The trend of developing corporate governance guidelines and codes of the best practices began in early 1990's in the United Kingdom and in the United Sates in response to problems in the corporate performance of leading companies. Over the past 12 years the UK has initiated a series of investigations into ways to improve the corporate performance of UK listed companies. These investigations have been high profile, lead by an experienced individual who has given his name to the final report. Thus we have seen a number of reviews and reports and some legislation along the development of Corporate Government, such as Cadbury Report (1992), Greenbury Report (1995), and Hampel Report (1998). (Jones I., 2003)
The developments of Corporate governance are listed below:
Directors Remuneration Report Regulations 2002
European Commission action plan
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FRC review of Turnbull
Operating and Financial Review (OFR)
Department of Trade and Industry (DTI)
Good governance: a code for the voluntary and community sector
The Takeovers Directive (Interim Implementation) Regulations 2006
Updated Combined Code
Companies Act 2006
Charities Act 2006
Commission of the European Communities report
European Commission on company law
Review of Combined Code 2006
Updated Combined Code
FRC Review of Combined Code
AIC revised Code of Corporate Governance
ABI Articles of Association and Associates Guidance
ABI Guidelines and Paper on Executive Remuneration
FSA Effective corporate governance (significant influence controlled functions and the Walker Review)
Source: History of corporate governance: Revised April 2010 (CIPD, 2010)
Cadbury Report (1992) published the findings of the Committee on Financial Aspects of Corporate Governance. (Robert W. McGee, 2008) It looked into the performance and rewards of boards and resulted in greater transparency and accountability in boardroom proceedingsThe report attached a code of best practice with guidelines for behaviour and disclosure Greenbury Report (1995) discusses directors' remuneration. It amended the section within the Cadbury report concerning executive pay Hampel Committee Report (1998) reviewed the success of the Cadbury and Greenbury Reports. It consolidated the recommendations of the two previous reports and recommended the creation of a 'Combined Code' which was annexed to the Listing Rules Combined Code on Corporate Governance (2003) were issued by the Financial Reporting Council (FRC) to produce a set of principles and code which embraced Cadbury, Greenbury and the committee's own work. The revised Combined Code builds upon the existing code and incorporates the recommendations of the Higgs and Smith Reports. The Code aims to achieve more open and rigorous procedures for the appointment of directors and improved induction and development of NEDs Updated Combined Code (2006) supersedes and replaces the Combined Code (2003) (CIPD, 2010)
It also recommended that the board should have three non-executive directors and the role of chairman and chief executive should be held by different people.
The main recommendations are the appointment of non-executive directors and an audit committee to oversee greater control of financial reporting and the separation of the role of the chair and chief executive.
The main recommendations were the appointing of a remuneration committee to determine directors' remuneration, and a nominations committee to oversee new appointments to the board. It recommended the creation of a 'Combined Code' which was annexed to the Listing Rules.
It also made recommendations on improving communication with shareholders and redressing the balance between implementing controls and allowing companies to find their own ways of applying corporate governance principles.
It recommends that half of the board members of the FT350 companies should be independent NEDs, that only NEDs should sit on the audit and remuneration committees and that if NEDs serve more than nine years they are no longer considered to be independent (unlisted companies should have two NEDs on the board).
Following a consultation in 2005, a number of changes were incorporated into the updated Code. During 2007 the Financial Reporting Council (FRC) reviewed the impact and implementation of the Combined Code. In 2007, it announced the outcome of this review, including its intention to consult on limited amendments to the Code.
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However, the corporate governance concept has gained in Malaysia and has been given more prominence after the Asian financial crisis. Development of corporate governance in Malaysia was first issued in March 2000 by Malaysian Code on Corporate Governance which was, 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 Code, Malaysian corporate scene has made significant strides in corporate governance standards. The mandatory reporting of compliance with the Code has enabled shareholders and the public to assess and determine the standards of corporate governance by listed companies. While significant improvement has been achieved, it is now timely to review the Code to further strengthen corporate governance practices in line with developments in the domestic and international capital markets. (Securities Commission, 2007)
The Malaysian Code on Corporate Governance as revised in 2007 represents the continued collaborative efforts between Government and the industry. The Securities Commission (SC) would like to thank some of the bodies for their invaluable feedback and comments Key amendments of Revised Code 2007 are aimed at strengthening the board of directors and audit committees, and ensuring that the board of directors and audit committees discharge their roles and responsibilities effectively. (Securities Commission, 2007)
Besides that, the introduction of Listing Requirement by Bursa Malaysia in January 2001 has drawn attention to the importance of corporate governance and disclosure requirements to public listed companies to comply with ever since. Under Bursa Malaysia's listing requirements, the annual reports must include narrative statements on how the companies have applied the broad principles set out in the Malaysian Code on Corporate Governance. The statements should also address the extent to which the companies have complied with by a listed issuer and its directors with regard to the best corporate governance practices articulated in the Code, and explain areas of non-compliance. (bursamalaysia, 2009)
The bodies are includes Companies Commission of Malaysia, Bursa Malaysia Berhad, Bank Negara Malaysia, the Bar Council, the Federation of Public Listed Companies, the Malaysian Institute of Corporate Governance, the Minority Shareholders Watchdog Group, the Malaysian Accounting Standards Board, the Malaysian Institute of Accountants, the Malaysian Institute of Certified Public Accountants, The Institute of Internal Auditors Malaysia, the Malaysian Institute of Chartered Secretaries and Accountants and the Malaysian Investment Banking Association.
b. Factors instigating good corporate practices and stricter corporate governance
Failure in corporate governance does not only occur in Malaysia, such a classical example like Malaysian Airlines System (Gan, 2003), but also globally such as the failure of Enron and WorldCom. The collapse of well-established and high profile companies like Enron and WorldCom is one fine example how weak is the corporate governance practices. (Wan Izyani, 2008) Most of these corporate failures were arisen due to washy corporate financial structures, over-leveraging, poor disclosure and accountability. (apo-tokyo, 2007)
In addition, Asian financial crisis in 1997-1998 has showed the inefficiency of corporate governance and transparency (Ho and Wong, 2001). The problems that we had encountered during that time Asian have weakened the quality and integrity of financial reporting. Therefore, the main reason of introduction of MCCG in 2000 by FCCG is to observe and establish a sound corporate governance framework. The recommendations in the Code have become mandatory for all public listed companies to comply. (Wan Izyani, 2008)
Besides the Asian financial crisis, let us take a look in some of the examples of unethical corporate practices happened around us. For examples, in year 2008, the board of Englotechs Holding Bhd believes that the investing public and shareholders should be kept informed of all material business matters, which may influence and affect the group. Timely release of information on the group's performance and major developments via appropriate channels of communication provides the shareholders and investors with an overview of the group's operation. (Annual Report 2008). But, what has happened in reality? Although it had been delisted in February 2010, Englotechs was publicly reprimanded last month by Bursa Malaysia for several breaches of the exchange's listing requirements, one of which was its failure to make an immediate announcement of the defaults in payment of credit facilities by the two subsidiaries. Due to this, three of the company's directors were fined RM113,050. (Errol Oh, 2010)
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Another example is in year 2007, Golden Plus Holdings Bhd which said that they will release financial results quarterly in order to provide shareholders with regular overview of the group's performances and operations. The announcements, quarterly and annual reports made could be obtained by shareholders and members of the public by accessing the Bursa Malaysia's website. (Annual Report 2007) But, in October 2009, Bursa Malaysia publicly reprimanded Golden Plus and slapped six directors with fines totalling RM120,400 for a list of breaches of the listing requirements. Among the infringements were late submission of accounts and quarterly reports, its failure to "ensure accurate disclosure on the status of the preparation and finalisation of the accounts." The company also did not comply fully with the stock exchange's requests and directives through letters issued between June and August 2008. (Errol Oh, 2010)
Besides that, in 2003, Polymate Holdings Bhd which recognises the importance of transparency and accountability to its shareholders and investors. The company reaches out to its shareholders and investors through its annual reports, which are not only informative but are also reader-friendly.( Annual Report 2003). However, Ng Kim Weng, Polymate's former group managing director, was charged in February 2007 for knowingly authorising the furnishing of false statements to Bursa. According to the SC, this refers to the inflated revenue and trade receivables for the year September 2003, which were reflected in the company's annual report 2003. Ng Kim Weng pleaded guilty last October and was fined RM300,000, or a year in prison, in default. Polymate was delisted in October 2006 because it did not have "an adequate level of financial condition to warrant continued listing." (Errol Oh, 2010)
After reviewed several examples of breach of corporate governance that stated above, it highlights the insurgence of the need of corporate governance in Malaysia. Good corporate practices and stricter corporate governance are needed to prevent the expropriation of shareholders by managers and to ensure the efficient management of companies. They are necessary too in order to attract the capital for large and worthwhile projects. Malaysia was among those countries that succeeded in building up many large firms that their countries needed for economic development funded by many economic agents. However, in the years leading to the Asian crisis, it failed to put in place a sound governance mechanism that could effectively solve the problems that were associated with ownership and control and led to many unethical corporate practices happened in the organizations. Therefore, a critical area for improvement in strengthening the effectiveness of corporate practices enforcement should be actioned by the regulators.
C. Exploring the application of MCCG (Revised 2007)
There are 3 parts in MCCG (Revised 2007). Only Part 1 and Part 2 are relevant to listed companies. Part 3 is not addressed to listed companies but to investors and auditors to enhance their role in corporate governance. Part 1 sets out broad principles of good corporate governance for the listed companies in Malaysia. Companies are required by the listing requirements of the KLSE to include in their annual report a narrative statement of how they apply the relevant principles to their particular circumstances. However, Part 2 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 will be required as a provision of the listing requirements of the KLSE to state in their annual reports. (Securities Commission, 2007)
Whilst a large portion of the MCCG 2007 is micro corporate governance (internal governance of directors). Para 2.17 states that besides historical and financial oriented information, the board should access the quantitative performance of company by looking at the performance factors, such as customer satisfaction, product and service quality, market share, market reaction, and environmental performance which is stated in company annual report. (Securities Commission, 2007) Para 2.17 of the MCCG and Para. 15.26 of the LRBM require BOD to have new tasks of taking into account corporate social responsibility (CSR) into their business strategies. CSR starkly opposes these traditional business precepts. CSR points out that a corporation owes obligations and duty to the society at large and means that a BOD owes a duty not only to shareholders but also towards the stakeholders from a wider perspective.
Traditional BOD duties which use application of strategic management is inward looking and performance of the corporation is benchmarked against internally forecasted sales and annual profits, imply that the corporation should gain and leverage profit from the markets. Conventional strategic concepts such as marketing and strategic management are designed to maximise profits and shareholders' interests. Figure 1 shows the Inward looking strategic concepts.
This is to secure sufficient disclosure so that investors and others can assess companies' performance and
governance practices, and respond in an informed way.
Figure 1: Inward looking strategic concepts
Internal benchmark and revise strategy
Gain profit from targeted market segments
However, CSR requires a corporation to be outward looking which means that a corporation must constantly look towards the interests of stakeholders. Thus, performance of the corporation is now benchmarked against the expectations of these stakeholders and no longer the expectations of shareholders. In order to communicate corporate transparency, reputation and sustainability issues, many of the companies are required to address issues of CSR, such as diversity and equality, environment stewardship, community work, talent management and building trust in their annual report. (ACCA, 2004) Figure 2 shows the outward looking model.
Figure 2: Outward looking strategic concepts
Profit gained from market
Satisfy stakeholders' demands / expectations
Below are the examples of corporate social responsibility:
Diversity and equality
Southern Bank differentiates itself from others with its gender-friendly policies. The bank was the first to offer a credit card tailored for women. It set up bank facilities and offered financial services at The Women's Institute of Management which is to make sure SBB WIM Master cardholders are part of "an organization that looks forward to women's involvement in the community, a novel way of fulfilling the agenda for woman's social and business advancement in society." (apo-tokyo, 2007)
Open disclosure practices on sustainable development are already in place among the leading resource-based companies. Petronas crafted a corporate sustainability framework that is committed to seven key result areas: sustaining shareholder value ; promoting efficient use of natural resources; safety and preserving the environment; product stewardship; respecting human rights; limiting greenhouse effects; and sustaining biodiversity. It is hoped that Petronas will extend this commitment and bench strength to its supply chain, stakeholders and competitors. (Petronas, 2009)
Connecting to community.
Both Microsoft Malaysia and Maxis Communications have carried out programs to narrow the digital divide in the rural communities. Maxis' Bridging Communities targets rural children who learn to use computers and surf the Internet at cyber camps. The project involves 500 Maxis employees in volunteer brigades. Similarly, Microsoft Malaysia has a community technology support network to help rural folk to keep up the technology advancement. DiGi has an ongoing Yellow Mobile program, which makes stopovers in various states where its staff volunteers teach young, disadvantaged orphans to appreciate the country's history of music and culture. (apo-tokyo, 2007)
Weaknesses of MCCG (Revised 2007)
Many critics have argued that poor corporate governance was the main reason for the 1997/1998 financial crisis. (Liew, P.K., 2006) Thus, it is essential for us to detect the weaknesses of MCCG. The weakness that are detected from Malaysia Corporate Governace and MCCG (Revised 2007) are discussed below:
Weak Shareholders' and Creditors' Protection because of lack of power
According to Johnson et al. (2000), weak legal framework for shareholder protection was an important element for the Asian financial crisis. Although laws concerning shareholder rights and the regulatory framework in Malaysia appeared comprehensive, shareholder rights were often neglected in practice because of the excessive power enjoyed by controlling shareholders. In addition, it is argued that the real problems in Malaysia were "compliance (and) enforcement â€¦ (and) a lack of professionalism in regulations". (Liew, P.K., 2006)
Lack of Transparency and Inadequate Disclosure
It has been argued that the lack of transparency arising from inadequate disclosure allowed significant problems to build up in the financial and corporate sectors. When the financial condition deteriorated, the investors being reluctant to hold shares while creditors became reluctant to rollover maturing short-term debts for fear of an imminent loss due to the lack of transparency. This contributed significantly to the erosion of investor confidence and in part exacerbated the crisis. (Liew, P.K., 2006)
Only applicable to publicly listed, but not private exempt companies
According to Bursa Malaysia's listing requirements, all the listed companies must include narrative statements in their annual report on how they have applied the broad principles set out in the MCCG . (bursamalaysia, 2009) However, these requirement is not applicable to the private companies. so that the effect is at best minimal.
The executive director of the National Economic Action Council (NEAC) in Malaysia, Daim Zainuddin, stated that the financial crisis in Malaysia was a 'crisis of confidence', where a loss in, or rather the lack of, investor confidence on the Malaysian market had been seen as having been stimulated by the weak supervision of the financial system and a lack of transparency and inadequacies in corporate governance (Zainuddin, 1998).
What can the government do in future for the improvement of MCCG? Government should keep the code up-to-date and aim to elevate the standard of conduct of directors and company officers of publicly listed companies, and to promote the development of effective internal governance and compliance. The corporate governance environment is evolving, however, and the Code and supplemental materials need to be kept up-to-date and developing the best practices. Moreover, government can consider and expedite the introduction of a corporate governance rating for all publicly listed companies by introducing a scorecard. The private investors are most likely looking for performance indicators can at least rely on the ratings to know the degree of corporate governance practice in the company and to make their own conclusions and recognize the improvements made by government, regulators and corporations but challenges remain: Convergence in regulations, attitudes and pressure from institutional investors and shareholder groups must continue. Strong supervision and enforcement of new standards are essential for success. The Malaysian "state of mind" must firmly recognize and put into practice the precepts of accountability, transparency and integrity. The laws and listing rules have been changed to promote corporate governance. That was the easy part. A paradigm shift is also necessary to adopt the true spirit of corporate governance. (apo-tokyo, 2007)