SHAREHOLDERS have the right to know how the pay of directors and key executives are linked to a company’s performance. But in Malaysia, most companies are still reluctant to disclose how much directors and key executives are paid, let alone provide information that allows investors to understand whether there is a link between their pay and corporate performance.

Thus, it is perhaps no real surprise that remuneration disclosure for directors and senior management is deemed “worse in Malaysia than many other markets”, according to the recently released biennial “Corporate Governance (CG) Watch 2016” ranking of 11 Asia-Pacific countries. Malaysia fell two notches to sixth place in the rankings, the first time its performance has slipped since 2007. Before then, it had shown consistent improvement.

“The requirement is to disclose director fees in bands of RM50,000 and many companies simply follow this, meaning that it is not possible to determine individual director fees, let alone the remuneration and incentivisation packages of senior management,” Benjamin McCarron, Asian Corporate Governance Association (ACGA) specialist consultant wrote in the report released on Sept 29 by ACGA and investment banking group CLSA.

“Bursa Malaysia clarified in May 2016 that companies must have shareholder approval for any increase in director fees. However, this misses the key point that shareholders do not understand how incentive structures relate to individual and company performance — if indeed they do relate,” he added.

“The lack of disclosure on remuneration contrasts with detailed disclosure on director training in many Malaysian annual reports,” McCarron said, pointing out that Malaysia had strong training institutions and that many directors are said to be “increasingly seeking out relevant skills on a voluntary basis”.

While Malaysia would have only fallen one place to the No 5 spot had sentiment not been undermined by the 1Malaysia Development Bhd (1MDB) saga, data in the report show that it needed to improve in more areas to retain the No 4 spot it held in the last ranking in 2014, even without 1MDB, because other countries have moved ahead.

Remuneration disclosure falls under “CG culture”, the area where Malaysia received the lowest score among five pillars measured by CG Watch. It is also one of the three pillars in which Malaysia saw a small decrease in scores from the last survey, the other two being “CG rules and practices” and “accounting and auditing”. For the remaining two pillars, a big 11-point decrease was seen in “political and regulatory environment”, negating the seven points gained under “enforcement”.

Where should Malaysia look for best practices?

“Good examples of how disclosures should be done can be found among top 100 Australian listed companies. Australia is an example of where the ecosystem plays a great role — where pressure from institutional and activist investors, civil society groups and NGOs rather than hard legislation is influencing corporate governance culture and behaviour,” ACGA secretary-general Jamie Allen tells The Edge.

At the best companies in Australia, not only is there a dedicated section in the annual report — where the remuneration committee chairman explains the board’s approach in determining performance-based remuneration — but the details disclosed in the report go beyond a two-year breakdown of key personnel compensation to why there was an increase or decrease in monetary and share-based compensation, a random check of annual reports among the top 10 largest companies on the Australia Stock Exchange (ASX) found.

A shareholder of ASX-listed mining company BHP Billiton Ltd, for example, would know that CEO Andrew Mackenzie’s total compensation fell from US$7.99 million in 2014 to US$4.58 million in 2015, with his short-term and long-term incentives dragged lower by impairment losses and accountability for five workers killed on the job in 2015 (which dragged lower scores for Health, Safety, Environment and Community). They would also know that his long-term incentive compensation fell to zero in 2015 from US$2.64 million in 2014, largely because BHP Billion’s five-year total shareholder returns of negative 15.2% was worse than negative 4.5% for peers and 78.6% gain on the benchmark index.

As far back as 2011, the Australia Securities and Investment Commission (ASIC) had issued guidance on remuneration reporting, focusing on disclosures on the amount and nature of remuneration for key personnel, plus details of material performance conditions and why they are chosen.

To be sure, such detailed explanation spells more work for independent directors. But the additional work done to advance corporate governance culture in Malaysia would further justify the need to pay independent directors decent fees.

Minority Shareholder Watchdog Group (MSWG) CEO Rita Benoy Bushon is all for better communication of how performance-based compensation is being done here as is there being need to properly remunerate independent directors.

“Remuneration needs to be linked to performance and the top companies are doing that. Independent directors should be paid decent fees but not given ESOS (employees share option scheme), which should only be for executive directors,” she says, adding that several good companies no longer give shares to independent directors on MSWG’s objection.

Bushon reckons that the findings and recommendations in the CG Watch 2016 report should be taken in a positive light but also put in a few good words for Corporate Malaysia: “Corporate governance culture among public listed companies has gained in strength in terms of awareness, substance, transparency as well as better and timelier disclosures.”

“Some companies have done good work but they don’t know how to articulate/communicate what they’ve done,” says Bushon, who is retiring from the shareholder protection group next month after eight years at the helm.

This is especially true when it comes to environmental, social and governance (ESG) reporting. “Companies cannot be shy to talk about [ESG efforts] because company and shareholders’ money is used on those efforts,” she says, adding that ESG reports should be comprehensive enough to give stakeholders a good understanding while being simple enough that everyone can understand them.

The CG Watch 2016 report also had good words for Corporate Malaysia: “On the issue of independent chairman/lead independent director, Malaysia is one of the better-performing markets in the region. While board chairs are generally not independent, the Malaysian CG Code refers to the need for a senior independent director, who should be the chair of the nominating committee. Consequently, a number of companies satisfied the requirements of the question, even on our view of independence, which is rather stricter than Bursa Malaysia’s definition.”

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