This content is from: Local Insights

Malaysia’s new corporate governance code

Malaysia's Securities Commission recently issued a new Code on Corporate Governance 2012 (MCCG 2012) in an attempt to enhance and further reform the country's corporate governance landscape. The MCCG 2012 will supersede the 2007 Code on Corporate Governance when it takes effect on December 31 2012.

In essence, the MCCG 2012 sets out the broad principles and specific recommendations on structure and processes which companies should adopt in ensuring good corporate governance and accountability as an integral part of their business dealings and culture. The MCCG 2012 advocates the adoption of standards that go beyond the minimum prescribed by regulation on a voluntary basis.

Among the key areas that have been strengthened in the MCCG 2012 are the roles and responsibility of boards of directors, composition of the board, commitment and remuneration of directors, risk management framework and internal controls systems, as well as the integrity of financial reporting.

Under the new MCCG 2012, it is recommended that the board of a company should formalise ethical standards through a code of conduct to support, promote and ensure its compliance. Due attention should also be given to environmental, social and governance aspects of business in its strategies in order to promote sustainability.

Furthermore, companies are also encouraged to formalise and make public a board charter and ensure that it is periodically reviewed. Other additions include the recommendation for the board to establish a Nominating Committee which should comprise exclusively of non-executive directors, a majority of whom must be independent. The Nominating Committee will be tasked with the responsibility to develop, maintain and review the criteria to be used in the recruitment process and annual assessments of directors as well as a focus to seek out suitable female candidates to sit on the board.

The emphasis on the independence of independent directors is further accentuated by the recommendation that the tenure of independent directors should be capped to a cumulative term of nine years. Upon completion of the nine years, it is recommended that the director may continue his or her service as a non-independent director if the retention is justified and shareholder approval is sought.

Another important recommendation is that the positions of chairman and CEO should be held by two different individuals, as this is aimed at ensuring a balance of power such that no individual has unfettered authority. It goes further to state that where the chairman is not an independent director, the board should then comprise a majority of independent directors.

The recommendations in the MCCG 2012, as with the 2007 Code, are expected to be implemented on a voluntary basis under the Main Market Listing Requirements. Nevertheless, a publicly-listed company must publish a statement in its annual report on how it has applied the principles in the Code and the extent of compliance with the best practices, including specifically identifying the areas of non-compliance with reasons and alternatives for any such non-compliance.

Although the present comply-or-explain approach is expected for the MCCG 2012, it remains to be seen whether the Securities Commission or Bursa Securities will decide in future that specific recommendations of the MCCG 2012 are prescribed as mandatory for a publicly-listed company or perhaps even be made applicable under law to all companies. Despite scepticism in certain quarters on the extent and efficiency of regulating sound corporate governance, the new MCCG 2012 must be applauded as a big leap towards the implementation of a culture of good corporate governance transparency and accountability in Malaysia. Debates may nevertheless continue on the appropriateness or efficacy of some of its recommendations.

Tan Kong Yam

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