YBhg Dato Dr Nik Ramlah Mahmood
Senior Executive Director
MICG Conference on the Recent Changes in the Corporate Legal Framework towards Better Corporate Governance
Monday, 28 January 2008
Kuala Lumpur Convention Centre
Yang Berbahagia Dato’ Seri Megat Najmuddin Megat Khas, President of the Malaysian Institute of Corporate Governance
Yang Berbahagia Dato’ Shahran Laili Hj Abdul Munid, Chief Executive Officer and Executive Director of the Malaysian Institute of Corporate Governance
Distinguished guests, ladies and gentlemen,
- Let me begin by congratulating the Malaysian Institute of Corporate Governance (MICG) for organising this conference on Recent Changes in the Corporate Legal Framework towards Better Corporate Governance – Its Implications on Directors’ Duties. It is hoped that this curtain-raiser event for 2008 will be the first of many other high profile and high impact activities that will be pursued by MICG throughout the year. I am honoured to be invited to deliver a keynote address on behalf of the Securities Commission at this very significant event. After all, enhancing the standard of corporate governance in Malaysia continues to be a matter that is very close to our heart and very high on our agenda.
- Last year marked the 10 th anniversary of the start of the Asian Financial Crisis. While efforts at enhancing the standards of corporate governance in Malaysia began way before that – including the formation of MICG, the requirement for audit committees, independent members of the board, quarterly reporting and many others – it is fair to say that the Crisis provided the impetus, the resolve and indeed the sense of urgency for a holistic approach to corporate governance reform in Malaysia.
- If the growth of our capital market is used as a barometer to measure the success of these reform efforts, clearly we have made very significant progress. Back in 1990, the size of our capital market, comprising the bond and equity markets, was RM200 billion. In 2007, it stood at RM1.7 trillion. We now have over a thousand listed companies, including some of the biggest resource-based and plantation companies worldwide. The product range on our exchange has also grown significantly – we now have call warrants, REITS, Closed-end funds and ETFs. Our bond market is the largest in ASEAN and the fourth largest in Asia. In 2006, we ranked third for M&A transactions in Asia-Pacific ex-Japan with announced deals worth RM120 billion. We now have more than 500 unit trust funds with total industry NAV of RM169 billion, representing 39% growth from 2006.
- The demography, diversity and sophistication of participants in the capital market – be they issuers, intermediaries or investors – have also changed dramatically. There is certainly greater foreign presence, whether as issuers, as intermediaries or as investors in our equity and bond markets. The growth and significance of our Islamic capital market has also brought in a new group of foreign investors looking for shariah-compliant investment opportunities. Our local investors and shareholders are also increasingly more demanding and more discerning with respect to their investments. Minority shareholders are increasingly showing less patience and tolerance when they feel that their rights have not been respected. The remarkable growth of our bond and sukuk market, has seen the arrival of triple A issuers to our market – the likes of World bank, IFC and ADB, to name a few. Phased liberalisation measures introduced consistent with the Capital Market Masterplan and the Financial Sector Masterplan, have brought in new local and foreign intermediaries to our capital market – whether as brokers, investment advisors, fund managers or Islamic banks.
- Meanwhile further liberalisation with respect to rules on investing abroad mean that local institutional funds, unit trust funds and fund managers generally need no longer put all their money in the local market – their investment horizon now extends far beyond the shores of Malaysia.
- Additionally, efforts to attract foreign listing and the introduction of greater flexibilities to facilitate dual listing will see the availability of new investment opportunities on Bursa. This will also provide investors the flexibility to trade on both the local and foreign bourses as well as facilitate cross-border mergers and acquisitions and international fund raising exercises.
- How, you may ask, will these changes in the demography and landscape of the Malaysian capital market, affect our efforts to enhance corporate governance? Specifically, from the perspective of the companies, their management and board, how will these affect the conduct of their affairs? Quite significantly, in my view. The sooner we realise that we cannot eschew these changes the better for all. The new capital market landscape means investors have greater choices – not only with respect to onshore investments, they are also now able to explore opportunities in other markets fairly easily. The presence of foreign investors, foreign issuers and foreign intermediaries in our markets also mean that our PLCs will be closely watched by fund managers, analysts, rating agencies and the like from across the globe. As our capital market becomes increasingly interlinked with the global market, we will be measured by standards expected in the global market place. There will be even lower threshold of tolerance for companies that do not observe the highest standards of corporate governance. There is no two ways about this.
- But global standards and the expectations of international investors are not lofty ideals that are beyond our reach. In fact, in many areas, we have achieved these standards. For instance in a World Bank publication, Doing Business 2008, Malaysia is ranked No.4 in the world for investor protection. Prior to that we were ranked No.5. In fact if we look further into the rankings, we scored 10 out of 10 for extent of disclosure index and 9 out of 10 for extent of director liability index. Also in the World Bank Report on Observance of Standards and Codes we scored top marks for disclosure and transparency of accounting standards. While these are all very significant achievements, it is important that we do not let complacency set in.
- It is often said that enhancing corporate governance is a journey, not a destination. The biggest mistake is to assume that the job can ever be finally done. A few years after Enron and with the coming into force of Sarbannes-Oxley in the US, there is a view that the hype on corporate governance around the world seemed to have fallen into a comfort zone. It is said that many companies have taken the route that as long as the box is ticked off, regulatory requirements on corporate governance have been met. Companies posted more information than ever before, on their websites and in their annual reports. But, the meaning and accuracy of what they publish has become questionable. Meanwhile corporate scandals continue to hog the limelight both at home and in other jurisdictions.
- As regulators, we are keenly aware that we cannot rest on our laurels. It is for this reason that the regulatory framework has been continuously enhanced following the 1997 crisis. Indeed Malaysia’s efforts have not been left unnoticed by the international community. These have been highlighted in numerous corporate governance reports amongst which, is the Report on the Observance of Standards and Codes (ROSC) by the World Bank, which highlighted the reforms that have been implemented in Malaysia since 1998. All these changes that were introduced since 1998 have been well documented and well recognised. It is not my intention to repeat them here. Let me however share with you briefly some of the regulatory developments that took place in the past year, which I am sure will be discussed in greater detail over the course of this conference.
- First the revised Code on Corporate Governance. The revision to the Code on Corporate Governance was announced in Budget 2008 and the revised Code came into effect in October 2007. The revised Code which supersedes the earlier Code issued in 2000 contained key amendments which are aimed at strengthening the roles and responsibilities of the boards of directors, particularly independent directors, and the audit committee, and ensuring that they discharge their duties effectively. Benchmarked against the best corporate governance practices in other jurisdictions, the revised code spells out among others, the eligibility criteria for appointment of board of directors and places greater emphasis on the role and professionalism of auditors, both internal and external. To ensure that the audit committee serves as an effective check on the management of a company, the revised Code provides for matters like composition of the audit committee, frequency of meetings and the need for specialised training.
- The Nominating Committee plays an important role in ensuring competence and independence of board members. It is tasked in the revised Code to nominate the right candidate to the board by taking into consideration amongst others, the candidates’ expertise, experience, professionalism and integrity. The effectiveness of the board, the board committees and each individual director will be evaluated on an ongoing basis.
- Last year also saw the coming into force of the Capital Market Services Act 2007 (CMSA) which consolidates parts of the Securities Commission Act with the Securities Industry Act and Futures Industry Act. The CMSA is significant in terms of new provisions to strengthen investor protection, the introduction of a single licensing regime and a framework for recognition and oversight of Self-Regulatory Organisations (SROs) to promote a market-based approach to regulation. The SC’s enforcement powers have also been enhanced. The SC can now claim three times the profit made or loss avoided not only for insider trading but also for market manipulation and other market misconduct through civil action. The CMSA also allows a barring order to be made against the directors/chief executive who have resigned, which was not the case before.
- As many of the responsibilities of the board of directors are embedded within the Companies Act, efforts have also been pursued to update and refine the law. The Companies (Amendment) Act 2007 seeks to amongst others, clarify the role of the board, introduce a business judgment rule and codify the common law principles on directors’ duties.
- The Corporate Law Reform Committee (CLRC) has also been working hard in promoting directors’ accountability through a comprehensive review of the Companies Act, taking into consideration the interests of shareholders and stakeholders. The Corporate Law Reform Programme represents an important opportunity to holistically reassess and examine the cost of corporate governance regulation and its impact on the business community. Among the many consultation papers released last year by the Committee is one entitled “Clarifying and Reformulating the Directors Roles and Duties” which looks into subjects such as directors’ qualification, resignation and removal of directors and clarification and codification of directors duties.
- Finally, last year, the Government also announced the establishment of an accounting oversight board to address weaknesses within the accounting and auditing profession. This represents a clear recognition by the government of the critical role played by members of the accounting and auditing profession in areas like preparation of financial statements and auditing.
- The SC fully recognises that strong public enforcement is a necessary prerequisite for effective regulatory frameworks. A proper, effective and rigorous enforcement regime is key to ensuring and sustaining investor confidence in the capital market. The SC has a diverse array of enforcement tools – ranging from criminal prosecution to civil and administrative actions. Over the past few years, the SC has invested significant efforts and resources to strengthen our enforcement capacity and capabilities. The adoption of a more strategic approach to enforcement has seen the wider use of our civil and administrative powers to ensure swift and effective resolutions. While we continue to pursue criminal action in appropriate cases, we have also focussed on restitution for investors, freezing of assets and the disgorgement of ill-gotten gains.
- It is trite that prevention is always better than cure. In this regard, we have taken measures to enhance the quality of companies that are listed. We have revamped the listing rules and strengthened the due diligence process to ensure to the extent possible, that dubious companies do not enter the public market. Once the companies are listed, we do not let our guards down. The SC as some of you may be aware has a very effective corporate surveillance programme. We have over the years, widened the scope of our financial and corporate surveillance activities.
- Strengthening of laws, effective gatekeeping and swift enforcement however are only one aspect of enhancing corporate governance. In the vigorous pursuit of these efforts we are mindful of the continuing debate about the proper role of laws and regulation in ensuring corporate governance and the cost to the capital market of over-dependence on regulatory discipline. We remain committed to our credo of no more regulation than necessary and we do not intend to regulate based on the lowest common denominator. To do so will not only impose extremely high regulatory costs but will also prevent companies that genuinely need funding from accessing the capital market. Enhancing corporate governance must therefore start with the companies themselves.
- It is very easy for a company to have sound corporate governance practice in form and yet possess none of them in substance. Sound corporate governance practice must be present and more importantly in practice throughout the company; this requires commitment and conviction on the part the board to spearhead and ensure continuity of good governance
- It is imperative that directors “walk the talk” and demonstrate expected behaviours that are in line with best governance practices. This starts but does not end with directors truly fulfilling their fiduciary duties. By truly, I mean realising that they owe a duty of loyalty and duty of care to the company. Duty of loyalty requires the director to place the best interest of the company first and to avoid advancing personal interest at the expense of the company, which unfortunately of late seems to be a duty that some directors have been failing to keep.
- Working out the roles and duties of the board is by no means an easy task. There are a myriad of topics concerning the board of directors that can and have been discussed from the amount of time spent for board meetings to the relationship between the board with management to the directors’ remuneration. Different companies have different needs, competencies and risks. Success indeed lies with competent and dedicated directors who take full responsibility and accountability for their decisions. Events like this are organised by MICG can certainly provide an opportunity for the role duties of director to be clarified and better understood.
- Contrary to expectations of doom and gloom and prediction about a lost decade after the Asian Financial Crisis, corporate Malaysia, is now much stronger, more transparent and highly regarded by international investors. Our ability to ride over difficult patches caused either by external events or a few corporate shenanigans, speak well of the resilience that we have built over the past decade. But as I had said earlier, enhancing corporate governance is a journey, not a destination.
- On this note, I bid you a productive conference ahead.