|When I was trying to put together my thoughts for this dinner speech just a couple of days ago, my attention was drawn to a book that had been sitting on my desk for quite a while – which together with many others, I had planned to read but never found the time. The book is ‘The Pursuit of Wealth’ by Robert Sobel. It explores and discusses how people have attempted to achieve wealth through the ages – from the traders in ancient Mesopotamia to the Wall Street investment bankers. Thinking that I might find nuggets of wisdom that I could use, I promptly turned to the fairly extensive index pages, I looked up first, transparency. I could not find it. Next I looked up accountability – it was not there either. Well, perhaps these are terms not commonly used in everyday language. So I tried looking for what I thought would be more familiar terms – first integrity then ethics. I could not find these words either. However, I found the word ‘corruption’ – which is used at at least 10 places in the book, ‘The Pursuit of Wealth’.|
|Before I go any further, ladies and gentlemen, let me first thank the organisers for inviting me to give this dinner talk in the distinguished presence of both local and international participants. I must say that I am greatly honoured to be here this evening to speak on issues that are close to my heart and also very much on the agenda of the Securities Commission given our twin statutory mandates of regulating and developing the capital market.|
|In the Epilogue of a recently published book titled Building Public Trust – The Future of Corporate Reporting, Samuel de Piazza Jr. (CEO of PricewaterhouseCoopers) and Robert G. Eccles (President, Advisory Capital Partners) offer three possible future scenarios 10 years post – Enron.|
|Scenario 1 : Disorder|
|It is 10 years after Enron. All efforts to achieve significant and broad reform of corporate reporting have long since foundered. Good ideas and intentions were squandered in a political melee. For this, there was a high price to pay: the capital markets have fragmented into a vast free-for-all. Informed access to global capital has become prohibitively cumbersome and expensive, except for the very few. Companies publish more data than ever on their Web sites, or pages of numbers and text. But the meaning of what they publish has become more impenetrable than ever.|
|The markets have become a global casino, fortunes won and lost on a single roll. The small investor comes into town by bus for the day, spends and likely loses a bit of “mad money”, but no longer feels respected or even wanted. The worst losers form long lines at the courthouse to file suit against any company or audit firm still in business. Accounting and auditing have become commodities sold at only as good as the buyer is willing to pay. Stakeholders? What are stakeholders?|
|Scenario 2 : Bureaucracy|
|It is 10 years after Enron. The regulators are now firmly in charge. The fear of chaos in the capital markets and of flawed corporate reporting proved to be so great that the capital markets gradually became national and regional fortress overseen by powerful agencies whose primary interest is making and enforcing rules. Closed borders prevent access to foreign capital, and investors have no option but to invest at home.|
|The movement of capital, slow and cumbersome, is greeted with suspicion. Rather than accelerating the pace of innovation and new ideas, the markets hold everything back. Conservatism and myriad new rules result in deceleration of growth.|
|Scenario 3 : Transparency|
|It is 10 years after Enron. The future of corporate reporting is now firmly in place. After sharp debate up and down the Corporate Reporting Supply Chain, the Three-Tier Model of Corporate Transparency has become a reality. Investors and all stakeholders have access to a wide variety of software packages for conveniently analysing information. Companies are providing timely and complete information to shareholders and other stakeholders in a way that is easy to understand. Most of the information used by investors is subject to some level of assurance.|
|The independent auditing firms have both the appearance and the reality of practicing at the highest level of professional skill, ethics and independence. Third-party analysis used by investors is prepared in conditions that are free of potential conflicts of interest. As a result, capital is being allocated more efficiently all over the world. As an added benefit, the cost of capital is more realistically priced, and the overall cost of capital has come down. Good transparent companies, no matter where headquartered, have access to capital, and society as a whole benefits from such robust markets.|
|Ladies and gentlemen,|
|Without the foresight of a prophet it is not for me to say which of the above scenarios will prove true for corporate America, ten years after Enron.|
|However, it is almost 6 years since the tsunami of the Asian financial crisis hit our shores. Of course there are fundamental differences between the massive corporate governance failures in the US and the Asian financial crisis. In particular while what I would broadly call ‘corporate governance failures’ were single-handedly responsible for the devastation caused on corporate America, corporate governance failures or weaknesses were contributory causes, which made our corporate sector less prepared for, and less resistant to, the devastating effects of the crisis. That notwithstanding, we bit the bullet and very early on during the crisis unveiled one of the most comprehensive blueprints to enhance our corporate governance framework in the form of the Finance Committee Report on Corporate Governance. But more on that later.|
|My point is close to six years after the onslaught of the Asian financial crisis, we do not have a scenario of disorder. Neither is the capital market paralysed by bureaucracy. I put it to you that we have moved and continue to move surely and steadily some way up the route towards greater accountability and transparency in corporate life.|
|And do not just take my word for it – listen to what our severest critics are now saying. CLSA’s Report on Corporate Governance released in February 2002 gave very high score for Malaysia’s rules and regulations (9 out of 10) and improved scores across all other aspects of corporate governance including enforcement, political/regulatory environment, adoption of international accounting standards and corporate governance culture. A survey of 188 emerging markets by McKinsey (released in July 2002) gave Malaysia the highest score for transparency among 6 emerging markets (others being South Korea, Taiwan, India, Mexico and Turkey) and second highest for Board oversight. A business broadsheet from a neighbouring country noted that “the Malaysian government has also adopted a more market friendly approach to woo investors. As a result, the regulatory authorities have improved standards of disclosure and corporate governance tremendously”. ABN Amro in May 2002 mentioned that “Apart from Korea, Malaysia could be the best regulated and most transparent market in Asia right now.” |
But I digress.
It is not my intention to use the time allotted to me for book reviews or to regurgitate the accolades. As someone deeply involved in these efforts, I will be the first to say that while much has been done, more needs to be done. There is no room for complacency. This is always the challenge with crisis-driven reforms. The momentum for reforms must be sustained even though the crisis has abated and indications of the return of better times are beginning to be felt by all.
Ladies and Gentlemen.
The growing importance of capital markets brought corporate governance issues to the forefront
|Like most jurisdictions we have requirements for corporate accountability and transparency which are as old as company law itself. Company law seeks to protect shareholders and others dealing with the company by requiring companies to disclose certain information regarding their affairs and financial positions. Remedies for misstatements and non-disclosure of information ensure compliance with these provisions.|
|Similarly with accountability. Certain duties are imposed by law on persons involved in the management of companies – particularly the directors. At common law, directors owe their company the fiduciary duties of acting in good faith and exercising skill and care. These duties are supplemented by statutory duties. |
|In fact while certain developed jurisdictions are making a big deal of new laws requiring directors to sign off the accounts, our Companies Act since as early as 1965, if not earlier, requires the accounts laid before a company to be accompanied by a statutory declaration of a director as to the correctness or otherwise of the accounts.|
|These and other core principles of company law remain as valid today as they were in the middle of the last century. But as life gets more complex, so do businesses and ipso facto, the regulations that govern them. |
|As companies requiring capital increasingly look for direct sources of funds, the capital market becomes increasingly important. In fact the efficiency of this market determines the cost of capital that is available to the users. If the cost is prohibitive or if the market is not efficient the users may look for other markets. Ditto the investors. |
|This twin forces of technology and globalisation have set the platform for both users and suppliers of capital around the world to look beyond their own shores for financial resources. Investors will demand and issuers, will be compelled to ensure that their corporate governance standards and practices are benchmarked internationally whether they like it or not. Capital mobility and the availability of information at the touch of a button mean that both investors and issuers will move away from markets that do not measure up to those that do.|
|Indeed, the Asian financial crisis, with its many painful lessons, serves to underscore not only the importance but also the interconnectedness of capital markets in the region. |
|Malaysia has a strong legal and regulatory framework for corporate governance|
|I mentioned crisis-driven reforms and the need to sustain the momentum for such reforms. Lest I be misunderstood let me make it clear that while Malaysia unveiled a comprehensive agenda for corporate governance reform less than 2 years into the Asian crisis, we did not start from zero.|
|Malaysia had inherited a strong common law system together with a corporate law regime that has largely followed developments of other commonwealth jurisdictions. The Malaysian Companies Act 1965 was developed substantially along similar lines to these commonwealth jurisdictions with variations to suit the local circumstances.|
|Because of the strong common law heritage, as I have alluded to earlier, Malaysian companies and securities legislation contain a plethora of provisions designed to create a sound corporate governance framework. |
|Additionally, the listing rules of the exchange have a number of provisions to provide for checks and balances to enhance corporate governance. |
|Efforts to enhance corporate governance began long before the Asian Financial Crisis|
|Ladies and Gentlemen,|
|Good corporate governance has always been on our agenda. Efforts to strengthen aspects of transparency and accountability in corporate life commenced long before the crisis – albeit perhaps in a rather piecemeal manner. For instance, our Listing Rules introduced requirements for independent directors on boards of PLCs, a decade before the crisis – in 1987, and for the establishment of Audit Committees in 1993.|
|In the area of corporate accounting, the Financial Reporting Act 1997 established the Malaysian Accounting Standards Board. The Board has sole statutory authority to issue, approve and review accounting standards for Malaysia while powers to enforce compliance are vested in the relevant agencies like the Central Bank, the SC and the Registrar of Companies. |
|Companies and securities regulations were continuously being reviewed and updated to ensure continued relevance and effectiveness. We had embarked on a phased move from a merit-based system of regulation to a disclosure-based regime since 1995. Laws relating to insider trading had already been modernized making that quantum leap from regulation based on fiduciary relationship to one based on abuse of information that is not generally available. The law also allows an investor or the SC in certain circumstances (on behalf of investors) to claim compensation for loss suffered. Efforts to revamp the Code on Takeovers and Mergers which began in 1996 culminated with the revamped Code being introduced in 1999 requiring higher standards of disclosure and corporate behaviour from those involved in mergers and acquisitions. |
|These efforts were supported by other non-statutory ones like the introduction of a Code of Ethics for Directors by the Registrar of Companies and the establishment of the Malaysian Institute of Corporate Governance. |
|The Finance Committee Report on Corporate Governance and the Capital Market Masterplan|
|Notwithstanding the on-going efforts, the Asian Financial Crisis underscored the need for a holistic approach. Reform efforts which were both comprehensive and pervasive had to be fast-tracked as a result of the financial crisis. In March 1998, the government formed the High Level Finance Committee on Corporate Governance. This Committee comprised very senior government officials, industry captains and heads of professional organisations. They released the Finance Committee Report within a year with more than 70 specific recommendations. |
The key thrusts of the corporate governance reform agenda under the Finance Committee Report are:
- Fair treatment of all shareholders and protection of minority shareholder rights, with particular emphasis on enhancing the rights and remedies of minority shareholders;
- Transparency – through the timely disclosure of adequate, clear and comparable information concerning corporate financial performance, corporate governance and corporate ownership;
- Accountability and independence of the board of directors;
- The promotion of training and education at all levels to ensure that the framework for corporate governance is supported by the necessary human and institutional capital; and
- The strengthening of regulatory enforcement
It’s now almost four years since the Finance Committee Report was released and I am proud to say that a very significant portion of the recommendations have been implemented. Significant achievements include :
The issuance of the Malaysian Code on Corporate Governance. The Code essentially codifies the principles and best practices of good governance and describes the basic standard for corporate governance structures and processes internal to the company. The Code is the product of extensive collaboration between government and industry and represents international best practices, while at the same time tailored to the needs of Malaysian companies.
Extensive amendments have been made to laws, rules and regulations in order to strengthen the regulatory framework. These addressed issues such as the need to improve the accuracy and timeliness of disclosure, the clarification of responsibilities and obligations of major shareholders and the need to raise the efficiency of shareholder redress mechanisms.
Strong and novel measures have been taken to step up the training and education of corporate governance agents at all levels. Firstly, amendments to the KLSE Listing Requirements introduced a new rule requiring the mandatory accreditation and training of directors of listed companies as a prerequisite to listing. This is supplemented by the need to undergo continuing education programmes annually. Additionally, the Malaysian Institute of Corporate Governance (MICG) and other professional bodies have also been proactively supporting and complementing the training and education efforts of the exchanges and regulators in respect of the training of other corporate and capital market constituents.
The Minority Shareholder Watchdog Group has been established as a company limited by guarantee whose members comprise some of the largest institutional funds in the country. Considering its age, I must say the Minority Shareholder Watchdog Group has made its presence felt.
Enforcement efforts have been stepped up, for instance in 2000 out of 17 individuals charged in court by the SC, 7 were directors or principal officers of companies. In 2001, 11 directors or principal officers were charged, mostly for Corporate Governance-type offences. Last year was an even busier year. By the end of the 3rd quarter we had changed 59 individuals, of which 28 were for corporate governance related offences.
|The Finance Committee Report also recommended further changes to securities and company law, including the requirement for auditors to report suspected breaches of securities laws, the codification of key duties of directors and provisions to curb a controlling shareholder’s right to vote in cases involving related party transactions. Implementation of these measures is currently underway.|
|Ladies and Gentlemen,|
The efforts to enhance corporate governance will not end with the implementation of the Finance Committee Report. Going forward the Capital Market Masterplan which was launched by the SC in early 2001 calls for further measures in this area.
By way of background, the Capital Market Masterplan seeks to comprehensively chart the strategic positioning of the Malaysian capital market over the next 10 years. The broad vision of the Masterplan focuses on the development of a highly efficient and internationally competitive capital market, having the ability to meet the country’s basic capital investment needs and which is supported by a strong and facilitative framework. The Masterplan is premised upon the achievement of 6 key objectives that relate to all the key segments of the Malaysian capital market. The 6 objectives are:
- To be the preferred fund-raising centre for Malaysian companies;
- To promote an effective investment management industry and a conducive environment for investors;
- To enhance the competitive position and efficiency of market institutions;
- To develop a strong and competitive environment for intermediation services;
- To ensure a stronger and more facilitative regulatory regime; and
- To establish Malaysia as an international Islamic capital market centre.
In the area of the corporate governance, the Capital Market Masterplan builds upon the momentum built by the Finance Committee Report and further develops the corporate governance reform agenda in a number of key areas including:
- Promotion of shareholder activism through further improving avenues for minority shareholders to exercise and enforce their rights and encouraging greater institutional investor participation in corporate governance and the promotion of shareholder value. This encompasses the raising of standards of investor protection in related party transactions, the introduction of measures such as cumulative voting, statutory derivative actions as well as the possible introduction of statutory civil and criminal remedies for the failure to make timely and accurate continuous disclosures to investors.
- Ensuring high standards of financial reporting and the continuous disclosure of timely, relevant and accurate corporate information to the shareholder to facilitate market discipline and informed investor decision-making. This includes measures to enhance the channels of communication between company and the shareholder and enhancing corporate disclosures in annual reports.
- Further enhancing the awareness of and accountability for the duties and obligations of company directors, financial controllers management and officers, and strengthening the role of auditors of PLCs.
Key Issues and lessons learnt
Ladies and Gentlemen,
|Efforts to enhance transparency and accountability in corporate life is an on-going process. The work is never done. The best practices and standards that we frequently hear about are in fact better practices – there is always room and need for improvement. Each country would have its own experiences with regard to efforts to enhance corporate governance. Some of these experiences may be unique while others may be universal in nature. They may or may not be relevant or appropriate for another country – depending on a whole host of factors such as the legal and institutional framework, the state of development of the capital market, the level of investor awareness and the professionalism of intermediaries.|
|With that all encompassing caveat let me share with you some of the lessons we have learnt in our efforts to enhance corporate governance in Malaysia.|
|First comprehensive and pervasive reforms calls for a mix of top-down and bottom-up approach. This is to ensure political will to implement changes as well as buy-in from the industry. In this regard, the creation of the Finance Committee on Corporate Governance with its high level representation from both government and industry had worked very well for us. Following form there it must be recognised that certain efforts must be driven by government while others can be better done by industry. Reform of laws will obviously be driven by government but Code of Corporate Governance, education and training programmes and promotion of shareholder activism must be led by industry with support from government where needed and appropriate.|
|The next lesson is to ensure there is no regulatory inflation. Laws exist for a purpose and as I have alluded to earlier laws relating to transparency and accountability in corporate life are intended to ensure efficient functioning of the capital market including ensuring investor protection and promotion of investor confidence. Unnecessary rules and regulation will add to the cost of doing business and will even choke entrepreneurship and risk taking – the every engines that drive the corporate sector. Too much regulation also results in a mentality of compliance by box ticking and a culture of ‘loophole mining’!|
|Having said that however, speaking as a regulator, it is incumbent upon me to mention that often the need to raise the standards of what is required by law occurs whenever there is a drop in the standards of ethical conduct. The amount of laws is often inversely proportional to standards of ethical conduct. New laws with higher standards are created to fill the void created by the lack of strong ethical standards. In our Capital Market Masterplan we have articulated that our guiding principle is “No more regulation than necessary”.|
|Another lesson is there must of course be visible and timely enforcement. It is however a fact that the wheels of the criminal justice system can turn rather slowly and enforcement whilst in fact carried out are not seen to be carried out. In this regard, information on enforcement actions taken must be regularly made known to the public. Additionally, the use of civil enforcement mechanisms and administrative sanctions to complement criminal prosecutions must be actively pursued. The role of other enforcers of corporate governance – not just auditors but also institutional investors, providers of credit such as the banks, as well as credit rating agencies must be recognised.|
|The next lesson is summarised in 3 words – Educate, Educate, Educate. And here I am not just referring to directors and management of companies but also professionals like advisers and even institutional and retail shareholders. Education is key to shareholder activism which in itself is an important enforcement mechanism.|
|Another lesson is that while laws are easy to change, mindsets are not. It is trite but true that morality and ethical conduct cannot be prescribed by black letter law. Hence while infringements of legal rules are tried in a court of law, infringements of ethical rules are tried in the court of public opinion. Victory in a court of law provides no guarantee of a victory in the court of public opinion. I am sure we all can think of our own examples of Pyrrhic victories in a court of law. This is so because the requirements imposed by a court of public opinion are often higher than those of a court of law.|
|Ladies and Gentlemen,|
|There is a saying in Malay – “Kerana nila setitik, rosak susu sebelanga” – A drop of dye can destroy the entire pot of milk. In the pursuit of corporate governance reform efforts it must be remembered that corporate governance reputation is easy to lose, difficult to maintain and even more difficult to regain. It is best to ensure there are no bad apples at all but if there are, they must be quickly and decisively dealt with.|
|Finally, we often hear of the cliché ‘walk the talk’ – especially when one has come up with a glossy report and a whole spectrum of recommendations. Indeed we have to. The worth of a report is in the implementation. However, from our experience it is equally important for us to ‘talk our walk’. All good efforts that are being put in place will not be known and appreciated if we ourselves do not tell the world what we are doing. Perhaps being modest about achievements is an Asian trait. Earlier I mentioned the many things that we have had in place prior to the crisis – audit committees, independent directors, independent accounting standards board, quarterly reporting and the like. Most other jurisdictions introduced these post-crisis and made a ‘song and dance’ about them. We did not because these are old news for us. What happened thereafter was that some international analysts and fund managers marked us down for purportedly not having introduced some of these measures. When we actively engaged these people they were pleasantly surprised (and I hope a little embarrassed) to learn that we have had these for a long time.|
|So ladies and gentlemen, of course it is important that we “walk our talk” but it is equally important that we “talk our walk”.|
|Thank you for giving me the opportunity to speak tonight, I hope I have managed to share with you the fact that we had and will continue to walk our talk, and talk our walk.|
Thank you for your attention.