Introduction
The concept of accountability is a well established principle in democratically organised societies, and is evident at different levels of governance, be it on a geographical or functional basis. In the corporate world, there is, based on law, a system of accountability and responsibility among and between shareholders, directors and the management of a company. The system of corporate governance is essentially developed by each company to ensure there is a balance between the interests of the shareholders who have entrusted their capital to the company and those of other constituents or stakeholders such an employees, suppliers, creditors, customers and the community in which they serve.
Central role of directors
Directors are at the core of the system of corporate governance as they are the parties through whom the company's management is monitored on behalf of shareholders. While directors are free to drive their companies forward, they have to exercise that freedom within a framework of effective accountability.
Directors of companies (especially those listed companies/companies seeking listing) are expected :-
- to understand fully the business direction and needs of their companies;
- to act in the best interest of all shareholders and to confine the use of their powers to the particular purpose for which they were conferred and not for some extraneous purposes;
- to devote time and effort to attend Board meetings so as to stay abreast with the affairs and activities of the companies they represent;
- not to divert to their own advantage any business opportunity that their companies are pursuing or to use any confidential information obtained by reason of their own office for their own advantage or that of others;
- to understand fully all applicable laws and guidelines and to ensure that their companies comply with relevant legislations, regulatory guidelines, government policies and contractual requirements:
- to enhance the corporate performance of their companies by:
- selecting, hiring and compensating a management team comprising people who are honest, loyal and capable;
- helping the management team to set goals which are in line with corporate objectives;
- monitoring the performance of the management team against the goals set; and
- replacing the management team, if necessary, in a timely manner; and
- to exercise independent judgment and be fair to all parties.
Internal controls
An essential tool of effective corporate governance is the institution of a system by which companies are directed and controlled. Internal controls adopted by companies, therefore, are central
While effective internal controls cannot solve all corporate problems, defective internal controls may lead to serious corporate problems.
It is important however to recognise internal controls are a part, but not the whole of, the management process, and that effective internal controls are not a remedy for poor decisions, ineffective management, or unpredictable external events. There is no substitute for good, far-sighted, pro-active and creative management.
But an ineffective internal control system can puncture the whole management process. Together good management and effective internal controls can help to ensure that a company is in a position to deal quickly and positively with adverse circumstances and can help to limit negative effects.
To reiterate, the directors and management of a company can achieve its goals and objectives if they have adequate control, i.e. they plan, organize and direct the effective use of all resources.
Internal controls are necessary for:
- achievement of goals, objectives and productivity;
- efficient and reliability of information; and
- compliance with policies, plans, procedures, laws and regulations.
Everyone in a company is responsible for internal controls.
- The chief executive officer, who is responsible for the "setting the tone from the top" must assume ownership of the internal control system.
- The chief executive officer must provide leadership and direction to management for a review of their control over businesses; and
- Senior managers must empower their staff to develop specific controls and procedures for functions which they are responsible for.
- The Board of Directors must provide governance, guidance and oversight.
- The Board must have knowledge of their company's activities and environment to be able to detect dishonest management.
- Internal auditors must monitor and evaluate the effectiveness of internal control systems.
- All members of staff have a role to give effect to the internal control system and to notify problems in operations, policy violations or illegal actions.
Role of Shareholders
Inactive and disinterested shareholders will fail to bring directors and the management to account. As they, particularly, appoint the directors, they must seek to be satisfied, at general meeting, that those directors have performed their duties of good faith and loyalty, and discharged them with diligence.
Directors whose conduct or integrity is questionable or who do not perform to expectations should not be allowed to stay on the Board.
Shareholders, therefore, must act like the owners they are and take an active interest in the performance of their companies and the directors' contribution or lack of contribution to it.
There is in Malaysia a less than satisfactory level of shareholder involvement in the whole corporate governance system. While there may be the odd complaint between them, the level of attendance and participation at general meetings is minimal. It is sometimes said, on behalf of minority shareholders particularly, that there is no use fighting the interest of the controlling shareholder. It is precisely this defeatist attitude that may encourage the controlling shareholder to ride roughshod over the interest of other shareholders. If the controlling shareholder is allowed to appoint all directors, including the so-called independent directors, himself without, additionally, those directors being made to account for their performance, quite clearly corporate accountability would exist only in theory but not in practice. It is not implied that each general meeting should or need necessarily be an occasion for open warfare between shareholders and the directors; on the contrary, it could be an occasion from which to mount an even better performance or to avoid future mistakes. Nevertheless, if there has been an unacceptable shortfall or, worse, breach of trust, shareholders should not sit on their hands. While the authorities have a responsibility to take criminal action when there is evidence of any defalcation, there are numerous cases where there is no or insufficient evidence which only the process of accountability to shareholders can address. It is important to remember that where the process of law has to come in, the system of corporate governance has, somewhere, broken down. It is better that the habit of being accountable is well inculcated and all parties thereby benefit, and not have to wait to suffer a loss. The concept of accountability is better manifest through a working system of corporate governance.
Corporate governance and the move towards a full disclosure-based regulatory system- The Securities Commission (SC) is taking the lead in introducing a full disclosure-based regulatory environment in this country wherein it is proposing a three-phase approach, spanning a period of five years from 1996 to 2001, in the move towards such a regulatory environment.
- High standards of corporate governance (in addition to high standards of disclosure and due diligence) will be one of the central themes which the SC will espouse in its move towards a full disclosure-based regulatory environment. In fact, high standards of corporate governance will form one of the cornerstones of a developed disclosure-based regulatory system.
- Listed companies, and those companies seeking listing, are expected to play an important role in achieving the desired standards of corporate governance (as well as standards of disclosure and due diligence) and this role is expected to be carried out through the directors of such companies. It should be remembered that directors are responsible under the law for all activities and actions of their companies although they may not be directly involved in operating and running them.
- The SC would be looking into the establishment of a Code on Corporate Governance to improve the manner in which listed companies are governed. It may be a requirement that listed companies disclose on an annual basis whether or not they have complied with the Code and if they do not comply to explain why.
Corporate governance and the securities laws- The Companies Act 1965 and the securities laws such as the Securities Industry Act (SIA) 1983 and the Securities Commission Act (SCA) 1993 do have relevant provisions under which corporate governance obligations are to be discharged by directors and other officers of the company. These corporate governance procedures and obligations are also amplified in the KLSE Listing Requirements and the SC's Policies and Guidelines on Issue/Offer of Securities as well as the Malaysian Code on Take-Overs and Mergers.
- Directors of listed companies should be ever mindful of their duties and obligations under these securities laws and guidelines and they should at all times observe not only the provisions of the laws and regulations but also the spirit of these rules.
- The SC would like to see improvement in the following list of corporate governance-related shortcomings:-
- Directors must always be mindful of their duties to the minority shareholders of their companies and not just to the major shareholders;
- Directors should discharge a high level of fiduciary duties when conducting themselves in related-party transactions and act with conscience and a sense of responsibility to the minority shareholders;
- Directors should be more vigilant in the monitoring of their companies' share prices. They should be more forthcoming in providing information to the KLSE and their investors on matters relating to unusual market movements in share prices. They should not wait until they are asked to do so.
- Audit Committees should play the role expected of-them. More regular and active deliberations are necessary to monitor the -activities of their companies and their Boards.
Conclusion
The principle of accountability, although well established, is not always manifest in practice. All parties -- the directors and management, the shareholders and the regulatory authorities -- should work at it to make the system of corporate governance truly effective. Shareholders should be more aware of their rights, and directors and management their duties and obligations. In such an environment, the authorities would have less cause to have to step in with the heavy hand of the law, which would mean a failure in the system.
