Legal Insights Issue 3/2017, September 2017 – “STEP UP WITH “CARE”“

STEP UP WITH “CARE”

 

Alia Abdullah highlights some new features in the Malaysian Code on Corporate Governance 2017

 

 

INTRODUCTION

 

The latest version of the Malaysian Code on Corporate Governance was released by the Securities Commission Malaysia (“SC”) on 26 April 2017 (“MCCG 2017”) and came into effect immediately. It represents the third revision made to the Code and supersedes its earlier edition, the Malaysian Code on Corporate Governance 2012 (“MCCG 2012”).

 

This article will highlight certain features introduced under the MCCG 2017.

 

AN OVERVIEW OF THE MCCG 2017

 

The MCCG 2017 is based on three key principles, namely: (1) board leadership and effectiveness; (2) effective audit and risk management; and (3) integrity in corporate reporting and meaningful relationship with stakeholders (“Principles”). These Principles are supported by 12 Intended Outcomes (“Intended Outcomes”).

 

The MCCG 2017 also sets out a list of 36 actions, practices and processes which a company is expected to adopt (“Practices”) in order to achieve the Intended Outcomes. The MCCG 2017 also provides guidance (“Guidance”) that may be adopted when applying a Practice in order to achieve an Intended Outcome.

 

As an illustration, under the “board leadership and effectiveness” principle, one of the Intended Outcomes is the promotion of good business conduct and maintaining a corporate culture that engenders integrity, transparency and fairness. Among the Practices which a company is expected to adopt to achieve this Intended Outcome is the establishment of a code of conduct and ethics to implement policies and procedures to manage conflicts of interest and prevent abuse of power, corruption and money laundering. By way of Guidance, the board is to encourage employees to report genuine concerns in relation to breach of a legal obligation (including criminal activity or breach of law) and to ensure that the company’s whistleblowing policies provide avenues where such concerns can be raised without the risk of reprisal. 

 

COMPLIANCE WITH MCCG 2017

 

Although the MCCG 2017 is targeted primarily at listed companies, non-listed entities including state-owned enterprises, small and medium enterprises (SMEs) and licensed intermediaries “are encouraged to embrace this code on corporate governance” to enhance their accountability, transparency and sustainability.   

 

Interestingly, the MCCG 2017 recognises that listed companies are not a homogeneous group. Thus, certain Practices, such as the requirement to have boards that comprise at least 30% women and to appoint independent experts periodically to facilitate objective and candid board evaluations, apply only to Large Companies.

 

A “Large Company” is one which is included on the FTSE Bursa Malaysia Top 100 Index or has a market capitalisation of RM2 billion and above, at the start of its financial year. Once a company satisfies either or both of the aforesaid criteria, it will be required to comply with the Practices that are applicable to Large Companies even if it subsequently ceases to satisfy those criteria during the financial year.

 

Other listed companies are encouraged to adopt the Practices applicable to Large Companies to achieve greater excellence in corporate governance.

 

CARE APPROACH

 

A key feature of the MCCG 2017 is the introduction of the Comprehend, Apply and Report (CARE) approach, and the shift from “comply or explain” to “apply or explain an alternative”.

 

The CARE approach requires a company to clearly identify the thought processes involved 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 has adopted and how this practice achieves the Intended Outcome.

 

In addition, a Large Company which departs from a Practice must disclose the steps that it proposes to take and the time frame required to comply with such Practice.

 

STEPPING UP

 

The MCCG 2017 also includes four enhanced Practices (“Step Ups”), namely limiting the tenure of independent directors to nine years, disclosing the detailed remuneration of each member of its senior management on a named basis, establishing an audit committee that comprise solely of independent directors and a risk management committee that comprise a majority of independent directors.

 

Companies that aspire to achieve excellence in corporate governance in particular, Large Companies, are encouraged to adopt the Step Ups to strengthen their governance practices and processes.

 

BOARD COMPOSITION

 

Board composition influences the ability of the board to fulfill its oversight responsibilities. A board comprising a majority of independent directors from a diverse pool allows greater depth and more effective oversight of management compared to a non-diverse board.

 

Under the superseded MCCG 2012, the board must comprise a majority of independent directors only where the chairman of the board is not an independent director.

 

On the other hand, the MCCG 2017 stipulates that at least half of the board should comprise independent directors. For Large Companies, the board should comprise a majority of independent directors.

 

Although the MCCG 2017 does not define an independent director, it provides that in considering independence, it is necessary to focus not only on whether a director’s background and current activities qualify him as independent but also whether the director can act independently of the management.

 

For listed companies, both the Main Market Listing Requirements and the ACE Market Listing Requirements (collectively “Listing Requirements”) define an “independent director” as “a director who is independent of management and free from any business or other relationship which could interfere with the exercise of independent judgment or the ability to act in the best interests of an applicant or a listed issuer”.

 

APPOINTMENT OF INDEPENDENT DIRECTOR

 

Stakeholders are increasingly concerned about the potential negative impact that directors’ long tenure may have on their independence. The long tenures of independent directors and familiarity may erode the board’s objectivity. Due to long or close relationship between the board and the management, an independent director may be too sympathetic to the management’s interests or too accepting of the management’s work.

 

Under the superseded MCCG 2012, the tenure for an independent director should not exceed a cumulative term limit of nine years. However, after the period of nine years has lapsed, an independent director may continue to serve on the board subject to the director’s re-designation as a non-independent director. If the board intends to retain an independent director in that capacity beyond nine years, it should justify and seek annual shareholders’ approval.

 

The position under the MCCG 2017 is similar except that shareholders’ approval to retain an independent director to continue to serve on the board as an independent director only applies from the ninth until the twelfth year. In this regard, the board should undertake a rigorous review to determine whether the ‘independence’ of the director has been impaired. Findings from the review should be disclosed to the shareholders for them to make an informed decision.

 

The MCCG 2017 requires a company which seeks to retain a person as an independent director after the twelfth year to obtain its shareholders’ approval through a two-tier voting process.

 

TWO-TIER VOTING PROCESS

 

The votes of shareholders under the two-tier voting process for the appointment of an independent director beyond the cumulative period of twelve years are to be cast in the following manner:

 

  • Tier 1: Only the Large Shareholder of the company votes; and
  • Tier 2: Shareholders other than Large Shareholders vote.

 

A “Large Shareholder” is a shareholder who:

 

  • is entitled to exercise, or control the exercise of, not less than 33% of the voting shares in the company;
  • is the largest shareholder of voting shares in the company;
  • has the power to appoint or cause to be appointed a majority of the directors of the company; or
  • has the power to make or cause to be made, decisions in respect of the business or administration of the company, and to give effect to such decisions or cause them to be given effect to.

 

The decision for the resolution is determined based on the vote of Tier 1 and a simple majority of Tier 2. If there is more than one Large Shareholder in Tier 1, a simple majority of votes determine the outcome of the Tier 1 vote. The resolution is deemed carried if both Tier 1 and Tier 2 votes support the resolution. Conversely, the resolution is deemed to be defeated where the votes between the two tiers differ or where Tier 1 voter(s) abstained from voting.

 

Notwithstanding the foregoing, the MCCG 2017 discourages Large Companies from retaining an independent director for more than twelve years.

 

The SC has stated in a FAQ that the two-tier voting process for the appointment of independent directors who have served twelve years will apply to resolutions to be tabled at general meetings after 1 January 2018.

 

LISTING REQUIREMENTS

 

On 14 August 2017, Bursa Malaysia (“Exchange”) issued Consultation Paper No. 3/2017 to seek feedback on the proposed amendments to be made to the Listing Requirements to align them with the MCCG 2017 (“Proposed Amendments”).

 

The Proposed Amendments require a listed company to disclose in its annual report, an overview of the application of the Principles (CG Overview Statement) and the application of each of the Practices (CG Report) during the relevant financial year. A listed company is required to explain any departure from the Practices and to disclose details of the alternative practice which it has adopted and how such practice has achieved the Intended Outcome.

 

It is proposed by the Exchange that the Proposed Amendments are to take effect from financial year ending on or after 31 December 2017.

 

As the consultation period for the Proposed Amendments closed on 11 September 2017, it is possible that the Proposed Amendments may be modified based on the feedback received by the Exchange.

 

CONCLUSION

 

The MCCG 2017 seeks to improve the quality of corporate governance disclosures, and at the same time, promote good corporate governance practices by companies, in particular, listed companies.

 

Excellent corporate governance practices among companies in Malaysia will maintain confidence in the capital market and attract more foreign direct investments (FDIs). According to leading academicians on the subject, excellent corporate practices also often lead to better financial performances and shareholder returns for companies.

 

In line with the SC’s aim towards greater internalisation of good governance culture, the MCCG 2017 emphasises the importance of application in substance of good corporate governance practices, beyond merely a matter of compliance in form with a set of rules. This is a positive move away from a box-ticking approach to a more progressive corporate governance culture for the Malaysian corporate landscape.

 

 

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