LEGAL & INSTITUTIONAL DEVELOPMENTS – KEY IMPLEMENTATION MILESTONES
This section identifies key implementation milestones for the development of the legal and institutional framework for corporate governance, as recommended/ highlighted by the Finance Committee in its Report on Corporate Governance and the Capital Market Masterplan (CMP).
Foundations for Strong Corporate Governance Framework in Malaysia
The reforms recommended by the Finance Committee Report and the CMP re-affirm and complement existing corporate governance enhancing structures. The recommendations build on the existing statutory and common law framework for corporate governance already in place, governing, inter alia, directors' duties, shareholder rights and redress mechanisms, internal control structures and corporate transparency and disclosure.
Key characteristics of the framework which form the foundational basis for the recommended reforms are highlighted below –
- Company and securities law entrenches key corporate governance requirements – Principal requirements governing corporate governance practices, including corporate financial disclosure, directors duties and liabilities and shareholder rights have been entrenched both in company legislation and more broadly, in the common law (for example, the one-share-one-vote rule and requirements governing the duties and responsibilities of d irectors'– including their duties over financial statements – have been incorporated in the Companies Act since 1965).
Securities law provides clear rules governing market manipulation, false and misleading disclosures, insider trading, compliance with the accounting standards prescribed by the Malaysian Accounting Standards Board as well as transparency of ownership. The last of these characteristics was achieved through amendments to securities legislation in 1998 to prohibit persons from hiding behind nominees through the introduction of the concept of an authorised nominee;
- Framework for corporate governance under the exchange listing requirements – The exchange listing requirements provided strong foundations for subsequent corporate governance reforms. In the area of corporate disclosure and transparency, this includes the existence of strong rules and clear structures governing periodic and continuous corporate disclosure. In the area of rules governing board composition and structures, regionally, the exchange has been recognized as an early adopter of key corporate governance enhancing mechanisms, including the early incorporation of rules governing independent directors (since 1987) and audit committees (since 1993); and
- Accounting standards and regulation – The Accountants' Act provided for the registration of accountants and the establishment of the Malaysian Institute of Accountants in 1967 to facilitate the self-regulation of the accounting profession. The Financial Reporting Act established the Malaysian Accounting Standards Board in 1997, one of the first of such independent standard-setting bodies in Asia. MASB standards broadly reflect international accounting standards and are mandated by law, covering both listed and non-listed companies .
Implementation Milestones
 * click image to enlarge *Based on matters reccomended/highlighted by the Finance Committee Report on Corporate Governance and the CMP |
Rules and Regulations
July 1998: Listing requirements strengthens rules on related party transactionsFol lowing a number of widely reported abuses by controlling shareholders in related party transactions, the SC and the Bursa Malaysia in July 1998 introduced revisions to Rule 118 of the exchange listing requirements which inter alia, requires a company to appoint an independent corporate advisor to advise the minority shareholders of the company as to fairness and reasonableness of a transaction.
The amended listing requirements clearly prevent directors, substantial shareholders and connected persons with such directors or substantial shareholders, from voting on any resolution on the related interested party transaction.
See related press release for further details.
January 1999: Revamp of Malaysian Code on Takeovers and Mergers
The revamped Malaysian Code on Takeovers and Mergers was amended (effective 1 st January 1999) to require higher standards of corporate disclosure and behaviour from those involved in mergers and acquisitions, based on international best practice.
It seeks sought to ensure that minority shareholders are afforded with a fair opportunity to consider the merits of an offer in deciding whether they should retain or dispose of their shares in the context of a general offer pursuant to the Code.
See related press release for further details.
August 1999: Exchange Listing Requirements Mandate Quarterly Reporting
The exchange listing requirements were amended to require quarterly reporting of financial information (effective August 1999), prepared in accordance with approved accounting standards of the Malaysian Accounting Standards Board.
Quarterly reports must now include the income statement, balance sheet, cash flow statement and explanatory notes. Immediate and periodic disclosures of listed companies, including the provision of current and historical data, are available to the market through KLSE-Link, an internet information repository operated by the exchange.
December 1999: Policies and Guidelines on Issue/Offer of Securities amended to facilitate equity participation by independent directors
One of the means to encourage independent or non-executive participation on the board of listed companies is to ensure that the regulatory framework is facilitative of equity participation by such directors. In line with this, amendments to the SC Policies and Guidelines on Issue/Offer of Securities (released December 1999) had inter alia, outlined the regulatory framework for this activity. See related press release for further details.
A related note in this context is that the exchange listing requirements now require at least 1/3 rd of the board to comprise of independent directors (amendments released January 2001). References to information on current practices of listed companies in relation to board balance and the extent of non-executive or independent participation on corporate boards is available here.
July 2000: Amendments to securities law to harmonise regime for regulation of prospectuses
In the move towards greater coherence and rationalisation of the regulatory framework governing listed companies, measures were taken by the SC and the Registrar of Companies (the functions of the Registrar of Companies have now been subsumed in the Companies Commission) to simplify and rationalise the regulatory regime for prospectuses.
The Securities Commission (Amendment) Act 2000 which came into force on 1 July 2000 effectively delineated and streamlined the responsibilities of the SC and the Registrar of Companies in the area of prospectus regulation, resulting in greater legal and regulatory certainty and provided the foundation for more rigorous and effective regulation in this area.
See related press release for further details.
January 2001: Major revamp of Exchange Listing Requirements
The revamped exchange KLSE Listing Requirements, released on 22 January 2001 is widely recognised as a major milestone in Malaysian corporate governance reform. Its release marked the successful implementation of a significant component of the recommendations in the Finance Committee Report on Corporate Governance.A key focus of the revamped listing requirements was the enhancement of standards of corporate governance and investor protection amongst listed companies through the introduction of new provisions and the strengthening of existing provisions in key aspects of regulation, including corporate disclosure and reporting, internal controls, directors rights and obligations and the general protection of minority shareholders interests.
Noteworthy highlights arising from the revamp include –
- New rules relating to disclosures on the extent to which companies comply with the Malaysian Code on Corporate Governance;
- New rules relating to board composition and the requirement that 1/3 rd of the board be comprised of independent directors;
- New rules relating to the enhancement of the composition, role and function of audit committees. This reform builds on the pre-existing mandatory requirement for listed companies to establish audit committees which was introduced in 1993;
- New rules requiring the mandatory accreditation of all directors of public listed companies (PLCs);
- New rules relating to disclosure by directors reporting on the state of internal controls;
- Enhancement of existing rules on related party transactions; and
- Clarification and streamlining of existing rules on exchange's corporate disclosure policy in relation to both immediate and periodic reporting. Notably, the obligation imposed on listed companies to ensure information submitted to the exchange is accurate, clear and unambiguous has been extended to both the directors and corporate advisors of listed companies.
See related press release for further details.
Download the revamped exchange listing requirements and subsequent practice notes issued pursuant to the revamp.
April 2003: SC introduces merit demerit incentives in Policies and Guidelines on Issue/Offer of Securities
The Finance Committee Report on Corporate Governance had broadly supported the concept of employing non-penal incentive structures to persuasively compel listed companies to take cognisance of the need to address corporate governance issues.
Consonant with this, the SC's revised Polices and Guidelines on Issue/Offer of Securities (released on 1 April 2003) intrinsically incorporate incentive structures of this nature within its framework. In application, the framework broadly facilitates speedier approval by the SC of corporate proposals by companies which have a good track record in terms of corporate conduct.
See relevant press release for further details.
Download the SC Polices and Guidelines on Issue/Offer of Securities.
January 2004: Amendments to securities laws introduce Provisions Governing Whistle Blowing
In January 2004, amendments to the Securities Industry Act 1983 came into effect which introduce novel whistle blowing provisions into securities law. The two key components of the whistle blowing provisions include –
- Mandatory duty for auditors to report to the relevant authorities breaches of securities laws and listing requirements. This requirement supplements existing requirements in the Companies Act imposing a similar duty on auditors to report to the relevant authorities breaches of company law; and
- Protection against retaliation for specific categories of persons, namely chief executive officers, company secretaries, internal auditors and chief financial officers who report to the authorities on company wrongs. The protection against retaliation includes protection against discharge, discrimination, demotion and suspension by the company on the whistle blower.
January 2004: Amendments to the securities laws enhance enforcement / investor redress mechanisms
Pursuant to the demutualisation of the Bursa Malaysia, the Securities Industry Act 1983 was amended to grant the SC an enhanced range of sanctions that it can impose for breach of, inter alia , the exchange listing requirements. The range of sanctions include pecuniary penalties (not exceeding RM1 million), reprimands, directions for compliance , and directions to remedy or mitigate the effect of the breach, including the power to direct the making of restitution to any persons aggrieved by such breach.
Provisions were also introduced to enhance investor avenues for judicial redress in the case of contraventions of, inter alia, the Securities Industry Act 1983 or the exchange listing requirements through provisions which now enable aggrieved persons to seek a wide range of orders by applying to the High Court, including an order restraining the breach of a relevant requirement and orders for the purpose of remedying or mitigating the effect of the contravention, including the making of restitution to any persons aggrieved by such breach. This development is in line with the general effort by the SC to broaden avenues for private enforcement by the market and strengthens the ability of the regulatory framework to facilitate stronger and more effective market-based regulation.
January 2005: Review of PN4 and PN10 Framework to Enhance Quality of Listed Companies
Bursa Malaysia reviewed the framework for Practice Note No.4/2001 (PN4) and Practice Note No.10 (PN10) by amending its Listing Requirements and Practice Notes (the "said amendments"). The said amendments, which took effect from 3 January 2005, are a key effort to further improve and strengthen the quality of companies listed on the exchange and are aimed at expediting the time taken by listed companies with unsatisfactory financial condition and the level of operations, to regularize their condition. The said amendments also help to further instill the practice of good governance by necessitating listed companies to be continuously conscious of the need to monitor the management of their affairs effectively, so as to avoid triggering the relevant prescribed criteria that may lead to suspension and de-listing.
The previous framework under PN4 and PN10 was introduced in 2001 to ensure that sufficient disclosure was made about listed companies that were financially distressed or had inadequate level of operations and to ensure that such companies took steps to expeditiously restructure to address their unsatisfactory condition. The PN4 and PN10 framework had served its objectives well, but given the improvements in the economic conditions and Bursa Malaysia's intention to continuously enhance the qualities of companies listed on the exchange, the enhancements made via the said amendments are timely and necessary.
Under the new framework, listed companies with unsatisfactory financial condition and level of operations (other than cash companies) will have 8 months to submit their regularization plans to the relevant authorities for approval, failing which their securities will automatically be suspended within the prescribed time period and de-listing procedures will be undertaken against such companies. The new framework also provides that cash companies are subjected to requirements set out in PN10 but in addition, such companies are given 12 months to submit their regularization plans to the relevant authorities for approval, failing which they may be suspended or de-listed.
The new framework applies to listed companies that trigger the prescribed criteria after 3 January 2005. For existing PN4 and PN10 companies however, the requirements under the previous framework will continue to apply. Bursa Malaysia will be adopting a stricter stance when considering any applications for extension of time from existing PN4 or PN10 companies whereby companies making such applications must demonstrate that significant progress has been made by them in their endeavours for regularization and that completion of the relevant obligation, for which they require more time, is imminent. Such listed companies will also be required to keep the market informed of their regularization efforts through announcements upon compliance or non-compliance with the prescribed obligations.
March 2005: Listing of Bursa Malaysia
In line with the recommendations made in the Capital Market Masterplan, Bursa Malaysia Berhad was listed on the Main Board of Bursa Malaysia Securities Berhad on 18 March 2005. The listing exercise is aimed at enhancing both the profile of Bursa Malaysia as a competitive global exchange and the competitiveness of the Malaysian capital market. The listing is also geared towards instilling greater discipline in enhancing transparency and efficiency at the exchange.
September 2005 : Guidelines on Corporate Governance for Licensed Institutions issued by Bank Negara Malaysia
As part of the ongoing efforts towards enhancing corporate governance among licensed institutions, the revised Guidelines on Corporate Governance for Licensed Institutions (the revised Guidelines) was issued in September 2005. The primary objective of the revised Guidelines is to promote the adoption of effective and high standards of corporate governance practices by licensed institutions and bank/finance holding companies. The revised Guidelines prescribe broad principles and minimum standards as well as specific requirements for sound corporate governance, which licensed institutions and bank/financial holding companies are expected to adopt.
The revised Guidelines are formulated on the fundamental concepts of responsibility, accountability and transparency, with greater emphasis on the role of the board and management. Amongst the key elements of the revised Guidelines include the requirement on the separation between shareholders and management, a clear separation between the roles of Chairman and Chief Executive Officer, enhances role and composition if independent directions, establishment of board committee (i.e Nominating Committee, Remuneration Committee and Risk Management Committee), limited vetting for the appointment of Deputy Chief Executive Officer / Chief Finance Officer (or other key positions) of licensed institutions and limitation on the number of Executive Directors on the board.
October 2005 : SC revises Prospectus Guidelines
In order to further expedite the processing of corporate proposals and to boost the efficiency of raising funds in the Malaysian capital market, the SC has revised it Prospectus Guidelines to facilitate the shift from a pre- to post-vetting prospectus registration regime.
The key objectives of the revisions to the Prospectus Guidelines are as follows:-
- Alignment with international best practice standards
- Addressing market trends
- Improving investor decision making
- Simplifying disclosure requirements
With the post-vetting regime, compliance and enforcement operations will be strengthened to address defective disclosures to enhance investor protection through improved market discipline.
This new regime is in line with SC’s move towards an enhanced disclosure-based regulation regime that expects higher standards of disclosure, due diligence and corporate governance.
Institutional Reforms :-
October 2005: Formation of Institutional Shareholders’ Pro Tem Committee
The Institutional Shareholders’ Pro Tem Committee (the Committee) was formed to make recommendations and decide on best practices and standards for Institutional Shareholders, in improving transparency and accountability and enhancing the efficiency and competitiveness of the capital market. This is in line with the Committee’s approach to promoting corporate governance.
The Committee members consist of representatives from various institutions and associations and the Minority Shareholder Watchdog Group acts as the secretariat for the Committee.
Development of Codes of Conduct and Industry Best Practices
March 2000: Malaysian Code on Corporate Governance introduced
The Malaysian Code on Corporate Governance, released in March 2000, provides a set of principles and best practices for companies on corporate governance. The Code is the product of an industry-led working group, established under the auspices of the Finance Committee on Corporate Governance. The revamped exchange Listing Requirements (issued on 22 January 2001) brought the Code into full effect by requiring mandatory disclosures on the state of compliance with the Code by listed companies. The hybrid nature of this approach towards corporate governance regulation is similar to the approach currently employed in relation to the Combined Code on Corporate Governance (United Kingdom), and broadly reflects the objective of the Finance Committee on Corporate Governance in seeking to balance regulatory flexibility and business efficacy with the clear need to strengthen corporate governance practices in the country.
Download the Code.
November 2000: Best Practices published by the Malaysian Association of the Institute of Chartered Secretaries and Administrators
Consistent with the policy direction of the Finance Committee Report on Corporate Governance, the Malaysian Association of the Institute of Chartered Secretaries and Administrators had published the best practice guides entitled “A Guide to Annual General Meetings” and “The Company Secretary: A Reference Kit” in November 2002. Both publications contribute towards the growing body of industry guidance material available dealing in substance with improving the quality of corporate governance amongst listed companies. Further information on procuring the documents can be obtained from Malaysian Association of the Institute of Chartered Secretaries and Administrators.
February 2001: Taskforce on Internal Control Issues Guidance for Directors on the Annual Report Statement of Internal Controls
The revamped exchange listing requirements (released January 2001) require the board to make an annual report statement on the state of internal controls of the listed company as a group. In line with this mandatory disclosure requirement and in order to enhance the quality of such disclosures, the guidance entitled “Statement On Internal Control: Guidance for Directors of Public Listed Companies” was issued by the Taskforce on Internal Controls.
In developing the guidance, the Taskforce took note of the recommendations of the Turnbull Report (the guidance issued to directors of companies listed on the London Stock Exchange), the Committee of Sponsoring Organizations of the Treadway Commission, the Basle Committee on Banking Supervision and the International Standards on Auditing as adopted by the Malaysian Institute of Accountants and the Malaysian Institute of Certified Public Accountants.
See relevant press release for further details. Download the “Statement On Internal Control: Guidance for Directors of Public Listed Companies”.
August 2002: Institute of Internal Auditors released Guidelines on the Internal Audit Function
The Institute of Internal Auditors Malaysia released in August 2002 a set of guidelines to assist the boards of directors of public-listed companies in the effective discharge of their responsibilities in relation to the establishment of internal audit functions and to facilitate the benchmarking of domestic practices with internationally-accepted best practices and standards in this area. The Guidelines on Internal Audit Function were formulated by an industry taskforce, supported by the Securities Commission and the exchange. The document is available for purchase from the Institute of Internal Auditors Malaysia.
August 2004: Best Practices in Corporate Disclosures
On 20 August 2004, the Taskforce on Corporate Disclosures Best Practices , which was established by the stock exchange and consisted of representatives from the industry, launched its guidance entitled "Best Practices in Corporate Disclosure". The said guidance sets out best practices that are aimed at assisting and guiding listed companies in meeting both the letter and the spirit of the continuous disclosure obligations under the exchange Listing Requirements and Malaysian securities laws.
Download here the "Best Practices in Corporate Disclosures"
August 2000: Minority Shareholder Watchdog Group formed
The independent Minority Shareholder Watchdog Group (MSWG) was established in August 2000 following the recommendation of the Finance Committee Report on Corporate Governance. Recognising the role of institutional investors as key governance agents, the raison d'être for the MSWG was to encourage independent and proactive shareholder participation in listed companies by harnessing the ability of large albeit minority institutional investors to monitor and effect change in listed companies.
The MSWG is a company limited by guarantee and its members represent the largest institutional funds in the country (i.e., the Employees Provident Fund, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji, Pertubuhan Keselamatan Sosial and Permodalan Nasional Berhad).
Among MSWG's key objectives are to become the think-tank and resource centre for minority shareholders, to influence the decision-making processes in listed companies, to recommend action against the management of listed companies by aggrieved minority shareholders, and to continuously monitor listed companies for breaches and non-adherence to good corporate governance practices that are detrimental to the rights and legitimate interests of its minority shareholders. The group seeks to act as a mechanism for collective action for its members in proxy voting on their behalf at companies' annual general meetings and extraordinary general meetings.
In recognition of its advisorial role investors, the SC granted an investment adviser's licence to MSWG on 4 March 2002. In fulfilling its commitment towards the MSWG ideal, on 10 April 2002, the SC disbursed a grant of RM250,000 to assist MSWG in its setup cost.
April 2001 Onwards: Education and Training of Directors pursuant to Bursa Malaysia's Listing Requirements.
A crucial aspect of efforts to improve corporate governance standards involve the training and education of directors. Because corporate governance extends beyond the mere promulgation of rules, into the realm of culture and shared values, it was thought necessary to influence corporate thinking on governance issues at the appropriate intellectual and pedagogical levels.
The revamped exchange requirements (released 22 January 2001) requires all directors of listed companies to undergo continuous training to equip themselves for the effective performance of their duties as directors and to attend such programmes as may be prescribed by the exchange from time to time.
In 2001, the exchange required all directors of listed companies to attend the Mandatory Accreditation Programme (MAP) which seeks to equip directors with a broad knowledge and understanding of various provisions, rules and regulations that would help enhance the effectiveness of the directors in discharging their duties.
At the initial phase, in July 2003, directors of listed companies were also required to attend the Continuing Education Programme (CEP) which was made compulsory for 2 years i.e. in 2003 and 2004. CEP created greater awareness on the importance of continuing training and skill enhancements for directors and promoted a culture of continuous learning and training. However, from 1 January 2005 onwards, the board of directors of listed companies will undertake the onus of evaluating and determining the specific and continuous training needs for their directors on a regular basis. As such, instead of accumulating points under the CEP, directors will be required to attend such training as may be determined by their boards of directors. More importantly under this framework, listed companies must disclose whether their directors have attended training in the annual reports issued for financial year ending on or after 31 December 2005.
