Keynote Address


YBhg Dato Dr Nik Ramlah Mahmood
Managing Director, Securities Commission 

at the

MSWG Seminar on Promoting the Corporate Governance Agenda-Raising the Bar

25th March 2010

Yang Berbahagia Tan Sri Halim Ali, Chairman, Minority Shareholder Watchdog Group,
Yang Berusaha Puan Rita Benoy Bushon, Chief Executive Officer, Minority Shareholder Watchdog Group,

Distinguished guests, ladies and gentlemen,

Assalamualaikum Warahmatullahi Wabarakatuh and good morning


Let me begin by congratulating the Minority Shareholder Watchdog Group (MSWG) for organizing this seminar on “Promoting the Corporate Governance Agenda – Raising the Bar.” It is heartening to note that a corporate governance event like this is no longer focused merely on raising awareness or ensuring compliance. In looking at “Raising the Bar” there is clear recognition first, that previous thresholds may not be high enough and that they have been substantially met, and second, that corporate Malaysia can and must move up the corporate governance trajectory in order to move forward. It also reaffirms the fact that work on improving CG standards is never done. I am therefore deeply honoured to be invited to deliver a keynote address at this very significant event.


How does one raise the Corporate Governance bar in Malaysia? There are of course several ways to do so but I will not be surprised if the first thing that comes to people’s mind is raising the regulatory bar. Regulators can exercise their license to regulate by introducing more laws and prescribing more requirements. Those affected will have no choice but to cross the raised bar or risk action being taken against them. The bar can also be raised by the regulator making it more difficult for companies to access the public market for financing. Listing rules can be changed to allow only the bluest of blue chip companies to be listed while guidelines for the raising of corporate bonds can be similarly tightened. Simply put, any number of regulatory prescriptions can be introduced in the name of raising the corporate governance bar.


Let me however assure you that introducing more laws is NOT the regulators’ default mode, although some people may want to believe so. It is true that raising (or tweaking) the regulatory bar may be inevitable in some instances, such as when there is blatant disregard of laws and widespread abuses, or where loopholes are being persistently exploited to the detriment of other parties. After all, to be useful laws must be kept relevant at all times.


The capital markets as we are aware, exist for the purpose of intermediating between those with capital and those needing capital, thus serving as an important engine for the country’s economic growth. While clearly the objectives of investor protection and ensuring fair and orderly markets require capital markets to be regulated, inappropriate and unnecessary regulation will make this engine of growth less efficient. Furthermore, as capital these days is extremely mobile and knows no national loyalties – it can very easily move to other markets that have less regulatory impediments. Hence raising the bar through prescriptive regulatory means, whilst occasionally necessary, is not the ideal solution. We must move away from a paradigm that sees more regulation as the solution to all our woes.


As I have observed in my previous speeches, the amount of regulation and prescription needed is always inversely proportional to the standards of conduct, morality and integrity of those that the law seeks to regulate. The higher the standards of conduct, morality and integrity, the less need for the former. It is human behavior that determines the amount of regulation that a society is subject too. Hence the tool of regulation to raise the bar should be only very sparingly used – when necessitated by the need to protect investors and to ensure fair and orderly markets. Even so we must always be mindful that we do not use the proverbial hammer to kill a fly. 


The second way we can raise the bar is of course by more vigorously enforcing existing laws and regulations. This is critical as laws which are not being enforced cannot influence or change human behavior. And I can assure you that this is being done. In fact we are determined to do more in this regard. Over the years, the SC has invested more time, effort and resources for our enforcement functions generally and specifically for pursuing corporate governance-type transgressions. In 2009, the SC brought criminal charges against four individuals (including an auditor) who submitted or were involved in submitting false financial information to the SC. We also charged two other individuals for their role in defrauding a PLC. Additionally, in using the wide range of enforcement tools that we have, we had also taken administrative action in 56 cases and imposed administrative fines totaling RM770,000. These administrative actions were taken against PLCs, their substantial shareholders, intermediaries and professional advisers. Bursa Malaysia, as the front-line regulator, has also been taking action against directors and PLCs for breaches of the Listing Requirements. In 2009, Bursa meted out 308 sanctions against 34 listed issuers and 76 directors, imposing fines totaling in excess of RM2.7 million. I can assure you that these enforcement efforts will continue to be pursued with vigour and determination.


In fact to enable us to pursue enforcement actions for corporate governance transgressions more effectively, the SC has introduced two very significant amendments to the Capital Markets and Services Act. A new Section 317A now empowers the SC to take action against those causing wrongful loss to a PLC while amendments to Section 320 make it an offence to influence persons preparing or auditing financial statements of listed companies. Amendments have also been introduced to make it an offence to falsify or destroy the accounting records of a listed corporation. These provisions are expected to come into force next month and it is our intention to make full use of these new provisions.


But enforcement of laws, whilst absolutely vital, cannot in itself raise the bar for corporate governance. After all enforcement is ex-post and enforcers can only take action against the wrongdoers after the damage is done. Enforcement actions are therefore inevitably and rightly seen as reactive. Furthermore enforcement takes considerable time and effort and court-based enforcement actions are of course subject to the rules and processes of the court and can and often do, take even longer. Furthermore while criminal actions as well as the imposition of administrative fines and other sanctions are intended to punish and deter wrongdoers, such actions will not provide restitution to the parties that have been wronged. Civil action on the other hand will allow such restitution but may then be viewed as letting off the culprits lightly.  


More importantly, enforcement action can only be taken when there are breaches of the laws and regulations. Mere observance with the laws and regulations however is not enough to foster good governance because good governance demands more than compliance with the minimum standards imposed by law. It is for this reason that in many countries, Malaysia included, laws are complemented by voluntary codes, best practices and guidelines. These impose standards of expected conduct that are higher than the minimum imposed by law. Through disclosure requirements, PLCs are required to disclose their level of compliance with these higher standards. While undeniably there have been many corporate governance transgressions that involve blatant disregard of the law (for which action enforcement action have and will be taken) many of our corporate governance-related problems involve those whose conduct are often on the brink of legality, those who make it a habit of pushing, stretching and testing the limits of what is lawful; those who choose to focus on the black letter rather than the spirit and substance of the law.  


How else then can the corporate governance bar be raised? The answer lies in the participants within the capital markets themselves. The corporate governance bar can be raised by every constituent within the capital market doing not merely what is legally required but also what is morally and ethically correct. There must be a consensus among PLCs, their directors, principal officers, advisers and professionals to move away from living dangerously on the brink of legality. To effectively raise the corporate governance bar, they must all move beyond merely doing things right; instead they must do the right things. It is about oiling the basic legal requirements with high doses of ethics, integrity and morality. It is about going beyond the black letter to the spirit and substance of the law; it is about compliance with the form and substance of the requirements. It is about recognizing that the law merely imposes minimum standards of conduct and behavior. It is about bringing an end to the culture of living on the brink of legality. 


Is corporate Malaysia ready for this? My answer is yes, many PLCs are already adopting standards and best practices beyond the minimum imposed by law. This is evident from the Securities Commission’s own findings as well from the MSWG’s 2009 Corporate Governance Index and Findings. There are also PLCs who continue to win one CG award after another on a yearly basis. Of course there is also a significant number of other PLCs that will need to move up a steeper curve. And for these companies, this is not an option – they have to lift their standards if they want to remain on the radar screen of investors.


As you are aware, Malaysia was the first country in the region to introduce a Corporate Governance Code in 2000. In 2007 revisions were made to our Code to improve the standards of corporate governance especially in the areas of board quality by putting in place the criteria for qualification of directors and strengthening the audit committee, as well as mandating the internal audit function of PLCs.


The MSWG has initiated and published the Malaysian Corporate Governance Report 2009 – Index and Findings. This useful survey gauged the level of adherence by PLCs to the Listing Requirements and CG Code based on their disclosures. Most of us, I assume are familiar with the findings which basically underscore what I have said earlier.


The SC has more recently completed an extensive review of all PLCs as part of our on-going regulatory efforts to enhance corporate governance standards. Our review has shown that some PLCs have indeed already adopted best governance practices and have moved beyond merely complying with the minimum standards required by the law or the CG Code.


For instance while the Listing Requirements stipulate that 1/3 of directors in a PLC must be Independent non-executive directors, there are 33 PLCS that have all (100%) non-executive directors on their board. Furthermore, 97% of all PLCs had established internal audit functions before this became a legal requirement in January last year. While Risk Committees are not mandated, 40% of PLCs on the Main Market have established such committee. Out of 688 companies that have the positions of Chairman and CEO held by two individuals, 585 or 85% ensured that these are held by individuals with no familial relationship. Even as more developed jurisdictions argue about giving shareholders a say on pay, one Malaysian PLC last year asked shareholders to vote on directors’ remuneration. 


These findings show that Malaysian PLCs are capable of moving beyond meeting compliance requirements and towards higher governance standards through the adoption of their own best practices.


Having shared with you our findings about “The Good”, it is only fair that I also share with you our findings with respect to the “not-so-good” or “The Bad”. These findings provide excellent examples of compliance with form rather than the substance and spirit of the laws and the Code. These findings were first made public by Chairman Tan Sri Zarinah last week when we released our 2009 Annual Report.


First, on Independent directors. Our findings show that a significant number of PLCs have independent directors who are related to each other. This raises concerns about the ability of independent directors to discharge their responsibilities effectively. Additionally, while a large majority of PLCs comply with the requirement to have one-third independent directors, more than 40% of these companies have independent directors with tenures exceeding nine years. Some 20 PLCs have independent directors with tenures exceeding 30 years. Boards cannot disregard the risk that independence may be undermined by long tenure.


Second, the relationship between chairman and CEO. While around three quarters of PLCs separate the role of the chairman and CEO, in many instances the chairman and the CEO are related – with the two positions being held by spouses, siblings or parent and son or daughter. This nullifies the benefits of having dual roles on the Board.


Third, a sizeable number of executive directors on boards. The independence of the Board may also be compromised by large numbers of executive directors. In our review, we observed that one quarter of all PLCs have more than 3 executive directors on the board and, in some instances, more than half the Board comprises executive directors. Additionally, there are instances where the executive directors are themselves related. We also came across situations where an individual serves in an executive director capacity in more than one company.


Finally, large board sizes. Although generally board sizes of our PLCs are appropriate – the average being 7.4 for the Main Market and 6.4 for ACE Market – we observed some companies with very large board sizes – with 17 directors in one instance. Although the Code does not limit the size of boards, the Code makes it clear that every board should examine its size, with a view to determining the impact of the number upon its effectiveness.


We also note that the quality and capability of directors vary greatly from Board to Board. The role of independent non-executive directors is to provide the much needed counterbalance to the ‘executive influence’ on the board. The major challenge is how to ensure that an independent director is independent in form and in substance. This means he or she must also be independent in mind and spirit, character and judgment. Merely satisfying the legal criteria of independence may not be sufficient.


Having the right independent directors on board will go a long way in raising the CG bar for Malaysia. However we often hear companies lamenting about the lack of good independent directors willing to serve on boards. In this regard, I wish to commend MSWG for your efforts in setting up the professional Independent Directors’ pool. As it would appear that currently this initiative is still not known to many, I hope MSWG will do more to publicise this very important initiative and will take proactive steps to look for and encourage professionals to join this pool. In doing so I hope MSWG will also take specific steps to ensure diversity in this pool of Professional Independent Directors. Having a diverse board will provide different perspectives to board deliberations and encourage more active discussions resulting in more creative and innovative board processes and decisions. MSWG’s own survey findings that only 7.5% of directors on PLCs are women, is most disappointing. Clearly there is a huge untapped talent pool hidden somewhere so I hope MSWG, under Rita’s leadership, will be able to uncover and add this untapped talent and experience to your pool of Professional Independent Directors.


Malaysia is now moving towards an economy driven by innovation, technology and knowledge. The pursuit of high growth must be accompanied by robust governance arrangements, greater shareholder activism, collective market discipline and most importantly greater self-discipline on the part of the companies, market intermediaries, exchanges, and relevant industry organizations. The collective efforts of all in raising the corporate governance bar will reinforce investor trust and confidence in the integrity of our markets. Together let us pursue growth that is underpinned by governance, not by greed; let us create value without sacrificing our values.

Thank you.