The Covid-19 outbreak has led to profound changes and is severely testing the resilience of countries and businesses. From the perspective of a corporation, navigating this crisis brings to the fore the importance of corporate governance issues for directors as their companies respond to the challenges and risks brought about by the pandemic.
Board leadership and effectiveness
For boards, a good response to this crisis will be rooted in a deep understanding of their roles, adherence to good corporate governance and exercising board discipline — knowing when to step in and when not to, and resisting the urge to blur the lines between the roles of board and management. The board adds most value when it provides critical oversight, strategic support and long-term vision.
The Australian Institute of Company Directors, in its guide on the relationship between board and management, highlights that “central to the relationship between board and management is a clear and mutual understanding of roles, delegations and boundaries, which allows each party to respect the other’s responsibilities, contributions and expectations. Further, management expects that the board does not unduly meddle in operational matters although being respectful of the need for the board to delve deeply from time to time, especially if problematic trends are emerging and are not being resolved by management”.
The principles and best practices of board leadership are espoused in the Malaysian Code on Corporate Governance (MCCG), including the clear demarcation of roles between the board and management, roles and responsibilities of a chairman and the separation of chairman and CEO to avoid concentration of power in the hands of one individual.
The importance of a clear demarcation of roles between executive and non-executive board members has also been fortified in many court decisions. In the case of Sime Darby Bhd v. Dato’ Seri Ahmad Zubair, the High Court held,
“In other word the executive directors have to descend to the base and execute the decisions, solve problems, manage resources, monitor progress, measure performance and be answerable to the Board and Committee for the performance of the company as a whole.
The duties of the non-executive director vis-à-vis the company are performed on an intermittent basis as he meets with the other non-executive directors and executive directors at the quarterly meeting of the Board or more often as may be necessary.
It stands to reason and indeed the reality of the matter is that vis-à-vis the company, the non-executive directors’ duties cannot be as co-extensive as that of executive directors.”
The New South Wales Supreme Court, in the case of ASIC v. Macdonald and others, also held that the role of a non-executive director was to guide and monitor the management of the company rather than to be involved at an operational level.
Clearly demarcated roles and function of board members and boundary vis-à-vis the role of management is critical to ensure there are checks and balances between executive and non-executive directors as well as independent oversight of management by the board. In this regard, the chairman plays a pivotal role in creating the conditions for overall board effectiveness. He has the responsibility of leading the board in setting the values and standards of the company and maintaining trust with and between the executive and non-executive directors.
Promoting good business conduct and an ethical corporate culture
The tone at the top set by the board is critical to promote ethics, which underpins good corporate governance culture. The MCCG emphasises the need for boards to engender integrity, transparency and awareness as well as ensure that the board, management, employees and other stakeholders are clear on what is considered acceptable behaviour and practice in the company.
To articulate acceptable practices and guide the behaviour of directors, management and employees, boards should establish a Code of Conduct and Ethics for the company, which explains the policies and procedures on, among others, preventing the abuse of power, corruption, insider trading, and managing conflicts of interest. It is encouraging to note that as at Dec 31, 2019, more than 90% of listed companies on Bursa Malaysia had established a Code of Conduct and Ethics for their companies.
While the earlier discussion focuses on listed companies, state-owned enterprises and regulators also have the obligation to ensure that decisions made are transparent, fair and objective. The Organisation for Economic Co-operation and Development (OECD), in its Guidelines on Corporate Governance for State-Owned Enterprises, emphasises the need for the board of an SOE to ensure mechanisms are implemented to avoid conflicts of interest, to allow board members to objectively carry out their board duties and to limit political interference in board processes.
In the OECD’s paper on Governance of Regulators, the organisation reiterated the need for regulators to maintain a high degree of regulatory integrity as it helps achieve decision-making which is objective, impartial and consistent, and avoids the risks of conflict, bias or improper influence.
The Securities Commission Malaysia Act 1993 (Act 498) contains extensive provisions on the governance structure of the SC board. The need for diversity of board members in terms of interest, knowledge, skills and experience is clearly stipulated. In addition, the person’s probity, knowledge, skills and experience will also be considered to ensure that the person appointed will be able to discharge his functions as a member of the board. Criteria for disqualification of board members are also clearly provided in Section 5 of Act 498, which includes instances where the person becomes an officer or a director of an entity licensed, registered, recognised or approved under securities laws; becomes a full-time officer in a public listed company; or becomes a member of the Senate, or House of Representatives, or any legislative assembly.
The process for management of conflicts of interest is also stipulated under Act 498 where a member of the board is required to disclose to the board or any board committee, the existence of his interest and the nature of that interest in relation to the matter under deliberation. Once the interest is disclosed, the board member is not permitted to take part or be present in the deliberation or decision of the board or board committee. Further, he shall be disregarded for the purposes of constituting a quorum of the board or board committee. The importance of managing conflicts of interest is fortified by the requirement in Section 4(4) of Act 498, where every board member of the SC is required to act honestly and in the best interest of the SC at all times.
The imperative of continuous learning
In a recent poll conducted by the Institute of Corporate Directors Malaysia on the preparedness of Malaysian boards and directors for Covid-19, 31% responded that there was either insufficient expertise on the board to provide guidance or that the board provided no guidance nor any emphasis on preparation for the crisis. On the other hand, 49% felt that their boards were sufficiently experienced to provide guidance. Only 20% thought that their boards were experienced and forward-thinking in guiding preparations for the crisis.
In order to be able to navigate the company through such challenging periods, continuous learning, training and development of board members is vital. Commitment to continuous learning and education will ensure that directors are kept up to date with changes in their role as innovation and the business landscape continue to evolve such as changes in the regulatory climate, cybersecurity threats, business model disruptions and geopolitical volatility.
As we continue to respond to the present situation, a few clear imperatives have emerged. There is a call for resilient leadership — one that shifts away from risk-based approach in favour of resilience, where focus is placed on facilitating recovery and adaptation in the aftermath of disruption.
While the crisis exposes vulnerabilities, it also presents a valuable opportunity for transformation. As at May 12, six listed companies had conducted fully virtual annual general meetings for the first time, facilitated by the SC’s Guidance Note on the Conduct of General Meetings. A number of listed companies have also expressed plans to conduct fully virtual or hybrid general meetings in the near future. The pace of digital transformation has indeed accelerated due to the pandemic, breathing life to the dialogue in Plato’s Republic — necessity is the mother of invention. The Covid-19 crisis has forced companies to rethink and forge ahead with their digital strategies to ensure the survival of their businesses.
The months ahead will likely continue to be volatile and dynamic. The way we cope, learn from and adjust to today’s crisis will deeply influence our success, long-term resilience and agility in a changed world. Boards must be ready and equipped to steward companies through this perfect storm and into the new normal.
Datuk Syed Zaid Albar is chairman of the Securities Commission Malaysia