural deterrents on anyone wishing to monitor management and induce corporate change. This has been largely as a result of rules that have created a series of deterrents to communications among shareholders. The system of proxy regulation forbids the sort of informed, coordinated, yet informal activity that would be pursued by institutional investors in monitoring management. Essentially it restricts shareholders from forming an informal coalition to pressure management. It even prevents activities such as canvassing peers about specific management voting proposals, for example, on executive compensation schemes. Institutional shareholders are therefore forced 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 that jurisdictions such as the UK and Australia do not have extensive rules regulating solicitations. In the UK for example, in recognition of the practice of boards to send out proxy forms in their favour with the notice of the meeting, the London Stock 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 against resolutions. The position is similar in Australia. There is, however, a rule in common law that where there is voting by proxy, an explanatory circular is necessary. The circular must be fair and must give all the information reasonably necessary to enable the recipients to determine how to vote148 . Where an explanatory circular is misleading, the court may restrain the holding of the meeting149 . Beyond that, proxy solicitations are not regulated. They are no rules regulating the type of information to be included, or for pre-vetting of these documents. 2.1.23 The US proxy solicitation rules go much further. Among other things it requires extensive disclosure requirements, pre-registration and SEC review of all communications that might influence shareholder agreements. The definition of solicitations as well is wide enough to cover any communication to shareholders that could result in the procurement, withholding or revocation of a proxy. The rules have been interpreted to the extent that any portion of the annual report that could be construed to contain advocacy on proxy issues now had to be filed as if they were proxy material. Also, if parties to a proxy dispute wished to distribute newspaper articles or analyst reports to voters, they would now have to file those materials, stating whether any remuneration had been paid to the publishing party for the preparation of the materials or to secure permission to re-circulate them. The original anti-fraud provisions had also been changed to deter communication of contentious and sophisticated information, and to promote non-analytical, factual background material. Full compliance with the SEC review process, which involves making initial submissions, suggested changes and resubmissions, involves tremendous cost.
147 148 149
SEC (1940 p.1) Re Dorman Long & Co. Ltd. [1934] Ch 635 Bain & Co. Nominees Pty. Ltd. v Grace Bros. Hldg. Ltd. (1983) 7 ACLR 777
178
2.1.24 While there is merit in regulating the quality of disclosures accompanying proxy solicitations, the level and breadth of regulation is a crucial issue. It may have the effect of imposing tremendous costs on companies. The Committee recommends that the relevant regulator should study the matter further to determine the level and breadth of regulation to be imposed on proxy solicitations.
Recommendation That the relevant regulator should study the matter further to determine the 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 of shareholders attending AGMs. Institutional shareholders generally prefer communications in the form of private briefings with the company. Consultations by 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 in which they invest. Institutions believe that information obtained at an AGM will not add to that which they have gleaned through their briefings with the company or from reviewing the financial statements or the notice.
2.2.2
However, the fact that they no longer take place within the formal atmosphere of company, AGMs may lead the individual investor to feel disenfranchised. Such private meetings with institutional shareholders deprive the private shareholder of the opportunity for understanding concerns and hearing questions raised by institutional shareholders and the answers given by the company, bearing in mind their superior access to resources and sophistication. The goal, therefore, should be to enhance the quality of proceedings at the meeting so that all investors see the worth in attending the meetings. In this respect, the Committee re-emphasises the recommendations of the Code151 on the need for the relevant professional organisations to undertake the task of developing best practices in general meetings for Malaysian companies. There is already precedent in this area in the form of the ICSA Guide to Best Practices in AGMs.
2.2.3
150 151
ICSA Best Practices Guide 1996 - Paragraph 2.17 Para 4.78 Part 4
179
Recommendation Re-emphasis on the recommendations of the Code in relation to the need for the relevant professional organisations to undertake the task of developing 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 and constructive shareholders communication policy, both by following the minimum requirements of the CA and by maintaining principles of good practice in handling shareholder affairs. It is best practice for all boards to provide adequate time for shareholder communications at AGMs. The CA makes no formal provision for shareholder questions and their handling is solely a matter of company practice. Under common law, shareholders are obliged to confine their questions to matters in the resolution. However, during the course of many public company AGMs there is an open forum for questions from shareholders which can range widely over almost any subject. Usually this is done under the agenda item adopting the reports and accounts. The Committee considered whether there should be a formal provision in the law for shareholder questions. There are two possible approaches to this. First, a provision could be inserted into the CA requiring companies to make such a provision at the AGM. This would be a codification of good practice. Alternatively, shareholders may be given a specific right to table a question to be asked at the AGM. However, such a right to table questions may raise major difficulties of procedure. An AGM would become unmanageable if every shareholder had an unconditional right to have his or her question answered at the meeting. Provision would be needed on the order in which the questions are 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 might as a result face criticism for selecting favourable questions. Provision would have to be made for supplementary questions and for limiting the debate on each question. And time would have to be allowed for the hearing of questions not notified in advance. The outcome could be rigid; excessively detailed and rigid rules in the Act, which might make the asking of the questions more difficult and hamper companies in the effective conduct of the AGM. For these reasons, the Committee recommends that the handling of questions at AGMs is best left out of the statutory provisions and should be dealt with in the development of best practice by the company.
2.2.5
2.2.6
2.2.7
2.2.8
180
The Committee considers the role of the Chairman to be crucial in handling questions and in sifting the genuine from the vexatious. A best practice guide in this area would be a significant aid to the Chairman.
Recommendation That the handling of questions at AGMs is best left out of the statutory provisions. This will be dealt with in the development of best practice by the company 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 by mail is generally regarded as significant in strengthening the ease with which a shareholder is allowed to vote152 . It overcomes several practical difficulties associated with having to attend general meetings.
2.2.10 From the point of view of retail investors (who dominate the Malaysian investing landscape), who may be dispersed all over the country, voting by mail is a cheaper and more efficient method of enabling shareholders to exercise their right to vote. 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 take on a greater role in the companys affairs as opposed to voting with their feet. 2.2.12 Many companies also hold their AGMs within the same time period, which makes it difficult for shareholders to exercise their right to vote unless they go through 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. This provision would be supplemented with provisions mandating reasonable notice periods and sufficient disclosure of information to give shareholders an opportunity to decide how they should vote as alluded to above.
Recommendation The CA should allow for voting by mail.
151 152
Part 4 paragraph 4.78 (iii) deal with the best practices for a Chairman dealing with questions and answers. Journal of Political Economy, R La Portaetal (1998)
181
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 in a minute book for inspection by any member. The right to inspect minutes is, however, not usually exercised by members. The Cadbury Committee recommended154 that companies should, after the event, send shareholders a brief summary of points raised at the AGM. This could be done either by a separate mailing or with the next financial report circulated to shareholders. 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 case of companies with very large registers. The Hampel committee suggested instead that companies should prepare a resume of discussion at the meeting (but not a full detailed record), together with the voting figures on any poll or a proxy count where no poll was called, and send this on the shareholders request. The Code recommends that companies should prepare a resume of discussion to be sent to shareholders upon request as a matter of best practice. The Committee 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 to shareholders upon request as a matter of best practice as referred to in the Code155 and not law.
2.3.2
2.3.3
2.3.4
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 Practices 155 Part 4, para 4.78(iv).
182
ISSUE FOUR
PROVISIONS DEALING WITH SHAREHOLDERS RIGHTS AND REMEDIES
This paper discusses the various issues relating to shareholders rights and remedies in the context of corporate governance.
1.
1.1
Statutory Remedy Against Oppression

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. Section 181 provides for a statutory remedy against oppression. It embodies a members personal right to be treated fairly. The relief sought must be for an injury done to himself. Section 181 of the CA entitles a member to make an application to court for appropriate orders where the member is oppressed, prejudiced or unfairly discriminated against, or his interests disregarded. The underlying element is one of unfairness to the shareholder concerned. Shareholders generally prefer the route of s181 as it accords them a wider range of remedies. The Court may order any remedy it thinks fit to remedy the matters complained of by the aggrieved member, even so far as to alter the memorandum and articles of association of the company, restricting or removing the powers of directors156 in the appropriate circumstances157 . Anecdotal evidence suggests that the wide range of orders has resulted in this remedy being the most commonly utilised by disgruntled shareholders. The Courts discretion to choose from a wide range of remedies, may include the following: 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 the company or the company; or winding-up the company.
1.2
1.3
1.4
1.5
Conduct caught under section 181 encompasses autocratic conduct by the board, appropriation of business, property or corporate opportunities at the expense of the company or its minority shareholders, unjustifiable failure to pay dividends or fair dividends or the directors neglect of the duty of care, skill and diligence158 where it affects the shareholder personally.
156 157
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) 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
183
1.6
If the injury is to the company, the proper plaintiff is the company and the proper action is a derivative action. However, if the action is for oppression and there is evidence to show that there is damage to the company, the wide discretion of the court allows it to order compensation to the company159 .
2.
2.1
Statutory Remedy of Winding-up

Pursuant to section 218 of the CA, the holder of fully paid up shares may petition the Court for the winding-up of the company. The Court would grant such a petition in a range of specified circumstances, including: the company is insolvent; the directors have acted in their own interests instead of in the interests of the members; 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 described as illegality or failure of the sub-stratum of the company, and those dealing with the management or operation of the company160 . It is a drastic solution, and unlike the situation in UK and Canada, unless it can be shown that the petition is frivolous or lacks substance, the Court has no alternative but to order the winding-up of the company even if another remedy would have been justified in the circumstances161 . This upholds the principle that litigants are entitled to choose whatever remedies they feel appropriate to remedy the injustice to them.
2.3
3.
3.1
Remedies At Common Law The Personal Action

A shareholder has a right to bring action where wrongs affect his interests in his personal capacity. The four sources of this personal right are: memorandum and articles of association; general law; provisions of the CA; and personal contracts.
159 160 161
Kumagai Gumi Co Ltd v Zenecon Pte Ltd [1995] 2 SLR 297 See discussion by Loh S.C, Corporate Powers at p.643 Tien Ik Enterprises Sdn Bhd & Ors v Woodsville Sdn Bhd [1995] 2 AMR 1033
184
Memorandum and articles of association 3.2 Section 33 declares that a companys memorandum and articles of association constitute a contract which binds the members. The section stipulates that the memorandum and articles bind a company and its members as though these documents had been signed and sealed by each member and contained covenants on the part of each member to observe all their provisions. The rights include Reg. 97 of Table A, CA which makes provision for the inspection of balance sheets and other documents of the company, the right to receive notice and to attend and vote at meetings and the right to transfer shares. Ordinarily, it would follow therefore that a member should have standing to sue whenever there has been a breach of the provisions of the memorandum or articles. However, the courts have indicated that a shareholder does not have an unqualified right to seek relief in court. A member can only sue on rights in his capacity as member, and not those involving internal corporate procedure. Therefore, a member can compel the payment of a dividend duly declared, but cannot force a director to retire in accordance with the provisions of the articles. These matters come within the realm of the rule in the 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 of the CA), register of members without charge (section 160 of the CA) and disclosure of directors shareholdings (section 134 of the CA). Personal Contracts 3.6 Aside from the contract arising out of the memorandum and articles of association, a member can enforce any contract between him and the company.
3.3
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 of care, diligence and skill, are duties owed to the company and not to the individual shareholders. The rule in Foss v Harbottle162 is that the proper plaintiff to take action for breaches of directors duties is therefore the company and not the individual shareholders. The rationale is that the company is an entity distinct from its shareholders.
162
(1843) 2 Hare 461
185
The rule also avoids a multiplicity of suits on the same subject matter. Barring anything in the articles or any shareholders agreement, the right to authorize proceedings belong to 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 the companys behalf. If the member feels that a wrong has been done to the company and the company has failed to do anything about it, he may request the board of directors to take action. If they refuse or fail, then the shareholder may requisition a general meeting to pass a resolution to commence litigation. Failing which, the shareholder may commence the action himself. This also applies to wrongs against the company by third parties. 4.2 However, the Foss v Harbottle rule is more notable for its exceptions, the following being by no means exhaustive:1) 2) 3) ultra vires acts; fraud on the minority; special majorities - where the individual member can sue if the matter is one which requires the sanction of a special majority; personal rights of the shareholders have been invaded; or when the justice of the case requires it163 .
4) 5) 4.3
In the derivative action, the plaintiff undertakes the action on behalf of himself and all other 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 its rights in the event the plaintiff succeeds in his action. The action must fall within one of the exceptions to the rule in Foss v Harbottle. The matters alleged, if established, would entitle the company to the relief claimed, and that the wrongdoers are in control of the company, and the company will not or has refused to sue. Since the action is brought for the benefit of the company, the plaintiffs are entitled to apply for an order of indemnity for the costs of the proceedings. CLERP in Australia has highlighted the numerous problems associated with the common law derivative action. The major uncertainty is whether ratification by some shareholders of directors breach of duty would result in denying other shareholders the right to bring a derivative action to protect the company. The ratification problem does not arise out of the ultra vires exception. As the company does 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 benefit at 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 against them by the company. Ratification by the majority is a very real problem in this instance.
4.4
4.5
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 rule completely.
163
186
4.6
CLERP additionally highlights that the shareholder bringing the action is potentially liable 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 of the justice exception to the common law rule, it is still a matter at their discretion. CLERP also argues that the statutory derivative action would not impose a new form of liability on directors, but rather removes uncertainty and therefore provides a more effective mode by which directors duties can be enforced. It also removes a regulatory burden on the authorities by providing an effective mechanism by which shareholders can protect themselves. Most persuasive is the CLERP argument that codifying the derivative action would potentially create a valuable tool to enhance corporate governance and maintain investor confidence. They have, therefore, proposed a statutory derivative action to overcome the inadequacies of common law and allow shareholders or directors of the company to bring an action on behalf of the company, for a wrong done to the company where the company is unwilling 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 the ASIC, 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 company and there is a serious question at issue; and the Court to have broad discretion on orders as to costs, ratification by general meeting would not be a bar, the Court can order supervision by an independent investigator to ensure that action was conducted in the best interests of the company and the applicants would be given access to company records.
4.7
4.8
4.9
4.10
As a natural consequence, directors and other officers of the company must be offered a safe harbor from litigation where the officer had made honest, informed and rational business judgment. In addition to the oppression remedy, Singapore enacted a statutory derivative action via 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 give them the opportunity to commence the action themselves (section 216A(3)). There is a provision to waive this rule if the complainant can show that notice cannot be given in accordance with Section 216A(3) (section 216A(4)). A complainant must then apply to court for leave to commence an action on behalf of the 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 in the discretion of the court is a proper person to make an application (s216A(1)). The complainant must show that there is an arguable case against the proposed defendants.
4.11
4.12
187
The Ontario High Court had recognised the difficulty of complainants to access company records, and has therefore interpreted the equivalent provisions flexibly to allow affidavits based in part upon information and belief164 . If there is an arguable case, it must be shown that it is in the interests of the company that the case be pursued. These may include commercial reasons. 4.13 If the court gives leave, the complainant then takes the steps necessary to initiate the action using the companys name. The Singaporean provisions also go further than the common law derivative action to allow a complainant to intervene in or defend an existing action. Section 216A(5) allows the court to make an order requiring the company to pay reasonable legal fees and disbursements incurred by the complainant in connection with the action. Finally, the court has a wide discretion to make such orders as it thinks fit in the interests of justice (section 216A(6)) . The advantages of the Singaporean approach are: As the complainant requires the leave of the court to commence action, the plaintiff need not conclude the action before the court could decide on whether or not the plaintiff should be permitted to prosecute it. The court only has to decide on the desirability of allowing the complainant to control the action without analyzing the companys alleged cause of action against the wrongdoer. There is also the chance that if the defendants are indeed guilty of breaches of duty, they would be inclined to settle at this stage. The court has the ability at a preliminary stage to strike out frivolous and vexatious actions. The court has the ability to impose conditions on the bringing of the action, to tailor the order to the justice of the case. This may include an order giving the complainant access to company records to enable him to gather evidence for the action, a problem which often deters well-meaning shareholders from bringing an action. The court has the ability to order that the company indemnify the complainant for the costs of the action. This overcomes the disadvantage of the common law derivative 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 traditionally have to use his own money, while the directors could be defending themselves with the companys resources. In certain cases, a plaintiff in a derivative action may obtain an order that the company indemnify him against the costs of the action. But indemnification is merely discretionary and a complainant must commence an action by being prepared to pay the costs of the action. Now, a minority shareholder only has to undertake the cost of the initial application for leave.
4.14
4.15
4.16
4.17
164
Armstrong v Gardner (1978) 20 OR (2d) 648, 652
188
The statutory action also allows the court to enable the complainant to commence an action as well as intervene or defend an existing action. A minority shareholder could therefore take over the conduct of a companys defence in situations where it appears that the directors may not be doing a proper job, for e.g. losing to benefit themselves or their cronies. This avenue of redress would also overcome the requirements of section 181 which requires 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 because of the fear that unscrupulous people would make frivolous applications to harass listed companies in an attempt to manipulate the share price. There is a very real fear that the US experience is replicated domestically. There have been instances of strike suits in the US brought for the purpose of obtaining a fee or being bought off. Companies also incur costs of defending such suits, both monetary and in terms of diverting resources away from the operation of the business. The American Law Institute (ALI) recommended certain changes in the law to overcome these problems165 . Amongst the recommendations: A shareholder will only have standing to maintain a derivative action if the shareholder acquired the shares before the material facts related to the wrong-doing were publicly disclosed, known or specifically communicated to the shareholder, or the shareholder obtained it by devolution of law from a prior holder of the security as described above. The shareholder must also hold the shares until the time of judgment unless he fails to do so as a result of a corporate action in which he failed to acquiesce. In those situations, the action must be commenced prior to the corporate action terminating the holders status, or the court finds that this shareholder is better able to represent the interests of the shareholders other than any other holder who has brought suit. The shareholder must also satisfy the Court that 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 the shares in the company for the specific purpose of bringing an action. As in Singapore, ALI also recommends that the shareholder make a written demand upon the Board of Directors, requesting the board to commence action or to take suitable corrective measures. The company has to reject the demand, before the shareholder can commence the derivative action. This provides the Board with an opportunity to pursue other remedies or take other remedial actions, or to take over the suit. Another safeguard is to require an attorneys certification that the suit was not filed for an improper purpose, to harass, cause unnecessary delay or needless increase in the cost of litigation. The Court can also award costs against the shareholder if it finds that the suit was made in bad faith or without reasonable cause.
4.19
165
Principles of Corporate Governance: Analysis and Recommendations Vol 2 at 33
189
Provisions to allow the board or a properly delegated committee to request for a dismissal of a derivative in specified circumstances. A derivative action should not be settled, discontinued, compromised or voluntarily dismissed by agreement between the plaintiff and the defendant, except with the approval of the court.
4.20
For certain shareholders of a listed company, the exit option of selling his shares is more cost-effective than litigation. However, certain institutional shareholders with large shareholdings may have a greater interest in bringing an action for wrongs done to the company as seen in the case of Prudential Assurance Co Ltd v Newman Industries Ltd166 . The derivative action is also still open. To date, there has been no decision in Malaysia as to the existence of the last exception to the rule, which has been applied in Australia167 . Courts in Malaysia have indicated a preference for the existence of the justice exception168 , which provides courts with greater flexibility to hear shareholder grievances against directors. Balancing the benefits of a statutory derivative action against the spectre of massive litigation mandates a cautious approach. Whether an incremental approach of only limiting it to certain types of companies such as public listed companies, or a bold approach to adopt statutory derivative actions would merit further study and review. 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 aggrieved shareholders of public-listed companies. Section 50 of the ASIC Act, allows the Commission to begin civil proceedings on behalf of a person. The Commission is allowed to begin such proceedings if, as a result of an investigation or from a record of examination, it appears to the Commission to be in the public interest for a person to begin 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 to which the investigation or examination related, or recovery of property of the person. The Commission requires the persons consent to begin such an action. It is recommended that a similar provision be enacted to allow the relevant regulatory body to commence civil proceedings on behalf of an individual in circumstances similar to that provided for in the ASIC Act. However, it is proposed that the circumstances be widened beyond situations which arise out of an investigation or examination by the regulatory body to include situations arising out of request by the company or individual concerned. In the meantime, the statutory derivative action, incorporating some of the safeguards suggested by the ALI, merits further review. Codifying the derivative action would, over the long run increase private enforcement and reduce the need for public or regulatory interference. Shareholders, particularly minority shareholders, can be weaned off their over-reliance on regulatory authorities as they become more cognizant of their role in the governance of their companies and thus take a more pro-active stance, be it internally, or via the judicial system.
4.21
4.22
4.23
4.24
166 167 168
[1981] Ch. 257 Biala Pty Ltd & Anor v Mallina Holdings Ltd & Ors (1993) 11 ACSR 785 Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd & Ors [1995] 3 MLJ 417
190
Recommendation Consider the enactment of a provision to allow the relevant regulatory body to conduct civil proceedings on behalf of any company or individual in the following circumstances: that it is in the public interest; that it may arise out of investigation or examination by the relevant regulatory body; 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 term incorporating 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 persons when the matter in dispute is common to all the members of the class and it is impractical for all persons affected to bring an action before the court. Proponents of class actions argue that they are often the sole means of enabling similarly injured persons to seek a remedy against injustices inflicted upon them by large multimillion dollar corporations. In addition, class actions would provide individuals with the clout to obtain greater compensation in situations where each person within the group suffers only limited damages. Class actions also provide an effective remedy against the errant defendant who is a multiple offender without incurring the costs of separate lawsuits and the risk of inconsistent decisions. In Malaysia, representative actions may only take either the form permitted under Order 15 rule 12 or rule 13, both of the Rules of the High Court of Malaysia. The former is appropriate where every member of the class can be ascertained, whereas the latter deals with representative actions involving parties, which cannot be ascertained or cannot readily be ascertained. 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 or against any one or more of them as representing all or as representing all except one or more of them. The rule is derived from the practice of the Court of Chancery. The Court of Chancery required the presence of all parties interested in the matter or suit in order that the final end be made to the controversy; but relaxed the rule in instances where the parties were so numerous that justice could not be done. Therefore, where a group of persons are
5.2
5.3
5.4
5.5
191
interested in a general right, the rule would allow an individual or some individuals to be selected from the group to represent the rest, so that the right might be decided between all parties of the suit so constituted. The rule applies to all causes and matters and 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 of the mutiplication of actions, with the attendant costs, in cases where one action would serve to determine the rights of a number of persons in a question with another party called as defendant. A series of different actions one after another by different plaintiffs is to be no longer necessary in cases where numerous persons have the same interests in one cause or matter, for in such cases one or more persons may sue on behalf of or for the benefit of all persons so interested169 In light of the origins of the rule, the Courts were keen to emphasize the flexibility of this tool of convenience in the administration of justice170 . Furthermore, [t]he principle on which the rule is based forbids its restriction to cases for which an exact precedent can be found in the reports. The principle is as applicable to new cases as to old, and ought to be applied to the exigencies of modern life as occasion requires. 171 The prerequisites of the rule are: there must be numerous persons (the case of Re Braybrook172 considered five persons as not being numerous, unless the amount involved is very small or the Court is satisfied that all the persons interested desire representation); there must be the same common interest arising under the same contract or the same 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
5.7
5.8
5.9
It appears however that where the relief sought is the recovery of damages, the plaintiffs only have recourse via O15r4 which allows for joinder of parties. Alternatively, the court may grant declaratory relief. Practically, this means that once the plaintiff in his representative capacity has established his claim to the declaratory relief sought, it will still be necessary for each member of the class to bring his own action to establish damage suffered by him within the limitation period. The declaratory order would make it easier for the class member to bring the action, insofar as the issues covered by the order would be res judicata between members of the class and the defendants174 . A further problem with this rule is that the representative persons and those represented are not considered parties to the proceedings, and as such, the court has no power to order any represented person to make discovery of documents.
5.10
Per Lord Shand in The Duke of Bedford v Ellis & Ors [1901] AC 1 at 14 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]
170
169
192
5.11
The represented parties are also not liable for costs175 which would discourage many would-be plaintiffs from undertaking the role of representative plaintiff. This may be overcome by the court granting an order that the company indemnify the representative plaintiff for the costs of the action. In a derivative action a plaintiff cannot sue in his own name. He must indicate that he is bringing the action in a representative capacity and disclose in the pleadings that it is a derivative action. Procedural rules also require that there be an express statement in the pleading for whose benefit the action is being brought. The inability to award damages to each member of the class is also not a bar, as the derivative action is commenced in the name of the company, and all damages or restitution of profits accrue to the company and not the individual shareholders. However, the application of representative actions for the oppression remedy of section 181 and the winding up provisions of section 218 remain uncertain. The, Malaysian courts 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 section 181, if the class of shareholders seeking redress is described with sufficient clarity, there should be no bar to a representative action under O15 r12. The only obstacle is the rule against recovery of damages. Civil procedure in the US is much more facilitative of class actions. Federal Rule on Civil Procedure 23 permits an individual to bring an action on behalf of himself and a class of other individuals where:1) 2) 3) 4) their claims present a common issue of fact or law; they are so numerous that joinder is impracticable; the claims of the named individual representative is typical of those of the class; the named individual will fairly and adequately represent the interests of the absent class members; and it may apply to actions seeking either equitable or monetary relief.
5.12
5.13
5.14
5) 5.15
There is thus no procedural bar against the recovery of damages. The general rule is that differences in the amount of damages claimed by the class members will not defeat class certification, so long as the damages are readily calculable on a classwide basis. Each member of the class is entitled to a pro-rata share of the damages recovered in the action. However, the US experience is cause for caution. In the United States, a series of legislations was introduced which provided that an investor will have a claim when a corporation with publicly traded securities makes misleading statements about its performance or prospects, or keeps adverse information from its public investors. The flood of litigation that followed drove Congress to introduce the Private Securities Litigation Reform Act of 1995. The Act sought to tighten the circumstances in which a
5.16
5.17
175
Markt & Co. Ltd v Knight Steamship Co Ltd [1910] 2 KB 1021
193
class action may be brought in securities fraud litigation, to reduce abusive litigation and coercive settlement. Prior to the Act, plaintiffs bought securities just to participate in a private action, sometimes at the behest of lawyers who profit under the American system of allowing contingency fees. The Act required a plaintiff to file a sworn certification that he did not purchase the subject matter securities at the direction of counsel or in order to participate in a private action. The certification must also identify any other action filed during the preceding three-year period where the plaintiff sought to serve as a representative party on behalf of the class, as well as ensuring that the plaintiffs do not accept payment for serving as representative party on behalf of the class beyond the plaintiffs pro-rata share of recovery. The Act also required more detailed allegations 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 and opening the floodgates. This may be achieved by merely removing the impediment to recovery of damages. The damages obtained may then be pro-rated according to the shareholding of the member concerned as at the date of the commencement of the action.
Recommendation Consider the introduction of statutory provision(s) to simplify civil procedures and to permit shareholders to undertake representative/class actions to obtain a prorata share of damages.
6.
Injunctions against breach of the law

ISSUE Should there be a statutory provision to allow shareholders to apply to Court for an injunction against breaches of the law?
6.1
Currently, an injunction can only be obtained if a shareholder can commence an action within the limited avenues available to him. Section 409A of the Singapore Companies Act allows a member to restrain the directors from entering into a transaction in breach of their fiduciary duties to the company. There is no Malaysian equivalent to this section. Section 1324 of the Australian Corporations Law allows the court to grant an injunction against any person engaged, or who is engaging or is proposing to engage in conduct that 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 person to contravene;
6.2
6.3
194
being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention 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, the Court may also order that person to pay damages to any other person (section 1324(10)). The ASIC or a person whose interests have been, are, or would be affected by the conduct stated may make the application to Court. This section, therefore, very neatly overcomes the Foss v Harbottle rule, and does not require that persons have personal rights of a proprietary 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 minority shareholders an opportunity to apply to court to stop directors or any other persons from committing an offence against the Corporations Law. Clearly for breaches of express provisions of statute, the law should be facilitative to allow a shareholder to halt or prevent a contravention. Breaches under general law can otherwise be dealt with under the statutory derivative action.
Recommendation Consider the introduction of a statutory provision in line with the Australian approach of section 1324 of the corporations law which allows shareholders or the relevant regulatory body to make applications to court to seek injunctions to halt or prevent breaches of the law.
6.5
6.6
7.
Right to inspect documents

ISSUE Should there be a statutory provision that gives shareholders the right to inspect documents?
7.1
In order for shareholders to enforce any right in Court, it is crucial that they have access to the relevant information. Shareholders have often complained that they are effectively prevented from utilizing actions that are open to them simply by virtue of the fact that they cannot arm themselves with the necessary information to mount a proper action. 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 (section 160). By virtue of s170, the profit and loss statement, balance sheet and auditors report is sent to members before the general meeting at which those documents would be laid
7.2
195
before the shareholders. Section 34 requires that the company send a copy of its memorandum and articles of association upon the request of the member subject to payment of a nominal sum. 7.3 However, Art 97 of Table A, CA states that the other accounts, books or papers of the company can only be inspected by a member, if not already authorised by statute, if authorised by the directors or by the company in general meeting. This is at a great disadvantage to minority shareholders, yet on the other hand, the company and its officers should not be constantly harassed to open the companys accounts, books or papers merely for shareholders out on a fishing expedition. Furthermore, even in the event the members are allowed to inspect such documents, they often do not have the expertise with which to examine them. Section 319 of the CL overcomes these concerns by providing a statutory right for members to authorize auditors and solicitors to inspect records of the company on their behalf, but only upon application to the Court. The Court must also be satisfied that the member is acting in good faith and that the inspection is made for a proper purpose. This allows the court to be an effective sieve to prevent unscrupulous shareholders from accessing company records for frivolous reasons, harassment or for industrial espionage. In addition, the court can thus minimise disruptions to business operations which would be inevitable.
Recommendation Consider the introduction of a statutory method by which shareholders can obtain access to company records: by application to court; satisfying the court that he is acting in good faith and the inspection is for a proper purpose; and that the shareholder is allowed to authorize solicitors and auditors to inspect the documents and to make copies.
7.4
7.5
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 a remedy, shareholders also have to contend with the lengthy judicial process. It is estimated that on average, cases take 2 to 3 years from the filing of papers to the completion of the trial, although anecdotal evidence suggests that most cases involving company law are settled pre-trial, usually at the point of interlocutory applications for
8.2
196
injunctions. The length of time taken for the judicial process oftentimes acts as a deterrent against shareholders contemplating the filing of a suit. 8.3 Although the High Court of Malaya at Kuala Lumpur has a specific Commercial Division in which to deal with matters relating to companies, when the court sits in other parts of the country, there is no specific division of matters. It is recommended that further detailed study should be undertaken to establish the extent to which the court system is utilised to resolve company law disputes, as well as the shortcomings of the system in providing access and quick and decisive solutions to the same. The study should also look into the feasibility of methods for alternative dispute resolution, the possibility of setting up specialized commercial courts or specialised tribunals or even into training for members of the bench. The study should also look into methods of encouraging practitioners to bring their experience and expertise into assisting dispute resolution. The study should carefully consider the success of the Commercial Court of the High Court of England and the Courts of the Southern District of New York, which have long been the favored forum for the purposes of conferring jurisdiction in international financial transactions because, inter alia: speedy and effective judicial remedies; and special courts staffed by judges who are experienced in deciding and who regularly decide 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 as the feasibility of alternative dispute resolution mechanisms with the objective of providing for the commercial and corporate sector a system that is manned by specialists which will ensure that the system will be responsive to the needs and demands of the business community and able to dispose of cases in an efficient manner.
8.4
8.5
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 setting up of a Minority Shareholder Watchdog Group to monitor and combat abuses by insiders against the minority.
197
9.2
This would be a first step towards encouraging shareholder activism in Malaysia. The role of shareholders and, namely institutional shareholders in demanding and pursuing higher corporate governance standards is increasing. The proposed Code for example, relies substantially on market regulation, and particularly, institutional investors to hasten the widespread adoption of the Code. The setting up of the Minority Shareholder Watchdog Group will certainly give impetus to the implementation of the Code and to shareholder activism generally. On the issue of who should take the initiative to get this going, the Committee would suggest that the Employee Provident Fund (EPF) as the largest institutional investor in Malaysia would be an ideal candidate to organise such a Watchdog Group and possibly with the technical assistance of the WB or the ADB. Other potential participants include the MICG, the Malaysian Investors Association and the Malaysian Association of Asset Managers. As the growth of the fund management industry in Malaysia gathers momentum through decentralisation of EPFs investment, these fund managers can then play a more active role in the Watchdog Group.
Recommendation That the EPF should take the lead to organise a Minority Shareholder Watchdog Group with technical assistance from the WB or ADB.
9.3
9.4
9.5
198
ISSUE FIVE
TO DEVELOP EFFECTIVE GOVERNANCE AND ENFORCEMENT MECHANISMS WITHIN THE REGULATORY FRAMEWORK
1.
1.1
Introduction
This part seeks to address the concerns expressed over enforcement, or the lack thereof in the Malaysian capital markets. The Committee, in the course of its study has been overwhelmed by the significance placed on the role of enforcement in its contribution to the massive loss of investor confidence in the Malaysian capital markets. It is to be noted that criticisms levelled against enforcement generally focus on the role of 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 securing compliance with laws, good corporate governance is not a matter for regulators alone. An inherent difficulty with statutory enforcement is that enforcement is more often than not after the fact and its effect is generally a deterrent to future breaches. For example, the UEM acquisition of Renong shares, in relation to timely disclosure of material information, although both the ROC and the KLSE took appropriate action when it was discovered, in the hostile mood that surrounded this affair, it was felt to be too little, too late. There are therefore potential before the fact enforcers that deserve attention. The focus of the Committee in this area is therefore to strengthen key governance or enforcement mechanisms both within and outside a company. The emphasis in this respect is to identify all potential enforcers of good governance in companies. It must be noted that the term enforcers is used in the broadest sense to refer to any person who may have a role whether directly or indirectly in encouraging good corporate governance practices. Enforcers of good corporate conduct can broadly be divided into internal and external enforcers. 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, corporate advisers and the regulators.
1.2
1.3
1.4
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 corporate conduct non-executive directors, audit committees and company secretaries.
199
2.1
Non-executive directors 2.1.1 In paragraph 2.1.27 of Issue 1, it was decided that the law should not distinguish between the duties of executive and non-executive directors. However, the Code would recognise the distinctive role of independent non-executive director participation on the board in reviewing the actions of the executive and taking the lead in conflict of interest situations. It is generally felt that this raising of the profile of non-executives has been very beneficial to the industry.176 There are, nevertheless, grave doubts about the ability of independent non-executive directors to monitor management and abuse by controlling shareholders. They include issues relating to the degree of their independence (appointment and removal of non-executive directors which is in practical terms controlled by the board or a controlling shareholder) and the tools they have able to discharge this aspect of their role effectively.
2.1.2
ISSUE Appointment, removal, resignations and re-elections of non-executive directors

Appointment 2.1.3 It is fair to say that the process for appointment and removal of directors is essentially controlled by directors or controlling shareholders as the case may be. This is especially so in light of the fact that a distinguishing feature of the Malaysian corporate landscape is that there are a number of public companies which have a significant shareholder and whose holdings are such that it can exercise or influence the control of a company. Control is ultimately exercised by electing or influencing the election of the board of directors and through removal. It is not surprising to find boards made up of friends and invitees of the controlling shareholder who are ultimately loyal to those responsible for their election. The appointment and retirement of directors are essentially governed by the articles of association of a company. In this respect directors may be appointed by 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 casual vacancy or as an additional director by virtue of the powers granted to them under Article 68, Table A of the CA. Any director so appointed shall hold office only 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 appointed by the Board to fill the casual vacancy shall hold office until the next AGM and shall be eligible for re-election.178 Despite the requirement to take all in between
2.1.4
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 CA 178 Part 8 of the Listing Requirements sets out the various provisions that a public-listed company must have in its articles of association. Rule 309 requires that a public-listed company must have provision in its articles of association for election of directors to take place every year, and all directors except the managing director shall retire from office once at least in each 3 years, but shall be eligible for re-election. Article 66 provides that shareholders are responsible for the election of directors in place of those retiring.
176
200
appointments to the general meeting, boards essentially control the selection of directors, unless the company is controlled by a significant shareholder, in which case, he controls the board. 2.1.5 In every appointment there are certain forms179 that are required to be lodged with the ROC. In the case of listed companies, the KLSE shall be notified of the appointment of director as soon as possible in accordance with Rule 30 of the Listing Requirements. The SC also needs to be notified of the appointment within seven days of the appointment as required by paragraph 7.02 of the SC Guidelines and more recently under subsection 99D(2)(c) SIA. The law sets out notifications requirements for the appointment of directors to the relevant authorities. It does not prescribe the selection process. The Code strengthens this requirement by recommending that non-executive directors should be selected through a formal and transparent process. The suggested formal process is through the setting up of the nomination committee, with the responsibility for proposing to the board, any new appointments, whether of executive or non-executive directors. The proposed nomination committee should have a majority of non-executive directors on it and be chaired by a non-executive director. Beyond this prescription, the committee 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 companies under section 128 CA. It allows members to remove a director any time during his term of office regardless of provisions to the contrary in the memorandum or the articles of association of a company. Special notice is required of any resolution 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 concerned and he is entitled to be heard on the resolution at the meeting. The said director is also entitled to make representations in writing (not exceeding a reasonable length) to the company and request that the members of the company be notified accordingly. Briefly, the procedures for removing a director in a public company are as follows: A member gives special notice of the resolution to remove the director from the 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 the special 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 notice of resolutions given to members;
2.1.6
179
Form 48A and Form 49
201
The company sends a copy of the representations to every member to whom the notice is sent. The company need not send out copies of the representations if the material is defamatory and the court confirms this; The Court may order the director to pay the whole or part of the companys costs on the application notwithstanding that the director is not a party to the 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 the removal, it is not bound to give reasons for the removal, nor is the director being removed required to make representations to the KLSE. Therefore, the KLSE is not made aware of the circumstances surrounding the removal, which may be information beneficial to the KLSE in its enforcement efforts. It is submitted that amendments should be made to this rule to require the company to forward to the KLSE a copy of the written representations of the director, or alternatively to require the director to make representations to the KLSE of the circumstances surrounding his removal. This is purely to aid the KLSE in its enforcement efforts and not for purposes of reinstating the director concerned. A variant to removals is essentially where a director is not re-elected. The listing rules 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 the company, provided there remains in the company, 2 directors, each having his principal or only place of residence in Malaysia. Form 49 is required to be lodged with the Registrar within the statutory period of one month from the effective date of resignation. There is no requirement for directors to make representations to the company or the regulators of the circumstances surrounding the resignation. 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 positive requirement to disclose reasons for his resignation. We concluded that such a requirement encroaches unnecessarily on the affairs of a director. In any case, it is always open to a resigning director to deny the existence of suspicious circumstances surrounding his removal. The Committee preferred instead to make channels of communication with the regulatory authority clear and open.
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.
180
202
It is recommended that the Listing Requirements should state clearly, the right of directors to bring to the notice of the KLSE, circumstances which the resigning directors 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, the Listing Requirements should similarly allow directors to bring to the notice of the KLSE, circumstances which the directors declining to stand for re-election think ought to be made known to the authorities.
Recommendation That amendments should be made to the Listing Requirements to require the company to forward to the KLSE a copy of the written representations of the director, or alternatively to require the director to make representations to the KLSE of the circumstances surrounding his removal. This provision should 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 purposes of reinstating the director concerned. That the listing rules should allow directors to bring to the notice of the KLSE of circumstances which the resigning directors, or the directors declining to 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 to remuneration for services. They are only entitled to remuneration if it is provided in the articles of association. There is usually provision for payment in the articles of association e.g. Article 70, Table A, CA which provides that the remuneration of directors shall be determined from time to time by the company at the general meeting and that the remuneration is accrued from day to day. In respect of executive directors, his appointment is usually coupled with a service agreement stipulating the terms and conditions of his service including his salary. 2.1.13 Non-executive directors do not have salaried appointment with the company and receive fees laid down in the articles of association and generally determined by members at a general meeting. A frequent complaint in respect of nonexecutive directors is that the level of remuneration does not commensurate with the additional responsibilities imposed on them. This is a valid issue as the level of remuneration that a director receives plays a key role in incentivising non-executive directors to play a keener role in the affairs of a company.
203
2.1.14 On fees, there is a balance to be struck between recognising the value of the contribution made by non-executive directors and not undermining their independence. The demands now being made on conscientious non-executives are significant and, therefore, their fees should reflect the time they devote to the companys affairs, their experience and responsibilities undertaken. 2.1.15 For this reason the Code recommends payment of non-executive directors for additional responsibilities undertaken (especially where they participate on board committees), their experience and time devoted to company affairs. This is coupled with a requirement for disclosure of fees payable to non-executive directors. It will be for the market to judge if the fees are adequate. It will also go some way towards indicating to the public of the value the company places on its non-executive directors and the importance the company places on corporate governance issues. 2.1.16 In respect of their independence, suggestions have been made to the effect that non-executive directors should be subject to a source of income that is independent of the company. However, we consider this to be too radical a proposal. To do so would be to over emphasise their monitoring role. Nonexecutive directors are appointed to the board primarily for their contribution to the development of the companys strategy. What matters is that non-executive directors should command the respect of the executive members of the board and should be able to work with them in a cohesive team to further the interests of the company. 2.1.17 One other means of encouraging and incentivising non-executive participation on the board is to encourage equity participation by non-executive directors. Equity participation by non-executive directors should be acquired by them independently and not through a share option scheme designed for executives whose role is to manage the company. The directors role is to assess effectively the performance of the company and its executives and a conflict of interest would be created if non-executive directors participated in a similar scheme to the executives. If it is decided (pursuant to a review conducted by the KLSE and is alluded to in 2.1.19 below) that the Listing Requirements definitions of independence should be extended to exclude substantial shareholders, it follows then that equity participation by non-executive directors should not exceed the 2% threshold applied to substantial shareholders.
Recommendations That non-executive directors should not be subject to a source of income that is independent of the company. That one method of incentivising active non-executive participation on the board, is through encouraging equity participation by these directors.
204
ISSUE Definition of independence

2.1.18 The composition of the board of directors is one of the most important issues in corporate governance and of crucial importance are the provisions ensuring the existence of independent elements on the board. This is, however, not an area appropriate for legislative intervention due to the need to maintain flexibility in the application of the rules. In this respect, the Code is an ideal forum to regulate this activity181 . The Code provides for extensive prescriptions on independence, based on rule 9 Listing Requirements182 . It essentially, prefers an imprecise definition of independence - it should be for the board to take a view as to whether a particular director is independent or not. It requires instead for directors to disclose in the annual report as well as the notice of meetings embodying the resolution for their re-election, which of the directors are considered to be independent and be prepared to justify their views if challenged. relates to two aspects of independence. First, independence from management and, second, independence from controlling interests. The latter is in recognition of the fact that non-controlling shareholders need special vigilance at board level on their behalf.
2.1.19 The KLSE is currently considering a proposal to expand the definition of independence embodied in Rule 9 to exclude substantial shareholders. This is based on the belief that substantial shareholding in a company is an interest or influence that could potentially create a conflict of interest and affect investor perception about the ability of the director concerned to act solely in the best interests of the company. The Committee initially agreed with the proposed expansion. However, based on feedback received and the subsequent lowering of the threshold of shareholding to be a substantial shareholder, it was felt that any attempt to exclude substantial shareholders (who are also minority shareholders) from participating as independent board members can have the effect 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 aggrieved by the conduct of the controlling shareholder. There is a strong case, therefore, for retaining the existing definition of independence in the Listing Requirements. 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.
205
ISSUE Size of non-executive director participation on the board

2.1.20 Even where non-executive directors choose to take a stand against management they 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 a benchmark that listed companies should measure themselves by requiring that at least one third of the Board should be independent. 2.1.22 This is then supplemented by a prescription introducing a form of proportional representation stating that in circumstances where a company has a significant 1 shareholder, in fulfilling the requirement that the _ of the board should 3 comprise independent directors, the board should include a number of directors which fairly reflect the investment in the company by the shareholder other than the significant shareholder. The term significant shareholder is defined as a shareholder with the ability to exercise a majority of votes for the election of directors. 2.1.23 Boards are then to disclose its analysis of the application of these best practices set 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 supplement the prescriptions in the Code by mandating a minimum number of independent directors on the board. The figures should not be fewer than 2. This recognises that it is practically very difficult to form an effective check against the nonindependent elements on the board.
Recommendations That the Listing Requirements should prescribe a minimum number of nonexecutive participation on the board and that this number should not be fewer than 2.
ISSUE Cumulative voting for directors

2.1.25 A proposal was made following consultation on the report for the introduction of cumulative voting for directors. Under cumulative voting, a shareholder is allowed to cast all their votes for one candidate standing for election on the board of directors (as opposed to casting one vote for each candidate). The shareholder is therefore allowed to cumulate his entitlement to one vote per candidate and cast it all in favour of one director.
206
2.1.26 Cumulative voting essentially seeks to harness the ability of large minority shareholders to put their representatives on boards to monitor management performance and control self dealing by controlling shareholders. It must be noted that whilst cumulative voting can strengthen the monitoring power of large minority shareholders, it is of little direct help to retail shareholders. The idea, however, is that all shareholders benefit if large minority shareholders are able to effectively monitor management and abuse by controlling shareholders. 2.1.27 Cumulative voting is not unprecedented. It is practised in certain common law jurisdictions such as Canada and the US. It has also been endorsed in some literature such as Black and Kraakman A Self Enforcing Model of Corporate Law, 1996 (Harvard Law Review). In Law and Finance Journal of Political Economy, La Porta, et al (1998), the existence of laws allowing for cumulative voting are set out as one of the rights that measure how strongly a legal system favours shareholders in the voting process. 2.1.28 The principal argument against cumulative voting is that there will be a necessity to 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 take the lead in management oversight and control self dealing by controlling shareholders, whether on the board or through board committee participation, a strong case may be made for strengthening the process by which independent directors are given a presence on boards. Therefore, we would suggest that this recommendation be given immediate consideration and that the relevant regulator study this issue further.
Recommendation That the relevant regulator study the issue of the introduction of cumulative voting 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 to information. Practically however, while non-executive directors have the same right to information as the executive members of the board, they lack the inside knowledge of the company of the executive members. However, their effectiveness turns on a considerable extent to the quality of information that they receive and the use they make of it. 2.1.30 A prescription stating this right is set out in the Code essentially requiring the Board to establish procedures granting this access. 2.1.31 The question is, however, whether this right should be embellished through a requirement of the law so as to deal with a situation where a director is denied the right to inspect documents by the company. A director seeking access to documents will not be able to enforce such a requirement if it is stated in the Code.
207
2.1.32 It is submitted that this right should be stated in the CA, with recourse to the courts to enforce this right. The section should give every director in discharge of 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 proving that one or more of the limits is applicable to a directors application to enforce this right should be on the company. 2.1.34 First, the right is not to be enforced upon application by the director to court to enforce this right, if the company establishes that the information to be obtained by exercise of the right is not reasonably related to the performance of directorial functions and duties. For example, if the company establishes that the information the director seeks to inspect consists of a closely guarded trade secret, or operating information developed by third persons and used by the company under a secrecy agreement, the directors application should be denied because knowledge of such secrets would rarely be necessary for the performance of a directors functions and duties. 2.1.35 Second, a court may, in its order, limit the ambit of the inspection when necessary to protect the company from undue burden or expense that complying with the directors request would be so expensive and time-consuming as to seriously disrupt the ongoing conduct of the business. 2.1.36 Finally, a directors right to information is not to be enforced when the company establishes that the director is likely to use the information in a manner that would violate the directors fiduciary or other obligation to the company. In making this determination, the court should consider the effect of an order prohibiting such conduct. If the court is convinced that the director intends to use the information in a manner that would violate the directors fiduciary obligations, it should refuse to give the director the access requested. 2.1.37 If the company resists in providing the requested information, as a practical matter the right will need to be enforced by an application for a court order. In a complex and fast-moving world, a substantial delay in the delivery of information may dilute or entirely drain its significance. Therefore, the provision should recognise that it is desirable to decide applications expeditiously and, therefore, that the court should be able to decide such applications by a hearing on the basis of affidavits, at its discretion. Although the hearing on such an application should be expedited, there must, of course, be due notice to the company. 2.1.38 The provision should also make it clear that if the director is successful in an application brought after the company has denied a request, the director is entitled to be reimbursed by the company for the expenses, including legal fees reasonably incurred in connection with the application.
208
Recommendations That a provision should be inserted in the CA to the effect that every director in the discharge of the duties of his office including his duties as a member of a board committee, has the right to inspect and copy all books, records, and documents of every kind, and to inspect physical properties of a company. That the following limits be placed on this right: Where the company establishes that the information to be obtained is not reasonably related to the performance of directorial functions and duties. Second, a court may, in its order, limit the ambit of the inspection when necessary to protect the company from undue burden or expense; Where the company establishes that the director is likely to use the information in a manner that would violate the directors fiduciary or other obligations to the company.
That the provision should provide for applications to be heard expeditiously and, therefore, that the court should be able to decide such applications by a hearing on the basis of affidavits, at its discretion. That the provision should provide that where the director is successful in an application brought after the company has denied a request, the director is entitled to be reimbursed by the company for expenses, including legal fees 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 the power to manage the business of a company. Occasions do arise when the independent members of a board or board committee members may need some sort of expert advice if they are to exercise their functions and powers in a proper fashion. There is no direct authority for recognising such a power in a subset of directors. Also while a committee would normally have implied authority to take all actions necessary to properly execute its functions, current corporate practice typically entails a return to the board for specific authorisation to retain such experts as the need arises. Normally, these directors should look to the in-house legal or other adviser, corporate staff, or regular external advisers for 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 there should be an agreed procedure for directors, in furtherance of their duties to take independent professional advice if necessary at the companys 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.
209
2.1.41 It is therefore submitted that a provision should be inserted in the CA to give the independent directors of a company, acting as a body, or board committees to retain experts to advise them on problems arising in the exercise of their functions and powers, at the companys expense, if the relevant directors reasonably believed that retention of an outside expert was required for the proper performance of their functions and powers, and if the amount involved was reasonable. The provision should go on to give these directors the right to enforce 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 retain an expert the independent directors of the company will act at a meeting of those directors called upon reasonable notice by one of them and attended by at least a majority of them. 2.1.43 This provision should not preclude corporate staff, or regular outside advisers or other experts, from providing assistance to individual directors as a matter of accommodation, nor does it preclude a company from voluntarily adopting a structure in which the board or some subset of the board has its own legal adviser 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 of the expert was reasonably required for the proper performance of the directors functions and powers, the reasonableness of the amount involved, and whether assistance 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 independent directors of a company, acting as a body, or board committees, the right to retain experts to advise them on problems arising in the exercise of their functions and powers, at the companys expense, if the relevant directors reasonably believed that retention of an outside expert was required for the proper performance of their functions and powers, and that the amount involved was reasonable. The provision should go on to give these directors the 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-executive director in question. Concerns have been expressed as to whether the supply of non-executives will be adequate to meet the demand. It is crucial that there are policies and training programmes in place to increase the pool of high calibre non-executive directors. An example of a policy to facilitate this objective, is to encourage executive directors of companies to accept appointments on boards of other companies. Issues relating to training are dealt with in Chapter 7 of this paper.
210
2.2
Audit committees 2.2.1 The Listing Requirements of the KLSE provide that all listed companies are to have audit committees made up of at least two independent directors. This requirement was introduced as a result of strong criticism of shortcomings in corporate governance, in the quality of executive management and the effectiveness of board supervision. An independent audit committee serves to implement and support the oversight function of the board in several ways. Such a committee provides a means for review of the companys processes for producing financial data, its internal controls, the independence of the companys external auditor, and a forum for dialogue with the companys external and internal auditors. In theory, the full board might execute these functions itself. In practice, however, there are several reasons why an audit committee would normally constitute a preferable location for these functions. For one thing, a focused review and detailed discussion of the companys processes for producing financial data, its internal controls, and independence of its external auditor might be too time-consuming for the full board. For another, because the companys financial data concerns the performance of management, it is important to have a 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 companys external auditor, and thereby helps assure that the auditor will have free rein in the audit process. This reinforcement is achieved in part by conferring on an organ that is independent of management and whose financial results are being audited, a vital role in the retention, discharge, and compensation of the external auditor. An independent audit committee provides a forum for regular, informal, and private discussion between the external auditor and directors who have no significant relationships with management. In the absence of such a forum, an external auditor would often be reluctant to call for a meeting at the board level unless a problem of great magnitude had arisen. In contrast, the provision of an institutionalised forum facilitates and indeed encourages the external auditor to raise potentially troublesome issues at a relatively early stage, allows the auditor to broach sensitive problems in an uninhibited and private fashion, and gives the auditor assurance that it can readily get a hearing in the event of disagreement with management. An independent audit committee reinforces the objectivity of the internal auditing department (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 board committee, it may encounter resistance to recommendations that do not meet with managements approval. Regular access to an audit committee may help ameliorate such resistance. A working relationship with an audit committee is also likely to increase the status and therefore, the effectiveness of the internal auditing department.
2.2.2
2.2.3
2.2.4
2.2.5
2.2.6
211
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 the fact that they have not been given the tools to discharge their responsibilities effectively. The Code deals extensively with the issues identified below. In this exercise the Committee essentially focuses on those aspects of the Code that should be reflected in the rules, thereby mandating compliance with these prescriptions. In this respect, the KLSE is currently in the process of reviewing its rules on audit committees. The Committees aim is to provide input for that exercise.
ISSUE Membership of the audit committee

2.2.8 The existing Listing Requirements require every listed company to have audit committees comprising at least three members, a majority of whom should be independent.183 It is submitted that this rule should be maintained. The number three is related to its functions, to ensure that audit committees have the resources necessary to undertake their tasks effectively. The Listing Requirements further provide that the committee should comprise a majority of members who are independent directors. The rule should be clarified to 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 a strong chairman, who has the confidence of the board and the auditors. The Finance director, the Head of Internal Audit and a representative of the external auditors shall normally attend meetings. Other board members may attend meetings upon the invitation of the audit committee. This ensures that a necessary level of calibre and expertise as well as accountability is available in the audit committee. However, at least once a year, the audit committee meetings should meet without the executive committee members present to ensure that there is a forum for the auditors to broach sensitive problems in an uninhibited and private fashion. Additionally, the term of office of each member of the audit committee should be subject to review every three years. This allows for the evaluation of the performance of the audit committee and of each individual director on the committee.
2.2.9
Recommendation That the existing Listing Requirements should be clarified to require the Chairman of the committee to be independent and that the Finance director, the Head of Internal Audit and a representative of the external auditors to attend meetings. Other board members shall attend meetings at the invitation of the audit committee. However, at least once a year, the committee shall meet with the external auditors without the executive members of the board present. Additionally, the term of office of each member of the audit committee should be subject to review every three years.
183
Rule 344A(2) KLSE Listing Requirements
212
ISSUE Terms of reference of the audit committee and actions open to audit committees
2.2.10 The Listing Requirements set out the functions of the audit committee184. The Code 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 it or that it has come across in respect of a transaction, procedure or course of conduct that raises questions of management integrity, possible conflict of interest or abuse by a significant or controlling shareholder. This should be specifically set out as a mandatory function of the audit committee. 2.2.12 The Committee felt it necessary for the duty to investigate to be supplemented with 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 the board. In others it may wish to conduct its own investigation, or request management to conduct an appropriate investigation. Where the committee pursues a certain issue but finds no substance, the matter could rest there. However, if as a result of the committees inquiries, a matter is left in significant doubt, or if the committee concludes a questionable practice has occurred, the committee should normally report to the board. Where however the board does not take action, the directors making up the committee should be required under the listing rules to report the matter directly to the KLSE. This is in recognition of the fact that the audit committee is a committee of the board. Hence, it may not be appropriate for the committee to take the matter to the authorities. However, the Listing rules may then place a positive obligation on the directors forming the membership of the audit committee to make this report.
Recommendation That the Listing Requirements be embellished to set out the the duty of the audit committee to consider and where it deems necessary, investigate any matter referred to it or that it has come across in respect of a transaction, procedure or course of conduct that raises questions of management integrity, possible conflict of interest or abuse by a significant or controlling shareholder. These duties should be supplemented with a statement as to the possible courses of action open to the committee. Where the committee pursues a certain issue but finds no substance, the matter could rest there. However, if as a result of the committees inquiries, a matter is left in significant doubt, or if the committee concludes a questionable practice has occurred, the committee should normally report to the board. Where however the board does not take action, the directors making up the committee should be required under the Listing Requirements to report the matter directly to the KLSE.
184
Rule 344A(5) Listing Requirements.
213
ISSUE Access to information

2.2.13 The above illustrates that audit committees will require full access to company information to undertake their responsibilities effectively. The discussion in respect 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 of each director to have access to independent professional advice at the companys expense. 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 officer under the CA. As an officer, the company secretary is expected to exercise independent judgment when discharging his duties. And in this respect they pay a valuable role in ensuring good corporate governance by acting as adviser to the Chairman and the board on the disclosure and other compliance obligations of the company under the law. In this respect, item 11 of the Code of Ethics for Secretaries states as good conduct in the discharge of his duties, To be impartial in his dealings with shareholders, directors and without fear or favour, use his best endeavour to ensure that the directors and the company comply with relevant legislation, contractual obligations and other relevant requirements. 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 embellishes their independence in discharging their duties. This accounts for the perception that they are completely subservient to the will of the board.
2.3.2
185 186
Section 139 (1) CA Article 95, Table A of the CA
214
2.3.4
However, the discussion in Issue 1 illustrates that there is increasing expectation of the role that they are expected to play in advising boards in respect of compliance issues. This increases the potential for removal by an untoward board. It is, therefore, necessary to put checks in place to ensure that company secretaries remain sufficiently independent to take on this increased role. The committee considered ways and means of strengthening the existing framework for appointments and removals of company secretaries. It was suggested that all appointments and removals of company secretaries should be subject to the general meeting, not unlike the existing requirements for directors and auditors. It was, however, felt that this may be too radical a move bearing in mind the increased costs that the company could potentially be subject to. There is nevertheless scope for improvement within the four corners of the existing requirement. Currently, companies are required to notify the Registrar of appointments of company secretaries. The CA also requires notification of the removal or resignation of such company secretary187 . The Committee considered that one way of enhancing the existing notification requirement is to set out a requirement for the countersignature of the company secretary being removed or resigning, stating that his/her removal, or resignation is not for professional reasons. Where the notification is filed without a counter signature, it is then open to the Registrar to make the appropriate enquiries. This requirement should not apply to all companies. It should be limited to public listed companies where the disclosure and compliance obligations are highest. The value in the provision lies not only in the fact that the regulators are made aware of suspicious removals but more importantly that directors are mindful of the fact that they may not abuse the removals of company secretaries. This gives company secretaries the opportunity to assert their independence within the company. On the other hand, it was also felt that this notification requirement could compromise the directors ability to remove an incompetent company secretary. A company secretary could now hold a director to ransom by not agreeing to the counter signature. 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 the notification and whether the costs imposed by this requirement outweigh the benefits.
Recommendation That the relevant regulator should study further the issue of whether the notification for removal of a company secretary should set out a requirement for the countersignature of the company secretary being removed or resigning, stating that his/her removal, or resignation is not for professional reasons.
2.3.5
2.3.6
2.3.7
2.3.8
187
Section 141(6)(d)CA.
215
3.
External enforcers
External enforcers of good corporate governance for purposes of this discussion are auditors, 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 to report to the shareholders on whether the companys annual accounts are properly prepared and give a true and fair view. It is designed to provide reasonable assurance that the financial statements are free of misstatements. Under the Malaysian Companies Act, the statutory duty of the auditor does not extend to ensuring whether the directors report is consistent with the accounts unlike the UK Companies Act where under section 235(3), auditors are required to consider whether the information given in the directors report for the FY for which the annual accounts are prepared is consistent with those accounts; and if they are of the opinion that it is not, they shall state that fact in their report. Bearing in mind that the directors statement is generally regarded as the most widely read part of the financial report, it is submitted that the basic statutory duty of auditors should be extended to include reporting on whether the directors report is consistent with the accounts. There are similarly other requirements placed on auditors by the London Stock Exchange Listing Rules that are currently not in existence in Malaysia. Essentially, the Listing Rules require directors to agree with auditors, the content of preliminary announcements of financial results. In this respect we recommend that the Listing rules of Exchanges should include auditor agreement of the content of preliminary announcements of financial results consistent with the aim of ensuring integrity and credibility of publicly reported information.
Recommendations That the basic statutory duty of auditors should be extended to include reporting on whether the directors report is consistent with the accounts. That the Listing rules of Exchanges should require the auditors agreement of the content of preliminary announcements of financial results consistent with the aim of ensuring integrity and credibility of publicly reported information.
3.1.2
3.1.3
3.1.4
216
ISSUE Auditor objectivity and independence

3.1.5 The audit provides an external and objective check on the way in which the financial statements have been prepared and presented, and is an essential part of the checks and balances required. If reliance is to be placed on accounts, it is essential that they should be true and fair and that is more likely to be the case if someone independent of the company has vetted them and certified that they are so. The question, therefore, is how to ensure auditor objectivity and independence. The framework in which auditors operate, however, is not well designed in certain respects to provide the objectivity that shareholders and the public expect of auditors in carrying out their functions. The main reasons are as follows Accounting standards and practice allow boards too much scope for presenting facts and figures derived from them in a variety of ways. Auditors cannot stand firm against a particular accounting treatment if it is permitted within the standards. Although shareholders formally appoint auditors and the audit is carried out in their interests, the shareholders have no direct say in audit negotiations and have no direct link with the auditors. Auditors do, however, have to work closely with those in management who have prepared the financial statements that they are auditing in order to carry out their tasks. The audit firms in this respect, like any other business, will wish to have a constructive relationship with their clients. Audit firms are also in competition with each other for business. They wish to maximise their business with companies of which auditing may only be a part. To the extent that they compete on the basis of their professional reputation, this will act as an incentive to maintain high standards. So will the ethical guidance of the profession, and the threat of litigation. To the extent, however, that audit firms compete on price and on meeting the needs of their clients (the companies they audit), this may be at the expense of meeting the needs of shareholders. Companies too are subject to competitive pressures. They will wish to minimise their audit costs and they are likely to have a clear view as to the figures they wish to see published, in order to meet the expectations of shareholders.
3.1.6
3.1.7
Steps have already been taken, within the last two years to strengthen the audit system through the establishment of a new regulatory framework. The Financial Reporting Foundation and its associated body, the Malaysian Accounting Standards Board have been set up to improve and tighten accounting standards, to give these standards the force of law and to facilitate enforcement of these standards through companies. The new system has only recently been established and its impact has yet to be felt. We endorse the steps that are being taken to
217
develop more effective accounting standards. These provide important reference points against which auditors exercise their professional judgment. Their position is strengthened if standards do not allow for alternative accounting treatment. The work of the Malaysian Accounting Standards Board is well in hand and has our full support. 3.1.8 There are certain other aspects of the framework surrounding auditors that can be improved to strengthen their independence and their role as watchdogs. In addition to the above, the Committee also considered the following additional action to strengthen public confidence in the audit approach. It has been suggested that a percentage limit should be placed on the total income that an audit firm may receive from a single client. This could be done via the by-laws of the relevant professional organisation concerned. This is to counter any temptation that may exist where a significant proportion of the income of an audit firm is dependent on a single audit client. The Committee were generally reluctant to impose such a requirement for the following reasons:s
difficulty in defining what a single client constitutes would it include companies 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 nonaudit work. The problem with non-audit work is that where auditors undertake non-audit services, it will increase the value of the firm to the auditorship and thus make the auditors more reluctant to do anything which will render it likely that the board of directors will seek to get rid of them as auditors. If so, then if in a particular year, a client undertakes a major corporate project, etc., would the audit firm be in breach despite the fact that this is an exceptional fee earned. On the other hand, if the threshold does not include non-audit fees, this would render the requirement quite redundant; and difficulty associated with enforcing this rule. Financial statements of auditors are generally regarded as very confidential. Unless this requirement had the force of law, it would be almost impossible to enforce.
s s
The Committee recommend as an alternative to the single client rule, full disclosure of fees paid to audit firms for non-audit work. The essential principle is that disclosure will enable the relative significance of the companys audit and non-audit fees to be assessed. As such subparagraph 1(q) of the 9th Schedule CA requirements in respect of disclosures in profit and loss accounts, should be extended to include disclosure of fees paid in respect of non-audit work.
218
The issue of quarantining audit from other services was considered as a counter measure for treating audits as loss leaders in return for the more lucrative non-audit work. The problem with such a prohibition, and as rightly pointed out by the Cadbury report188 is that it would limit the freedom of companies to choose their source of advice and could increase their costs. The Cadbury committee recommended instead that the audit committee of a company should undertake the task of keeping under review the overall financial relationship between the company and the auditors. In particular, the audit committee should have a key role where auditors also supply a substantial volume of non-audit services to clients.189 This is already included as a function of the audit committee in the Listing Requirements. Another proposal considered was that some form of compulsory rotation of audit firms should be introduced, to prevent relationships between management and auditors from becoming too comfortable. The Committee, however, felt that any advantages that this would bring would be more than outweighed by the loss of trust and experience built up when the relationships are sound and by the risk of audit effectiveness at the changeover. This was an issue considered by the Cadbury Committee where they suggested that a periodic change of audit partners should be arranged to bring a fresh approach to the audit. The Cadbury recommendation came in the form of exhortations to the accounting profession to draw guidelines to this effect. It is believed that some of the bigger accounting firms already practice this as a matter of international best practice. The Committee recommend that the relevant professional body should develop guidelines to this effect.
Recommendations That there should be disclosure of fees paid to audit firms for non-audit work. In this respect, subparagraph 1(q) of the 9th Schedule CA requirements in respect of disclosures in profit and loss accounts, should be extended to include services paid in respect of non-audit work. That a periodic change of audit partners should be arranged to bring a fresh approach to the audit. The Committee recommend that the relevant professional body should develop guidelines to this effect.
Auditors as watchdogs 3.1.9 The primary responsibility for prevention and detection of fraud or other illegal acts on the part of the company rests with the board as part of its fiduciary responsibility for protecting the assets of the company. The auditors responsibility is essentially to properly plan, perform and evaluate his audit work so as to have reasonable expectation of detecting material misstatements in financial statements.
188 189
Paragraph 5.11 These are recommendations of the Hampel committee on the issue of auditor independence.
219
ISSUE Duty to report breaches of law or reasonable suspicions of breaches to the regulatory authority
3.1.10 Subsection 174(8) CA places a statutory duty on an auditor to report in writing to the Registrar, where in the course of performance of his duties as an auditor of a company he is satisfied that: There has been a breach or non-observance of any of the provisions of the Act; The circumstances are such that in his opinion the matter has not been or will not be adequately dealt with by comment in his report on the accounts or consolidated accounts or by bringing the matter to the directors of the company or if the company is a subsidiary, of the directors of the holding company.
3.1.11 Failure to do so carries the penalty of imprisonment for two years, or thirty thousand ringgit or both. 3.1.12 The obligation to report is triggered when the auditor is satisfied that a breach of the Act has occurred and where he has no confidence that the directors will deal 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, collusion or 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 report matters that in his professional opinion constitute breach of the CA. This provision should be supplemented with a provision in the SIA placing a similar obligation on auditors in respect of breaches of securities laws and listing requirements of Exchanges. The advantage to this phrasing is essentially that auditors are held to a more objective standard by which a decision to or not to report is assessed against. 3.1.15 The Committee was asked to consider if this provision should be extended to cover fraud and other serious offences. Section 207(9A) of the Singapore Companies 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 to believe that a serious offence involving fraud and dishonesty is being or has been 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 acted without malice. This protection is necessary to enable an auditor to perform his function as a watchdog fearlessly.
220
3.1.17 It is submitted that auditors in Malaysia should be placed under an obligation to report fraud, dishonesty and other serious breaches to the relevant authority. The provision should additionally protect them from defamation suits if the auditor acted without malice, not unlike section 174A(1)CA. Additionally, the relevant professional bodies should develop guidelines in consultation with the relevant regulators to provide guidance to their members as to the scope of the duty. 3.1.18 Following from the increased responsibility in respect of compliance with the requirements of the SIA and Listing Requirements, the relevant professional organisations should arrive at a standard benchmark fee increase upon consultation with all relevant parties.
Recommendations That subsection 174(8) CA should be amended to enable auditors to report matters that in his professional opinion constitute breach of the CA. This provision should be supplemented with a provision in the SIA placing a similar obligation on auditors in respect of breaches of securities laws and listing requirements of Exchanges. That auditors in Malaysia should be placed under an obligation to report fraud, dishonesty and other serious breaches to the relevant authority. The provision should additionally protect auditors from defamation suits in respect of this reporting obligation. Additionally, the relevant professional bodies should develop guidelines in consultation with the relevant regulators to provide guidance to their members as to the scope of the duty. Following from the increased responsibility in respect of compliance with the requirements of the SIA and Listing Requirements, the relevant professional organisations should arrive at a standard benchmark fee increase 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 by resolution of a company at a general meeting, of which special notice has been given. 3.1.20 Subsection 172(5) requires such special notice to be sent to the auditor in question as well as the Registrar. The auditor is then given the right to make representations in writing to the company and request that copies of the representations are sent out to every member prior to the meeting at which the resolution is to be considered, be heard orally or require that his representations are read out at the meeting190. Once removed, the company must notify the Registrar in writing of the removal191.
190 191
Subsection 1729(5)(b) and (6) CA Subsection 1729(8) CA
221
3.1.21 The provisions do not require the company to furnish to the ROC a copy of the written representations made by the auditor. Therefore, the ROC is not made aware of the circumstances surrounding the removal, which may be information beneficial to the ROC in its enforcement efforts. It is submitted that amendments should be made to section 172 to require the company to forward a copy of the written representations of the auditor, and to require auditors to make representations to the ROC of the circumstances surrounding his removal. This is purely to aid the ROC in this enforcement effort and not for purposes of reinstating the auditor. 3.1.22 A similar provision, should also be inserted in the Listing rules of Exchanges, to require listed companies to report all removals of auditors and reasons for the removal, as well as representations by the auditor to be made to the Exchange.
Recommendations That amendments should be made to section 172 to require the company to forward a copy of the written representations of the auditor, or alternatively to allow the auditor to make representations to the Registrar of the circumstances surrounding his removal. This is purely to aid the Registrar in its enforcement efforts and not for purposes of reinstating the auditor. That a similar provision to this effect should also be inserted in the Listing rules of Exchanges, to require all removals of auditors and reasons for the removal, as well as representations by the auditor to be made to the Exchange.
ISSUE Resignations of auditors 3.1.23 Under section 172(15) CA 1965, directors are required to call a general meeting as soon as it is practicable upon receipt of notice in writing from its auditor that he desires to resign. The meeting is for the purpose of appointing another auditor and there is no requirement that the circumstances surrounding the auditors decision to resign be disclosed. 3.1.24 It was suggested that perhaps a change should be effected along the lines of section 392 British Companies Act 1985 which gives power to auditors to require directors to convene an extraordinary general meeting when they resign and to bring notice to the shareholders the circumstances which the resigning auditors think ought to be made known to the shareholders. 3.1.25 However, in view of the tremendous costs that could potentially be incurred by a company for purposes of calling such a meeting, the Committee felt that such a 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 Exchanges requiring the company to circulate the auditors representations stating reasons for his resignation, at the companies expense. This should be further supplemented by a provision in the CA requiring auditors to inform the Registrar and in the case of listed companies, the Exchange, of the reasons surrounding his resignation.
222
3.1.26 Another variant of removals and resignations is essentially in respect of reelections and declination to stand for re-election by auditors after completion of an existing audit. This may in certain circumstances amount to a substantive act of removal or resignation. The notification requirement should apply equally here.
Recommendation That in the case of resignations and declinations to stand for re-election by auditors, a provision should be inserted in the rules of the Exchanges requiring companies to circulate to the shareholders, the auditors representations in respect of his reasons for resignation or declination to stand for reelections. The provision should be inserted into the CA and the SIA requiring auditors to inform the Registrar and in the case of listed companies, the Exchange, of the reasons surrounding his resignation or declinations to stand for reelection. The notification requirement should be extended to embrace failure to reelect 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 particular transaction, have the potential to play a key role especially in protecting the rights of minority shareholders when advising a company on a particular transaction. The responsibility of corporate advisers in such transactions is widened to ensure that the transactions are not done to the detriment of the minority shareholder. The Committee endorses amendments in July 1998 to Rule 118 of the Listing Requirements that now require the appointment of independent corporate advisers in related or interested party transactions which exceed a pre-determined materiality threshold. The independent corporate advisers role is to advise the minority shareholders of the company by commenting on the fairness and reasonableness of the transaction. A similar requirement exists in other jurisdictions. For example, in Australia, the report of an independent expert on whether a transaction is fair and reasonable is required under the Australian Stock Exchange Listing rules.192 The same requirements are echoed in the Hong Kong Stock Exchange Listing Rules and the Singapore Stock Exchange Listing Manual. This amendment enables a minority shareholder to be apprised of pertinent details of the transaction and to be given an objective view that the transaction is fair and reasonable and not to his detriment.
3.2.2
192
Rule 10.10
223
3.3
Regulatory authorities 3.3.1 This has been the subject of much criticism in recent times. Regular and consistent enforcement is crucial in inculcating discipline amongst corporate participants. There should be significant effort to strengthen the enforcement function of the regulators. In this respect, the enforcement function of the regulator 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 effectively discharging their duties in enforcing the law. There have been questions as to the will and ability of regulators to ensure transparency and protect investors the cornerstone of any modern regulatory system. In this respect the perception that enforcement has not been at the level it should be, whether legitimate or not, should be addressed forcefully in order to set about regaining confidence in the Malaysian capital markets. Some of the main concerns highlighted are the 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 that regulators must be allowed to enforce laws without interference or fear or favour. The autonomy of powers granted to regulators to enforce laws is a fundamental pre-requisite to taking on the mandate of investor protection. Regulators must be allowed to get on with their job, so that what is provided in rules, regulations and laws, are backed up with action, which in itself reinforces the credibility of the entire regulatory framework. Consistency in enforcement of laws and regulations ensures a level playing field for all participants. When there in no level playing field and the market is perceived as not being fair, investors will not be attracted to it while those already in it will be unjustly treated and suffer loss. The regulator cannot countenance this and must be allowed to enforce laws and regulations to protect the investor and the integrity of the system and, where these are not sufficient, to improve and enhance them.
224
3.3.4
The UEM-Renong debacle is an oft-cited example of such a problem. The public outcry that followed demonstrated how markets can swing so significantly under volatile and angry conditions. While there is no point in indulging in recriminations, all steps should be taken to ensure that the loss of confidence in regulation causing the controversy is not repeated. The Committee urges the highest levels of government to give full co-operation towards this effort.
Recommendation That regulators should have sufficient autonomy to enforce laws without interference or fear or favour.
ISSUE Rationalisation of the regulatory framework

3.3.5 The need for rationalisation cannot be stressed enough, especially in light of the inefficiencies brought to light by the financial turmoil of 1997 and, namely in the area of enforcement. Fragmentation obstructs enforcement in two broad ways: First, it confuses jurisdiction over laws that often lead to regulators struggling to react to situations, often a little too late. Often, the response to jurisdictional 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 to unwarranted but inevitable blame being laid on a regulator not responsible for regulating that activity, thus further entrenching public perception that regulators are not enforcing the law. Second, it results in unco-ordinated enforcement activity. This has tremendous consequences, namely in relation to access to information or intelligence in investigations. A fragmented framework relies heavily on arrangements between regulators and the crisis highlights the inadequacy of co-ordination between regulators. In respect of inter-agency arrangements, experience suggests that there is always the potential for something to fall between the cracks. This is a discussion that has preoccupied financial services regulators in recent times, and the trend has been to re-organise themselves along functional lines to among other things, minimise the need for inter-agency arrangements. The argument takes on greater force in crisis management situations, where the speed at which information needs to be exchanged intensifies.
3.3.6
In short, the benefits of rationalisation are clear: better management of financial crisis; effective systemic risk surveillance;
225
3.3.7
lower regulatory costs; and greater confidence in regulation.
The Committee urges the government to take active steps towards the development of a coherent and rationalised framework for the Malaysian capital markets.
Recommendation That the government should take active steps towards the development of 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 regulatory resources. This translates into having high quality people with the right skills in the various regulatory bodies. Staff training is key. There should be throughout the regulatory system, a systematic approach to the identification of skills and qualities needed to do the different regulatory jobs more effectively, and rapid development of training programmes to develop skills and competence. This should include not just study training but on the job training, staff interchanges between regulators and secondments to the industry. The approach both to training and secondments must also reflect todays altered priorities from rules orientated policy, towards supervision and enforcement work. Investigatory and other qualities are increasingly going to be in demand.
3.3.9
3.3.10 Inter-regulator cooperation - Each regulator will naturally need to address its own particular needs. But there is likely to be added value from joint efforts for example, from the development of common courses for regulatory personnel doing a similar job in different bodies, the development of training curricula to inter-regulator recruitment and secondment. 3.3.11 One other aspect of getting the right skills is that the regulators must be in a position to attract the right talent. This includes conferring on regulators sufficient flexibility 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 by regulators in the United States and other developed economies, and to take specific action with that in view.
226
Recommendations That steps should be taken to enhance training and secondment. In this respect such training and secondment should reflect todays altered priorities from rules orientated policy, towards supervision and enforcement work. That there should be inter-regulator cooperation in respect of training and secondment. That regulators should have in place the right incentive schemes to attract such personnel.
ISSUE Exercise of exemptive powers by regulators

3.3.13 One critical issue on the regulation of takeovers as demonstrated by the UEMRenong case was the perceived arbitrary exercise of discretionary power in granting waivers from the obligation to make a mandatory general offer. The fact that UEM and its related parties had been granted a waiver from having to make a general offer for the remaining shares in Renong by the FIC under Rule 34.2 of the Code on Takeover and Mergers gave the impression that the perceived bail out of Renong and its substantial shareholders was supported by the authorities. Whilst the SC administers the Code, the FIC has the sole prerogative to grant general offer exemptions on grounds of national interest. This is not a satisfactory situation as demonstrated by the widespread dissatisfaction on the part of minority shareholders and the investing public. The Committee believes that exemption powers must be subject to clear and transparent criteria as stipulated in the statute so that the authority that exercises such discretionary power can be checked by statute as well as by investors who would have recourse to the court if the discretionary power has been arbitrarily exercised. This is a critical issue that must be resolved at the highest levels of government in the reform of the Code on Takeovers & Mergers.
227
Recommendation That exemption powers must be subject to clear and transparent criteria as stipulated in the statute so that the authority that exercises such discretionary power can be checked by statute as well as by investors who would have recourse to the court if the discretionary power has been arbitrarily exercised.
Update The new Malaysian Code on Takeovers and Mergers brought into effect on 1st January, 1999 makes the SC the sole authority to grant exemptions from provisions of the Code. The amendment to the Code also subject the exemptive powers conferred on the SC to a clear and transparent criteria as set out in subsection 33A(5) SCA. In this respect, the SC will have to ensure that: the shareholders and the directors of an offeree and the market for the shares that are the subject of the take-over offer are aware of the identity of the acquirer and offeror, have reasonable time in which to consider a take-over offer, and are supplied with sufficient information necessary to enable them to assess the merits of any take-over offer; all shareholders of an offeree have equal opportunity to participate in benefits accruing from the take-over offer, including in the premium payable for control; shareholders, in particular, minority shareholders, are treated fairly and equally; and directors of the offeree and acquirer act in good faith to meet the objectives that are specified in subsection 33A(5) of the SCA and that minority shareholders are not oppressed or disadvantaged by the treatment 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 of broad exemptive powers by regulators. However, there is general consensus on the need for more transparency by regulators. Transparent conduct enhances the credibility and standing of the agencies concerned. Transparent conduct may begin with disclosures in the annual report by regulators of their activities for the year, including enforcement activities. 3.3.15 The credibility and standing of regulators become crucially important in times of crisis, when confidence is fragile. There is a natural tendency for investors to react hastily and irrationally. A device that is often employed by some countries in the wake of a major crisis such as a bank failure for example, is the appointment of an independent commission. Guidelines should be developed to set out the circumstances that would warrant such a commission, though this should be
228
utilised only in extreme situations. Too frequent appointments of independent commissions only serves to undermine confidence in regulators and the regulatory system.
Recommendations That regulators should be transparent, namely in relation to their enforcement activities. That guidelines should be developed outlining circumstances that would justify the appointment of an independent commission as a mechanism 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. Regulators should have various range of sanctions to counter corporate abuse. The range is important bearing in mind that company frauds and illegal acts of directors, especially if it involves forgery, collusion or management override of control systems, are getting increasingly harder to detect. This, coupled with a criminal standard of proof, sometimes makes it difficult to gain a conviction against an offender. 3.3.17 Some of the various actions now open to regulators in other jurisdictions to pursue 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 recovery of losses caused by insider trading, by way of civil actions instituted either by the SC or by an investor. However, there is no general right for a regulator to take 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 in a persons name, where as a result of an investigation, it appears to ASIC to be in the public interest for a person to begin or carry proceeding for the recovery of damages for fraud, negligence, default, breach of duty committed in connection with 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 that ASIC had not done enough to protect the interests of shareholders in the companies whose funds were lost in the 1980s. Section 50 has now been used by ASIC in a number of cases and in some, auditors were joined as defendants in the action.
193
The ASIC is the designated regulator over the Australian equivalent of the CA.
229
On-the-spot fines/Penalty notices
3.3.21 The ASIC has the power under section 1313 Compensation Law to impose onthe-spot fines, or penalty notices. Under this section, ASIC may serve a notice on a person if there are breaches in relation to certain prescribed offences. Persons receiving such a penalty notice may either pay the fine or ask that the matter be tried in court. However, if an on-the-spot fine is paid no criminal proceeding can later be initiated for that particular offence. However, the payment of such on-the-spot fines will not reduce the impact of the offence upon disqualification if there is persistency or repetition in the commission of such offences.
Recommendation That the range of enforcement powers of the regulator should be modernised which should include among other things the power to institute action 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 enforcement powers of the Exchange over directors of companies. Section 11 SIA places on statutory footing the power of the Exchange to enforce obligations required of companies under the listing rules. In this respect, there are two areas of review under the rules: First, that the range of sanctions for breach are limited to directing a person to observe the requirements of the listing rules, impose a penalty not exceeding RM 250,000 or reprimand a person in default. It is submitted that subsection 11(2)(b) SIA should be amended to increase the fines and the range of sanctions that may be imposed for breach. Second, the KLSE has expressed difficulty with section 11 SIA in enforcing the provisions of the Listing Requirements against directors of listed companies, on the basis that the obligations under the Listing Requirements are directed at the company and not the directors. It has been brought to our attention that there is a similar provision to section 11 SIA in the Australian Corporations Law, i.e. section 777. Despite the existence of the provision, the courts in Australia have not been sufficiently clear on whether it is sufficient to impose a positive obligation on directors to comply with the Listing Requirements. The Committee regards it as crucial that listed companies should have the power to enforce rules against directors of listed entities. Therefore, to the extent that there are ambiguities in their existing powers, this area should be reviewed and clarified.
230
Recommendations194 That subsection 11(2)(b) SIA should be amended to increase the penalties and 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 the KLSE to enforce its Listing Requirements against directors, this should be clarified.
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 listing requirements to a maximum of one million ringgit; and clarify the Exchanges right to enforce its listing rules against directors and additionally against any person to whom the rules or listing requirements 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 should apply their minds to consider other possible incentives to enhance the level of governance practised in these companies. In particular, the Committee has had the opportunity to consider a merit/demerit scheme that favours companies practising high standards of corporate governance when approving corporate exercises proposed by these entities. The scheme in brief 3.3.24 The statutory authority for this scheme is essentially derived from section 32 SCA. This gives the Commission power to approve companies seeking listing on 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 corporate governance. The scheme affects all listed companies applying to undertake proposals under subsection 32(4) SCA. The advantages of receiving a favourable grading may manifest itself in various forms: Easier access to the capital markets for example, shorter prospectuses especially 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.
231
permitted to move to a full disclosure regime whilst those that are not will be held back. This is to ensure that good and compliant companies are not held back by those that are not. 3.3.25 The purpose of the scheme in this respect is not to offer investors guidance in relation to investment but as a device by the SC to force listed companies to take issues pertaining to disclosures and corporate governance seriously. 3.3.26 The Committee is in support of such a scheme. It, however, seeks to highlight certain matters for consideration by the SC when developing the scheme: a) That there should be a definite criteria or benchmark by which companies may be assessed. The criteria will need to be largely objective, though there will be some subjective elements that are essentially based on the entities previous dealings with the regulator. Some of the more objective standards by which these companies may be assessed include, the accuracy and timeliness of disclosures by companies, the level of corporate governance disclosures of companies, the compliance history of the entity and the quality of its management. b) That there should be a mechanism by which companies that fall on the borderline may be dealt with. c) Standard periods for assessment. Companies that do not fall within the higher grade should be given time to establish a compliance track record that would enable 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 remains credible and free of accusations of bias and abuse. The SC should make public both the criteria of assessment as well as its reasons for grading a company in a particular way. Other possible incentives 3.3.27 The Committee considered other possible incentives that could encourage compliance with corporate governance. They include, for example: Factoring in the level of governance practised by companies into credit ratings of companies. It is recommended that the relevant rating agencies examine the feasibility of this proposal. Joint ventures with members of the financial press in undertaking evaluations of corporate governance practices of listed companies. An active financial press has a crucial role to play in complementing disclosures of the extent of compliance with the Code.
Recommendation That the SCs proposal for the introduction of a merit-demerit scheme, where listed companies will be categorised into grades favouring companies practising higher standards of disclosure and corporate governance, should be supported.
232
Chapter 7
TRAINING AND EDUCATION
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.
235
1.
1.1
Introduction
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. The previous chapters of this Report have attempted to remove this haziness by clarifying in great detail the duties, obligations, rights and liabilities of corporate participants as well as touching on regulators and the judiciary, who all have their respective roles to play in the governance of companies in Malaysia. 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 the list of matters requiring improvement. The thrust of training and education would not only be focused on the introduction of the Code and the accompanying regulatory reforms suggested in this Report, but also on the existing regulatory framework as they affect corporate participants involved in the governance of companies.
1.2
1.3
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 is about directors, officers and shareholders being responsible for their companys fate1 . Although regulators and the judiciary have a role to play in providing the legal, regulatory and enforcement framework for the governance of companies, it is ultimately the company directors, company advisers and the shareholders who determine the equilibrium between management flexibility and controls. Therefore, as the Report has earlier highlighted in Chapter 6, the need for education and training for regulators and the judiciary, this Chapter will therefore only centre on the 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 programmes recommended here are directors, company secretaries, members of audit committees and shareholders/investors.
2.2
Address by Alan Cameron, Chairman, Australian Securities Commission (ASIC), 9 June 1995 at Corporate Governance 95 held at RMIT, Melbourne, Australia.
th
236
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 where necessary, industry and company specific information.
3.2
The courses can be conducted for ethnic groups with medium of instruction in the respective local languages and dialects as desired, in order to reach the widest audience possible.
Recommendation It is recommended that the training and education of the targeted participants focus on the following: their respective rights, duties, obligations, responsibilities and liabilities under law, both common law and under statute, rules, regulations and guidelines; application of the Code; and where necessary, industry and company specific information.
4.
Directors
ISSUE Should directors (both executive and non-executive) be subject to compulsory education and training?
4.1
The general thrust of the proposed regulatory changes and the Code is to create a body of directors who undertake their role in the governance of companies in a professional manner. 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 is essential that directors have a grasp of these matters to fulfil their role of providing strategic leadership and vision to the company. The Survey had also highlighted this need for a clearer definition of directors responsibilities.
4.2
237
Accreditation programmes 4.3 If the target of training and education is to inculcate professionalism in directors, the question is whether we leave it to voluntary professionalism, i.e. allow directors to voluntarily enrol themselves in training courses, or require director accreditation. Director associations in Australia, the UK and the US all have programmes for director education. However, only the Australian programme offers an accreditation course. The Australian Institute of Corporate Directors (AICD) offers a Company Directors Course Diploma. The Royal Melbourne Institute of Technology offers a two-year part-time Master of Business by Coursework, which is intended for people wishing to, practice as directors or fill senior management positions, act as advisers to senior corporate executives and boards, work as professionals in regulatory and other professional bodies, and/or manage institutional investment and financial activities. This course was developed with support from the AICD and the Chartered Institutes of Company Secretaries. The US has adopted a wait-and-see attitude, where they would only require director accreditation only if it is found that voluntary professionalism fails. It is argued that the increasing demands on directors would by natural progression increase interest in selfeducation and would lead to boards selecting similarly trained persons to join them, thereby resulting in self-certification. The state of corporate governance in Malaysia however, necessitates a more heavyhanded approach. It is recommended that all existing and future directors of publiclisted companies be required to undertake a programme broadly covering the following matters: directors legal rights and responsibilities; operation of the board; and the Code.
4.4
4.5
4.6
4.7
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 of the company, a formalised training programme would simplify and accelerate this process. The programmes should be formulated to educate directors on their powers and duties under common law and statute as well as the disclosure requirements of the company and the directors personally. In addition, directors should be educated on the conduct of general meetings. Directors should also be aware of the accompanying penalties for non-compliance with the relevant laws. A public-listed company is also subject to additional obligations, and the directors and officers of the company should be educated on these obligations, which include listing and continuous listing requirements set out in the Listing rules of Exchanges and in the SCs Policies and Guidelines on Issue/Offer of Securities.
4.9
4.10
238
4.11
In addition, once a company issues securities to the public, it is also subject to the provisions of the securities laws such as the SIA, the SCA and the SICDA. The provisions range from disclosure requirements, to provisions to combat insider dealing and market manipulation. Operation of the board
4.12
4.13
In the boards role to manage or supervise the management of the board, board members should understand the division of responsibility between management and ownership and the boards role in creating value for shareholders. Independent directors should be made aware of their role in bringing independence to the board and protecting the interests of shareholders, particularly minority shareholders. 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; boards role in strategic planning and positive change; officer performance review and compensation; boards role in creating shareholder value; ways to deal with unexpected crisis, trouble shooting; and effective use of committees.
4.14
4.15
As a guide, the initiatives in this area can be modelled after programmes undertaken in the US which uses case studies, such as the Harvard Law School programme on Making Corporate Boards More Effective, or role playing, such as that offered by the Wharton/ Spencer Stuart Directors Institute, which places participants on a fictitious board and allows the participant to serve on key board committees and participate in a meeting of the full board. The Code
4.16
Directors should be educated to apply their minds to the need for corporate governance by the company and to use the Code as a guide, rather than a checklist by which ticking the boxes would absolve them of any proper analysis of the recommendations in the Code. A checklist mentality would encourage an attitude of form over substance and do little to enhance the credibility of those people entrusted with the management of the company.
239
4.17
The introduction of the Code must be accompanied by guidances on compliance obligations. Induction as a pre-requisite to listing
4.18
Prior to the company being listed on the Exchange, it is recommended that its directors attend the mandatory training programme as developed above. Such training is to be made a pre-requisite to listing by including a provision to that effect in the Listing Requirements and in the SCs Guidelines. In-house director orientation
4.19
4.20
As recommended in Chapter 6, the board of directors collectively have a duty to manage or supervise the management of the business and the affairs of the corporation. Currently, directors learn the business on the job, oftentimes in a haphazard fashion as and when the relevant matters arise. The effectiveness of information absorption also depends on the initiative taken by the individual director i.e. whether he takes a proactive stance to learn about the company and the industry, or he is passive about seeking such information. Directors may study published materials and other documents about the company, as well as meeting with other directors before appointment. However, the role of directors to manage the company requires all directors to understand the business of the company and the industry. Therefore to accelerate the learning process, it is recommended that a formal orientation programme be established to familiarise directors with information about the companys core businesses, competitive posture and strategic plans and objectives. The content of the training is a matter best left to the company, via the existing board of directors, to determine, but should at the very least include information on the products, customers, suppliers and market conditions, with visits to key operating sites, and meetings with company executives who are not board members, as well as the companys key professional advisers. This training should preferably commence as soon as a person is appointed as a director of the company, to ensure that he can make meaningful contributions to board decisions as soon as possible. This need for organised training is even more crucial in the case of non-executive directors who are brought in to the company to tap their skills and expertise derived from their diverse backgrounds, or to represent the interests of substantial shareholders, and often have no experience in the companys line of business. More so, when the Code recommends that non-executive directors bring independent judgement to bear on the issues of strategy, performance and resources, including key appointments in the company.
4.21
4.22
4.23
4.24
240
Continuing education programmes 4.25 Professionalism requires that the members of the professional body keep abreast of developments in its field. Consequently, this push for professionalism in directors also requires that directors should continually educate themselves. Hence, there should also be a continuing requirement for directors to retain their accreditation only if they undertake a prescribed minimum period of training annually in approved education programmes. Aside from the relevant regulatory bodies, the course content for the initial as well as the continuing education programmes should be developed in consultation with the Malaysian Institute of Directors (MID) and the Malaysian Institute of Management (MIM).
Recommendations It is recommended that accreditation be introduced for all existing and future directors 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: directors legal rights and responsibilities; operation of the board; and the Code.
4.26
4.27
Further, that this programme be made a pre-requisite for directors of companies seeking listing on the Exchange. Directors must also undertake continuing education in approved courses as a condition of accreditation. In addition, companies must develop in-house orientation programmes for directors to familiarise themselves with the company.
5.
Company Secretaries
ISSUE What training is required for company secretaries to take on their advisorial role on compliance?
5.1
Unlike directors, company secretaries must be duly qualified and are members of professional bodies, such as the Malaysian Association of the Institute of Chartered Secretaries and Administrators (MAICSA), the Malaysian Institute of Accountants (MIA), the Malaysian Association of Certified Public Accountants (MACPA), the Malaysian Bar or the bar councils of Sabah and Sarawak, and the Malaysian Association of Company Secretaries (MACS).
241
Compliance obligations 5.2 As the training structure for company secretaries is already well-established, any initiatives for their training and education should be via the existing structure. However, the focus of such programmes should move beyond the company secretarys purely administrative role to an advisorial one. Company secretaries now have a crucial role to play in advising the board of its compliance obligations under the law, and not merely the routine filing requirements and other administrative requirements under the CA. They should be updated on changes in the law, administrative and disclosure requirements as well as best practices. Since company secretaries are generally well-versed with compliance requirements under the CA, the programmes must provide clarification on all disclosure obligations affecting the company, particularly those contained in the securities laws, the Listing rules of Exchanges and in the SCs guidelines and releases. There must be clear guidance on the timeliness of the disclosures and the extent of information required in the circumstances. The Chairman and the board should be entitled to look to the company secretary for guidance as to the responsibilities of the board and the discharge of those responsibilities. Programmes should also be created to cater for industry specific matters, such as the extra disclosure requirements for financial institutions under the Banking and Financial Institutions Act, 1989. The Code 5.5 In keeping with this advisorial role on compliance, company secretaries also have a key part 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 this new but crucial role. Since they advise directors, company secretaries must be aware of the purpose of the Code and to impress upon the board to take an analytical approach to compliance with the Code, rather than a checklist approach. Independence 5.7 They also have to be educated on their independence from the board, and be given guidance on how such independence can be asserted without fear of reprisals. For example, the Code recommends that the removal of company secretaries be a matter for the 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 secretaries to familiarise themselves with the company. This is to overcome concerns that company secretaries, particularly external ones, do not have a hands-on role in the daily workings of the company, and therefore cannot effectively fulfil their compliance role. There is of course a concern that these programmes should not be as comprehensive as that advocated for directors to protect company secrets, especially in the case of external company secretaries.
5.3
5.4
5.6
5.9
242
Continuing education programmes 5.10 The profession itself recognises the whilst qualification is an important pre-requisite, it is also important for company secretaries to have continuous education to develop the necessary skills for the proper discharge of their duties. In fact, the company secretarial licence issued by the ROC often contains the condition that company secretaries are encouraged to undertake continuous professional education during the term of their licence. Company secretaries can undertake a variety of courses so long as they relate to their work as company secretaries. Such courses are organised by several institutions. For example, MAICSA has a Technical and Research Department as well as the Training and Professional Development SubCommittee to upgrade the skills of members on company secretarial practice through workshops, seminars and publications. All the other initiatives recommended for directors, such as an induction course upon listing, continuing education of legal duties, rights, responsibilities, and the Code should equally apply to company secretaries. Suitable ongoing training programmes and continuing professional development courses conducted by professional bodies like MAICSA, MIA, MACPA, MACS etc., should also be made available to company directors, shareholders and other corporate participants.
Recommendations It is recommended that existing and future company secretaries be required to undergo formal training 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 their advisorial role. In addition, companies must also develop in-house orientation programmes for company secretaries, similar to that developed for directors, to familiarise company secretaries with the company.
5.11
5.12
5.13
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 and accounting system, as well as the preparation of the companys published financial statements. In-house orientation
6.2
A formal in-house training programme should be established to educate newly appointed members to the audit committee of a company. The programme must operate beyond that of a mere orientation manual into the financial operations of the company. New
243
audit committee members should be walked through the financial control system, and in the process, familiarise themselves with not only the system, but with the individuals responsible for the system, particularly the finance director and the internal audit department. In addition, they should be introduced to the external auditors of the company to establish a good working relationship at the outset. The Code 6.3 A training programme should be developed to explain the recommendations under the Code as they relate to audit committees, for example, their support of the oversight function 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 be educated to understand the importance of their independence from the board, to be able to effectively review the companys internal controls and financial policies, as well as 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 accounting policies and practices, particularly with changes in accounting standards and other legal requirements pertaining to financial matters. It is proposed that all training programmes be developed in association with MIA and MACPA.
Recommendations It is recommended that audit committees undergo formal training on the requirements of the Code and the importance of their independence, as well as continual updates on accounting and financial matters. In addition, newly appointed members to the audit committee should undergo inhouse orientation to familiarise themselves with the financial system of the company.
6.6
7.
Investors
ISSUE What do investors need to know to participate more effectively in corporate governance?
7.1
Education of investors should include information on: their rights and remedies under law; understanding and interpreting financial statements; and the Code.
244
7.2
The bulk of efforts in this area would concentrate on retail investors, who unlike institutional investors, are not sophisticated investors with access to superior resources and expert opinions. However, institutional investors must not be ignored given the weight 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 remedies currently 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 practices in companies. These rights include their voting rights and general meeting procedures, particularly the fact 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 for wrongs done to themselves and wrongs done to the company in which they hold shares. Financial statement analysis
7.4
7.5
Investors should have an avenue by which to be educated on the rudimentary points of financial statement analysis to better comprehend the annual reports of public-listed companies. The Code
7.6
Education of investors on the Code should parallel the efforts undertaken for the other corporate participants. Investors should be made aware that they should give due weight to all the relevant factors which are drawn to their attention by the Code. They must also be wary of using the Code as a mere checklist, that having all the boxes ticked does not mean that the company is a shining example of good corporate governance The company should still be judged on its merits. The programme must also stress that the Code gives flexibility to companies and shareholders should, therefore, pay close attention to departures from the Code and the companys explanation for such departures. Another key matter is that the programme should educate investors in paying particular attention to 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 be employed. One recommended method is to organise roadshows in major cities and towns around the country to reach the widest range of investors possible. Booklets encapsulating the content of such roadshows can be produced for investors to take home and peruse at their leisure. The mass media can also be roped in to publish or broadcast investor education and investor protection segments. The existing Malaysian Investors Association is another conduit by which information relevant to investors can be disseminated.
7.8
7.9
245
Recommendations An education programme should be established for investors on the following matters: their rights and remedies under law; understanding and interpreting financial statements; and the Code.
8.
Timing And Performance Evaluation Of The Programmes

ISSUE When and how should the proposed training and education programmes be implemented?
8.1
Work on all areas of training and education recommended above should commence immediately, to reap the full benefit of the push to introduce high standards of corporate governance in Malaysia. More importantly, active steps must also be taken to evaluate the performance and effectiveness of the initiatives introduced above. Surveys of and consultations with corporate participants can provide valuable feedback to further improve and refine the training and education programmes recommended above.
Recommendations It is recommended that work on the programmes proposed herein commence immediately upon their approval. In addition, continual surveys and consultation should be used to evaluate the effectiveness of the programmes and to recommend changes where required.
8.2
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 area to create benchmark programmes. Commercial programmes can supplement this by catering to industry niches where the corporate participants would benefit from a more industry-specific focus. This is not to ignore the importance of in-house training which companies have the responsibility to organise.
246
9.2
With regard to external training and education providers, utilising existing training agencies, with existing structures, expertise and experience would not only be practical but would also prevent duplication of efforts. Training and education on corporate governance, therefore, need not commence in a vacuum. There already exists training facilities such as: Institut Bank-Bank Malaysia (IBBM) for financial institutions; Securities Industry Development Centre (SIDC), the training arm of the SC and the Research Institute of Investment Analysts in Malaysia (RIIAM), the research and training affiliate of KLSE for capital market participants; and a host of other professional bodies which undertake training and education for their members.
9.3
Where relevant, MICG will collaborate with these institutions to co-ordinate the training and education programmes. Nevertheless, it is recommended that the Committee oversees the implementation of training and education programmes to ensure that the programmes are implemented in a coherent, centralised and focused fashion in conformity with the recommendations of this Report. The syllabus or content of these programmes should be approved by the relevant regulatory bodies, for example, programmes involving banks should be approved by Bank Negara Malaysia, public-listed companies in general, the SC, and company secretaries, the ROC. It is envisaged that MICG may ultimately in the long term undertake to provide more properly structured education and training programmes on corporate governance for all concerned. First phase
9.4
9.5
9.6
As a training centre, MICG will have to be adequately financed to cover overheads estimated to be at least RM50,000 per month. Initially, training resources may have to be 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 governance training centre (CGTC) will require engaging the services of local and international consultants in the following areas of specialisation:(1) (2) (3) (4) (5) (6) (7) Corporate law; Corporate finance; Corporate governance and industrial economics; Accounting and finance; Corporate strategic planning; Marketing and product development training specialist; and General management training.
247
9.8
The initial budget for this centre is estimated to be at least RM500,000.

Recommendations It is recommended that training and education be both private and public sector driven, using existing training facilities, in collaboration with MICG. In the long term, it is envisioned that MICG will develop a corporate governance training centre to provide structured training on matters relating to corporate governance. 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 relevant regulatory bodies.
10.
Funding
ISSUE What are the potential sources of funding for these training and education programmes?
10.1
In current times, training and education would be a further imposition on the financial resources of companies. It is recommended, therefore, that the programmes be made affordable for participants. This may require subsidisation of the programmes. 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-ordinate application for grants by any relevant training agency undertaking the initiatives outlined in this Chapter. This would include the funding for the proposed CGTC to be established under the auspices of MICG. In turn, the Ministry should be the central body to apply for technical grants from external sources for disbursement to the relevant training agencies. The sources may include the following: ADB; WB; and/or Commonwealth Secretariat - Technical Policy on Corporate Governance.
10.2
10.3
10.4
This is to ensure proper distribution of resources to the various parties involved in training and education.
Recommendations It is recommended that the training and education programmes be provided at minimal 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 the Commonwealth Secretariat, and to disburse such grants to the relevant training agencies
248
Chapter 8
IMPLEMENTATION PROGRAMME
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.
251
1.
1.1
Introduction
Should the recommendations in the report of the Committee be accepted by Y.A.B. Minister of Finance, it is proposed that the implementation programme as set out below be similarly adopted. The proposed implementation plan is premised on the following That implementation of any of the recommendations can only be effectively carried out if there is buying-in by all relevant stakeholders. That while the responsibility of implementing the different aspects of the recommendations may fall on different authorities or organisations, the Committee will be the central body that supervises and ensures the timely and effective implementation of the recommendations. That the Committee, with senior representation from the public and private sectors, will continue to be the committee through which all policy recommendations relating to corporate governance are made to the government.
2.
2.1
Phase 1 Consultation
It is essential that the Report receives the widest possible airing and is subject to thorough consultation. This ensures that all views are considered, as wider consultation leads to greater 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 that have an interest in the findings of the Committee. Consultation period There should be enough time given for the industry to reflect and fully comment on the recommendations. In this respect, we propose that a one-month consultation period be allowed.
3.
Phase 2 Collation and consideration of comments and preparation of final report

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 from their very narrow and specific interests. As such, it is absolutely essential that the comments, should they differ materially from those in the first report, be reconsidered by the Committee, and if deemed necessary, additional submissions may be made.
3.1
252
Chapter 8 Implementation Programme
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 differ materially from the original recommendations.
4.
4.1
Phase 3 Implementation
This is a crucial phase of the process and while it can start immediately, the implementation of the recommendations will be over a considerable period of time. Given that the recommendations vary from amendments to laws, regulations and listing rules to the introduction of the Code and conduct of training, it is crucial that this plan be tightly supervised by the Committee. The implementation of this Report will essentially involve amendment to legislation, to listing rules, and publication of new documentation, such as a Code of Best Practices in corporate governance and various guidelines by professional and other organisations as 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 in activities. Implementation priority should be given to changes in supervision and enforcement, disclosure requirements and training. The following is proposed: The implementation exercise may be carried out via an implementation project team set up under the Committee, comprising representatives from every regulatory authority and organisation relevant to the recommendations of the Report. Monitoring and Reporting The successful implementation of the recommendations of the Committee is a function not only of timely and effective implementation of the same but also of systematic reporting to and monitoring by the Committee. The implementation project team should make the following reporting to the Committee so it may ensure rapid implementation of recommendations. To ensure that the attention to corporate governance continues and that all relevant participants may prepare for the impending changes, such participants should also be apprised of progress. This involves:s s
4.2
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 of the Committee. The team will comprise representatives from the regulatory authorities and organisations relevant to the recommendations of this Report including the ROC, the SC, the KLSE, Bank Negara Malaysia and the relevant industry and professional associations or institutions. The relevant regulatory bodies are tasked with augmenting the recommendations with additional requirements where it is deemed necessary.
253
Implementation targets 4.4 The team will establish detailed target timetables, monitor and manage the implementation programme in the following areas: Law reform It is proposed that all draft provisions arising from the recommendations contained in this Report be tabled before the Committee. Training and education The general direction of training and education in corporate governance is to be determined and co-ordinated by the Committee. However, the relevant members of the Implementation Project Team have the responsibility to examine the content and syllabus of the training and education programmes undertaken by participants subject to the relevant laws, rules, regulations and guidelines under its purview.
5.
5.1
Conclusion
Should the recommendations be accepted by Y.A.B. Minister of Finance, and consultations on this Report concluded, a more detailed implementation plan will be drawn up with the approval of the Committee.
254
Appendix I
THE KLSE/PRICE WATERHOUSE JOINT SURVEY OF THE CORPORATE GOVERNANCE PRACTICES IN PUBLIC-LISTED COMPANIES EXECUTIVE SUMMARY
Appendix I
1.
Introduction
Malaysia, as an emerging capital market in Asia, is keen on participating in the current global debate on Corporate Governance. A key initiative is Malaysias recent leading role in conjunction with the WB and the ADB in coordinating an Asia Pacific Economic Cooperation (APEC) to examine ways to improve Corporate Governance to avert a future Asian financial crisis. Effective Corporate Governance and increased transparency have in recent years been a subject of focus by the Government as part of its aims to promote a conducive business environment for an efficient capital market. However, the enormous financial market pressures in the last year and the financial distress faced by several companies have added urgency to an examination of the effectiveness of Corporate Governance. It is with this intention that the KLSE in conjunction with Price Waterhouse have conducted this study on Corporate Governance amongst Malaysian corporates with the intention of improving the corporate governance framework to ensure that companies conduct 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 Malaysias Corporate Governance and Business Ethics and proposed reforms.
The survey is designed to be quantitative rather than qualitative and is a major step towards improving understanding of the Corporate Governance regime in Malaysia.
257
2.
The Study Methodology

The study was conducted in five stages:1. Current Price Waterhouse Global Group and international public and private studies on the subject were reviewed; The survey questionnaire was jointly designed by the research team of the KLSE and Price Waterhouse; The postal survey method was conducted amongst directors and senior management of all Public-Listed Companies, both Main Board and Second Board; The survey results were processed by independent market research company, Insight Research (Malaysia) Sdn Bhd (Insight) to ensure confidentiality; and Aggregated data from Insight were analysed by the KLSE and Price Waterhouse study team.
2.
3.
4.
5.
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 Chairman Finance Director/Financial Controller Other Directors Company Secretary Others 47 15 11 10 9 8
258
Appendix I
4.
Sample Profile
The profile of the respondent companies are as follows:Main Board (Total number of respondents = 167 companies) % of Total Respondents Consumer products Industrial products Construction Trading/services Finance Properties Plantations Others Total 12.7 21.4 6.5 16.7 13.6 15.4 8.5 5.2 100.0 % of Respondents achieved per sector 22.8 41.7 34.5 40.0 44.3 40.6 36.8 21.7 NM
Second Board (Total number of respondents = 137 companies) % of Total Respondents Consumer products Industrial products Construction Trading/services Finance Total 19.3 46.3 12.8 21.2 0.0 100.0 % of Respondents achieved per sector 60.4 48.0 37.1 53.4 0.0 NM
Note : NM not meaningful
259
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 as shown below:
Average Number Independent non-executive directors Non-executive directors Executive directors Total number of directors 2.6 2.6 2.9 8.0
Almost all (90%) companies have two (2) or more independent non-executive directors, of which half (49%) have two (2) independent non-executive directors and 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 nonexecutive directors. Amongst them, the majority (81%) involved the Board as a whole. Number of Full Board meetings in a year Most (63%) companies held four (4) or more full Board meetings a year and over one-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 Conduct and/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.
260
Appendix I
KLSE Corporate Disclosure Policy Most (80%) companies had formal policies and procedures to monitor compliance with the KLSE Corporate Disclosure Policy. More than half (56%) of the companies delegated 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 Committee meetings a year whilst 42% had two (2) or less meetings a year. It is interesting to note that some 1% had Audit Committee meetings once a month.
Composition The profile of the Audit Committee members are as follows:-
Representation
Majority
About Half 17% 8% 6%
Minority
None
No answer 5% 11% 9%
Financial professionals Legal professionals Retired industry leaders Retired senior government officials
20% 6% 7%
37% 23% 17%
21% 52% 61%
9%
6%
32%
45%
8%
Remuneration Committees Whilst the concept of Remuneration Committees is relatively new in Malaysia, it is encouraging to note that one in five of the companies already have a Remuneration Committee.
Internal Controls Internal Audit Department Most (68%) companies have internal audit functions but some 32% do not. Amongst those who do not have, 33% outsourced its internal audit functions.
261
Maintenance of procedure manuals The most common areas where companies maintained procedure manuals were in financial 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 Human resource Health & safety Quality assurance/ISO Code of conduct Treasury management Data security Environment protection Related party transactions 78 77 52 47 42 29 27 20 20
Responsibilities for internal controls and fraud detection There is a clear lack of understanding that the whole Board of Directors is ultimately responsible for ensuring an effective system of internal control is in place and for limiting and detecting fraud. Only 11% managed to identify that the whole Board is ultimately responsible for internal controls and 13% on the whole Boards 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 controls are in place (51%) and for limiting and detecting fraud (36%). Investor communication Most companies (62%) have formal investor communication policies with the key responsibilities largely delegated to one person. For all three group enquiry segments, be it, media, analysts and shareholders, the Managing Director was the key contact person followed by the Chairman and Corporate Affairs and/or Communications department personnel.
262
Appendix I
The majority (77%) of companies reminded their staff and directors of the companies investor and communication policies at least once a year. Perception of Malaysias Corporate Governance Regime Call for reforms The call for reforms to the current Corporate Governance regime is undoubtedly strong 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 investors interest and confidence in the equity market; the need to increase transparency including more disclosures in the accounts on related party transactions and directors dealings; the need to protect minority shareholders interest; and the need to make directors and management more accountable to shareholders and 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.
263
Other suggested areas for reforms In addition to the proposed regulatory reforms, respondents also suggested other areas where they wanted to see improvements. The areas indicated in ranked order include:-
(%) Improved education about existing rules Improved enforcement of existing rules Clarification and simplification of existing rules More disclosure of related party transactions Clearer definition of directors responsibilities More disclosure of directors dealings Greater separation of company ownership & management Compulsory establishment of procedures to minimise fraud Compulsory establishment of procedures for releasing price sensitive information Compulsory introduction of internal auditors Clearer definition of the role of internal auditors Clearer definition of the role of external auditors Separation of roles of Chairman Compulsory introduction of remuneration committees Increase the number of non-executive directors Shareholders approval of directors remuneration Compulsory introduction of nomination committee 62 55 49 41 40 39
38
38
37 34 25 18 17
16 8 8 8
264
Appendix I
Malaysias perceived standard of Business Ethics and Corporate Governance Malaysias standard of Business Ethics and Corporate Governance is largely perceived to be on par with Taiwan but better than China, India, Indonesia, Philippines and Thailand. However, Malaysias perceived position fell short when compared to Australia, Hong Kong, Japan and Singapore.
6.
Conclusion
Based on the survey findings, it is apparent that greater emphasis and attention will have to be given to reforms to the current Corporate Governance regime. The unanimous acceptance by our Public-Listed Companies on the need for improvements in Corporate Governance paves the way for reforms to the current Corporate Governance regime.
265
Appendix II
TERMS OF REFERENCE FOR THE FINANCE COMMITTEE ON CORPORATE GOVERNANCE MEMBERSHIP OF THE FINANCE COMMITTEE JPK WORKING GROUP I JPK WORKING GROUP II
Appendix II
TERMS OF REFERENCE FOR THE FINANCE COMMITTEE ON CORPORATE GOVERNANCE

Mission
1. The Committee will seek to promote high standards of corporate governance in the interests of strengthening investor protection (and in doing so, aim to restore investor confidence in the fairness and transparency of the Malaysian capital markets) and enhancing the standing of Malaysian companies.
Terms Of Reference
2. The Committees agenda in corporate governance is the following:Definition a) to develop an acceptable definition of corporate governance for Malaysian companies;
Clarification of responsibilities of key participants in the corporate sector b) to identify and clarify the following:(i) (ii) the objectives and duties of a company (as distinct from that of its officers); the principal role and responsibilities of the board of directors, its legal duties, the interests it represents and its 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) (v) the principal responsibilities of auditors and their legal duties and obligations; the role and responsibilities of shareholders and other stakeholders;
269
(vi)
the role, responsibilities, duties and obligations of all other key corporate participants; and
(vii) to provide guidelines for discharging these duties, obligations and responsibilities in an efficient and effective manner. Raise standards of corporate governance c) to recommend appropriate measures in order to address deficiencies in standards of corporate governance in Malaysian public-listed companies. This includes the following tasks: to review the role of board of directors, executive and non-executive directors, including a review of:(i) (ii) the structure and composition of the board; the requisite procedures to assess the collective and individual performance of directors;
(iii) the definition of independent directors; (iv) the types of governance related functions and the way in which they should be carried out by boards and directors (whether or not through board committees) including:s s s s
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 companys 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) and other stakeholders in corporate governance issues including an analysis of issues relating to the relationship between the board and shareholders and the board and other stakeholders, the accuracy and timeliness of information disclosed to shareholders, barriers to shareholders participation in the governance of a company, fair treatment of minority shareholders and the representation of their interests on the board; to review the role of auditors including an analysis of issues relating to the framework within which auditors operate, the extent and value of audits and the linkages between shareholders, boards and auditors; to review the role of government and regulatory authorities in corporate governance issues;
270
Appendix II
to review issues relating to the creation and maintenance of effective and appropriate internal control systems in public-listed companies and effective implementation and monitoring of these controls; to review developments in corporate governance internationally so as to ensure that standards set for Malaysian companies do not fall short of international standards; and to improve and enhance the transparency of corporate governance practices of Malaysian companies.
The recommendations of the committee may come in any form it considers appropriate including recommending changes to legislation, regulations or rules or prescribing best practices or standards in corporate governance. Promote training and education d) to identify and recommend training and education for directors (namely nonexecutive directors), other officers of a company, shareholders and other relevant corporate participants and identify possible candidates or structures to undertake such 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 incentive structures that will encourage compliance with the recommended standards of corporate governance; deal with any other relevant matter.
f)
Approach Of The Committee

3. The Committee will always keep in mind the need to minimise the regulatory burden on companies (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 of size. In carrying out its review the committee may invite submissions and seek comments from a broad spectrum of interests and may similarly disseminate its draft recommendations for external comments prior to submitting its final report to the Y.A.B. Minister of Finance. A final report is to be provided to the Y.A.B. Minister of Finance no later than 30th June 1998.
4.
5.
271
MEMBERSHIP OF THE COMMITTEE
Y.Bhg. Datuk Dr Aris bin Othman Secretary General of Treasury, Ministry of Finance Chairman Encik Ali bin Abdul Kadir Chairman, Securities Commission Y.Bhg. Tan Sri Wan Azmi bin Wan Hamzah Chairman, Financial Reporting Foundation Y.M. Dato Raja Arshad Tun Uda Chairman, Malaysian Accounting Standards Board Y.Bhg. Dato Idrus bin Harun Registrar of Companies Y.Bhg. Dato Mohd Azlan bin Hashim Chairman, Kuala Lumpur Stock Exchange Y.Bhg. Tan Sri Dato Seri Ali Abul Hassan bin Sulaiman Governor, Bank Negara Malaysia Y.Bhg. Tan Sri Azman bin Hashim Chairman, Association of Merchant Banks, Malaysia Y.Bhg. Dato Megat Najmuddin Megat Khas Chairman, Federation of Public-Listed Companies Ms Wong Suan Lye Executive Director, Association of Banks, Malaysia Ms Mohayani bt Shamsudin Chairman, Association of Stockbroking Companies, Malaysia Prof. Abdul Manap Said Immediate Past President The Malaysian Association of The Institute of Chartered Secretaries and Administrators Secretariat Securities Commission.
272
Appendix II
JPK WORKING GROUP I ON CORPORATE GOVERNANCE IN MALAYSIA
Y.Bhg. Dato Megat Najmuddin Khas Chairman, Federation of Public-Listed Companies Bhd Chairman Y.Bhg. Tan Sri Wan Azmi bin Wan Hamzah Chairman, Financial Reporting Foundation Y.Bhg. Dato Kok Wee Kiat President, Business Council For Sustainable Development Malaysia Y.Bhg. Dato J.J. Raj (Jr) Director General, Malaysian Institute of Directors Dr Nordin Mohd Zain Board Member, Malaysian Accounting Standards Board Puan Al-Baishah Hj Abdul Maran Deputy Registrar of Companies Mr Khoo Beng Chit Senior Assistant Registrar of Companies Ms Wong Sau Ngan Specialist (Legal & Regulatory Policy,) Securities Commission Ms Shanthi Kandiah Senior Executive, Securities Commission En. Izlan Izhab Executive Vice-President, Kuala Lumpur Stock Exchange Cik Latifah Hj Yusof Senior Vice President, Listing, Kuala Lumpur Stock Exchange Ms Qua Gek Kim Senior Vice President Research & Publications, Kuala Lumpur Stock Exchange Ms Selvarani Rasiah Legal Advisor, Listing, Kuala Lumpur Stock Exchange Mr Inderjit Singh Listing Manager, Kuala Lumpur Stock Exchange
273
Ms Koay Lean Lee Senior Listing Officer, Kuala Lumpur Stock Exchange Encik Nik Hassan bin Nik Mohd Amin Council Member, Association of Merchant Banks In Malaysia Cik Zeti Marziana Mohamed Executive Secretary, Association of Merchant Banks in Malaysia Ms Joanne Wong Manager, Association of Banks in Malaysia Mr Lee Siang Chin Management Committee Member, Association of Stockbroking Companies Malaysia Prof. Abdul Manap Said Immediate Past President, The Malaysian Association of The Institute of Chartered Secretaries and Administrators Mr Cheah Foo Seong Technical Director, The Malaysian Association of The Institute of Chartered Secretaries and Administrators Mr Lee Leok Soon Technical Director, Malaysian Institute of Accountants Encik Ali Tan Sri Abdul Kadir Vice President, The Malaysian Association of Certified Public Accountants Encik Adnan Ariffin Executive Director, National Chamber of Commerce and Industry of Malaysia Mr Chris Lee Wai Kit Manager, Ins., Mining & Services Rating Rating Agency Malaysia Berhad Puan Rohana Yusof Assistant Director, International Movement for a Just World Mr Tommy Thomas Representing, Bar Council, Malaysia Dr. P.H.S. Lim President, Malaysian Investors Association Cik Khadijah Abdullah Secretary, Federation of Public-Listed Companies Bhd
274
Appendix II
JPK WORKING GROUP II ON CORPORATE GOVERNANCE IN MALAYSIA
Dr. Nik Ramlah Nik Mahmood Director, Securities Commission Chairman Y.Bhg. Datuk Ramly bin Hj. Ali Registrar of Companies Y.Bhg. Dato C.Rajendram Executive Director, Rating Agency Malaysia Berhad Cik Khadijah Abdullah Secretary, Federation of Public-Listed Companies Bhd (FPLC) En. Abdul Samad bin Haji Alias Senior Partner, Arthur Andersen & Co Ms. Loh Lay Choon Director, Price Waterhouse Ms. Chia Lee Kee Director, Public Bank Berhad Mr. Cheong Kee Fong Senior Partner, Cheong Kee Fong & Co Mr. S.K. Dutt Partner, Ernst & Young Mr. Philip T.N.Koh Director, Phileo Allied Berhad Ms Selvarany Rasiah Legal Advisor, Listing, Kuala Lumpur Stock Exchange Mr. Leong Eng Yee President, The Malaysian Association of The Institute of Chartered Secretaries and Administrators
275
ISBN 983-9386-12-3

Cgreport

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cgreport

Uploaded by

Copyright:

Available Formats

Front

FINANCE COMMITTEE ON CORPORATE GOVERNANCE

Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5

171 183 199

Chapter 7 Chapter 8 Appendix I

233 249 255

267 269 272 273 275

HIGH LEVEL FINANCE COMMITTEE REPORT ON CORPORATE GOVERNANCE

MEMBERSHIP OF THE COMMITTEE

INTRODUCTION TO THE REPORT

Chapter 1 Introduction To The Report

INTRODUCTION TO THE REPORT

Background to the Report

The Preparation of the Report

Chapter 1 Introduction To The Report

Layout of the Report

Chapter 2 Executive Summary

Meaning of Corporate Governance

Chapter 2 Executive Summary

Chapter 2 Executive Summary

Law Reform Issues in Corporate Governance

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

Chapter 2 Executive Summary

Codification of the common law duties of care and skill

Chapter 2 Executive Summary

Abuses by controlling shareholders in respect of their right to vote

Defences 3.1.11 Reliance on others

Chapter 2 Executive Summary

International reporting standards

Chapter 2 Executive Summary

Chapter 2 Executive Summary

Statement of directors standing for election or re-election

Recommendation The CA should allow for voting by mail.

Chapter 2 Executive Summary

Chapter 2 Executive Summary

Chapter 2 Executive Summary

3.5.10 Membership of the audit committee

3.5.12 Access to information and professional advice

Chapter 2 Executive Summary

Chapter 2 Executive Summary

3.5.20 Enforcement of laws and rules

Training and Education

To whom should training and education be targeted?

Which areas should be the focus of training and education?

Chapter 2 Executive Summary

Chapter 2 Executive Summary

SETTING THE SCENE CORPORATE GOVERNANCE IN MALAYSIA

Chapter 3 Setting The Scene Corporate Governance In Malaysia

SETTING THE SCENE CORPORATE GOVERNANCE IN MALAYSIA

Chapter 3 Setting The Scene Corporate Governance In Malaysia

Overview of the legal framework

Chapter 3 Setting The Scene Corporate Governance In Malaysia

Chapter 3 Setting The Scene Corporate Governance In Malaysia

MEANING OF CORPORATE GOVERNANCE

Chapter 4 Meaning Of Corporate Governance

MEANING OF CORPORATE GOVERNANCE

MEANING OF CORPORATE GOVERNANCE FOR MALAYSIA 1.

Key ingredients in the definition

Chapter 4 Meaning Of Corporate Governance

THE MALAYSIAN CODE ON CORPORATE GOVERNANCE

Chapter 5 The Malaysian Code On Corporate Governance

THE MALAYSIAN CODE ON CORPORATE GOVERNANCE