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1.0 Historical development of corporate governance
A definition by the Finance Committee on Corporate Governance in Malaysia in the Report on Corporate Governance (2002) stated that: "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 realizing long term shareholder value, whilst taking account the interests of other stakeholders". This indicates that corporate governance is not only applied to the shareholders but the other stakeholders as well. (Abdul Hadi bin Zulkafli et al., NA)
Later in 2001, the tragic collapse and losses of giant companies such as Enron Corporation, WorldCom and Typo International in the United States (US), which is known to have the best regulated and most efficient capital market in the world, further reinforced the critical need to improve the corporate governance system in both developing countries. The unexpected financial collapse of BCCI and Maxwell Corporation and the harsh economic climate in the United Kingdom (UK) in early 1990 spurred initiatives on fostering good governance to improve financial reporting and accountability of all listed companies registered in the UK (Cadbury Report, 1992). In fact, in the US, the National Commission on Fraudulent Financial Reporting known as the Treadway Commission (TC) emphasized the role of various key players (management, board of directors, audit committees, internal auditors and external auditors) in the corporate governance systems as agents to help prevent financial reporting fraud about 15 years earlier. Failure of the executives, auditors and audit committees to embrace the TC recommendations is believed to have resulted in the meltdowns of Enron, WorldCom and other companies in the US (Barrier, 2002). (Hafiza, 2009)
The Cadbury Report (1992) links corporate governance and financial reporting quality and warns that financial reporting quality may be compromised by ineffective governance mechanisms. (Hafiza, 2009) According to Malaysian Code on Corporate Governance 2007, the MCCG draws from the United Kingdom's (UK) experience set out in the Hampel Report. This involved the use of best practice prescriptions together with a rule requiring disclosure of the extent to which listed companies have complied with the prescriptions and the reason why they have not. Hampel reviews the Cadbury code and its implementation to ensure that the original purpose is being achieved with an additional task where to look afresh at the roles of directors, shareholders and auditors in corporate governance. Hampel does realize the necessary of restriction of the regulatory burden on companies, and to substitute principles for detail.
The Malaysian Code on Corporate Governance (MCCG), first issued in March 2000, marked a significant milestone in corporate governance reform in Malaysia. It codified the principles and best practices of good governance and described optimal corporate governance structures and internal processes. Since the release of the MCCG, the Malaysian corporate scene has made significant strides in corporate governance standards. The mandatory reporting of compliance with the MCCG has enabled shareholders and the public to assess and determine the standards of corporate governance by listed companies. The MCCG as revised in 2007 represents the continued collaborative efforts between government and the industry. Key amendments to the MCCG are aimed at strengthening the board of directors and audit committees, and ensuring that they discharge their roles and responsibilities effectively. The amendments spell out the eligibility criteria for appointment of directors and the role of the nominating committee. On audit committees, the amendments spell out the eligibility criteria for appointment as an audit committee member, the composition of audit committees, the frequency of meetings and the need for continuous training. (Malaysian Code on Corporate Governance 2007)
The listing requirements that acquired by Bursa Malaysia
all applicants shall be of a certain minimum size, quality and have a record of operations of adequate duration;
investors and the public shall be kept fully informed by the listed issuers of all facts or information that might affect their interests and in particular, full, accurate and timely disclosure shall be made of any information which may reasonably be expected to have a material effect on the price, value or market activity in the securities of listed issuers;
all holders of securities shall be treated fairly and equitably;
directors, officers and advisers of listed issuers shall maintain the highest standards of integrity, accountability, corporate governance and responsibility; and
Directors of listed issuers shall act in the interests of the company as a whole, particularly where the public represents only a minority of the shareholders or where directors or major shareholders have material interests in transactions entered into by listed issuers.
(Listing Requirements of Bursa Malaysia Securities Berhad)
2.0 Factors instigating good corporate practices and stricter corporate governance
Regarding the breach of legal provisions with respect to related-party transaction, sanctions should be reviewed and substantially increased, in line with penalties for insider trading violations. There is also a need to improve the quality of enforcement actions taken for breach of the provisions on related-party transactions. (eStandardsForum, 2009)
Effective January 2004, as noted in the World Bank's 2005 report, the SC has put in place whistle-blowing provisions to report breaches of securities laws or listing rules or any other financial matters, with the aim of protecting directors, management, and auditors of publicly listed companies. Enhanced provisions under the Companies Act for protection of corporate whistleblowers were under review at the time of the World Bank's 2005 ROSC. (eStandardsForum, 2009)
Nestlé e received criticism in relation to its practices including unethical marketing and utilizing a supply chain that uses child bonded labour. (Kim Kercher, 2006) In China, Nestlé suffered a public relations disaster after government inspectors found unsafe amounts of iodine in some of the company's powdered baby milk. The CEO Peter Brabeck-Lemathé announced to his shareholders that the corporation would spend a large-scale marketing campaign in the country in order to win back consumer support. Nestlé has sent health professionals in its employ to Chinese grocery stores, where they stand in "nutrition corners" stocked with Nestlé products and promote them to shoppers. Clearly, the Nestlé's aggressive promotion of their products in China is a violation of the International Code and as such undermines breastfeeding and subsequently infant health. (Nestlé Boycott, 2006)
Shell's joint venture with the Nigerian government where, in 1995, Ken Saro - Wiwa and eight others were executed largely due to leading a non-violent campaign against environmental damage associated with the operations of multinational oil companies, including Shell and British Petroleum. Shell was criticised for not using its power to intercede with regard to the executions. (Kim Kercher, 2006) Royal Dutch / Shell, the world's third-largest oil group, revealed on Friday that 3.9 billion barrels of oil and gas, a fifth of it's reserves had been misidentified. The announcement led to a slump in the share price and a warning from Standard & Poor's that it may downgrade its triple-A credit rating. Shell's corporate governance structure, with Sir Phil Watts as both chairman and an executive director, contravenes best practice in corporate governance, which dictates that chairmen should be non-executive. (Ethical Corporation,2009)
Malaysia Airlines is listed on the stock exchange of Bursa Malaysia under the name Malaysian Airline System Berhad (MYX: 3786). The airline suffered high losses over the years due to poor management and fuel price increases. As a result of financial restructuring (Widespread Asset Unbundling) in 2002, led by BinaFikir, Penerbangan Malaysia Berhad became its parent company, incorporated in 2002, in exchange for assuming the airline's long- term liabilities. (Scribd, NA) Malaysia Airlines launched a 3-year MAS Integrity Plan (MIP) to inculcate of best practices in integrity and ethical behaviour throughout the organization. Launched by Chairman, Tan Sri Dr Munir Majid, MIP reaffirms the airline's commitment to strengthen its corporate governance policy to promote greater transparency, openness and respect towards its internal and external stakeholders. (Word Slinger, 2010)
3.0 Exploring the application of the MCCG 07
Part 1 of Malaysian Code on Corporate Governance 2007 sets out broad principles of good corporate governance for Malaysia. The objective of the principles is to allow companies flexibility in applying the principles according to the varying circumstances of individual companies. Companies will be required by the Listing Requirements of Bursa Malaysia to include in their narrative statements, have applied the relevant principles in the annual report. This is to secure sufficient disclosure so that investors and others can assess companies' performance and governance practices, and respond in an informed way. Every listed company should be headed by an effective board which should lead and control the company. The board should include a balance of executive directors and non-executive directors, such that no individual or small group of individuals can dominate the board's decision making. 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. The board should be a formal and transparent procedure for the appointment of new directors to the board. All directors should be required to submit themselves for re-election at regular intervals and at least every three years. (Malaysian Code on Corporate Governance 2007)
Furthermore, 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 best practices is voluntary, companies are required as a provision of the Listing Requirements of Bursa Malaysia to state in their annual reports, the extent to which they have complied with the best practices set out in Part 2 and explain the circumstances justifying departure from such best practices. The board should maintain an effective communications policy that enables both the board and management to communicate effectively with its shareholders, stakeholders and the public. 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 officer should be publicly explained. 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 company's business decisions. (Malaysian Code on Corporate Governance 2007)
In January 2005, announcement if Peter Brabeck as Nestle's new Chairman and Chief Executive Officer (CEO triggered a strong opposition from a group of shareholders, led by Ethos Foundation, a pension fund, which was against Nestle's decision of concentrating the powers of the chairman and CEO in the hands of one person. The company was going against the best practices of corporate governance because most of the European companies and one-third of the Fortune 500 companies had adopted the practice of segregating the roles of chairman and CEO.
Shell plays high commitment to social responsibility, with the program ranging from education and women's development to environmental awareness. According to the External Affairs Manager of Shell Dubai, Hussain Al Mahmoudi said that Corporate Social Responsibility helps bridge many cultural and social issues by building better relationships with governments, stakeholders and the local community.
General Manager of Malaysia Airlines said that he did not have the intention to discriminate but have to face the reality that nowadays passengers want to serve by young and pretty stewardesses. Thus, the employee union has begun a campaign against sex discrimination, pointing out that women must retire 15 years earlier than the male counterparts. Malaysia Airlines sacked one of its female employees when she refused to resign after falling pregnant. Malaysian High Court rejected the petition of her, which company's review of female stewardesses can only have two children and reign after 45 years old.
4.0 Weaknesses of MCCG 07
Weaknesses of MCCG 2007 remain unchanged along with the overlapping authority of the regulatory institutions governing the securities market. The regulatory institutions still hold the rights to govern the securities market. The high level of equity ownership by government caused the small enterprise has limited power in making decisions for the business. Besides, the Codes do not have sufficient power to protect the minority shareholders, thus they have minimum authority during the annual general meeting. Directors' accountability is high that they have to fully responsible for any profit and loss incurred. The weak amount of public company shares available to investors (free float) is also one of the weaknesses. It was advised to enforce disclosure and reporting requirements in a continuous and consistent manner, in order to strengthen directors' independence and accountability to investors. Besides that, in the corporate governance framework, it also can enhance the role of institutional investors and shareholder activism. World Bank advised the SC to enforce disclosure and reporting requirements in a constant and steady method. To strengthen directors' independence and accountability to investors, it further recommended implementing legislative to be reformed. Finally in the corporate governance framework, there was a need to enhance the role of institutional investors and shareholder activism.
I can see that the states involvement in business had changed and the roles of state had increased in different ways. First, it is the rights of the shareholders to be informed about the business operation and future plan of the company. They can choose to accept or reject any proposals and plans as well as instruct the management of the company to pursue according to government's needs. Second, the financial institutions that provided funds and working capitals are controlled by the owner of the financial institutions. Third, agency and government offices are constructed by the states, to process applications for contracts and loan tender from its wholly owned companies.
In the future MCCG, in favour of companies' benefits, corporate governance is very important as it protects companies from any unethical corporate activity that might incurred and detect those doing business illegally in the way of against laws. Moreover, it creates a series of rules that needed to compile by the companies so that it is consistency in the method of doing business.