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Lecture 10: MCCG, Corporate governance:
A set of corporate practices,…
Lecture 10: MCCG
MCCG
- MCCG reflects global principles & internationally recognised practices of corporate governance - above & beyond minimum required by the statute, regulations or those prescribed by Bursa Malaysia.
- Recognises the aspect of corporate governance where statutory regulation is necessary & others where self-regulation complemented by market regulation is more appropriate
MCCG 2000
- It was created to encourage private sector to review and reform corporate governance standards, emphasizing that self-regulation may be more effective.
- A code was necessary due to economic forces & the need for corporate reinvention to compete globally
- Economies are shifting towards market orientation, reducing protection from traditional regulations
- The code guides by clarifying responsibilities & enhancing control over companies
- Director's roles are increasingly important in:
1) hiring
2) compensating
3) planning for senior management succession
- Outlines principles and best practices
- Some micro-level key structures and processes addressed:
1) Board composition
2) Director requirement
3) Remuneration
4) Board committees and activities
Impact of MCCG 2000
- Expected to enhance corporate governance standards as evidenced by experiences in other jurisdictions.
e.g the Hampel Report was a revision of UK's corporate governance system that built on Cadbury Code's recommendation. It set out basic corporate governance principles for companies to follow. The Hampel Committee noted that the Cadbury Code of Best practices led to improved governance & increased awareness, achieving its primary aim of full disclosure.
Significance
- Self regulation alongside market regulation is often more suitable for certain aspects of governance. e.g. For instance, a listed company might improve transparency not just because it’s required, but to build investor trust and attract capital
- Code of governance shapes social expectations, influencing legal standards, & judicial interpretations of director's duties. It influence what society considers reasonable or responsible behaviour of directors. Consider MCCG in evaluating whether a director was negligent. Shapes director accountability.
- Growing trend to hold directors to a higher objective standard as seen in Daniels v Anderson and Dorchestor Finance v Stebbings. Directors are increasingly expected to meet a minimum objective standard of care and diligence, regardless of their personal background
- Flexible responses to corporate governance challenges can raise standards better than rigid statutory regulations - businesses are able to adapt it to their unique structure; flexibility allows for quicker adaptation and innovation in maintaining good governance
Included in MCCG 2000:
Principles:
- Broad corporate governance principles in Malaysia allow flexible application based on company circumstances.
- Companies must include a narrative statement in annual reports on the implementation of these principles as per KLSE listing requirements.
- Sufficient disclosure is essential for investors and stakeholders to evaluate company performance & governance practices
Best practices
- Provide guidelines for corporate governance design.
- Compliance is voluntary, but companies must disclose their adherence to these practices in annual reports as per KLSE listing requirements, explaining any deviations
Exhortations to other participants:
- Encouragement for investors & auditors to improve role in corporate governance emphasizing that these actions are voluntary & not directed at listed companies
Explanatory notes & "mere best practices"
- Explanatory notes on principles and best practices along with recommendations from part 3 outline best practices for listed companies.
- Those practices that do not require justification for deviations, referred to as "mere best practices"
MCCG 2007:
- Reflects joint efforts between the government and the industry.
- The Securities Commission acknowledged various organizations for valuable feedback, including the Companies Commission, Bursa Malaysia, Bank Negara, and multiple professional institutes.
Key amendments:
- Strengthening the board of directors and audit committees
- Defining eligibility criteria for director appointments & the role of the nominating committee.
- Outlining criteria & composition for audit committee members, meeting frequency and continuous training.
- Mandating internal audit functions in all PLCs & clarifying internal auditors' reporting line.
MCCG 2012:
- Outlines principles and recommendations for integrating good corporate governance into business practices and culture
- The code emphasizes the following:
Board leadership roles
- Principle 1: Roles and responsibilities
Outline board responsibilities including management oversight, setting a sustainable strategic direction & promoting ethical business conduct.
- Principle 4: Foster commitment:
Directors must dedicate time to fulfill responsibilities & continuously update knowledge and skills
- Principle 6: Manages and recognises risk
Establish a sound risk management framework & internal control system
Enhances effectiveness through improved composition & independence:
- Principle 2: Strengthen composition
Implement transparent policies for selecting members who add value.
-Principle 3: Reinforce independence:
Policies and procedures to ensure effectiveness of independent directors.
Promotes corporate disclosure policies that respect shareholder right:
- Principle 5: Uphold integrity in financial reporting
Ensure FSs are a reliable source of info
-Principle 7: Ensure timely and high quality disclosure
Ensure comprehensive, accurate and timely disclosures.
Principle 8: Strengthen relationship between company & SHs
Facilitate the exercise of ownership rights by shareholders
Majority of independent directors in the board IF the chairman is not independent
Independent directors' tenure should not exceed 9 years, after which could continue as non-independent directors. Retaining an independent director beyond nine years requires justification & annual shareholder approval.
MCCG 2017:
- Based on 3 key principles:
1) board leadership & effectiveness
2) effective audit & risk management
3) integrity in corporate reporting and meaningful relationship with stakeholders
Principles supported by 12 intended outcomes
Compliance with MCCG 2017:
- Having at least 30% on board applied for large companies
- CARE approach which is a shift from comply or explain approach
The CARE approach requires a company to clearly identify the thought processes in practising good corporate governance and to provide a fair and meaningful explanation on how it has applied the practices.Where there is a departure from a Practice, the company must provide an explanation for the departure, disclose the alternative practice it adopted & how this practice achieves the Intended Outcome.In addition a large company which departs from a practice must disclose proposed compliance steps and the required time frame.
Four enhanced step-ups:
1) limiting independent directors' tenure to 9 years
2) disclosing detailed remuneration of senior management
3) establishing an audit committee with only independent directors
4) forming a risk management committee with a majority of independent directors
Board composition
- Affects oversight effectiveness: a majority of independent directors and diverse management enhances management oversight.
- Requires at least half of the board to be independent directors with a majority needed for large companies
- Emphasizes that independence involves assessing a director's background, current activities, and ability to act independently of management
- "Independent director" is one free from management influence & any relationships that could compromise independent judgement or the best interests of the company
Appointment of independent directors: (not mandatory)
- Long tenure may compromise their objectivity as familiarity could lead to undue sympathy towards management.
- Similar to MCCG 2012, retaining an independent director from 9th to 12th year requires justification and shareholder approval and a thorough review of director's independence, with findings disclosed to shareholders for informed decision-making.
- Companies that wish to retain an independent director beyond 12th year requires shareholder approval via a two-tier voting process
Two-tier voting process:
Tier 1: Only large shareholder vote
Tier 2: Other shareholders vote
Resolutions are approved by a Tier 1 vote & a simple majority in Tier 2; both must support the resolution for it to pass. If votes differ or Tier 1 abstains, the resolution fails.
Listing requirements:
- Listed companies must disclose a Corporate Governance Overview Statement and a Corporate Governance Report in annual reports,
MCCG 2021:
1) Principles: Used to guide a system of corporate governance
2) Intended outcomes: To achieve good governance
3) Practices: To help guide companies to achieve IO
Focuses on:
- Enhancing board policies and practices
- Strengthening board oversight and integrating sustainability into strategy ad operations
- Adopting best practices especially for companies with low level of compliance.
Amendments
-
Women's Participations in Decision-Making Positions
- Now not only for large companies
Politicians on Board
- Individual connected to politicians are discouraged from board positions
No chairman on Board Committees
- to limit their influence, promoting better checks & balances & ensuring objective reviews
Sustainability taking a more prominent role:
- Address sustainability risks and opportunities for long term success
1) Integrating sustainability into company strategies, business plan and risk management
2) Communicating sustainability targets and performance to stakeholders
3) Staying informed about relevant sustainability issues
4) Evaluating the management of sustainability risks in board and senior management performance reviews
Step-up:
- appoint a management representative focused on strategically managing sustainability and integrating it into their operations.
Board remuneration:
- Controlling shareholders & connected directors should abstain from voting on own fees, & each non-executive director's fees should be presented separately
General meetings:
- Utilize technology for voting and remote participation expanding beyond those with large membership and remote meetings as was in MCCG 2017
- Focus on meeting conduct, cyber practices, rights and responsibilities of shareholders, company, chairman and BOD
-
Departure Now Comes with Timeframe for Compliance
- Requires large companies to:
1) Disclose the timeline, justification & actions for adopting departed practices.
2) Adopt these practices within a reasonable period, ideally 3 years or less, indicating board commitment.
Meaningful disclosure standards
- Focus on stakeholder perspectives not only the board or management
- Corporate governance should meet stakeholder needs particularly shareholders
Corporate governance:
- A set of corporate practices, structures and processes designed to provide guidance for good governance in a corporate context.
Objective: Attain long-term shareholder value while considering the interests of other stakeholders.
Focus:
- BOD - how the company is directed
- Shareholders - value gained and the role in overseeing the performance of the board
Why corporate governance is a set of rule rather than a law?
- Relates to the economic function of the corporate law where it is suggested that the law governing companies must be flexible & facilitative to attract investments into the country
-
More favored over statutory laws because it allows flexibility by providing guidance without imposing mandatory obligations