Seminar on Corporate Governance
4 April 2000 |   By : Ali Abdul Kadir, Chairman, Securities Commission
"CORPORATE GOVERNANCE in Malaysia - Beyond the Finance Committee Report"

Ali Abdul Kadir
Chairman, Securities Commission

Seminar on Corporate Governance

4 April 2000
Hotel Nikko, Kuala Lumpur


Distinguished guests, participants and ladies and gentleman. I am pleased to be invited to deliver a keynote address at this Conference. This Conference sees us one year after the release of the March 1999 Finance Committee Report on Corporate Governance. This gives us an opportunity to take stock of where we are today and to have a discussion of where we see ourselves in the future. For this, I wish to congratulate the joint organisers of this conference namely The Malaysian Insurance Institute (MII), Malaysian Institute of Corporate Governance (MICG) and The Malaysian Association of Certified Public Accountants (MACPA) for organising this timely event.

In my early discussions on the Finance Committee Report, I referred to the formidable task of implementing the recommendations of the Report. Today, one year down the line, and after this seminar, I am certain that we will all be in a better position to make a judgement on the status of implementation of the Report as well as developments in the area of corporate governance.

In this session, what I would really like to do is as follows:

  • First, by way of background, I will provide a brief update of some of the developments since the publication of the report in March 1999.
  • Then, I would like to concentrate on what might be or what should be the future of Corporate Governance in Malaysia. Hence the subject of matter of my speech - "Beyond the Finance Committee Report".


As most of you would remember, after the publication of the Finance Committee Report, the Finance Committee set up an "Implementation Project Team". The Project Team was commissioned primarily to drive and oversee the implementation of the proposals of the Finance Committee Report. The Members of the Project Team are Ministry of Finance (MOF), the Securities Commission (SC), the Registry of Companies (ROC), the Kuala Lumpur Stock Exchange (KLSE), and Federation of Public Listed Companies (FPLC). The Project Team met three times last year to discuss, at some length, the terms of reference, the implementation target dates and the status of implementation.

What has happened since then?

  • Well, firstly, a proposal was made to the Finance Committee for the inclusion of 2 other very significant agencies, in the Project Team. These are Bank Negara Malaysia and the Malaysian Exchange for Securities Dealing and Automated Quotation Berhad (MESDAQ) and I am pleased to report this proposal was endorsed on 23rd August 1999.
  • Secondly, in terms of the legal, regulatory and rule amendments, the Finance Committee Report, if you remember, made recommendations to update laws, regulations and rules to keep up with commercial reality and to bring the level of corporate governance up to internationally acceptable standards. I am pleased to report that this exercise is well on its way and it is hoped that proposed amendments to the Securities Commission Act 1993 and companies legislation will be tabled in Parliament very soon. The SC and the KLSE have also been working hard to finalise the KLSE's amendments to the Listing Requirements. This is expected to incorporate many of the recommendations of the Finance Committee relating to the listing rules.
  • In addition, other recommendations of the Finance Committee in relation to the Malaysian Code on Corporate Governance, are (as planned) being implemented through the amendments to the KLSE's Listing Requirements.

Following discussions with industry, the SC also initiated recommendations to the Finance Committee to consider the role of internal auditors. As such, the Code now introduces a new "best practice guideline". This exhorts all public listed companies to set up an internal audit function. Where there is no internal audit function, the Code provides that the audit committee should assess whether there are other means of ensuring that there is regular review and appraisal of the company's internal controls. I, as a member of the accounting profession, am obviously in full support of this development and believe that internal auditors can play a crucial role in raising standards of conduct of companies. I believe that this can help alleviate the particular problem of poor financial management by companies.

  • In terms of training and education, one of the most important elements in the Finance Committee recommendations is in its emphasis on training and education. In particular, one of the recommendations of the Committee is that there must be compulsory education programmes for directors of a company seeking listing as a pre-requisite to listing. In addition there should be mandatory accreditation for all existing directors of listed companies. Appropriate programmes have been developed for this purpose. The Research Institute of Investment Analysts (RIIAM), the training arm of the KLSE is expected to launch some of these director accreditation programmes before the end of this quarter. This is intended to help with the problem that directors tend to be subjected to a plethora of complex common law and statutory responsibilities without having a full understanding of the significance of these responsibilities. Of course education in relation to corporate governance is not confined to director accreditation. Training and education must be pursued at all levels for all who can contribute to promoting and enhancing corporate governance. In this regard, the SC's own Securities Industry Development Centre (SIDC), the Malaysian Institute of Corporate Governance (MICG), the Institut Bank-Bank Malaysia (IBBM) and other professional associations such as the Malaysian Association of the Institute of Chartered Secretaries and Administrators (MAICSA), the Malaysian Association of Certified Public Accountants (MACPA), The Malaysian Institute of Accountants (MIA) and the Malaysian Insurance Institute (MII) all have important roles to play.

What other developments have occurred apart from the recommendations in the FC Report?

  • With regard to transparency and disclosure, the major concerns have always focused on both the timeliness of the release of information and upon the content of releases. I believe that in this, age of technology, companies should no longer choose to ignore this ethic if they are to raise capital with the necessary speed and efficiency that the markets now demand. It is with this belief that the SC has in December 1999 further amended the SC's Policies and Guidelines on the Issue and Offer of Securities. The recent revisions to the Issues Guidelines mark the commencement of Phase 2 of a 3-phase implementation programme adopted by the SC in moving from merit-based regulation. The recent revisions to the Issues Guidelines liberalise the requirements on pricing of securities, valuation of assets and utilisation of proceeds. The SC will thus minimise its assessment in these areas as long as the broad requirements/guidelines are complied with. Some of you may query whether these amendments will necessarily raise corporate governance standards. While this move may not be an immediately obvious enhancement of the standards of corporate governance, I believe that these steps are very much consistent with the Finance Committee's views. Corporate Governance is not just concerned with the injury that companies can do. It is also concerned about the manner in which enterprise can be promoted. Thus with this approach, it is left to the company to ensure that there is good governance so as to enhance the corporation's overall economic performance. Balanced against this liberalisation is also SC's stand that the SC will not hesitate to take action in the event of abuse of these liberalised measures and failures to make the relevant disclosures.
  • In this connection, much activity has occurred in the area of accounting standards and reporting requirements. This shift in policy to disclosure based regulation also entails having high quality financial reporting standards. This was a matter that was not addressed in detail in the Finance Committee Report as measures were being taken in relation to this issue, particularly by Malaysian Accounting Standards Board. I am happy to report prolific activity in this area. As you are aware, the SC in 1998 set up a "Financial Reporting Surveillance and Compliance" Department. Since then, the SC has also established a programme to ensure that listed companies comply with accounting and financial reporting requirements in preparing and presenting their financial statements. In 1999, the KLSE also introduced a requirement for quarterly reporting by listed companies that would be mandatory for all public listed companies with quarters ending on or after 31st July 1999. They are, in addition, required to issue their annual audited accounts, auditors' reports and directors' reports within 4 months from the end of a financial year, with effect from the financial year ending on or after 31 July 1999. On the regulatory side, the Securities Industry (Compliance and Approved Accounting Standards) Regulations 1999 came into force in July 1999. Very significant progress in the area of accounting, if I may say so.
  • In relation to financial institutions, it has also been recently reported (on March 22nd 2000) that Bank Negara has also embarked on a project to expand the scope of the central credit bureau to capture information on all loans granted by the banking sector, regardless of size. The expanded database is intended to provide real time information to banking institutions on the total exposure of an applicant and the conduct of the loan accounts to assist banks with credit evaluation. The Central Bank is also reported to be taking steps to implement schemes to enhance its regulatory framework, so as to make important information accessible to the public on a timely basis.

Industry Initiatives

  • I would also mention a couple of other steps that have been transpired, apart from the recommendations of the Finance Committee, which are encouraging signs that Finance Committee recommendations are not considered the "be all and end all". Firstly, the market institutions are in the process of developing a "Code of Conduct for Market Institutions"*. The market institutions, that is to say, the Kuala Lumpur Stock Exchange (KLSE), the Malaysian Exchange for Automated Dealing and Securities Berhad (MESDAQ), the Securities Clearing and Automated Network Sdn. Bhd. (SCANS), the Malaysian Central Depository Sdn. Bhd. (MCD), the futures exchanges and clearing house, have voluntarily developed this Code. This Code is to serve as a guide to their directors, managers, and employees to clarify obligations and to provide general governance guidelines that apply to the institutions and persons within the institution. At the same time, the guidance leaves room for the institutions to come up with the detail to fill up other areas that have not been covered which are peculiar to their own institutions.
  • Secondly, for brokers themselves, the KLSE has announced capital adequacy requirements, which are to help the brokers significantly improve and enhance monitoring. Again this raises the standards by incorporating internationally recognised approaches and measures, and sets the standard for overall risk control framework for stockbroking companies. It is also intended to promote an environment of enhanced risk management by enabling stockbroking companies identify the capital available to cover the risks of their business and to provide a proactive alert mechanism for stockbroking companies to quantify, manage and address the risk of their business.

All these are significant developments. Significant in the perception by specific industries and regulators - especially the financial services industry - that particular industries may have risks peculiar to them that do not apply to others. Some of these developments are also significant in that industry itself has also felt the need to address governance issues themselves rather than be subject to further legal or regulatory requirements. The setting up of the Code for Market Institutions themselves is important, firstly, to elaborate on and clarify the manner in which issues of inherent conflicts of interests and duties within these market structures should be addressed. Secondly, in my view institutions such as the KLSE and MESDAQ that impose corporate governance requirements on their listed companies and members, should also adhere to the highest standards of conduct and lead by example.

Beyond the Finance Committee Report

I have described the status of implementations of the recommendations for reform under the Finance Committee Report. The Report, in a sense, provides us with a map for reaching immediate destinations. I have also already described developments that have occurred which have not arisen from specific recommendations of the Report. The latter developments, I believe, provides us with signposts to possible destinations in the evolution of corporate governance.

At this point I think that we may properly ask, what might happen, beyond the Finance Committee Report?

You will remember that the Finance Committee Report only deals with public listed companies. However, you will remember also that it was always envisaged that these issues would not be limited to the public listed companies. It is expected that in time, these governance practices should spill over to the governance of other types of companies. This spill-over is already evident, from the developments that I have just described in the financial services industry.

I believe that parties that invest in, or that advice or sponsor new ventures that are private companies can and must contribute significantly to the enhancement of corporate governance. Companies should also not only consider these issues at the point of exit on listing, but as soon as the company commences operations and on an ongoing basis. The reasons for these statements are as follows.

  • Firstly, venture capitalists that place money in companies involved in new ventures, may - and should - demand high standards of corporate discipline and accountability, before they are happy to put their monies at risk in the ventures concerned. In fact, venture capitalists in other jurisdictions have been known to require audit and remuneration committees in relation to such companies.
  • Secondly, the routes for exit, for example through listing on MESDAQ, may well require that advisers and sponsors undertake various responsibilities in relation to the company. These responsibilities will apply at the point of listing, as well as on an ongoing basis. MESDAQ rules, for instance, incorporate rules on disclosures, and the advisor and sponsors will also be responsible to advise and make statements on compliance by the company of these rules. To undertake such responsibilities, the advisor and sponsor would want to satisfy itself with the manner in which the company has been run, and with respect to the integrity of the persons running it.
  • Thirdly, there is the requirement for accreditation of directors of listed companies that has been proposed by the recommendations of the Finance Committees. Founder directors of the company, that continue to run the company on its listing will necessarily need to be up to speed in order to qualify to act as directors for such companies.
  • All these matters lead to the conclusion that such companies, their directors and relevant shareholders must lay the foundation for prudent and effective corporate governance. This will stand the company in good stead, should it then apply to the equity markets for more funding.

In this context, I would also spend a moment discussing how corporate governance will be affected by the advent of matters such as e-commerce. In my mind, the advent of recent developments in e-commerce has come about a bit like an avalanche - fast and overwhelming and you can only ignore it at your own peril.

In the UK, for instance, an article was published in the Guardian (on February 18, 2000) recently about the exhortations of a controversial entrepreneur. This entrepreneur, Luke Johnson, wrote to the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF) to strongly suggest endorsement for new corporate governance guidelines on e-commerce. These guidelines were to dictate disclosure on e-commerce strategies. Johnson argued that companies that view the web to be an insignificant part of their business should have to alert shareholders to this belief or risk being "in breach" of best practices. It would seem that the organisations are taking Johnson's proposal seriously and are examining the governance issues raised by the growing presence of e-commerce start-up companies.

I am not even making a remote suggestion that this is a proposal that should be adopted, nor that investors should be asking for such a disclosure. On the contrary, investors in Malaysia might even wish to ask for justifications for the valuation of e-commerce ventures proposed by listed companies. However, it would appear that corporate governance issues will become especially pertinent to companies involved in e-commerce, whether as a start up or in new businesses entered into by existing listed companies.

I am sure that you will agree that one of the essential issues with the whole corporate governance exercise is its credibility. In this respect, I believe that regulators and rules do play an essential role. Beyond the Finance Committee Report, therefore, I see a continued role for enforcement. In terms of promoting effective enforcement, I appreciate that the views of many - including the National Economic Action Committee (NEAC) - that transgressions must be penalised and rules must be effectively enforced. If you surf on the KLSE website, you will also see that the number of public reprimands imposed by the KLSE has approximately doubled in1999 from 1998 and the number of fines has tripled in 1999 from 1998. In 1999 there were approximately 40 public reprimands and 25 fines imposed by the KLSE on listed companies. Many of these infringements related to the failure to make timely announcements. On the part of the SC, as you know, the SC has undergone a major recruitment drive over the past year to expand our enforcement capacity and have already taken up several enforcement actions. Additionally we have also through amendments to the law strengthened the Commission's investigative and enforcement powers and increased penalties to ensure greater compliance, as well as introduced civil penalties and liabilities in respect of certain offences. The SC has every intention of continuing this exercise.

While the effectiveness of regulators in enforcing good governance is crucial, I believe that shareholder activism is the other key to ensuring governance. While the Finance Committee Report suggests the manner in which shareholders could take steps to enforce governance - e.g. by setting up a Minority Shareholder Watchdog Group - this in itself should not stop the retail and other investors from actively participating in efforts to enforce governance. Investors must make full use of the proposals that may be effected further to the Finance Committee Report. For instance, the Report has recommended that voting by mail be allowed, and recommended ways and means to make involvement in annual general meetings more accessible for the shareholder and the investor is better informed of matters for the purposes of making decisions.

In relation to companies themselves, I believe that I have alluded to this before, but I think that it is worth reiterating. While companies, their directors and controlling shareholders must be accountable for their acts, they would not wish their entrepreneurial activities to be unduly fettered by rules and regulations and hence, unnecessary regulatory costs. The corollary of having a more market oriented approach type of regulation is the trust that regulators and investors can place on the companies, their directors and shareholders. It is incumbent of these persons, companies and their advisors, therefore, first of all, to have a clear understanding of what their responsibilities are, and then, to conduct themselves professionally and ethically and have a reputation of so doing.

This need to preserve their reputation will also become increasingly pertinent in future since even domestic investors will have ready access to greater choice of companies in which to invest, and not be limited only to Malaysian companies but corporations listed on other markets. Internet trading facilities, for instance, are likely to allow investors to have greater, easier and cheaper access to foreign markets. As such, real investors that intend to place long term money into corporations are more likely to choose those with good corporate governance standards.


To conclude, Ladies and Gentlemen, I believe that the rules and regulations in relation to corporate governance and the proposals in the Finance Committee Report will provide participants in Malaysia with a foundation for the enhancement of corporate governance practices. It would seem to me that progress has been made in the implementation of many of the Finance Committee recommendations. However, I also believe that all these are merely mechanisms, rules, statements, exhortations, proposals and stages of implementation. As with a good Constitution, rules, regulations and exhortations are no use, if the rules and the persons ruled do not understand its objectives.

In the area of financial services industry, I believe that rules are still necessary and cannot be avoided. Financial institutions and intermediaries pose particular risks to the financial health of the country, which must be provided for. Nevertheless over-regulation is not the objective of the SC and I am encouraged by the steps taken by self-regulatory authorities and professional associations to enhance the governance standards of these institutions.

With the advent of competition and globalisation, companies must themselves place great importance on its reputation its success. This need will be reinforced by increasing scrutiny from regulators, the Press, watchdog and associations. However it is incumbent on the companies themselves, in this age of intense competition, to take steps need to build up this reputation.

In the U.S., when an investor who unhappy with the manner in which management deals with the business of the company and dumps his shares, this is called the "Wall Street Walk". In Malaysia, I suppose with the KLSE being where it is, such a practice should be called the "Exchange Square Walk". Beyond the Finance Committee Report, therefore, the question that each of the participants and the regulators must really ask ourselves, and keep asking ourselves from time to time is this:- How do we stop the "Exchange Square Walk"?

Thank you, Ladies and Gentlemen.

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