Opening Address
YBhg Datin Zarinah Anwar
Deputy Chief Executive, Securities Commission
at the
Conference on Corporate Governance – Adding Vision to Oversight

1 August 2003
PWTC, Kuala Lumpur

Distinguished speakers and guests, ladies and gentlemen.
First of all, I would like to thank the Boardroom Professionals and the Malaysian Institute of Directors for inviting me to deliver this morning’s opening address of the Corporate Governance conference entitled “Adding vision to oversight”.

Indeed the organising institutions ought to be commended for taking the initiative to highlight the role of the board of directors in ensuring that good corporate governance prevails.

Yesterday you have heard about the strategies for effective governance and control, the responsibilities of directors for risk management, good corporate governance in the public sector and forms of internal control assurance. From the programme, I note that today’s discussions will take you through the corporate governance mechanisms shared between the board and the corporate professionals, the role others like the media can play to promote and enhance good corporate governance, and the means to increase directors’ professionalism in this respect. To set the tone for the day, I would like to speak about The Board of Directors: Performance beyond Compliance.

Corporate Governance
The Asian economic crisis of 1997 -1998 and the financial scandals like Enron, Global Crossings and WorldCom in more recent times have reinforced the fact that no market jurisdiction can be complacent about corporate governance. Indeed the effects of these mis-governances have shown us that weak or ineffective governance procedures do not just create huge potential liabilities for the individual firms but also the market in general and society, collectively. It is because of this that corporate governance issues have become a priority in most jurisdictions and why even the most developed economies have taken steps to review their corporate governance system, such as the Higgs Review in the UK, as well as introducing new regulations such as the Sarbanes-Oxley Act in the USA.

In Malaysia, we have always been aware of the importance of good governance. We recognise that good corporate governance and effective regulation contribute both to the attractiveness of a country in terms of inward investments and business development and also to the efficiency of its capital market, and its effectiveness in the service of the real economy. To this end, Malaysia’s efforts to inculcate good corporate governance were already underway even prior to the Asian crisis, although admittedly the events of 1997/1998 acted as a catalyst to increase the momentum of the corporate governance reform efforts.

As you know, the crisis saw the setting up of a high level Finance Committee comprising of both government and industry to identify the weaknesses in the then governance framework. The Committee set out their recommendations to overcome these weaknesses in the Report on Corporate Governance and proposed a Malaysian Code on Corporate Governance (the Code). Since then, changes have been made and measures have been taken to implement the necessary reforms. The Code was finalised in 2000 and sets out the principles and best practices of corporate governance. The Kuala Lumpur Stock Exchange (KLSE) listing rules today require all public companies to provide a mandatory statement of the extent of compliance with the Code.

Theory vs. reality
The ideals of company law dictate that shareholders are the real owners of the companies; and directors and managers work on behalf of the shareholders to allocate the companies’ resources to optimum use. However, this is not always as straightforward in reality. As Alan Greenspan (Chairman, the Federal Reserve Board, U.S) pointed out recently, in the real world, where companies are big and getting bigger, the vast majority of corporate share ownership is for investment and not to achieve operating control of the company. There is no real de facto shareholder control. Ownership is dispersed and very few shareholders have sufficient stakes to individually influence the choice of boards of directors or chief executive officers.

Worse, in practice, the shareholder is at the mercy of the stewards of the company. Under normal circumstances, it is the management or in particular, the Chief Executive Officer (CEO) that has stewardship of the company – to guide and steer the company according to what he or she perceives to be in the best interest of the shareholders. The shareholders usually perfunctorily endorse the CEO’s decision. For example, the boards of directors who are there to act as internal enforcers of good governance are in the overwhelming majority of cases voted in by the shareholders from the slate proposed by the CEO. The CEO also sets the business strategy of the organisation and strongly influences the choice of the accounting practices that measures the ongoing success or failure of that strategy. External auditors are also normally chosen by the CEO or by an audit committee of CEO-chosen directors. It is this practical reality of centralisation of power that can lead to abuse. This was exemplified clearly in the cases of Enron and Xerox, and here in Malaysia, in the numerous cases of corporate misconduct investigated and prosecuted by the Securities Commission.

In Asia, a prominent feature of the corporate landscape is the predominance of the family-run firms. The practical reality is such that two thirds of listed companies and substantially all private companies are family-run1, which means that the management and the board are family members. There is also an informal nature of stakeholder relations i.e. the principal investors are usually family members or close friends.

While strengths such as entrepreneurship spirit and hard work fostered by the close relationship of the Asian firm with family groups have been the hallmarks of the Asian success, the Asian crisis highlighted the corporate governance concerns resulting from such relationships in terms of creating opportunities for serious conflicts of interest and engendering imprudent risk taking at the expense of minority and public shareholders. Indeed the 1999 APEC Report on Corporate Governance in the aftermath of the economic crisis concluded that the high degree of family ownership in Asian firms was a major contributing factor to the severity of the crisis.

This merely serves to emphasise how important it is for the system to provide real and effective safeguards against the shortcomings of the practical realities of corporate governance. Internal, as well as external, oversight mechanisms are necessary to ensure that there are checks and balances within the framework. Particularly since Enron and Worldcom, the call for high-quality, unbiased and independent auditors playing the role of the external enforcer has been significantly louder. But there has not been enough emphasis on the role of the internal enforcers, i.e. the insiders of the companies such as the board of directors who have a duty to provide strategic leadership for the management, to monitor the reporting systems and to ensure that managers do not overpay or entrench themselves at shareholders expense. In other words, directors must fulfil their mandate as the oversight and supervisory body to ensure that the company meet its obligations to its shareholders.

Board of Directors: Providing oversight
Good corporate governance must simply start in the boardroom. The board must be reminded of its assigned role and what it needs to do to fulfil that role. Directors must be aware that they are there to perform a function and that the privilege of being on a board comes not only with authority, but responsibility and accountability.

Given that a primary objective of the board is to exercise oversight over the management, it is essential for there to be some degree of director independence necessary to evaluate managerial performance. Thus most governance guidelines and codes of best practices require the presence of independent directors on the board.

Independent directors
Independent directors have a crucial role to play – to provide a balanced and independent view to the board. However it is important that these independent directors be of sufficient calibre and numbers for their views to carry significant weight in the board’s decisions.

As the Cadbury Committee observed, non-executive directors have two particular important contributions to make to the governance process as a consequence of their independence from executive responsibility. The first is in reviewing the performance of the board and of the executive. Non-executive directors should be given access to all company’s books and accounts. They should be able to address the strategic aspect of their responsibilities carefully and should ensure that the chairman is aware of their views. If the chairman is also the CEO, board members should look to a senior non-executive director who might be the deputy chairman, as the person to whom they should address any concerns about the combined office of chairman/CEO and its consequences on the effectiveness of the board.

The second is in taking the lead where potential conflicts of interest arise. An important aspect of effective corporate governance is the recognition that the specific interests of the executive management and the wider interests of the company may at times diverge, for example over takeovers, boardroom succession or director’s pay. Independent non-executive directors, whose interests are less directly affected, are well placed to help to resolve such situations.

Because the non-executive directors do not report to the CEO and are not involved in the day-to-day running of the business, they are able to bring fresh perspectives and contribute more objectively in supporting as well as constructively challenging and monitoring, the management team. Recognising the valuable role of the independent director towards good corporate governance, the Malaysian Code on Corporate Governance advocates for one third of the board of listed companies to comprise of independent directors.

‘Independent’ in this context means independent of management and free from any business or other relationship that could interfere with the exercise of independent judgment or the ability to act in the interests of the stakeholders. Like their colleagues, the executive directors, they have a duty to exercise care, skill and diligence.

Unfortunately in many cases, the appointment of independent directors remains one of form over substance. The persistent cases of minority shareholder exploitation demonstrate the failure of independent directors in giving effect to the role and responsibility intended to be discharged by them, either by condoning the wrong of the executive directors or by being unaware of such wrong in the first place.

The role of the independent director should not be underrated. It is demanding, complex and requires skills, experience, integrity and particular behaviours and personal attributes. Independent directors need to be sound in judgment and to have an inquiring mind. They should question intelligently, debate constructively, challenge vigorously and decide dispassionately. And they should listen sensitively to the views of others, inside and outside the board.

One way to ensure that the independent directors fulfil their role is for companies to provide good induction programmes for their independent directors. The induction must set the tone for how the appointment works in practice. Independent directors must be given accurate and precise information about their role as members of the board and an outline of their legal obligations. They should meet the management to send the message to other directors that their role as independent directors is to be taken seriously by the company. They must familiarise themselves with the functional and strategic plans of the company. The company must also provide training where necessary.

Compliance with the law
Standard & Poor’s Company Transparency & Disclosure Survey 2001 indicated that the weak points in the Malaysian corporate governance framework is the “board and management structure and processes”, specifically board composition, directors’ and management’s shareholding, existence of internal audit, and board and management remuneration.

The numerous cases of corporate misconduct that have occurred appear to support this conclusion and raise doubts in the investing public’s minds on the ability and willingness of the board of directors to discharge their fiduciary duties to the company and shareholders. Thus the recently published White Paper on Corporate Governance in Asia have recommended that directors must improve their participation in strategic planning, monitoring of internal control systems and independent review of transactions involving managers, controlling shareholders and other insiders.

Various mechanisms or structures exist to ensure that directors and management act prudently; to use investor’s assets in the best interests of the company; and that substantial shareholders do not abuse their control powers against the interests of minority shareholders of a company. These relate to board structure and composition, the extent of independent participation of boards, the use of board committees, the audit committee and its role in ensuring effective oversight of the audit function, the appointment and removal of directors, the duties and liabilities of directors generally.

At the most basic level, once elected to the board, directors have a fiduciary duty to act in the best interest of the company as a whole. They are elected to use their best judgment for the welfare of the company, which judgment in turn must be independent and unfettered by specific interests.

A director has special obligations to the corporation because he or she occupies a position of trust. The general duty can be divided into two broad categories: a duty to act in good faith, and a duty to act with reasonable care and intelligence.

A director must act in good faith for the benefit of and in the best interests of the corporation as a whole and for a proper purpose. The director must also exercise his/her powers and discretions consistently with the purpose for which the power or discretion is conferred. Although the standard of care and diligence will depend on the particular position of a director such as the office and responsibilities held, the size and nature of the company, the composition of its board and the distribution of work between the board and other officers, as a minimum, all directors are really obliged to:

  • Take reasonable steps to place themselves in a position to monitor the management of the company;

  • Obtain a general understanding of the business and operations of the company and the effect which changing economic circumstances may have on the business of the company and;

  • Understand the company’s financial position.

Directors are also under a continuing obligation to keep themselves informed about the activities of the company to enable them to participate in the overall management of the company’s affairs.

Apart from the general requirements demanded by law, the Code also recommends certain measures to be taken to ensure that the board may fulfil its function as an oversight body, to be independent so that it is capable of adding value in the strategic decision-making process as well as working in an uncompromising manner on behalf of the shareholders. It is because of this that the Code requires directors to undergo prescribed mandatory accreditation training to enhance standards of competency and professionalism and to ensure that the directors appreciate the full extent of their duties, obligations and roles they are expected to perform.

The Malaysian Code of Corporate Governance also encourages the companies to appoint board committees to deal with matters relating to the nomination process, compensation and remuneration of directors and senior management as well as the internal controls and the integrity of the external audit to ensure independence of process.

Performance beyond compliance
As noted earlier, ever since the Asian crises and the subsequent financial debacles, corporate governance has featured prominently on the global reform agenda. There are also more initiatives taken to monitor and survey progress of economies in this area. In this respect, Credit Lyonnaise Securities Asia (CSLA) known for issuing their annual corporate governance survey observed “as more and more companies and economies get feedback on their low score, there has been a greater effort for them to present the right face and to browbeat analysts into giving them higher scores.” It was also commented that much of these changes are in form and that the substance behind these changes is impossible to determine.

This is accentuated by the findings of the ACCA in its November 2002 Report on Corporate Governance which found that while 90% of boards in Kuala Lumpur, Hong Kong and Singapore have discussed financial reporting and disclosure, only 50% have carried out formal reviews of their corporate governance practices and even then the reviews tended to focus on disclosure and compliance rather than on enhancing transparency.

The point has to made and emphasised that the test of good corporate governance is not in compliance with the law. It is beyond that; it is about what is right, it is about ethics, about high individual and collective standards, and a high degree of personal and collective responsibility. It is all about having the right mindset and the need for performance beyond mere compliance.

For example, regulators may be able to legislate and provide laws to ensure independence based on proximity and relationship, but we cannot regulate independence concerning the mindset. Therein lies the biggest challenge: to prevent or in some cases, overcome the “board capture” culture whereby directors (even independent ones) become beholden to the company or its current CEO in ways too subtle that it cannot be captured in customary or legislative definitions of “independence”.

Without this ‘independence” the board of directors would have failed to fulfil their role as the internal enforcer, the supervisory mechanism for good corporate governance. They will also not have an effective oversight role over the operations of the business. They would not be able to carry out their duties and responsibilities to monitor, measure, and reward or penalise management’s performance as required.

The solution to such a problem can only be one thing – ethics. Ethics play a crucial role as a guide to proper and honest behaviour. Being ethical and complying with the law is not the same thing. Ethics is beyond law. Law does not and cannot specify all that is ethical for acting ethically requires freedom of choice. This freedom of choice encompasses not only ‘not doing the wrong thing’ but also doing the ‘right thing’.

Thus, if the pervading corporate culture is one that inculcates and encourages integrity and ethical behaviour, the risk of transgressions would not be a real one. Ethical behaviour would shift the emphasis from doing things right (compliance) to doing the right things (performance). Compliance is targeted at meeting the basic legal requirements but performance on the other hand, goes beyond that – to act and perform accordingly because it is the right thing to do. This is what is required to ensure good corporate governance and must be practised by all market participants be it at the micro as well as the macro level. Companies must promote systems which align profit-making activity with ethics. Captains of industry must demonstrate ethical leadership through example and ensure that the culture to do the right thing permeates the environment to such an extent that it becomes the natural thing to do. In this respect, those who are elected to sit on boards would be in the prime position to lead the way, to demonstrate strong ethical standards and discharge their duties and obligations to the stakeholders and the society they operate in.

Ladies and gentlemen, I thank you.


1OECD White Paper on Corporate Governance in Asia June 2003