“Quality Financial Reporting and Corporate Governance
– Building Public Trust, Integrity and Accountability”
YBhg Datuk Ali Abdul Kadir
Chairman, Securities Commission, Malaysia
MICG International Conference
28 July 2003
Istana Hotel, Kuala Lumpur
Distinguished speakers, honoured guests, ladies and gentlemen.
First of all, I would like to congratulate the Malaysian Institute of Corporate Governance, Universiti Utara Malaysia and Universiti Teknologi MARA for their joint effort in organising this conference to discuss a topic which is very relevant and important in today’s business environment. I hope the discussions and deliberations that will take place during this conference can contribute effectively to the improvement in quality financial reporting and corporate governance.
Let me start by stating the obvious. Fairness, transparency, accountability and responsibility are the fundamental pillars that underline good corporate reporting.
To expand further, financial transparency translates to timely, truthful and reliable disclosure on companies’ financial position and performance.
These pillars are vital for a strong corporate governance framework. With good corporate governance, a foundation for a strong and robust capital market will be laid.
Ladies and Gentlemen,
In the age of globalisation and cross border transaction, corporate governance has never been more important. Today, investors and companies around the world look beyond their shores for investments and capital. As such, companies, markets and even economies are being benchmarked against international standards and investors’ demand that these standards be met before they invest in these markets. With increased mobility of capital and availability of information, investors will not hesitate to stay away from markets that are not up to the mark.
In the recent past, we have seen several corporate giants in the United States being brought down to their knees resulting from poor corporate governance. In Malaysia, whilst the 1997/98 economic crisis contributed to the failure of many PN4 companies, poor corporate governance and mismanagement have also been a contributing factor.
As corporate governance is now a key factor in investment decisions, it acts as a mode of brand differentiation. Corporate governance therefore has far reaching implications, not only to a particular company but also to the market or economy as a whole.
Ladies and Gentlemen,
Weaknesses or lapses in accounting practices of these corporate giants have been identified as one of the corporate governance issues which led to their failure. In relation to this, the motivation by the management to meet expectations has overtaken the fundamental duty of giving a truthful and reliable presentation of the company’s financial position and performance.
Even in some instances, the accounting professionals were targeted because of their failure to function as independent auditors. Many were perceived as not being independent as they also provided consultancy business to the firms which they audited.
Evidently, these corporate failures and misconduct affect investors’ confidence and trust. Investors’ confidence provides the foundation on which the capital market is built. Therefore, it is imperative that investors’ confidence is maintained and continuously enhanced.
To do this, improvements to the accounting and disclosure rules as well as the roles played by both the company’s audit committee and external auditors have to be examined. This has led to regulatory responses in the form of the Sarbanes-Oxley Act in the US and the Higgs Review in the UK.
Improvements in the quality of financial reporting as well as corporate governance practices would instil investors’ confidence and trust in the capital market. This is evidenced by the willingness of investors to pay a ‘corporate governance premium’ for securities of a well-governed company.
A survey by McKinsey of global investor in 2000 indicated that investors place significant emphasis on corporate governance in making their investment decision and a majority of investors were prepared to pay a premium as high as 20-25% for companies exhibiting high governance standards1.
In a study on almost 400 companies from Indonesia, Korea, Malaysia, the Philippines and Thailand2, it has been found that during the Asian financial crisis of 1997-1998, companies with higher quality of disclosure exhibited significantly a better share price performance.
Ladies and Gentlemen,
In Malaysia, promoting good corporate governance practices has always been on our agenda. We already have in place a sound corporate governance and reporting framework, whereby measures and regulations introduced over the past few years would be able to address many of the concerns. What we need to do is to work on them and practise them.
The broad objectives of the Malaysian corporate governance agenda focus on achieving fair treatment of all shareholders, in particular protection of minority shareholders, timely disclosure of accurate, clear and comparable corporate financial information and governance as well as accountability of the board of directors.
We also give equal emphasis on training and education to ensure that the corporate governance framework is supported by the necessary human and institutional capital, together with the strengthening of the regulatory enforcement.
To achieve this, the Malaysian Code of Corporate Governance was introduced in 2000, which sets the tone for directors of public listed companies to inculcate good corporate governance practices in their organisation. This, in the end, will create a culture of compliance for the right reason and not because somebody is watching over them.
The Minority Shareholders Watchdog Group (“MSWG”), was established in August 2000 with the aim of creating awareness among minority shareholders of their rights and at the same time acts on behalf of the minority shareholders to monitor and to deter any abuses by the majority shareholders who control the decision making process of PLCs. In this regard, we have seen interesting development in shareholders activism that has led companies to be more prudent and cautious in their approach. As an example, a PLC had to abort a transaction which appeared not to be in the best interest of the company, after a group of shareholders expressed their concerns through MSWG. Ultimately, enough pressure was brought to the management of that PLC for them to abort that deal.
In developing the financial reporting framework in Malaysia, the Financial Reporting Foundation and the Malaysian Accounting Standard Board were set up under the Financial Reporting Act 1997. These bodies are responsible for the development of the accounting standards in Malaysia, which are benchmarked against the accounting standards issued by the International Accounting Standard Board. The framework also places responsibility on directors and chief executive officers to be more diligent in the preparation and presentation of their financial statements. To ensure the effectiveness of the framework, the accounting standards issued by MASB come with legal backing, with enforcement powers accorded to authorities such as the Securities Commission, Companies Commission Malaysia and Bank Negara Malaysia.
Ladies and gentlemen,
As we seek to develop a culture of good corporate governance, the rules of the books are merely the beginning. For the implementation of the rules to be successful, market players, from directors to corporate managers to advisors to accounting professionals to investors, should hold to the spirit of the rules rather than a mechanistic compliance with the letter.
To encourage this, the Capital Market Masterplan, which was launched in February 2001, spells our various recommendations relating to corporate governance practices, covering areas such as shareholders activism and protection, independence of auditors, effective dissemination of corporate information as well as enhancement in corporate disclosure.
One recommendation in particular promotes the enhancement of disclosures in annual reports by public listed companies. This enhancement includes the disclosure of non-financial and forward-looking information. Given the complexity of businesses today, it is essential for companies to disclose information explaining the main factors affecting the financial performance of the companies in the annual reports. This recommendation aims at encouraging companies to provide additional information and management discussions which will assist investors in assessing the prospects of the business and in making an informed investment decision. With this, not only the disclosures of financial information will be comparable, but this also applies to the disclosure of non-financial information.
There is also a recommendation for public listed companies to provide appropriate disclosure on shareholders value. With this, it is hope that public listed companies will focus on wealth enhancing activities and work towards value creation for shareholders, which will make the companies more attractive to investors in the long-term.
As I have mentioned earlier, one of the priorities of the corporate governance agenda is the protection of minority shareholders. In line with this, few recommendations in the CMP have been dedicated to inculcate shareholders activism, particularly by the institutional investors. In addition, independent directors of public listed companies are expected to play a more pro-active role in ensuring that the board is an effective board and through which good corporate governance practices can be promoted throughout the entire company. Independent directors have a fundamental duty to shareholders, particularly minority shareholders, to ensure that transactions placed for board consideration will create value for the company and its shareholders. Therefore, they are required to probe, robustly engage the management and take a position even if it is not in line with the position taken by the majority owners and management.
Another area to be promoted is the enhancement of the quality and independence of auditors. The role and responsibilities of the auditors are being re-examined with a view to implementing measures that will enhance the quality and independence of auditors. This is particularly important and timely as the trust and confidence in them have, to some extent, eroded due to the many accounting frauds that took place in the recent years.
Ladies and gentlemen,
The task of ensuring good corporate governance is an effort of all parties. Whilst regulations are in place, it is the proper implementation and application of the principles that determine their effectiveness. As such, better dissemination and understanding of the principles are essential.
It is encouraging to see the positive response of the market to corporate governance. Over the last few years, we have seen increasing interest among investors and directors alike, in understanding their rights and responsibilities in monitoring and implementing good corporate governance practices. This conference is a good example of the interest shown in deliberating on corporate governance issues. In addition, companies are increasingly engaging their shareholders and other stakeholders by way of dialogues, briefings, seminars and publications.
It is in the best interest of a company to have good corporate governance practices. The benefits are immense. Good governance practices not only make companies or markets more appealing to investors, they also build public confidence and trust. If all of us play our part in promoting quality financial reporting and good corporate governance practices, there will be less work for regulators but more business for everyone else.
On this note, I wish to conclude my remarks and hope that you all have a fruitful discussion at this conference.
1The McKinsey Quarterly 2000 Number 4
2 Mitton, T. ‘A cross-firm analysis of the impact of corporate governance on the East Asian financial crisis’. Journal of Financial Economics, 2002, Volume 64.