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Corporate governance refers to the way in which companies are governed, and to what purpose. Corporate governance refers to the practices and procedures which organizations are operating with the rules from such sources as the legal system, the judicial system, financial markets, and factor markets. (Cadbury Committee, 1992)Sir Adrian Cadbury, head of the Committee on the Financial Aspects of Corporate Governance in the United Kingdom, stated that corporate governance is the system by which companies are directed and controlled (Cadbury Committee, 1992.)
Corporate governance in United Kingdom (UK), Australia and the United Stated (US) were developed through publication of a series of Reports by Committee of Corporate Governance. (Cheah F.S. and Lee L.S., 2009)The change of this were came from major financial institutions were concerned with the quality and reliability of financial reports that provided by public companies which investors are derive information from. Thus, there is an impetus of these changes; UK Cadbury Report is the useful starting point on corporate governance. In 2001 and 2002, corporate scandals caused the US policy makers to introduce the Sarbanes-Oxley Act (SOA) to legally tighten corporate in US. US has developed a codes of practices that is Hampel Report which covered a number of issues, such as the composition of the board and the role of directors, directors' remuneration, role of shareholders, communication between management and shareholders and the areas of financial reporting, auditing and internal controls. Where Cadbury Code focuses on improving financial reporting, improving the effectiveness of the board, stating the rights of directors in getting information and director's accessibility to information particularly to the services of the company secretary and other professionals. (Cheah F.S. and Lee L.S., 2009)
Malaysia has developed a code of practices for corporate governance. However, in the olden day, there is no existence of this kind of practices. In 1997, Malaysia suffered economic downturn due to the financial crisis. Thus, on March 1998, government has announced the establishment of a framework for corporate governance and setting best practices for capital market. The Malaysian Code on Corporate Governance (Code) was first issued in March 2000 after numerous editorial changes and adjustments by Secretariat at the Securities Commission Office. Closely modeled on the 1998 UK Combined Code, as developed by the Hampel Committee, and influenced by rules in the US and Canada, the Malaysian Code goes further than many other national codes in Asia in promoting international standards of corporate governance
In 2007, SC and other government agencies revised the code to bring the country's corporate governance framework more in line with current globally accepted best practices. (Asian corporate governance association, 2008) In particular, the revised Code contains key amendments aimed at strengthening the roles and responsibilities of boards of directors and audit committees, and ensuring that they discharge their duties effectively1. (Securities Commission Malaysia, nd) The eligibility criteria for the appointment of directors, the composition of the board of directors and the role of the nominating committee are now clearly outlined. SC, in carrying out its role as inforcer of the securities laws, strives to take action that is timely, impartial and carries sufficient deterrent penalties. Lim Chai Hock, the director of Tat Sang Holdings Bhd, knowingly authorized of false statements to the furnishing of false statements to KLSE in respect to of company annual reports, was convicted by the court and sentenced to jail.
The nominating committee: spells out the eligibility criteria for appointment of directors, the composition of the board of directors and the role of the nominating committee. Independent non-executive directors are expected to provide a more meaningful and independent oversight function. The nominating committee, as the gatekeeper for a director's appointment and reappointment, are expected to evaluate the professionalism and integrity of a proposed director, in addition to ensuring the basic requirements of possessing the necessary skills, knowledge, expertise and experience to discharge his duties and responsibilities as a board member. To ensure that the audit committee serves as an effective check on the management of a company, the revised Code details the composition of audit committees, the frequency of meetings and the need for audit committee members to attend continuous training to keep abreast with developments in relevant financial and other related developments. In addition, executive directors will no longer be allowed to become members of an audit committee in order to preserve the independence of the committee. (Securities Commission Malaysia, nd)
Factors encourage good corporate practices and stricter corporate governance
The fundamental focus of governance issues and problems are the result of the separation of ownership and control, issue arising from the power of certain controlling directors-shareholders over minority shareholders. Governments have an important responsibility for shaping an effective regulatory framework that provides for sufficient flexibility to allow markets to function effectively and to respond to expectations of shareholders and other stakeholders.
The development of codes of best practice and stricter regulatory regimes has come largely from scandals and setbacks, where evidence of bad corporate governance has emerged, and company share prices and stock market generally have suffered as a consequence. In Malaysia, Transmile Group Bhd, there were accounting irregularities and fraud discovered in the company. The company has overstated its accounts for the two consecutive years of 2005 and 2006 respectively and thus the investor can get full information about Transmile, in actual fact the company was at a net loss; In Ocean Capital Bhd, this company has been facing a loss since 2000, nonetheless, the loss was not brought to the attention of the shareholders. Thus the share prices of both Transmile and Ocean were not reflected at the true value (New Straits Times, 2007). It is therefore good for the country and the corporations that support the economy to show that good corporate governance and practices are being carried out by the board of directors and the participants (such as shareholders, the authorities and regulators including the society at large.) (Cheah F.S. and Lee L.S., 2009) Moreover, when company complied with the practices, companies are able: access to cheaper sources of funds, encourage investment, promote sustainable productivity and growth and create opportunities to strengthen a company's internal processes and thereby enhancing business.
A number of high profile cases of governance failure led to executives being accused of activities such as stealing, improperly diverting funds and lying to investors to receive more money.
In one such case, L. Dennis Kozlowski, former CEO of Tyco International and his CFO Mark H. Swartz were accused of stealing $150 million from their employer by secretly forgiving loans that they received. They were also accused of misappropriating millions more through other improper means and selling stock after lying about the company's condition. Ultimately, both Kozlowski and Swartz were convicted.
In Hollinger International Inc, Lord Conrad M. Black, former CEO and F. David Radler, former Chief Operating Officer, were accused of diverting to themselves $400 million, practically all of Hollinger International's net income over seven years. Richard Breeden, former Chairman of the S.E.C., prepared the report describing accusations, which stated, "Black and Radler made it their business to line their pockets at the expense of Hollinger almost every day, in almost every way that they could devise." (Breeden, R.C. 2004)
Joseph P. Nacchio, former CEO of Qwest Communications International and six of his executives were sued by the S.E.C. for orchestrating a $3 billion accounting fraud intended to mislead investors during the telecommunications bubble and its aftermath.
Numerous other major firms suffered governance breakdowns, including Xerox, WorldCom, Qwest and Bristol-Myers Squibb.
The organization scandals that mentioned above have devastated numerous firms and hurt millions of investors, they did prompt important regulation (SOX) and codes of conduct that improved corporate governance (Cadbury Code, Hampel Code, MCCG, Greenbury report and etc). In this section, it has shown that the important of corporate governance in Malaysia, actually not only in Malaysia but the entire world. Implementing good corporate governance can helps to reduce information asymmetry as well as to help the company improve its operations
Exploring the application of the MCCG 07
Much of the traditional doctrine considers that organizations must be managed to promote shareholders' rights. Activities in favor of non-shareholder constituencies such as suppliers, consumers, employees or the society at large can be perceived as a means of management to increase its power and personal prestige.
However, numerous of scandals in this world were the evidence show that company should not focus on shareholders' wealth. In the tradition view, director's was to maximize shareholders wealth, but from those serious scandals, it has proved that director's should focus on stakeholders' interest. The modern interpretation of a director's duty to the corporation permits directors to consider stakeholders' interest into a decision about what is in the best interests of the corporation. (Venturechoice.com, nd)
This result on most of the countries are included these interest in to its code of corporate governance. In Malaysia, SC has revised the MCCG based on this factor. There can be are many perspectives to view organization's practices of promotion of constituencies other than shareholder's interests. One of the way to shows whether a company has adopted good corporate governance is corporate social responsibility (CSR).
Esso Malaysia Bhd's CSR is providing efficient, affordable and environmentally responsible energy to Malaysia's various sectors, a commitment that underscores strategic and daily activities.Â In Esso, as a good corporate citizenship it emphasize CSR on it operations, from operating with the highest business integrity, contributions to the community, ensuring the highest standards in safety and health, protection of the environment, to championing the development of technology. For instance, Esso Malaysia Bhd , partnering with local NGOs and government agencies, it support projects that bring sustainable, long-term benefits in five key areas - education, welfare and community aid, health, environment and the arts. (Esso, nd)
Siemens Malaysia stated that, "people are our greatest assets and by supporting them in the environment where they live, work and play, it brings forth a well balanced life". After all, long-term business success is best achieved in a stable society that is capable of meeting the challenges presented. Over the years, Siemens has been involved with the community at large. Through it strong support for the arts scene and it active social citizenry, it show that Siemens cares this society.
Moreover, in Panasonic Manufacturing Malaysia Berhad, Tan Sri Datuk Asmat bin Kamaludin, chairman of Panasonic Bhd, stated that "contributing to society through its business activities". CSR is an integral part of Panasonic plans to deliver sustainable growth in shareholders' value. This has prove that nowadays company can maximize shareholders' wealth by implementing CSR, where in traditional view, it was something that wasting resources. Under the guiding principles of coexistence, the Company carries out corporate citizenship activities with an emphasis on the environment and the community. (Panasonic Manufacturing Malaysia Berhad Annual Report, 2008) The environmental symbols are used for indicating the Company's commitment toward environmental activities and conservation, based on Panasonic's pivotal eco concepts: "eco ideas for manufacturing", "eco ideas for products" and "eco ideas for everybody, everywhere".
Weaknesses of MCCG 07
However, Malaysia's government has enforced the MCCG in this country. But, there are some weaknesses that have been realized by public. The weaknesses remained with regards to the overlapping authority of the regulatory institutions governing the securities market, the government's high level of equity ownership, low free float, weak protection of minority shareholders, and directors' accountability.
Moreover, corporate governance has mainly focus primarily on public companies, especially on large companies whose shares are traded on a major stock market. However, it is not compulsory for private companies and bodies to implement it.
In MCCG 2007, there is a new regulation of board composition, it introduces a form of proportional representation by requiring that 1/3rd of the board should comprise independent directors, and in fulfilling this requirement, the board should include a number of directors, which fairly reflects the investment in the company by the shareholder other than the significant shareholder. However, whether board composition fairly reflects the investment of minority shareholders of a company, it leaves it to the market to judge the composition and effectiveness of the board. Notwithstanding, the private companies' stock is not traded in main board, but, there is necessary for public how the company's rights and responsibilities are shared by different groups to ensure common objectives.
The overlapping authority of the regulatory institutions governing the securities market, this was due to the authorities had decided to make the code partly related under the listing requirement to ensure a complete change of attitude by the board of directors and the corporations. These two primary regulators of Malaysia's capital markets - the SC and Bursa Malaysia - have been actively seeking to bring perpetrators to task, their powers have limitations. Firstly, the SC's powers are largely over offences related to the issuance of securities or financial instruments, while Bursa only has its listing requirements to rely on, which are mainly about disclosure issues. Aside from the SC, there are other bodies that play a role in the regulation of financial crime, namely the Companies Commission of Malaysia which has the sole jurisdiction over the Companies Act, and the police, who oversee cases involving criminal breach of trust and fraud.
Last but not least, it was lacking of punishment for directors if breaches of duty in MCCG, company officials who have been found guilty of their capers have had only to pay fines which were small in comparison to the havoc wreaked, or worse, in comparison to the huge amounts of money they had possibly amassed from their misdeeds. 2 As a result of this state of affairs, many transgressions and questionable deals that have taken place in the capital market involving companies such as Idris Hydraulic (M) Bhd, Repco Holdings Bhd, Aokam Perdana Bhd, Ekran Bhd and Renong Corp Bhd, have not resulted in any individual being put behind bars.
Asian Corporate Governance Association (ACGA) has ranked Malaysia at 6th in 2007 after being assessed on corporate governance rules and practices, enforcement, political and regulatory environment, accounting and auditing standards, as well as the overall corporate governance culture.3
In this regard, it was advised to enforce disclosure and reporting requirements in a continuous and consistent manner, to strengthen directors' independence and accountability to investors, and to enhance the role of institutional investors and shareholder activism in the corporate governance framework.
2. Lee Leok Soon from Minority Shareholder Watchdog Group (MSWG) says: "Fines on directors are not a deterrent. It is like having to pay a fine for a traffic offence. If one has to go to jail, then it is an entirely different story. The deterrent effect that would have on directors and company officials is massive."
3. In that report, it was highlighted that for Malaysia, while public enforcement efforts had improved, regulators did not have a reputation for treating all companies and individuals equally. It also said the consensus was that politics hampered the ability of regulators to do their job properly.
MCCG is revised to reduce information asymmetry, consider other stakeholders' interest and etc. From my point of view, MCCG should require company to should the procedures of each internal control within that company.
Sound internal control can help company reduce unnecessary fraud and increase the productivity of company. Thus, shareholders and stakeholders are get know the operation of it, from this, they can make a decision that is whether continuing invest in particular company or withdraw. Moreover, should require company to show the relationship between executive board of directors and the independent board of directors. Without this, users are not able to know is it that independent is truly independent.
MCCG is merely implied with public listed companies and just a guideline for private companies, private companies should have one set code on corporate governance to govern it. Thus, in future, Malaysia government and authorities can design a set of code for it.