Fifth OECD Asian Roundtable on Corporate Governance
Datuk Ali Abdul Kadir
Chairman, Securities Commission, Malaysia
26 March 2003
1. Allow me to add my own warm welcome to the welcome extended to you by Mr. Isaakson of the OECD. I am particularly pleased to see so many of our foreign guests attending this roundtable in Kuala Lumpur given the prevailing international environment. Let me assure all our guests that we have taken the necessary steps to ensure that your stay with us will be safe and even an enjoyable one! In the next three days, we have an excellent opportunity to interact and exchange ideas among ourselves on issues relating to Corporate Governance which are close to our hearts as regulators and practitioners.
Ladies and gentlemen,
2. As business practices converge worldwide, the trend towards convergence in the area of corporate governance standards and practices- such as those evidenced through the OECD Principles on Corporate Governance – is becoming markedly observable across a wider number of jurisdictions. Indeed, the large number of non-member countries, including emerging and transition economies, participating in this and other roundtable dialogues by the OECD are a testament to this. We need to recognize the fact however that any meaningful international exchange on governance reform strategies must take into account the legal, institutional and cultural differences between jurisdictions. In other words, the contextual setting, in this case the regional dimension for corporate governance reform is imperative. In my view, the Fifth Asian Roundtable on Corporate Governance provides a unique opportunity for exactly this type of exchange. From this perspective, each and every participant present will undoubtedly have much to contribute, both to each other and in providing input towards the OECD Corporate Governance White Paper, which I am sure will morph into a useful tool which would contribute to the process of informed policy making.
Ladies and gentlemen,
3. The Malaysian corporate governance reform agenda is broadly consistent with both the spirit and substance of the OECD Principles of Corporate Governance. We agreed on a strategy in 1998 to implement a holistic framework for reforming governance practices in corporate Malaysia, culminating in the publication of the Finance Committee Report on Corporate Governance in 1999, which was in part succeeded by the Malaysian Capital Market Masterplan, released in 2001. Collectively, the two documents provide a blueprint for our reform agenda in this area.
4. The legal and institutional reforms proposed have been founded upon the existing legislative and common law practices that regulate issues such as directors’ duties, insider trading, and the conduct of general meetings. The reforms ranged from the introduction of best practices such as the Malaysian Code on Corporate Governance, to the introduction of stringent exchange requirements regulating key governance issues, with a particular focus aimed at curbing abusive self-dealing, and include key institutional reforms, such as the formation of the Minority Shareholder Watchdog Group and the rationalisation of the regulatory framework for prospectus disclosures in the primary market between the Securities Commission and the Companies Commission. In a further endeavor to ensure that the board of directors is properly aligned with minority shareholder interests, we have introduced a requirement for 1/3 of the board of listed companies to comprise independent directors. Given that the effectiveness of any regulator ultimately depends on the powers, constitution and resources accorded to that body, we have also sought to ensure that regulatory reforms are supported by the necessary investigation and enforcement infrastructure.
5. For Malaysia, the focus of policy in the next stage of corporate governance reform will to galvanize the potential for market-based discipline of corporate conduct. In this regard, the basic building blocks for a strong market-based regulatory model for corporate governance are already swiftly moving into place. A key component of this relates to the quality of disclosure by PLCs. For example, in addition to a stringent continuous disclosure framework, quarterly reporting of financial information was introduced in 1999. Mandatory disclosure in annual reports on compliance with the Code on Corporate Governance was introduced in 2001. In fact, in the primary market, the transition to a full DBR environment for the bond market was achieved in July 2000, and a similar transition for the equity market is well under way.
Ladies and gentlemen,
6. Over the last decade, the emergence of institutional investors as major holders of corporate equity in Asia carries strategic implications for their role as a mechanism for market-led monitoring and discipline. In this country for example, domestic institutional investors control more than a third of the market capitalization of the KLSE – and this figure by the way, does not include securities indirectly held through nominees. Greater shareholder activism through voting and engagement, could potentially be an effective market disciplinary tool in terms of preventing management from pursuing interests other than that of the shareholders. This would also pave the way for other forms of market discipline – such as the impact of voice on share prices and the cost of capital. However, notwithstanding the crucial role they can and should play, the focus of contemporary shareholder activism in Asia reflects a bias towards exit, rather than voice.
7. In recognition of the fact that the portfolio voting power of institutional investors represents an important and yet-to-be-fully-tapped munition in the corporate governance reform arsenal, the SC is proposing the introduction of a set of best practices and standards for institutional investors in order to provide a normative model to assist them in determining their approach towards the corporate governance of investee companies. The SC has also proposed that institutional investors provide disclosure to their investing clientele as to the steps they have taken to ensure that their investee companies comply with applicable standards of corporate governance. Looking ahead, it is not inconceivable that we will see shareholder champions – perhaps even the MSWG begin playing a role in facilitating the building of shareholder coalitions to enhance the effectiveness of the minority shareholder voice.
8. As we seek to develop a market that has a strong culture of self-discipline, the rules on the books are not enough – directors, market professionals and regulators alike must believe that these rules reflect commonly-shared and socially-reinforced values. This is in part contingent on a country’s legal culture and respect for the rule of law. The development of such a culture is, and must be, a dynamic rather than a static process. In Malaysia a strong emphasis has been given to the training and awareness of market participants, not least directors. The introduction of the programme to enhance standards of competency and professionalism for directors of PLCs has largely been a success, with, as at 20 March 2003, some 5,191 directors having undergone training through a total of 59 sessions since the programme’s inception.
9. All of these efforts, taken together will, we believe, lay the foundation for the creation of a more dynamic and effective regulatory regime in general, and for better corporate governance practices in particular.
Ladies and gentlemen,
10. The promotion of policy dialogues amongst regulators and key market participants by the OECD through its successive regional roundtables are to be applauded. I am convinced that the dialogue will play an important role in contributing towards our understanding of present governance practices and in guiding future reform efforts. On behalf of the SC, I welcome all of you once again, and look forward to the forthcoming discussions on the challenges involved in corporate governance reform in Asia. Thank you very much.