Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on May 1, 2017 - May 7, 2017

”You’re pirates. Hang the code, and hang the rules. They’re more like guidelines anyway [than actual rules].” — Elizabeth Swann (Kiera Knightley) in the blockbuster Pirates of the Caribbean.


WALT Disney and Hollywood producer Jerry Bruckheimer may have transformed pirates into iconic heroes, but in the real world, pirates are people who attack, rob, steal and plunder.

Corporates hate pirates when it comes to their assets and intellectual property.

Now, corporates need to decide whether they themselves will be “pirates” when it comes to adhering to the newly enhanced Malaysian Code on Corporate Governance (MCCG) that came into effect on April 26.

Among other things, companies are to make detailed disclosures, on a named basis, of the total remuneration package (fees, salary, bonus, benefits-in-kind and other emoluments), to the ringgit, that individual directors earn, as well as the top five senior management (in RM50,000 bands).

The disclosures are not meant for tea-time gossip but to allow stakeholders to understand the duties of each director and consider a fair compensation package. Proper, detailed disclosure helps stakeholders to see the link between senior management remuneration and the company’s performance.

Companies looking for examples may want to check out disclosure standards in Australia. BHP Billiton CEO Andrew Mackenzie saw a 40% pay cut in 2015 due to shareholder losses and the death of five workers on the job, according to its annual report. In 2016, the annual report revealed he had no bonus in a year when BHP shed 15,000 jobs and booked the biggest loss in its history.

Over in the UK, shareholders are taking action with the information they have. In April 2016, for instance, just over 59% of BP shareholders — including Aberdeen Asset Management and Royal London Asset Management — reportedly rejected BP CEO Bob Dudley’s 20% pay increase after the company reported a record net loss and announced thousands of job cuts following an oil price slump. While the shareholder vote was non-binding, BP pledged to respond with changes to the way it pays executives.

For Malaysia, the requirement that at least 50% of board members must be independent directors is aimed at improving impartiality in decision-making and effective oversight of management. The added emphasis on independent directors is because they are seen as representatives of minority and independent shareholder interest in the boardroom.

This is also why members of the Audit Committee — whose primary purpose is to oversee financial reporting and ensure there is an effective audit process, proper risk management and internal controls — should only comprise independent directors.

Currently, 55 of the top 100 companies in Malaysia have a majority of independent directors. Statistics for the other 900 companies are not immediately known.

For large companies — companies on the FTSE Bursa Malaysia Top 100 Index or those with at least RM2 billion market capitalisation — more than 50% of board members need to be independent and at least 30% of the board should consist of women directors. Previously, only companies that had a non-independent chairman were required to have a majority of independent directors.

The new code also introduces a two-tier voting process for boards that choose to retain independent directors who have served for more than 12 years. For the resolution to pass, it would need a positive vote from both: (i) the largest shareholder or those with more than 33% equity interest; and (ii) shareholders other than the large shareholders.

If a board chooses to retain an independent director beyond nine years of service, it should provide justification and seek shareholders’ approval annually. An independent director who has served for more than nine years may continue to serve on the board as a non-independent director.

According to the Securities Commission Malaysia (SC), some 810 independent directors have served for more than nine years, with the longest-serving independent director sitting on a board for 37 years. At least 52 companies did not table specific resolutions to reappoint independent directors, it adds.

It is understood that nine years and the two-tier voting system are on par with international practice, but it is worth noting that it took less than nine years for the Transmile Group Bhd scandal, for instance, to unravel. Transmile founder and former CEO Gan Boon Aun was charged by the SC in 2007 for furnishing misleading financial information and the case is still ongoing. Recall that in 2004, the Kuok Group bought a 28.5% stake in the company that was listed in June 1997.

To be sure, some bars have been set high — possibly a reason the SC is looking at 2020 instead of the end of the year for most companies to meet the 30% women director rule. After all, in 2011, a target was set for a 30% women director quota to be met last year.

As it is, women make up 16.8% of boards and, 25.6% of senior management at the top 100 public listed companies and only 7.2% of 972 CEOs are women, the SC says.

Parties that have been advocating the 30% target include TalentCorp Malaysia and the 30% Club Malaysia. The NAM Institute for the Empowerment of Women, which comes under the Ministry of Women, Family and Community Development, has a Women Directors Registry as well.

The SC is working with stakeholders to establish the Institute of Corporate Directors Malaysia to provide a professional development pathway for directors. A Corporate Governance Council will be established to coordinate all corporate governance initiatives.

Compliance with the MCCG is not mandatory but serves as a benchmark for companies that aspire to adopt strong corporate governance practices and provide fair and meaningful disclosure for the benefit of all stakeholders. Under the listing requirements, companies will have to include in their annual report a narrative of how they are applying the MCCG.

Companies that depart from MCCG practices are expected to have an alternative practice and explain how the latter achieves the intended outcome. Large companies that depart from the recommended practice are also required to disclose actions they have taken, or will take, and the timeframe required to apply the practice. (The first batch of annual reports that apply the MCCG practices are expected around April 2018, for companies with their financial year ending Dec 31, 2017.)

As the information from these disclosures is meant to help better decision-making, it is up to shareholders and investors to decide that there will be consequences when pirates “hang the rules”, by speaking out and voting with their feet.

 

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