90822 Report on the Observance of Standards and Codes (ROSC) CORPORATE GOVERNANCE COUNTRY ASSESSMENT Malaysia July 2012 Report on the Observance of Standards and Codes (ROSC) CORPORATE GOVERNANCE COUNTRY ASSESSMENT Malaysia July 2012 Acknowledgements This assessment of corporate governance in Malaysia has been prepared by David Robinett of the World Bank Global Capital Markets Development Department, as part of the Reports on Observance of Standards and Codes Program. The report is based in part on a template/questionnaire completed by the law firm Mah-Kamariyah & Philip Koh. It also draws on the 2010 Malaysia Corporate Governance Report prepared by the Minority Shareholder Watchdog Group, and the 2012 Accounting and Auditing ROSC, also prepared by the World Bank. It has been updated to reflect all relevant changes through July 2012. The assessment reflects technical discussions with the Securities Commission, Bank Negara Malaysia, Bursa Malaysia, Companies Commission of Malaysia, the Minority Shareholders Watchdog Group, Employees Provident Fund, Khazanah Nasional Berhad, Kumpulan Wang Persaraan, and representatives of companies, banks, and market participants. Alexander Berg, Sau Ngan Wong, James Seward, Alexander Pankov, Charles Canfield, Eugene Spiro, Chris Fabling, Pasquale Di Benedetta, and Catherine Hickey provided advice and comments. Findings of this ROSC are based on the Detailed Country Assessment (DCA), which is presented as a separate annex. About the ROSC What is corporate governance? The goal of the ROSC initiative is to identify weaknesses that may contribute to a country’s economic and financial Corporate governance refers to the structures and processes for vulnerability. Each Corporate Governance ROSC assessment the direction and control of companies. Corporate governance benchmarks a country’s legal and regulatory framework, concerns the relationships among the management, board of practices and compliance of listed firms, and enforcement directors, controlling shareholders, minority shareholders and capacity vis-à-vis the OECD Principles. other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the > The assessments are standardized and systematic, and performance of companies and increasing their access to include policy recommendations and a model country outside capital. action plan. In response, many countries have initiated legal, regulatory, and institutional corporate governance The OECD Principles of Corporate Governance provide reforms. the framework for the work of the World Bank Group in this area, identifying the key practical issues: the rights and > The assessments focus on the corporate governance of equitable treatment of shareholders and other financial companies listed on stock exchanges. At the request of stakeholders, the role of non-financial stakeholders, disclosure policymakers, the World Bank can also carry-out special and transparency, and the responsibilities of the board. policy reviews that focus on specific sectors, in particular for banks and state-owned enterprises. Why is corporate governance important? For emerging market countries, improving corporate > Assessments can be updated to measure progress over time. governance can serve a number of important public policy objectives. Good corporate governance reduces emerging > Country participation in the assessment process, and the market vulnerability to financial crises, reinforces property publication of the final report, are voluntary. rights, reduces transaction costs and the cost of capital, and leads to capital market development. Weak corporate By the end of June 2012, 80 reports have been completed in governance frameworks reduce investor confidence, and 52 countries. can discourage outside investment. Also, as pension funds continue to invest more in equity markets, good corporate governance is crucial for preserving retirement savings. Over the past several years, the importance of corporate governance has been highlighted by an increasing body of academic research. Studies have shown that good corporate governance practices have led to significant increases in economic value added (EVA) of firms, higher productivity, and lower risk of systemic financial failures for countries. The Corporate Governance ROSC Corporate governance has been adopted as one of twelve core best-practice standards by the international financial community. The World Bank is the assessor for the application of the OECD Principles of Corporate Governance. Its assessments are part of the World Bank and International Monetary Fund (IMF) program on Reports on the Observance of Standards and Codes (ROSC). The 2012 Corporate Governance Rosc for Malaysia Contents Executive Summary............................................................ 1 Landscape........................................................................... 5 Key Findings..................................................................... 11 Commitment and Enforcement................................. 11 Shareholder Rights..................................................... 19 Disclosure and Transparency...................................... 24 Board Practices and Company Oversight.................. 28 Findings of the DCA ................................................... 32 Recommendations............................................................ 33 Annex................................................................................ 39 Summary........................................................................... 42 Acronyms definitions A&A ROSC: Accounting and Auditing ROSC (Report Cumulative voting: Cumulative voting allows on Standards and Codes) for Malaysia, 2012 minority shareholders to cast all their votes for one candidate. Suppose that a publicly traded company AOB: Audit Oversight Board has two shareholders, one holding 80 percent of the BNM: Bank Negara Malaysia, the central bank votes and another with 20 percent. Five directors need Bursa: Bursa Malaysia to be elected. Without a cumulative voting rule, each shareholder must vote separately for each director. CA: Companies Act 1965 The majority shareholder will get all five seats, as s/he CCM: Companies Commission of Malaysia will always outvote the minority shareholder by 80:20. CEO: Chief Executive Officer Cumulative voting would allow the minority share- holder to cast all his/her votes (five times 20 percent) CFO: Chief Financial Officer for one board member, thereby allowing his/her chosen CG Code: Malaysian Code on Corporate Governance candidate to win that seat. 2012 Pre-emptive rights: Pre-emptive rights give existing CGR: Malaysian Corporate Governance Report shareholders a chance to purchase shares of a new prepared by the Minority Shareholder Watchdog issue before it is offered to others. These rights protect Group shareholders from dilution of value and control when CMSA: Capital Markets and Services Act 2007 new shares are issued. CSR: Corporate Social Responsibility Proportional representation: Proportional represen- DCA: Detailed Country Assessment, an annex to this tation gives shareholders with a certain fixed percentage ROSC. of shares the right to appoint a board member. EPF: Employee Provident Fund Pyramid Structures: Pyramid structures are struc- GDP: Gross Domestic Product tures of holdings and sub holdings by which ownership and control are built up in layers. They enable certain GLC: Government-linked company shareholders to maintain control through multiple GLIC: Government-linked investment company layers of ownership, while at the same time they share IFRS: International Financial Reporting Standards the investment and the risk with other shareholders at each intermediate ownership tier. ISA: International Standards on Auditing ISQC: International Standard on Quality Control Shareholder agreement: An agreement between shareholders on the administration of the company. KWAP: Kumpulan Wang Persaraan, the retirement Shareholder agreements typically cover rights of fund for government employees first refusal and other restrictions on share transfers, MASA: Malaysian Approved Standards on Auditing approval of related-party transactions, and director MASB: Malaysian Accounting Standards Board nominations. MFRS: Malaysian Financial Reporting Standards Squeeze-out right: The squeeze-out right (some- times called a “freeze-out”) is the right of a majority MIA: Malaysian Institute of Accountants shareholder in a company to compel the minority MSWG: Minority Shareholder Watchdog Group shareholders to sell their shares to him. The sell-out PCG: Putrajaya Committee on GLC High Performance right is the mirror image of the squeeze-out right: a minority shareholder may compel the majority share- ROSC: (Corporate Governance) Report on Standards holder to purchase his shares. and Codes RPT: Related Party Transaction. Withdrawal rights: Withdrawal rights (referred to in some jurisdictions as the “oppressed minority,” SC: Securities Commission “appraisal” or “buy-out” remedy) give shareholders SCA: Securities Commission Act 1993 the right to have the company buy their shares upon SOE: State Owned Enterprise the occurrence of certain fundamental changes in the company. SRO: Self regulatory organization ROSC 1 | Corporate Governance Rosc FOR malaysia executive summary Report on the Observance of Standards and Codes (ROSC) Corporate Governance Country Assessment Malaysia July 2012 Executive Summary This report assesses Malaysia’s corporate governance policy framework. It highlights recent improvements in corporate governance regulation, makes policy recommendations, and provides investors with a benchmark against which to measure corporate governance in Malaysia. It is an update of the 2005 Corporate Governance ROSC. Good corporate governance enhances investor trust, protects minority shareholders, and encourages better decision making and improved relations with workers, creditors, and other stakeholders. Better investor protection can lower the cost of capital and encourage companies to list and raise funds through equity markets. It is crucial to protect retirement savings invested in listed companies. Good corporate governance also helps to ensure that these companies operate more transparently and efficiently. Achievements: With almost 1000 listed companies and two dozen or so IPOs each year, Malaysia has a large and robust capital market. The market is underpinned by a well-developed legal and regulatory framework and strong institutions, including the Securities Commission (SC), Companies Commission of Malaysia (CCM), Bank Negara Malaysia (BNM)—the central bank, and Bursa Malaysia. Corporate governance reform has been a priority since the 1997 financial crisis and has continued since the last CG ROSC in 2005, with significant revisions to the Companies Act 1965 (CA), a new Capital Market and Services Act and new corporate governance guidelines for financial institutions and government linked companies (GLCs), key revisions to the Code of Corporate Governance for listed companies, and the launch of the Corporate Governance Report, a corporate governance “scorecard” produced by the Minority Shareholder Watchdog Group (MSWG). The Audit Oversight Board (AOB) was established, and local accounting standards converged to International Financial Reporting Standards. The SC, BNM, CCM, and Bursa, are well resourced and active in enforcing the various rules and requirements under their jurisdiction. The government has established the Putrajaya Committee on GLC High Performance (PCG), chaired by the Prime Minister, which includes government linked investment companies (GLICs)—some of the largest shareholders in listed companies—to improve the performance and governance of the largest listed GLCs. Basic shareholder rights are well established, and shareholders freely trade their shares, participate in shareholders meetings, including by proxy, and receive a range of information from listed companies. They approve board members, dividends, major and related party transactions (RPTs), Corporate Governance Rosc FOR malaysia | 2 executive summary capital increases, and changes to the company’s articles. RPT rules require interested shareholders to recuse themselves from voting and third party valuations. Shareholders are to approve potential anti-takeover devices and receive tender offers from shareholders that acquire 35 percent of shares, requirements which are regularly triggered in Malaysia’s active market for corporate control. Insider trading is prohibited and other types of self-dealing and conflicts of interest are regulated. Both the SC and Bursa actively monitor the market for abusive practices. GLICs and other institutional investors regularly vote their shares and some have issued voting policies. They occasionally vote against management. The MSWG provides proxy advice. Companies produce complete, audited, annual reports consistent with international standards. These include disclosure of: industry and company trends and prospects; details on directors; risk management; shareholdings of major shareholders and directors; details on RPTs; and statements on corporate governance and corporate social responsibility (CSR). Information is available through company websites, and through the CCM, both online and offline. Companies also pass on a range of material information to the Bursa, which is then posted on its website. Most directors are non-executive directors, and typically at least one third of the board are considered independent of management and major shareholders. Most boards also have separate chairs and CEOs. Duties of loyalty and care are found in the law and responsibilities are spelled out in the CG Code, including oversight of management and strategy, approval of budgets and major expenditures, and ensuring that risk management and internal controls are established and that the company reports true and fair financial statements. In practice, directors take their responsibilities seriously. They participate in director training, and undertake annual self-evaluations of their performance. Listed companies have audit committees of non-executive and independent members, and many also have nomination remuneration committees, as encouraged by the CG Code. Companies also have internal audit functions that report to the audit committee and generally have internal control and risk management systems. Whistleblowers are legally protected. Directors and major shareholders in financial institutions must pass a fit and proper test, and can be rejected and removed by the BNM. Guidelines for banks and other financial institutions have additional norms, including a risk committee for the board. Key Obstacles: Amended several times, the CA still contains gaps with respect to shareholder rights and is not always clear or explicit in key areas. More generally, the legal framework for corporate governance can be complex, and market participants may not always fully understand relevant parts of it. Some market participants have questioned if certain high profile cases related to corporate governance have been pursued as vigorously as they could have been. While they are largely autonomous and do not require the Minister’s consent to exercise administrative, enforcement or supervisory powers, neither the BNM nor the SC are fully independent of the Ministry of Finance (MoF). The Ministry also excerpts 3 | Corporate Governance Rosc FOR malaysia executive summary influence through the GLICs; which in turn play a large role in the market, face potential conflicts of interest across their various holdings, and are responsible for managing substantial assets. While all shareholders have the same basic rights under the law, the law does not call for the board to act in the interest of all shareholders, provide fair treatment to shareholders, or, beyond respecting common rights, treat all shareholders the same. Rules for proxies are interpreted to prevent participation in show of hands voting and do not allow custodians to accurately reflect the views of a range of clients. Postal voting is not allowed, and electronic voting does not happen in practice. The law does not explicitly require timely payments of dividends. GLICS and other institutional investors do not have to vote, disclose voting, disclose or develop voting policies, or develop or disclose policies on conflicts of interest. Minority shareholders have little influence on actual board selection, and whether or not the company decides to issue shares and to who. Substantial transactions, including large RPTs, do not require qualified or super majority approval. Other than approval of stock options, shareholders have little influence on board member pay. If the minority shareholder goes to court, the judge is likely to be skeptical of the case, and few minority shareholders have done so. Annual reports do not have to disclose details on board pay, key risk factors, or why board members are independent. In practice, they disclose direct shareholdings, but often do not disclose indirect control, or control held through shareholder agreements or the “golden shares” used in some GLCs. Given the size of the capital market and number of companies that need to be audited, there are not that many licensed auditors in Malaysia. Independence requirements for auditors do not effectively restrict or limit the provision of a range of non-audit services to clients, and, until recently, there was little oversight of audit quality or independence. Other reputational agents also have limited requirements in terms of disclosing or managing conflicts of interest. While board chair and CEO are generally not the same, the chairman is still generally not independent and may act as a “full-time” chair. Some market participants also question the effective independence of many long-tenured board members and some GLC directors. In practice, the controlling shareholder still has great influence board selection. The controlling shareholder may also pick the CEO, which is not an explicit board power, and in turn some board members may see the interest of the company and the controlling shareholder as being largely the same thing. Findings of the Detailed Country Assessment: The Detailed Country Assessment of the OECD Principles of Corporate Governance is summarized in the tables at the end of the report. The assessment is based on a methodology developed with the OECD and looks at both legal requirements and actual practice. The assessment confirms that Malaysia is a regional leader in corporate governance and has achieved high levels of compliance in a number of key areas, including more sophisticated ones, like prohibition of insider trading and implementation of high quality accounting standards. However, it also finds a number of gaps, 5 principle are implemented at 50 (out of a 100 percent) or less, and 25 at 75 or less. Overall, of the assessed Principles, 9 are rated fully implemented (95+), 31 broadly (75+), 24 partially (35-75), and none are not implemented. Corporate Governance Rosc FOR malaysia | 4 executive summary Next Steps: Malaysia has undertaken important reforms in recent years. However protecting smaller shareholders and retirement savings and maintaining investor confidence will require reform to continue. Key reforms include: > Fundamental reform to the company law to protect shareholders and improve legal clarity; This should include explicit equitable treatment of shareholders and more ways for shareholders to protect their own interests; > Enhancing disclosure of beneficial ownership and other non-financial information; > Strengthen auditor independence and effectiveness of market intermediaries; This should include explicit limits on non-audit work for audit clients; > Revising the CG Code and Listing Requirements to reinforce board independence and support ongoing reform; > Reviewing the role of the GLICs and other institutional investors and owners; This includes better management and disclosure of conflicts of interest and consistently considering governance in their investment decisions; > Maintaining the credibility and effectiveness of the SC; this should include reviewing ways to increase independence and sustain enforcement credibility. 5 | Corporate Governance Rosc FOR malaysia landscape Landscape The Corporate Governance ROSC assessment of Malaysia benchmarks law and practice against the OECD Principles of Corporate Governance. The ROSC focuses on the companies listed on the Bursa Malaysia. This report updates a previous report published in June 2005. Corporate governance reform has been a priority in Malaysia since the 1997 financial crisis. Since the 2005 ROSC, Malaysia has continued to make substantial progress in improving the legal and regulatory framework, with key changes to the Companies Act 1965 (CA), a substantially revised legal framework for securities markets, additional guidance on corporate governance to financial institutions and government linked companies (GLCs), and revisions to the Corporate Governance Code and Bursa Malaysia’s Listing Requirements. The Securities Commission (SC), Companies Commission of Malaysia (CCM), Bank Negara Malaysia (BNM)—the central bank, and the Bursa have all been active in enforcing laws and regulations and building their capacities and resources to do so. Corporate governance in GLCs has been promoted by the Putrajaya Committee, chaired by the Prime Minister. Companies and boards have also taken important steps to improve their governance and generally comply with a range of good practices, as confirmed by the Corporate Governance Report, a corporate governance “scorecard” launched by the Minority Shareholder Watchdog Group (MSWG) However, a number of challenges remain. The CA is decades old, and has gaps and lacks clarity in key areas. While there is no interference in its operational or ongoing activities, the SC is not fully independent of the government, and must be vigilant in protecting its reputation. GLICs and GLCs play a significant role in the market, and must manage potential conflicts of interest. While they have the same basic rights as other shareholders, minority shareholders do not have explicit rights to equitable treatment, have limited influence on board choice and some other key decisions, and do not always receive key information on companies, including full disclosure of who controls them. Auditors can and do provide non-audit services to clients and only recently came under independent oversight, raising questions on their independence. Boards do not have clear power to choose or remove the CEO, and may still put the interest of the controlling shareholder over other shareholders. Capital Markets Malaysia’s real GDP expanded by an average 6 percent per year in 2003-07, not far below the post colonial average of 6.5 percent. The global economic crisis led to a sharp slowdown, with a 1.7 percent contraction in 2009, but the impact was limited: the economy grew by 7.2 percent in 2010 and is estimated to have increased at about 5 percent rate in 2011. Growth has traditionally been driven by exports of both commodities and manufactured goods, and while these remain strong, in recent years it has also been supported by an expanding service sector and rising domestic consumption. Both by regional standards and when compared to other emerging market economies, Malaysia has a large and active capital market. Bursa Malaysia, the single stock exchange, has 956 companies Malaysia has almost 1000 listed companies listed on two boards: the Main Market and the ACE Market. Formerly the MESDAQ, ACE (Access, Certainty, Efficiency) is for smaller and newer companies. At the end of 2011, 119 companies were listed on it. Corporate Governance Rosc FOR malaysia | 6 landscape Listed companies cover a range of sectors, with dozens each in construction, consumer products, finance, manufacturing, plantation, property, technology, and trading and services. The top ten companies account for about 37 percent of market cap and turnover. While not a small fraction, this is lower than in many other comparable economies, and is a measure of the depth of the overall market. In response to the global economic crisis, Bursa Malaysia saw a substantial fall in market The equity market is capitalization in 2008: the main market index fell by almost half. By 2010 these losses had been bigger than those of reversed, and at 176 percent of GDP, the end 2010 ratio of market capitalization to GDP was many higher income substantially higher than in most high income countries or other countries in Asia. From 2000 countries to 2010 market capitalization has grown by 11 percent a year. Turnover on the other hand is somewhat lower than in comparable markets, and may reflect the role of large, government linked investors (discussed below) that generally hold shares for the longer term. The Bursa is an important source of finance for local companies. Over the last 3 years, there have In recent years, been over 70 IPOs (including a few exchange traded funds and trusts, but primarily companies) companies have which have raised over RM 35 billion (~12 billion USD) as well as over 200 secondary offerings. raised over 12 billion USD in IPOs Malaysia also has a large corporate bond market: in 2009 and 2010 there were over 80 new issues that raised or refinanced almost RM 100 billion. As discussed below, a large part of the funds coming into the market are mobilized by government Government linked linked investment companies (GLICs). This includes the Employee Provident Fund (EPF), to investors play a large which private sector employees must pay 11 percent of their salary to the fund, while employers role in the market contribute 12-13 percent. Higher income individuals can invest some of these savings in unit trusts instead. Private pensions are small, though are being encouraged, and the SC is developing a new regulatory regime for pensions. All shares to be traded must be dematerialized in the Bursa Malaysia Depository, which is a wholly owned subsidiary of the exchange. Clearing and settlement are done on a Delivery vs. Payment (DVP) basis at T+3. While investors may make withdrawals, 99 percent of shares are currently dematerialized in the Shares are dematerial- Depository. Depository accounts are held by custodians and brokers, but also include ownership ized and clearing and information for their clients, organized by unique ID numbers. While companies still use third settlement consistent with international party registrars for corporate actions, the official list of shareholders is prepared by the Depository. best practice There are approximately 4 million individual accounts for an estimated 1.5 million investors. 7 | Corporate Governance Rosc FOR malaysia landscape Table 1: Capital Markets: Malaysia vs. Regional and Global Emerging Markets (2010) Number Stock Market Stock Market Market Capitalization Percent Value Private of Listed Capitalization/ Turnover 10 Largest Traded 10 Traded Credit/GDP Companies GDP (%) Ratio (%) Companies (%) Companies (%) (%) Malaysia 957 172.6 27.1 37 37.4 114.9 High Income 196 57.6 71.1 52.9 69.6 114.4 OECD Median Brazil 373 74 66.4 55.4 50.3 56.6 China 2063 81 164.4 23.3 8.4 130 Hong Kong 1396 481 160.1 36.9 29.6 189 SAR, China India 4987 93.5 75.6 27.6 21.9 49 Indonesia 420 51 48.1 40.6 42.3 29.1 Philippines 251 78.8 22.6 42.9 45.7 29.6 Russian 345 67.9 85.7 60.4 95.5 45.1 Federation Singapore 461 177.3 82.9 28.1 59.3 102.1 Thailand 541 87 104.8 45.4 38.1 116.6 Vietnam 275 19.2 82.7 - - 125 Table 2: Equity Raised on Bursa Malaysia, 2007 - 2011  IPOs Secondary Year No. of Issues Funds Raised (RM bil) No. of Issues Funds Raised (RM bil) 2007 26 2.6 133 8.0 2008 23 1.3 58 4.8 2009 14 12.0 49 15.8 2010 29 19.9 105 13.1 2011 28 6.7 125 8.3 Corporate Governance Rosc FOR malaysia | 8 landscape Figure 1: KLCI Index 2007-2011 1,400 1,200 1,000 800 600 400 200 0 2007 2008 2009 2010 2011 Figure 2: Market Cap/GDP 2002-2010 200 180 160 140 120 100 80 60 40 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Figure 3: Turnover Ratio 2002-2010 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 9 | Corporate Governance Rosc FOR malaysia landscape Ownership With a typical free float of just under 60 percent,1 corporate ownership in Malaysia is relatively dispersed when compared to many other countries in South or East Asia. However, the great majority of companies still have a controlling shareholder, albeit one that may own less than 50 percent of shares. Shareholders include: > Families and private controlling shareholders: Traditional family groups are still an important Family groups remain part of the corporate landscape. An estimated 10-12 family groups control a range of companies key players through a mix of direct and indirect ownership and shareholder agreements. However, over the last 15 years smaller listed companies have emerged with owners outside of these groups. > Government Linked Investment Companies (GLICs): Seven investment funds are considered Government linked “government linked”, with government oversight and participation on their board, usually funds hold 30 percent through the Ministry of Finance (see annex 1). Most of these investment companies also of the market have beneficiaries—pensioners and investors--who are also represented on their board. The 7 GLICs include the EPF, PNB, which provides investment opportunities for ethnic Malays and indigenous peoples, and Khazanah, which is the official investment arm of the government. The GLICs are major investors in listed companies, with hundreds of billions USD in shares, and directly hold about 30 percent of total market capitalization. They control a number of companies—known as Government Linked Companies (GLCs)—and have minority stakes in dozens more. They also invest in several dozen non-listed companies, and are major investors in government and corporate bonds, and property. > Foreign companies: Over a dozen subsidiaries of foreign companies are listed on the Bursa, including the Malaysian operations of British American Tobacco (one of the 30 largest listed Foreign investors are important both as companies), Carlsburg, Exxon-Mobil, Guinness, La Farge, Nestle, and Shell. In each, the parent direct and portfolio company retains at least 50 percent of the shares. In some cases, listing was required by the investors licensing agreement the company has to operate in Malaysia. These have been joined by foreign companies listing their shares directly, which has been allowed since 2008. There have been 7 such IPOs since 2009, mostly of Chinese companies. > Retail and foreign investors: The share of trading on the Bursa accounted for by domestic retail investors has tended to drift down in recent years, and is now at about 25 percent, with the Institutional investors remaining 75 percent accounted for by institutional investors. Institutional investors include dominate trading GLICs and asset managers which offer unit trusts, and are now estimated to have total assets of RM 220 Billion (73 billion USD). There are also 60 insurance companies with RM 188 billion in assets, some of which is invested in equity. Foreign participation in the market, also mostly through institutions, has varied, but recently has also been about 25 percent of trading and share ownership. 1  These are shares held by smaller investors and institutions. This excludes the holdings of major shareholders, corporate insiders, and other companies (except investment companies). Corporate Governance Rosc FOR malaysia | 10 landscape Laws and Institutions Malaysia has a common law legal system. The Companies Act 1965 (CA) is based on the 1948 The CCM, SC, and UK act and has been amended a number of times. The Companies Commission of Malaysia Bursa all play (CCM) administers the act. The CCM was created by the merger of the Registrar of Companies important roles and Registrar of Businesses in 2002. in ensuring good governance in listed companies The Securities Commission (SC) is the principle regulator of the capital markets, including market intermediaries and listed companies. Key laws for the capital markets include the Capital Markets and Services Act 2007 (CMSA) and the Securities Commission Act 1993 (SCA). The SC also oversees Bursa Malaysia (Bursa), which in turn acts as the “front-line” regulator. Its Listing Requirements include a number of key corporate governance requirements for listed companies. The SC is also responsible for the Malaysian Code on Corporate Governance (CG Code), originally drafted in 2000. The Minority Shareholder Watchdog Group (MSWG) is an investor advocate set up in 2000. Since 2009, a Since 2009, it has produced the Malaysian Corporate Governance Report (CGR), an annual “scorecard” has been issued that ranks “scorecard” similar to the ones produced in Thailand, Indonesia, and the Philippines that assesses which companies have and ranks the corporate governance of all listed companies based on publicly available data. the best corporate governance The Putrajaya Committee on GLC High Performance (PCG) was formed in January 2005 to oversee the GLC Transformation Program. It has issued corporate governance guidance for the government linked companies (GLCs) in its GLC Transformation Manual, which includes a section on Enhancing Board Effectiveness, aka the “Green Book”, and other guidance to improve GLC performance. Bank Negara Malaysia (BNM) is the central bank and responsible for regulating and licensing GLCs and banks have financial institutions, including commercial banks, investment banks (with the SC), insurance additional corporate governance guidance companies, and Islamic financial institutions. It has issued Guidelines on Corporate Governance and oversight for Licensed Institutions for commercial and investment banks and related guidelines for Islamic financial institutions. Auditors for listed companies are, since 2010, overseen by the Audit Oversight Board (AOB), which was created under the SCA and is overseen by the SC. The Malaysian Institute of Accountants (MIA) is the legally established professional body, which has responsibility for auditor and accountant certification as well as audit standards and practices. 11 | Corporate Governance Rosc FOR malaysia key findings Key Findings The following sections highlight the principle-by-principle assessment of Malaysia’s compliance with the OECD Principles of Corporate Governance. COMMITMENT AND ENFORCEMENT Legal and Regulatory Framework Since the 2005 Corporate Governance ROSC, Malaysia has experienced extensive change to the There has been legal and regulatory framework for corporate governance. This includes major changes to the CA, extensive legal and a substantially revised legal framework for securities markets, significant revisions to the CG Code, regulatory change in and the launch of the AOB. Important revisions were also made to the framework for financial Malaysia since 2005 institutions and listed companies, and the MSWG initiated its Corporate Governance Report. The SC has also recently issued a Corporate Governance Blueprint that assesses current practice and suggests further improvements for the coming years. When the SC prepares draft guidelines and regulations, it consults with various focus groups and Stakeholders are issues exposure drafts, usually allowing 1-3 months for comments. It generally doesn’t call public consulted on new hearings. The Bursa, CCM, and BNM follow similar procedures, and do seem to take feedback rules and regulations into account. New laws or legal amendments are prepared by the office of the Attorney General based on drafts or outlines prepared by the relevant authority(ies), who in turn would consult with stakeholders, as noted. The CA had significant amendments in 2006 and 2007. Key changes included clearer duties of loyalty and care for directors, recusal requirements for conflicted directors, a requirement for Critical amendments shareholders to approve substantial and related party transactions in line with Listing Requirements, have been made to a shareholders’ right to file derivative actions on behalf of the company in cases where directors the CA may have violated their duties, a requirement for companies to establish internal controls, and whistle-blower protection for auditors and company officers. While these are important amendments, the CA, based on the 1948 UK Act, and amended several However the CA times, still shows its age. It lacks clarity on a range of issues, including key shareholder rights, and still lacks clarity and still has a number of gaps, as discussed below. It also offers a weak basis for issues of creditor rights, specifics in key areas insolvency and liquidation, which currently fall under its scope. The CMSA was also introduced in 2007 and amended in 2011, and 2012. This consolidated a number of previous acts, strengthened the SC, and contains important provisions on investor protection, including during changes in corporate control and prevention of insider trading market manipulation. Another important change to securities law was the amendment of the SCA in 2010 to allow for the creation of the AOB, as discussed under Disclosure below. Listing Requirements are issued and periodically revised by the Bursa, with SC approval. They Listing Requirements include a number of key corporate governance provisions, covering non-financial and material include important disclosure, rules for related party and major transactions, and the audit committee in listed corporate governance companies. There are only a few notable omissions, including clearer requirements to disclose provisions key risk factors and details of board member pay and independence, and confirmation of the independence of the external auditor. Corporate Governance Rosc FOR malaysia | 12 key findings The CG Code was also amended in 2007, with criteria for board appointment, encouragement The Code includes for board evaluations, stronger requirements for the audit committee, and a requirement for good practice for directors companies to have an internal audit function. It was further amended in 2012 as this report was being finalized. The 2012 amendments confirm the role of the audit committee in ensuring the independence of the external auditor and requires a company to adopt a code of ethics. The Code is focused primarily on the role of the board, and offers limited guidance on disclosure, rights and equitable treatment of shareholders, or relations with stakeholders, which are addressed (for the most part) by the Listing Requirements and CA. While the CG Code is voluntary, under the Listing Requirements, companies are required to Companies disclose explain the extent of their compliance with the code. In practice, companies comply with many their compliance with the CG Code, but of its provisions and report on their compliance. Compliance in some areas, like separation of board pay and some chair and CEO, have clearly improved in recent years. However based on the CGR there are some other areas are under areas where too many companies still do not confirm the full extent of their compliance, or non- reported compliance. Examples of Code recommendations not confirmed by many companies, either due to a lack of practice or reporting, includes: details of director pay and the link between director and executive pay and performance; the appropriateness of the relationship with the external auditor, the how the audit committee interacts with the external auditor and other details on the practices of the audit committee; and how board evaluations are carried out under the nomination committee and other details on the nomination or remuneration committee. The MSWGs CGR helps supplement the “comply and explain” nature of the CG code by building scores and corporate governance rankings for companies. This provides useful information to market participants and gives an additional incentive for companies and their boards to go beyond what is required in the law or Listing Requirements. The report (or a summary) is not available online or as widely known as it could be. The BNM issued its Guidelines on Corporate Governance for Licensed Institutions, for BNM Guidelines for commercial and investment banks, in 2008 and updated them in 2011. The BNM have issued banks go beyond the similar guidelines for insurance companies and Islamic financial institutions. These are largely CG Code in key areas consistent with the CG Code (and listing requirements), but include additional provisions on risk and risk management, for example requiring bank boards to have risk committees, and address some other issues of importance to financial institutions, including corporate governance in institutions that are part of an international, bank or group. The Guidelines also go beyond the CG Code in other areas, including giving the board the power to remove the CEO. While the framework contains substantial good practice and there are no major contradictions In total, the CG or inconsistencies in the various requirements, the cumulative effect of these rules and other framework can be supporting guidelines and regulations can be daunting for market participants, who do not somewhat complex always have a clear understanding of relevant provisions. The authorities have tried to address this, and opaque holding periodic seminars and other awareness raising and educational activities. The Bursa has also prepared the Corporate Governance Guide, which presents and explains the various legal, code, and listing requirements for directors and other market participants, together with other good practice. 13 | Corporate Governance Rosc FOR malaysia key findings Enforcement The CCM, SC, BNM, and Bursa all have clear areas of authority, and there are no notable gaps in the enforcement framework, at least from the side of the regulators. There are also areas of overlap, The CCM, SC, BNM, and the various bodies do seek to cooperate, with, for example MOUs between the SC and BNM, and Bursa cooperate, but not always as joint inspections between the BNM and SC, and a white collar crime committee that includes the effectively as some SC, CCM, and BNM together with the police and tax authorities. market participants would hope Investment banks and financial conglomerates can come under the jurisdiction of all four, and may face a range of inspections and a fairly involved set of requirements. In their various reviews and inspections, the SC, BNM, and Bursa may not always coordinate or share information as effectively as they could. Corporate governance cases involving, for example, violations of the CA by listed companies, also require high levels of cooperation between the CCM and SC and, if criminal investigation is required, the police. Market participants noted that sometimes this high level of cooperation can be hard to achieve. The Companies Commission The Companies Commission Malaysia (CCM) has authority over all companies under the CA2. Created in 2002 by the merger between the Registrar of Companies and the Registrar of Business, The CCM collects and make available the CCM is well resourced and more active in enforcement than company registrars in many electronically a other countries. The CCM is self financed with fees, which it splits with the national budget. The range of company CCM collects fundamental documents from companies, including founders, articles, and annual information reports, and makes some company information available online. Its records are electronic and can be searched and accessed relatively easily. The CCM has about 400 personnel in the enforcement department, including 15 prosecution officers attached in to the headquarter and 2 prosecution officers in each state. The Senior Director The CCM can launch criminal proceedings in the Enforcement Department is a Deputy Public Prosecutor. Under the CA, the CCM can fine against directors companies and individuals and launch criminal prosecutions. It not only ensures companies file required documents, it can also respond to complaints about other CA violations, like failures to hold the GMS or directors acting with negligence or against the interest of the company. The Securities Commission The Securities Commission (SC) is responsible for oversight of securities markets and has authority The SC has wide over listed companies and other issuers; dealers, brokers, and fund managers; and the Bursa and ranging authority and Audit Oversight Board (AOB). It is drafting new regulation for private pension funds. It jointly powers regulates investment banks with the BNM. The SC issues regulations and guidelines under the CMSA and SCA, licenses capital market intermediaries, conducts investigations, and undertakes a range of enforcement actions. 2  There are approximately 300,000 companies that are considered active, not being wound up, and have been established long enough to require an external audit of financial statements. There are approximately 6000 public companies. Corporate Governance Rosc FOR malaysia | 14 key findings TABLE 3: SC Sanction of Listed Companies: Areas of Enforcement 2007 2008 2009 2010 2011 CRIMINAL PROSECUTION INITIATED Corporate Governance† 16 5 5 7 4 Fraud, Market Manipulation & etc for 1 3 1 Non-Corporate Governance Cases Short Selling & Licensing Related Offences 2 Compound Offered (Settlement) Breach of Condition of Approval for Proposal 1 Financial Reporting 2 2 1 Causing to Issue a Prospectus Which Contains 1 False Information Short Selling & Licensing Related Offences 1 2 1 Securities Not Deposited in the Name of the 1 1 Beneficial Owner Civil Actions Insider Trading 1 1 1 3 Market Manipulation 10 Unlicensed Activities 7 2 7 Breach of Takeovers Code 7 Restitution 4 3 Appointment of External Administrators 2 1 † Examples of corporate governance related offences are providing false or misleading information on corporate proposals/dealings in securities of affairs of a company, fraud involving directors or management, mis-utilisation of issue proceeds, breach of condition of SC’s approval, trading offences involving directors or management. TABLE 4: SC Sanction of Listed Companies: Administrative Penalties ADMINISTRATIVE ACTIONS 2007 2008 2009 2010 2011 Total (until August) Reprimand 5 9 14 Public Reprimand 1 1 Private Reprimand 7 5 24 5 41 Revocation/Suspension 6 8 5 2 21 of License Directives 5 4 20 5 4 38 Imposition of Fine/Penalty 6 3 4 9 1 23 Remedial Action Refusal to Receive Submission 1 1 Total 19 18 56 29 17 139 15 | Corporate Governance Rosc FOR malaysia key findings The SC’s powers include administrative actions, such as warning letters, public reprimands, fines, and the suspension and removal of licenses. It may also issue directives to comply with relevant securities law and regulation. The SC may also initiate civil actions in court, including against directors and controlling shareholders in listed companies, and may collect damages on behalf of shareholders. The SC also has its own staff prosecutors, and with the approval of the Attorney General, may launch criminal proceedings. Over the last 5 years, the SC has taken over 130 administrative actions, 51 civil actions and In recent years, the initiated 45 prosecutions. They also issue dozens of warning letters each year for minor issues. SC has taken enforce- These enforcement actions have covered a range of offenses, including provision of false and ment actions against misleading information, and failure to comply with rules on takeovers and other SC requirements. directors, shareholders They have been taken against directors and controlling shareholders in listed companies as well as and other connected market intermediaries. Recent examples of sanctions include: to listed companies… > A public reprimand against a valuation firm for a valuation given in the context of a corporate action, > Criminal conviction of two directors for falsifying accounts in 2005, > Criminal conviction and prison time for two directors for market manipulation, which also took place in 2005, > Criminal convictions and investor restitution for two large scale investment/ponzi schemes and a case of embezzlement by two company directors. Compared to many other jurisdictions, the SC has been relatively aggressive in using its powers …however some and a range of enforcement tools. However there have also been notable scandals and investigations market participants which remain ongoing. The delay in sanctions being imposed on these cases has raised questions wonder if some cases among market participants on the willingness to pursue them, especially if a prominent person are pursued as aggres- is involved. It should be noted that the SC effectively pursuing these cases frequently also require sively as possible effective cooperation with the CCM and police. The SC is well resourced, with a 2010 budget of RM 136 million (45 million USD). It has 450 professional staff, out of 670 staff in total. The SC pay scale is not tied to the civil service pay scale, and is considered competitive with other regulators and the private sector. The SC has a range of training options and requirements for its staff. It is self-financed: in 2010 its revenue was RM 154 million. While self-financed, the SC is not entirely independent from the government. It is a statutory body with a distinct legal personality, however the Ministry of Finance (MoF) chooses and may While autonomous in practice, the SC is remove the chair and other commission members. It may provide instructions to the SC and not fully independent request information from it, at least to extent that these are consistent with securities law. The from the government MoF must approve proposed regulation (though not guidelines) and receives the annual report under the law from the SC, which it then tables in Parliament. In practice, the SC is operationally independent and the MoF has used these powers sparingly, for example never (openly) forcing a commissioner to resign. Corporate Governance Rosc FOR malaysia | 16 key findings Under the law, the Chair of the SC is also, effectively, its top executive. The law allows for a deputy chief executive, but until recently, this position was not filled. Some market participants have noted that, as with a listed company, it would improve the internal checks and balances of the SC and its accountability if the positions of top executive and chairperson were separate. The SC has been largely free from scandal and has a positive reputation in the eyes of market participants3. However these limits on its independence, and the questions raised by market participants about certain prominent cases, all could raise questions on its impartiality and effectiveness. Bursa Malaysia Demutualized in 2004, Bursa Malaysia is both a locally-listed, profit making company, and the The Bursa is both a “front-line” regulator for listed companies. This arrangement is distinct from other exchanges, like listed company and a the London Stock Exchange, that have generally reduced their regulatory role when demutualizing. regulator The Bursa board has four “public interest” directors chosen by the Ministry of Finance, and starting at the level of the board, seeks to separate operational and regulatory functions. This includes decisions on listing, changes to Listing Requirements, and enforcement actions, which are conducted independently of operations. The Bursa applies good governance practices, consistent with the CG Code and its own Listing Requirements4. The Bursa is profitable with about RM 300 million (100 million USD) in revenue and a RM 180 million budget. This is used to support a number of departments and professional staff engaged in enforcement and ensuring companies comply with Listing Requirements: TABLE 5: Bursa Staff for Compliance and Enforcement Division Staff Listing 40 Corp. Surveillance & Governance 16 Surveillance 25 Investigation 20 The Bursa can amend its Listing Requirements, with SC approval, and issues supporting guidelines The Bursa can and does sanction directors and documents. It can go beyond de-listing and suspending trading, and may take remedial actions in listed companies and fine both companies and their directors and officers. In 2010, the Bursa issued 280 sanctions (against 50 listed issuers and 84 directors) ranging from private reprimand to public reprimand which may be coupled with fines. Total fines of RM 7.4 million were imposed on errant directors. 3  The only potential scandal that has involved the SC in recent times involves the husband of the former Chairwomen, Zarinah Anwar Azizan. Abdul Rahman was involved in several listed companies and bought shares in one before a major transaction was an- nounced, and for which tender requirements were waived. The Chairwomen recused herself from the investigation and no wrong doing was found. 4  Together with the 4 public interest directors, the Bursa board has eight independent non-executives, plus the CEO. Board com- mittees include risk management, audit and nomination, composed of independent board members. The board and its members are evaluated annually and participate in regular training. 17 | Corporate Governance Rosc FOR malaysia key findings It has taken other enforcement actions, including mandating directors to undertake relevant training program and compensate listed companies for losses suffered from contravention of the Listing Requirements by the directors. Bank Negara Malaysia Bank Negara Malaysia (BNM) is the central bank and has authority over commercial banks, The BNM approves insurance companies, and Islamic financial institutions. It jointly supervises investment banks bank auditors, with the SC. The BNM can and does issue regulations and guidelines, conduct examinations and directors, and major inspections, and take a range of enforcement actions. It seeks to ensure that banks and insurance shareholders companies have strong corporate governance and effective risk management systems in place, and approves, and can reject or remove, directors, external auditors, and financial institution shareholders with 5 percent or more of shares. The BNM has also issued guidelines on lending to connected parties to ensure these are done on an arm’s length basis. In practice, many financial institutions in Malaysia are part of groups that contain both financial and non-financial companies. These guidelines seem to be effective, but do leave substantial discretion to the board. The BNM employs risk based supervisions and has the resources to monitor financial institutions and subject them to extensive scrutiny, as needed. The BNM is governed by a 2009 act that reinforces its independence in certain areas, but still leaves a large role for the Ministry of Finance. The MoF must give final approval to regulations and licenses, advises on the choice of BNM’s board members, can remove board members—with cause, and tables BNM’s report in Parliament. Oversight of GLICs and GLCs The 7 government linked investment companies (GLICs) described in annex 1 are governed by their own founding acts and articles. Together with the Ministry of Finance (MoF), the GLICs have stakeholders on their boards, employee and employer representatives in the EPF for example, and in practice act with a certain amount of independence. The government linked companies (GLCs) in turn come under the CA and other laws and regulations, including those for listed companies and or financial institutions, as relevant and GLICs generally carry out their shareholder functions for GLCs in this framework. However, the MoF has special rights in some listed companies, through “golden shares” that provide various powers in the companies’ articles. For example, MoF chooses some board members MoF inc. chooses board members in in the Bursa, and in Pos Malaysia (the postal company), even though most state/GLIC ownership both GLICs and some has been sold in the latter. The MoF carries out many of its shareholder functions through MoF GLCs Inc., a corporate body that carries out asset management for the MoF5. 5  A separate, overlapping category of companies with the GLCs is MoF Inc. companies. 108 companies are listed as MoF Inc. compa- nies, including various GLICs, GLCs, and the Bursa, as well as companies that are wholly owned by the MoF. Corporate Governance Rosc FOR malaysia | 18 key findings To help ensure high performance and governance in the 20 (now 19) largest GLCs (listed in annex 1), the Putrajaya Committee on GLC High Performance (PCG) was established in 2004. Khazanah acts as the secretariat for the PCG, which is chaired by the Prime Minister. The PCG has sought to improve the effectiveness of the GLICs as shareholders and had 10 major initiatives, including Enhancing Board Effectiveness (the Green Book), Intensifying Performance Management (the Blue Book), and the establishment of MiNDA (the Malaysian Directors Academy) to provide training to directors in GLCs. In addition to providing guidance, the PCG actively monitors GLC progress and issues an annual report. The transformation program has contributed to stronger performance and governance for the The PCG has improved largest GLCs. However, the PCG mandate is supposed to end in 2014, and it is unclear if it will large GLC governance, but its mandate is be replaced. There are also the many GLCs that do not come directly under the mandate of the ending PCG. Many of the GLICs are large, managing extensive assets. Some mirror the groups found in the private sector, with a mix of controlling stakes in financial and non-financial companies. The GLICs have sought to diversify their investments, expanding internationally, selling some controlling stakes, and making limited use of non-GLC asset managers. However they will continue to be challenged to manage conflicts of interest and maintain strong performance in the coming years6. The role of the MoF in the GLICs, the SC, and the BNM also raises questions on the impartiality of regulation and if GLCs and private companies face a truly level playing field. The Courts and Alternative Dispute Resolution To improve the performance of the judiciary, session courts focused on white collar crime and Court performance commercial courts have been established. Key performance indicators for courts have also been has improved… introduced. Based on data collected by the World Bank, court efficiency has improved. Court cases in Malaysia take less time, have a lower cost, and a lower number of procedures than other countries in East Asia. They also compare favorably towards OECD countries in terms of time and procedures, though cost is higher. However, courts are still considered to be skeptical towards the claims of smaller shareholders and …but they remain their grounds to bring complaints against the company, directors, or major shareholders. Since the skeptical of small CA was amended in 2007, shareholders have filed a few derivative suits against directors, though shareholders none have yet led to award of damages to a company7. In practice, the great majority of cases under the CA involve disputes between major shareholders, frequently threatening to wind up the company if some concession is not made. 6  There is another group of state linked companies through Petronas, the national oil company which also has some policy and self regulatory functions. Petronas subsidiaries include large listed companies, like Petronas Chemicals, Petronas Gas, and Malaysian Marine Heavy Engineering. These companies do come under MoF or the PCG. Petronas has a Code of Conduct and Business Ethics for directors and employees in its group companies. 7  Cases include Mohd Shuaib Ishak versus Celcom (Malaysia) Berhad, the first case to proceed under the new, it was later thrown out by the appeal court, and Ng Hoy Keong versus Chua Choon Yang & Ors, in which the plaintiff is a 50 percent shareholder. 19 | Corporate Governance Rosc FOR malaysia key findings TABLE 6: Doing Business 2012: Enforcing Contracts Indicator Indicator Malaysia East Asia & Pacific OECD Average Procedures (number) 29 37 31 Time (days) 435 519 518 Cost (% of claim) 27.5 47.8 19.7 Alternative dispute resolution is established in Malaysia, and includes mediation, conciliation, adjudication, and arbitration. The Kuala Lumpur Regional Centre for Arbitration (KLRCA) was Alternative dispute established in 1978 to provide institutional support as a neutral and independent venue for the resolution is estab- lished, including in conduct of domestic and international arbitration proceedings. KLRCA adopts the UNCITRAL capital market cases Arbitration Rules with modifications (the Rules for Arbitration of the Kuala Lumpur Regional Centre for Arbitration). In 2010 Securities Industry Dispute Resolution Center (SIDREC) was established, to facilitate mediation and arbitration between investors and licensed capital market participants, such as brokers and fund managers. It does not appear that alternative dispute resolution is widely used between investors and companies SHAREHOLDER RIGHTS Basic Shareholder Rights Basic shareholder rights are largely in place in Malaysia. Shareholders in listed companies may freely trade their shares and have access to secure shareholder record keeping through the Central Shareholders freely trade their shares, Depository. Under the Companies Act 1965 (CA) shareholders have the right to obtain financial and have other basic statements, company articles, minutes of the general meeting of shareholders (GMS), and the list rights… of shareholders as well as other information on ownership and share classes. Board members must be approved, and can be removed, by shareholders at the GMS. Shareholders also have the right to receive and approve dividends. Changes to a company’s articles and authorized capital require the consent of three-quarters of the shareholders attending the GMS. However there are also some key gaps and omissions in the CA with respect to basic shareholder …but legal gaps rights. There is no explicit right for shareholders to receive dividends in proportion to their persist shareholdings or to receive them in a timely manner, though company articles may allow for both. More generally, there is no explicit legal requirement for shareholders of a particular class of shares to be treated the same or confirmation that their shares carry the same rights8. There are also problems in practice. As discussed below, there are key gaps in disclosure of company ownership and control. Companies also often delay in providing the list of shareholders when it is requested. 8  The right to equitable treatment in these areas is implied under common law. Corporate Governance Rosc FOR malaysia | 20 key findings Shareholder Meetings Under the law, shareholders have the right to attend and vote at the GMS, and do so in the Shareholders actively hundreds and thousands. The annual general meeting of shareholders, and any meeting with participate in the a special resolution (that is one that requires approval by at least three-quarters of present general meeting… shareholders) must be announced at least 21days in advance, and shareholders are to receive the meeting agenda together with the notice and other relevant information, like particulars on proposed board members. The CG Code recommends that the board take reasonable steps to encourage shareholder participation. In practice, companies hold their meetings in generally accessible locations and do not create barriers to shareholder participation. The agenda, notice, and annual report are provided in advance. According to MSWG data, 71 percent of companies provided adequate detail on proposed directors. However there are some potential problems in the law regarding shareholder meetings. Shareholders …but cannot easily have the right to “speak” but not the right to ask questions under the CA, though they generally influence the agenda do so in practice. To amend the agenda requires a petition from at least 100 shareholders with at least 5 percent of the voting rights, which is a high threshold for most shareholders. And only 14 days notice is required for an extraordinary meeting unless it involves a special resolution, which may give little time to prepare for or participate in the meeting. The law allows for voting by proxy, which is widely used, but under current interpretation, proxies Custodians are lightly may not participate in show of hands voting, which is also widely used, unless company articles regulated allow for it9. Electronic voting is allowed under the law, though not widely used, and neither is postal voting. There are also no formal requirements to inform investors on voting procedures, or count ballots, when used, in a confidential manner. Custodians are generally considered professional and in practice represent the interest of their clients, but there are few regulatory requirements in terms of passing on information, or soliciting their feedback on how to represent clients in the GMS. Some Malaysian companies have issued depository receipts to investors in other jurisdictions, and these provide few explicit rights to their beneficiaries. The EPF, KWAP, and some other GLICs and institutional investors consider corporate governance Many institutional factors in making their investments and actively participate and vote in the companies in which investors participate in they are minority shareholders, sometimes voting against proposals from the board. They tend to GMSs and vote be particularly vigilant with respect to related party and other important transactions and repeated reappointment of board members, which they sometimes oppose. Both EPF and KWAP have developed policies to guide their voting. The MSWG offers proxy advice to its members, and follows 300 companies. Sometimes the various investors also cooperate or at least vet various positions with each other. However, certain kinds of cooperation may be considered “acting in concert” under the takeover rules. 9  Until recently, there was also a limit on how many ballots a custodian could cast, which could make it difficult to accurately reflect the views of their clients. Listing rules were changed in 2012 to allow custodians to cast multiple ballots. 21 | Corporate Governance Rosc FOR malaysia key findings The CG Code encourages institutional investors to use their voting rights, and the MSWG released a best practice guide for institutional investors. The Putrajaya Committee also encourages They do not disclose how they vote or GLICs to be active and effective investors. However there is no requirement for these investors to policies for voting or vote, to disclose how they vote, or to disclose their voting policies. And few institutional investors conflicts of interest do in fact disclose voting or voting policies. Conflicts of interest involving institutional investors is regulated by SC Guidelines, in the case of unit trusts, BNM rules for insurance companies, and the founding acts of the various GLICs. However, there is generally no requirement to develop policies on conflicts of interest or disclose such policies10. Participating in Board Appointment and Capital Increases Minority shareholders have little influence While shareholders approve the choice of board members at the GMS, non-controlling shareholders on director selection have few ways to influence who is actually put on the board. The CG Code recommends that board nomination committees consider proposals from any shareholders, but this is purely voluntary. Under the law, it takes 100 shareholders with at least 5 percent of the voting rights to place a nominee before other shareholders. After a board member is nominated, minority shareholders will also have little influence on the final choice: each director is voted on individually, and the controlling shareholder can generally choose each one. According to MSWG data, only 32 percent of boards had a minority shareholder representative. While changes to a company’s authorized capital requires the approval of three quarters of Boards can ask for a shareholders at the GMS, in practice authorized capital tends to exceed issued capital, which can ‘general mandate’ be increased by an ordinary resolution. Existing shareholders generally do not have pre-emptive to issue new shares, rights to participate in share increases. largely at their discretion Listing Requirements allow, and companies regularly include in the agenda of the annual meeting, a “general mandate” authorizing the board to issue new shares up to 10 percent of the current capital in the coming year, largely at their discretion and for any particular purpose the board finds useful. It is up to the board to decide if the shares are offered to the public or in a private placement, and they may be sold at up to a 10 percent discount vis-à-vis the market price. Listing Requirements do have some limitations to prevent abuse, and not allow the shares to be placed with major shareholders, directors, corporate officers, or persons connected to them. 10  Draft SC rules for employer provided pension funds, which currently play a small role in the market, do require developing a policy on managing conflicts of interest. Corporate Governance Rosc FOR malaysia | 22 key findings Related Party and other Extraordinary Transactions Listing Requirements include detailed provisions on disclosure and shareholder approval of related Related party party and major transactions. The Requirements define various percentage ratios: value of assets transactions must be involved in transaction versus assets of the issuer, net profits attributable to the transaction versus disclosed and large net profits of the issuer, equity to be issued for the transaction compared to the issuer’s current transactions approved by shareholders equity, and so forth. When a transaction exceeds 5 percent of one of these ratios and RM 250,000 (about 80,000 USD) then it must be announced to the Bursa with various prescribed details provided on the transaction. The Bursa in turn passes this information on to the public. If one of the ratios exceeds 25 percent, then it must also be approved by shareholders before it can take place. Listing Requirements define related parties, including directors, shareholders with 10 percent or more of shares, and persons or companies connected with them, and sets stricter requirements for transactions involving them. When a transaction with a related party exceeds .25 percent of one of the percentage ratios and RM 250,000 then it must be disclosed. If it exceeds 5 percent, then it must receive an independent assessment and be approved by shareholders. Interested directors and shareholders must recuse themselves and may not vote to approve the transaction. Under Malaysian Financial Reporting Standards (MFRS) related party transactions must also be disclosed in the annual report. Banks have additional requirements for lending to connected parties, as discussed below. Data compiled by the World Bank, which focuses on a RPT, also confirms that legal protection for investors are relatively strong. TABLE 7: Doing Business Investor Protection Component East Asia & OECD DB Investor Protection Indicator Malaysia Pacific Average Extent of disclosure index (0-10) 10 5 6 Extent of director liability index (0-10) 9 5 5 Strength of investor protection index (0-10) 8.7 5.4 6.0 In practice, companies generally comply with these requirements, disclosing required information But related party on substantial and related party transactions, and getting shareholder approval when required. transactions rules may not always be imple- mented effectively The current requirements do have some potential weaknesses: only an ordinary resolution is required (simple majority of votes at the GMS), even for very large transactions, and a meeting to approve such a transaction only requires 14 days notice. Market participants have also raised questions about the independence of some third party assessments. Incomplete disclosure of beneficial ownership and control may allow interested parties to influence the approval. In addition, it is unclear if most GLCs are disclosing or effectively managing all transactions with other GLCs controlled by the same GLIC. 23 | Corporate Governance Rosc FOR malaysia key findings Changes in Corporate Control Malaysia has an active market in corporate control. Controlling stakes are periodically sold, and there have even been cases of proxy fights and “hostile takeovers” being launched when the The SC’s Takeover Code regulates controlling share was low enough or formerly friendly major shareholders disputed control. 2010 Malaysia’s active saw 27 tender offers valued at RM 25 billion (~8 billion USD) for control in listed companies. market in corporate These transactions are governed by the Capital Markets and Services Act 2007 (CMSA) and the control Takeover Code issued by the SC. When a person or persons acting in concert reach 33 percent of ownership, they must make a tender offer to all other shareholders, and all shareholders are to be treated equally. The offer price must be at least as high as that paid by the offeror in the last six months, and the offer is subject to independent evaluation. The offer document must contain detailed information as proscribed in the Takeover Code and the offer must be open to shareholders for at least 21 days. The Takeover Code contains various provisions to prevent abusive anti-takeover tactics or tactics Anti-takeover devices that might favor certain shareholders. It notes that directors should not take action to frustrate the require shareholder offer without shareholder consent, and provides a list of possible anti-takeover devices requiring approval… shareholder approval, like new share issues or major transactions that could affect the offer. It explicitly calls for fair and equal treatment of minority shareholders. The Code does not address shareholder agreements or the “golden shares” that some GLCs have …but shareholder and that provide certain powers to government in the company’s articles, usually the Ministry of agreements and Finance. Both of these could be used to hinder or limit changes in control. Market participants golden shares may frustrate some control have also expressed skepticism about some control changes, and have advocated for open auctions changes of control instead of relying on the Takeover Code. There are also some gaps in the legal framework; the CA lacks clear rules for certain control events, like mergers. Outside of a takeover, it does not appear that shareholders can insist on the The framework is controlling shareholder buying them out, even when the controlling shareholder has 90 percent unclear on merger approval and sell-out or more of shares11. rights Protection from Insider Trading and Self-Dealing The CMSA prohibits trading shares with material information that has not been provided to the public. It also prohibits market manipulation by, for example providing misleading information Insider trading is prohibited to the market. Directors have 3 days to report details on their trading in the company’s shares. In the 30 days before the announcement of quarterly results, directors must give 1 day notice to the company and Bursa on intent to trade, and must disclose the terms 1 day afterward. Both the SC and Bursa engage in real time surveillance of potential irregularities in trading patterns and share price movements, with special attention given to trading by insiders. The SC has taken various enforcement actions in response to possible market manipulation and insider trading, including a number of civil and administrative actions, and has launched 5 related prosecutions in the last 5 years. 11  This is a special case, as the standard free float is 25 percent. However, under the law and Takeover Code as written, it may be possible for shareholders to be stuck in a company that delists if they fail to act during a control change or other corporate event. Corporate Governance Rosc FOR malaysia | 24 key findings Other restrictions on self-dealing include the RPT rules noted above, and restrictions to monitor Shareholders have and avoid conflicts of interest, discussed in the Board section below. The CA does not require limited influence on board compensation directors to seek shareholder approval of their remuneration, though the articles can allow for it. Shareholders are empowered to approve stock options, but otherwise have limited influence on director pay. Shareholder Redress Short of going to the courts, regulators, or selling their shares, shareholders, especially minority Shareholders may shareholders, have limited redress in the face of potential problems or abuse originating with call for the GMS, but the board or management. Shareholders with at least 10 percent of shares may call for a GMS. not for an audit or Shareholders may not call for a special audit or investigation of the company, nor may they sell investigation shares back to the company or controlling shareholders without a court order. As noted, their ability to influence the GMS agenda, participate or effectively block capital increases, choose board members (if in the minority), or overturn board or CEO pay are all limited. The CA does have an oppression remedy that allows shareholders to go to court if the “powers Controlling share- of the directors are being exercised in a manner oppressive to one or more (of them)”. The court holders can be sued as “shadow directors” can require the company or other shareholders to buy back shares, stop prejudicial actions, and request the company be wound up. In practice it is unclear if certain actions (like a GMS decision) can be reversed under the law. In 2007 the CA was amended to allow shareholders to bring derivative actions against directors and company officers for violating their duties on behalf of the company. The CA also notes that “directors” for this purpose includes those that give instructions to directors but may themselves not have the title or have been approved in the GMS, aka “shadow directors”, and in practice usually controlling shareholders. Shareholders cannot collect damages directly from the company or director under the CA. Data collected by the World Bank would seem to indicate that shareholder suits are a viable redress In practice, courts mechanism (see above). However, in practice courts tend to be skeptical of claims from small remain skeptical of shareholders. The SC and CCM can respond to shareholder complaints under their respective suits from investors laws, and the SC can collect damages for investors. DISCLOSURE AND TRANSPARENCY Company Reporting As required by law, listed companies produce audited financial statements that include a balance Companies produce sheet and statements of cash flow, income, and changes in equity, together with comprehensive complete financial notes. Statements are consolidated, as needed. Statements are prepared using Malaysian Financial statements largely Reporting Standards, which, with a few exceptions, are a word for word copy of IFRS12. The consistent with IFRS 2012 Accounting and Auditing ROSC for Malaysia (A&A ROSC) provides an in-depth review of company reporting. Overall, a large majority of companies produce complete statements largely consistent with MFRS (and IFRS), however the A&A ROSC notes that there is room for improvement in terms of reporting geographical segmenting, especially for companies with 12  Exceptions are IAS 41 on pricing of agricultural products and IFRS 9 on financial instruments. Full convergence is planned for 2012. Non-listed companies have the option of using Private Entity Reporting Standards, based on an older version of IFRS/IAS. 25 | Corporate Governance Rosc FOR malaysia key findings international operations, as required by MFRS8 (IFRS 8), intangible assets, as required by MFRS 138 (IAS 38), and exposure to certain financial risks, as required by MFRS 7 (IFRS 7). The Malaysian Accounting Standards Board (MASB) is responsible for setting accounting standards and since 2006 they have worked to close and eliminate the gap between MFRS and IFRS. They also work to inform the public of proposed changes, issuing notes on interpretation, discussion papers, and exposure drafts. The MASB is largely independent of the accounting and audit profession. Practically all companies have websites, and, according to MSWG data, 85 percent regularly Material information update them and 92 percent have investor relation sections. Relevant information is also passed is available through on to Bursa through its LINK system, which is then placed online. the Bursa website This includes material information, which is defined in the Listing Requirements and is to be immediately passed on to the Bursa and the public. Selective disclosure of material information is prohibited. Non-financial Disclosure Financial statements are to be accompanied by a Chairman’s Statement that discusses industry trends and developments, the company’s performance and related events, and future prospects. Annual reports include company and industry There is no requirement to disclose company objectives, nor is there an explicit requirement for trends, but few details listed companies to disclose risk factors. The BNM does require financial institutions to make such on risk factors or statements, and MFRS 7 requires disclosure on risk related to exchange rates, financial activities, impact of strategy and financial instruments. In practice, practically all companies make a Chairman’s Statement with some qualitative discussion, and, according to the MSWG data, 75 percent include some kind of risk management statement. Many companies also have high level disclosure on vision and mission statements. However, only 5 percent provide details on risk factors, and only small percentages discussed impact of strategy, performance targets, or related areas. Shareholders with 5 percent or more of the shares are required to disclose their holdings to the company, which in turn is required to disclose these substantial shareholders as well as the top Major shareholders are disclosed… thirty shareholders in the annual report and directly to the Bursa. In practice, companies do disclose the direct holdings of major shareholders, and some cases of indirect ownership involving the right to acquire shares or voting rights. Shares held through custodian or nominee accounts are also frequently disclosed in annual reports. However most indirect shareholdings, for example through a company or when the holder of a custodian or nominee account is itself a nominee or custodian (a fairly common occurrence), are …indirect sharehold- ings often are not not disclosed to shareholders. Crucially, neither are the terms of shareholder agreements, which are commonly used. “Golden shares”: special rights for the Ministry of Finance found in the articles of some listed GLCs, are sometimes disclosed, though there is no consistent practice in terms of their disclosure. The GLICs, which have their own rules and governance arrangements, are also not consistent in reporting the extent of their holdings or assets. Corporate Governance Rosc FOR malaysia | 26 key findings Under the CA, companies can request additional information on shareholdings and control, and this can include the terms of a relevant shareholders agreement. Regulators also have the means to get ownership information, including requests to other jurisdictions for offshore entities. As for shareholders, brokers sometimes provide information on group structures to investors, and they can also access information by doing research through the CCM, allowing them to track ownership in non-listed companies. This requires work on their part, and may still not fully reveal corporate control, including through shareholder agreements. Companies also disclose the shareholdings of directors, and some also disclose indirect transactions Companies disclose or holdings, for example by family members. They also disclose other director details, like details on directors, background, meetings attended, committees served on, and other directorships. Companies except individual director pay disclose which directors are executive, independent, and non-executive non-independent, but not the criteria used to determine independence. They disclose the aggregate pay to directors, but only a small minority—around 7 percent according to MSWG data—disclose individual director pay or other details like remuneration policy or link between remuneration and performance. 70 percent of companies gave sufficient information on nominated directors before the meeting at which shareholders would approve them, implying that a significant minority failed to pass on that information. As discussed above, companies are required to make both ex-ante and ex-post disclosure of related Companies disclose party transactions, which announcements both through the Bursa website, and disclosure in RPTs, but these the annual report. This includes transactions connected to directors and major shareholders. disclosures are not always complete Companies make these disclosures, however they may not always be comprehensive or complete, including in the case of recurring transactions that are considered to be part of normal ongoing business for the company, but may still require annual approval by shareholders. RPT disclosure between GLCs is not always complete. The great majority of listed companies produce statements on corporate social responsibility. CSR is disclosed, but Overall reporting on stakeholders is mixed: according to MSWG data, 70 percent of companies the wider impact of reported on human resource issues, 64 percent reported on environmental issues, and 78 percent the company generally is not reported on community issues. Some companies also report on creditor related issues, though this is not required. The CG Blueprint call for a move to “integrated” reporting that not only describes CSR programs but gives a more thorough assessment of the impact that their business operations have on the community. Audit and Audit Oversight All companies are required to produce audited financial statements. Audits are based on Malaysian Financial statements Approved Standards on Auditing (MASA), which are issued by the Malaysian Institute of are to be audited Accountants (MIA) and are, except for some references to MIA requirements, identical to current according to interna- tional standards International Standards on Auditing (ISA). Auditors are appointed by shareholders, usually on the recommendation of the board and/or audit committee. 27 | Corporate Governance Rosc FOR malaysia key findings While auditors in Malaysia are highly competent, the A&A ROSC finds that the number of auditors is low given the size of the corporate sector or number of companies being audited. There may be a shortage of auditors… 328,000 companies (including 6,000 public companies and 956 listed companies) are required to have their financial statements audited annually and 1,514 auditors are licensed to audit them (including 302 registered to audit listed companies). In addition the very large number of companies that , under current legal interpretation, must be audited, according to the A&A ROSC the relative shortage of auditors may also be a function of the opportunities that Malaysian accountants have to work outside the country, the current system of licensing auditors, which does not give enough credit for experience gained working outside Malaysia by Malaysian or foreign nationals, and potentially low audit fees which may also make work abroad relatively attractive. It should be noted that this shortage of auditors is primarily a challenge for non listed and smaller …especially for smaller listed companies. The six largest accounting firms audit the equivalent of 94 percent of market audit firms and listed capitalization and nearly all banks and insurance companies. These larger firms are generally companies able to meet the International Standard on Quality Control 1 (ICQS1) and other relevant audit standards. However large audit firms also have a problem with high staff turnover. To audit a listed company requires being a chartered accountant member of MIA, meeting relevant work requirements, and being registered with the CCM and Audit Oversight Board (AOB)13. Maintaining the license requires 60 hours of continuing education over a three year period. To audit a financial institution also requires the approval of BNM. The MIA is a self regulatory body for the accounting and auditing profession and has responsibility for ensuring that audit standards are met. In 5 years the MIA reviewed the work of 34 percent of audit firms, selected at random. In the context of audit standard compliance, it found problems with over 40 percent of audit firms. However these reviews led to very few actions against auditors14. In 2010 the AOB began operation and has primary responsibility for auditors in public interest entities, including listed companies15. The AOB has some industry representation but also includes The new Audit Over- sight Board is inde- members from the CCM and BNM and is overseen by the SC. Over the last two years, it has pendent, but will have been able to review fifty five audit engagements, all at the six main audit firms, and has issued to rapidly expand its warning letters to some audit firms based on its findings. Given the very large number of audit capacity engagements each year, it is unclear if either the MIA or AOB have adequate resources, though the AOB is planning to expand its staff and number of engagements it reviews in 2012. 13  Under the CA, the MoF is responsible for granting auditor licenses, and the Audit License Committee has been established for this purpose. To be a chartered accountant requires a recognized accounting degree and qualifying examination and 3 years relevant experience. A license also requires attendance at the Public Practice Program organized by the MIA, being an active accountant in Malaysia for the last 3 of 4 years, and passing an interview with the Audit License Committee. 14  The MIA also investigates complaints: from July 2010 to June 2011 it handled 19 cases with 6 cases resulting in some kind of sanction. 15  This includes oversight of audit standards, in cooperation with the MIA. In practice, as noted, these have been revised by the MIA to be in-line with ISA. Corporate Governance Rosc FOR malaysia | 28 key findings MIA bylaws require audit partners to rotate after 5 years with a particular client, and require a Auditors are to be 2 year cooling off period. Under the CA, the auditor cannot be an employee, shareholder, or rotated, but face few limits on providing borrower from the company. The MIA bylaws are largely inline with the IFAC Code of Ethics and non-audit services limit external auditors from providing accounting or internal audit services. However, in contrast to good practice internationally and in other countries in the region, other non-audit services, including tax and consulting services, may be provided to audit clients without restriction, and according to MSWG data, 70 percent of auditors performed non-audit services for clients. The recent reviews by the AOB of auditors for listed companies has also found key shortcomings, including a need to make reviews and identification of related party transactions more robust. In 2012 the CG Code was amended to require the audit committee to ensure the independence of the auditor. This includes an explicit review of non-audit services provided. The BNM closely oversees audits and auditors of financial institutions. It has a 5 year cooling The BNM closely off period for auditors of banks, and does note in its CG Guidelines for financial institutions supervises bank that the auditor should be independent and not have business connections with the financial auditors institution that would compromise their objectivity. They have also issued additional guidelines on Appointment of External Auditors for Banking Institutions and similar guidelines for other institutions. Other Reputational Agents Malaysia has two credit rating agencies, which come under guidelines issued by the SC. These There is limited guidelines regulate conflicts of interest and require that the two agencies confirm their compliance disclosure of conflicts of interest by capital with international good practice. Brokers are also required to track and disclose potential conflicts. market intermediaries. Other intermediaries, like sell side analysts and investment banks, are not required to disclose conflicts of interest or how they are managed. In practice, there is limited disclosure in these areas. BOARD PRACTICES AND COMPANY OVERSIGHT Composition and Selection Companies in Malaysia have one tier boards with members classified in one of three ways: At least one third of executive directors, independent directors, and non-executive non-independent directors. The last the board of a listed typically make up about half the board and includes major shareholders and those connected to or company will be independent representing major shareholders. Under Listing Requirements, companies are required to have at least two independent directors who make up at least one third of the board. These directors should not be related to major shareholders and should not have other ties to the company. Practically all listed companies have at least the minimum number of independent and according to MSWG data, about 40 percent of boards exceed it. Companies generally disclose what director falls into what category, they generally do not disclose why a particular director would be considered independent. 29 | Corporate Governance Rosc FOR malaysia key findings To foster additional board independence and objectivity, the CG Code encourages the chairman of the board to be separate from the CEO. This has gone from being the exception to the norm, with Most chairmen are not the CEO, but may not the MSWG reporting that 82 percent of boards now have separate chairmen and CEOs. However, be independent either only 36 percent confirmed that the chairman was an independent director. Many chairmen are major shareholders, former CEOs, and sometimes related to the CEO, often father and son. In some cases the chairman is a full time executive and the so called CEO is really a deputy. How board members, including independent members, are chosen varies somewhat across companies. The CG Code encourages companies to have a nomination committee with a majority Boards have nomina- of independent board members. The great majority of boards have such committees: according to tion committees… but the controlling the MSWG, 82 percent had nomination committee composed mainly of non-executives. Under shareholder may still the Code the nomination committee should take a leading role in board selection, choosing pick the board candidates for approval by the board and ultimately shareholders based on clear criteria. In practice, in some companies the nomination committee is the primary source of director candidates. In other companies, the controlling shareholder still dominates both board nomination and selection. This includes in GLCs, where the relevant GLIC may dominate board selection. While board composition and performance has improved for large GLCs under the guidance of the PCG, market participants still question the independence and objectivity of some GLIC nominated board members. Some independent board members have served a number of three year terms, always being re- nominated and approved. Some institutional investors and other market participants have Some investors are skeptical of board questioned the independence of these long term board members. In 2012, the CG Code was members with long amended to require board members with 9 or more years tenure to be labeled non-independent, tenures or for the company to justify their independence, subject to shareholder approval. Board members in banks, non-bank financial institutions, and insurance companies, must also pass a fit and proper test from BNM, and can be removed by BNM. The SC can also bar someone from serving as a director for violation of securities law. Board Duties and Responsibilities Board member duties of loyalty and care were explicitly incorporated into the CA in 2007. Directors are to act in the best interest of the company, with proper purpose, and in good faith. Board members have They shall exercise reasonable care, skill, and diligence. The CA also includes a “business judgment explicit legal duties to the company rule” that clarifies when a director may be liable for violating his or her duties. Board members in Malaysia generally do take their responsibilities to the company seriously, and indications are that their diligence has increased since the CA was amended. There is no explicit legal requirement, or encouragement in the CG Code, to treat shareholders fairly, act in the interest of all shareholders, and not put one group of shareholders above another. They do not have While many board members do seem to seek to act in the interest of the company, they may a duty to act in the interest of all sometimes still give greater weight to the interest of the main shareholder that effectively appoints shareholders them versus the interest of other shareholders. Corporate Governance Rosc FOR malaysia | 30 key findings The CG Code includes the key responsibilities of the board: overseeing management and the Boards have well de- company’s strategy, setting performance targets, identifying key risks and ensuring implementation fined responsibilities… of risk management and internal control systems, and review and approval of the company’s budget, financing, and major capital expenditures. The CG Code also gives the board oversight of disclosure, and under the CA directors are responsible for ensuring that the company reports “true and fair” financial statements. According to MSWG data, 95 percent of companies make a statement of “lead and control” confirming the primary role of the board. In practice, company boards generally act professionally and effectively oversee strategy and management, engage in key company decisions, and seek to ensure that key systems are in place. The CA and CG Code imply, but do not explicitly state, that the board should choose the CEO. …except the explicit The CG Code does note that the board and nomination committee should develop a succession responsibility to choose the CEO plan and that the board should appraise CEO performance. In practice, the CEO and senior management are overseen by the board, but choice of CEO is still frequently made by the primary shareholder. The CG Code also encourages boards to have remuneration committees, to take the lead in setting their own compensation and that of top management, and to link compensation to performance. However when the company is part of a group or there is a dominant controlling shareholder, the group or the shareholder may take the lead on compensation policy. According to the MSWG data, over 90 percent of companies have remuneration committees, Companies make though only 51 percent confirm that these committees were composed primarily of non-executives. limited use of perfor- 50 percent of companies linked non-executive director remuneration to their contributions and mance based pay responsibilities. 53 percent disclosed that they took into account performance for executives, though a minority confirmed using long-term incentives or significant performance based pay. Some companies do provide stock options to executives. The Board and the Control Environment Listing Requirements mandate that boards have audit committees composed of non-executives, a majority of whom are independent, including the chair, and at least one of whom must have adequate financial and accounting expertise. Companies are also required to have an internal audit function that reports directly to the audit committee; the audit committee should also manage the relationship with the external auditor. Practically all companies have audit committees with independent chairs and also have internal Companies have audit audit functions. According to MSWG data, 55 percent of companies confirmed in their annual committees, who reports that the chairmen of the audit committee had qualifications in accounting and finance, often, but not always, take the lead in and 54 percent noted that the internal auditor did in fact report to the audit committee. Only 35 choosing the auditor percent confirmed that the audit committee had met at least twice with the external auditor in a particular year. These figures probably understate the role of the typical audit committee in audit oversight, but it was also clear from market participants that in many cases company management still had significant influence on both internal and external auditors. 31 | Corporate Governance Rosc FOR malaysia key findings Under the CA the board is to ensure the establishment and adequacy of the company’s internal controls. The CG Code also encourages the board to oversee risk management and the company’s Companies have internal audit and internal controls and information systems. The BNM requires boards of financial institutions to internal control take responsibility for risk and risk management, understand the central role of risk management systems in directing a financial institution, and ensure that appropriate systems are in place. According to MSWG data over 89 percent of companies report on internal controls and 75 percent make a statement on risk management. However only 11 percent have board level risk committees, and these are primarily financial institutions complying with BNM guidance. In many non-financial companies, risk and risk management remains primarily a focus of management, not the board. Audit committees of listed companies are required to review and report to the board on related Directors should party transactions. As discussed above, RPTs have to be disclosed, and if large enough, approved by not participate in a shareholders. Under the CA, a conflicted director should disclose their interest and not participate decision in which they or vote on a decision related to it. There are no specific requirements in the CG Code for the board are interested to manage conflicts of interest. BNM guidelines do task bank boards with carefully managing lending to connected parties. The Boards have some guidelines go into some detail on the need for the board to ensure that a loan to a connected party discretion in is conducted on an arms- length basis and on market terms. Such loans must be documented and lending to affiliated monitored and any risk they pose carefully considered. There is a limit on total exposure to such companies loans to 25 percent of outstanding credit. Beyond this, the loans are largely at board discretion, with limited monitoring from the BNM. Given the prevalence of groups that are connected to banks, including through the GLICs, these guidelines leave ample scope for related lending to take place. The CA and banking law prohibit loans to directors. Under the CG Code, the board should review the internal systems for compliance with laws and regulations, which of course includes legal commitments to stakeholders like employees and Listed companies are now encouraged to creditors. The Code was amended in 2012 to encourage companies to have codes of ethics. The have codes of ethics CCM does include a voluntary code of ethics, though awareness of it is limited, and the BNM encourages financial institutions to have such a code. According to the CG Code, the code of ethics adopted by the company should include provision to facilitate whistleblowing. Whistleblowers also have legal protection under the CA, CMSA, and a Whistleblowers Protection act. Auditors are required to report wrong doing under the CA and CMSA. Board Professionalism Practically all listed companies have board committees, usually made up primarily of independent and non-executive members. These committees allow independent board members to play a leading role in overseeing external and internal audit, director and executive nomination and compensation, and other key areas. Listed companies are required to disclose the terms of reference and minimum functions of the audit committee, and the CG Code encourages the same for the nomination and remuneration committees. In practice, many companies do disclose committee Corporate Governance Rosc FOR malaysia | 32 key findings duties, but do not often disclose the terms of reference or other details like number of meetings or attendance. As noted, whether or not independent directors do in fact play these key roles varies across companies. The CG Code encourages new board members to receive orientation training and Listing Board training is Requirements mandate that all directors receive relevant training each year. The Bursa also requires provided by a range and provides its own induction training for new board members. The BNM requires directors in of institutions, but directors do not licensed institutions to participate in the Financial Institution Director’s Education Programme, always seek out formal and directors in GLCs receive training through the Malaysian Director’s Academy (MinDA). board training unless Director training is also provided by other organizations, including the Malaysian Alliance of required to Corporate Directors (MACD) and the Malaysian Institute of Directors. However, outside of required Bursa and BNM courses, many board members do not feel the need to receive training from any of these institutions and instead meet their continuing education requirements with more general workshops, seminars, or in house training. The CG Code encourages the board to undertake an evaluation led by the nomination committee. Boards undertake In practice, many company boards do undergo self evaluations, which typically involve a self self-evaluations assessment both of the board as a whole and by the individual director of their own performance. In some cases the board may evaluate the chair, and vice versa. The board may be assisted in the evaluation by an outside consultant, and there are enough boards doing so that consultants have begun to specialize in facilitating board evaluation. According to MSWG data, 22.8 percent of companies confirmed that the nomination committee did an annual review of board and only 11.2 percent reviewed particular directors. Very few (0.4 percent) companies presented the appraisal criteria for board members. FINDINGS OF THE DCA The Detailed Country Assessment of the OECD Principles of Corporate Governance is summarized in the tables at the end of the report. The assessment is based on a methodology developed with the OECD and looks at both legal requirements and actual practice. The assessment confirms that Malaysia is a regional leader and has achieved high levels of compliance in a number of key areas, both fundamental ones, but also more sophisticated ones, like prohibition of insider trading and implementation of high quality accounting standards. However, it also finds a number of gaps, 5 principle are implemented at 50 (out of a 100 percent) or less, and 25 at 75 or less. Overall, of the assessed Principles, 9 are rated fully implemented (95+), 31 broadly (75+), 24 partially (35-75), and none are not implemented. 33 | Corporate Governance Rosc FOR malaysia recommendations Recommendations Malaysia has continued to make substantial progress in improving corporate governance in listed Protect minority companies, government linked companies (GLCs), and financial institutions. However protecting shareholders and minority shareholders and retirement savings and maintaining investor confidence requires that maintain market reform continues. confidence Key reforms include: > Fundamental reform of company law to protect shareholders and improve legal clarity; > Enhancing disclosure of beneficial ownership and other non-financial information; > Strengthening auditor independence and effectiveness of market intermediaries; > Revising the CG Code and Listing Requirements to reinforce board independence and support ongoing reform; > Reviewing the role of the government linked investment companies (GLICs) and other institutional investors; > Maintaining the credibility and effectiveness of the Securities Commission (SC). Fundamentally reform company law to protect shareholders and improve legal clarity To better protect shareholders and increase the clarity and consistency of the legal framework for corporate governance, a new company’s act, or, at the very least, substantial amendments, Replace the Companies Act should be considered. The new act should build on the existing legal and regulatory framework for companies and incorporate relevant lessons from other recent company law reforms in common law countries, including the United Kingdom, and Australia. A new act, or amendments to the existing Companies Act 1965 (CA), should explicitly note the following. Shares of the same class should have the same rights, including to dividends, which should be paid in a timely basis, for example within 90 days of being approved or at a time specified in the shareholders meeting. More generally, shareholders should be treated equitably and directors should act in the interest of all shareholders. Shareholders should have an explicit right to ask reasonable questions in the GMS. Lower thresholds for agenda amendments, for example at least 10 shareholders with 1 percent of shares, Include explicit rights to equitable treatment should be considered, and all GMSs should have a standard 21 day notice period. As called for in the CG Blueprint, when a person represents more than one shareholder as a proxy, they should be able to exercise separate proxies for each shareholder so represented. Postal voting should be allowed. Consideration should be given to stronger language on secure counting and disclosure of voting by poll in the GMS. Corporate Governance Rosc FOR malaysia | 34 recommendations Shareholders should have stronger protection during share issues, for example rights to participate in an issue unless three-quarter of the shareholders at the GMS vote otherwise. Major transactions, mergers, and large related party transactions should also require three-quarter approval. Shareholders should approve, or vote down, director remuneration. To facilitate this, disclosure of remuneration should be required. Current language on the oppression remedy and derivative actions should be clear that minority Give shareholders shareholders have these right, consistent with equitable treatment. As recommended in the CG more ways to protect Blueprint, other ways of easing shareholder litigation should be considered. themselves When a single shareholder has more than 90 percent of the shares, they should be required to buy out any other shareholder, if they wish to sell, at a reasonable price. Allowing for shareholders to call a special audit and withdrawal rights for shareholders should be considered. Consider options to allow some board members to be chosen by smaller shareholders, or at least allow such options in law. Examples include cumulative voting, proportional representation, and a “minority slate”, where one or more directors are chosen only by smaller shareholders. In addition, review putting more explicit board responsibilities in the law. This should include choosing and removing the CEO. Ensuring compliance and taking into account the legitimate interest of stakeholders should also be considered. Enhance beneficial ownership disclosure and other non-financial disclosure Company law revisions should also be consistent with the need to ensure effective disclosure of ownership and control. Law and Listing Requirements should include disclosure of ownership rights provided through shareholder agreements, company articles, including “golden shares”, and other mechanisms. Consideration should also be given to how to better disclose indirect ownership to the public, Improve disclosure that is through family members, company ownership, nominees and custodians, and so forth. of shareholder Companies should have to disclose their group structures, preferably with a diagram, that not only agreements and indirect ownership includes subsidiaries but also other companies to which they have significant ownership linkages. As noted, director remuneration should be disclosed, as should that of the CEO and possible other highly paid executives. This should be at the individual level and should include a description of remuneration policy, links to performance, and all forms of compensation, for example pensions or housing or travel benefits. Other disclosure that should be required includes an explicit requirement to disclose key risk Disclose key risk factors and criteria used to determine board independence. As discussed in the CG Blueprint, factors and pay policies consideration should also be given to more comprehensive reporting, including on company objective and reporting on stakeholder impact that goes beyond CSR statements. 35 | Corporate Governance Rosc FOR malaysia recommendations As discussed next, companies should disclose confirmation that the auditor is independent and objective in carrying out the audit. The regime for RPT disclosure and valuation, including for recurring RPTs, should also be reviewed to ensure that it is fully effective and that investors are receiving accurate information. Ensure auditor independence and effectiveness of market intermediaries Revised company law, the CG Code, and Listing Requirements should have clear language calling for the independence of the external auditor. For example, the BNM guidelines for banks note that: “(the audit should be) conducted by fully independent auditors whose business connection with the (bank) should not be such as to compromise the auditor’s independence and objectivity”. Independence and its criteria should be disclosed. Regulation from the SC or Audit Oversight Board (AOB) should place explicit restrictions on Strictly limit non-audit tax and consulting services provided to audit clients. International best practice calls for these services to audit clients functions to not be provided to audit clients. As an alternative or transitory provision, limits could be placed on the amount of fees that can be earned for non-audit services provided to audit clients. The AOB needs to be provided adequate resources to review a larger fraction of the several hundred audit engagements that take place each year. Malaysian Institute of Accountants (MIAs) role should continue to be scrutinized. Recommendations on the MIA, the scope of the mandatory audit, and strengthening the profession contained in the A&A ROSC should also be implemented. Other reputational agents, like sell-side analysts, should have stronger requirements in terms of Strengthen rules for managing and disclosing conflicts of interest. Custodian rules should be strengthened to include custodians and other explicit requirements to pass on relevant information to clients and act on client instructions. intermediaries Revise the CG Code and Listing Requirements to reinforce board independence and support ongoing reform The CG Code, Listing Requirements, and some other guidelines should also be strengthened. Reconsider the scope of the CG Code When revising the CG Code, one fundamental issue to consider is if it should maintain its current scope, or be expanded to say more on shareholder rights, disclosure, and responsibilities to stakeholders. This could help reinforce key practices, but would also overlap more with the CA and Listing Requirements. Even if the scope is kept largely the same, some of these issues should be touched on, as noted next, and some overlap may be inevitable, as for example, changes are made to the code before they can be made to company law. Revisions to the CG Code that should be considered include: Strengthen language on equitable > Calling on board members to treat shareholders equitably, including in the context of corporate treatment of actions; shareholders and board independence > The need to pay dividends in a timely manner, Corporate Governance Rosc FOR malaysia | 36 recommendations > Providing at least 21 days notice before all meetings and include language on the need for secure polling and disclosure of results of a poll; consideration should also be given to the need to provide shareholders with information on voting procedures ; > Stronger language of auditor independence and oversight, as noted; > Stronger language should be considered on the chairmen, with encouragement for independence and that the role is not a full time one; > Encouragement of greater board independence, including moving to one half independent board members; > Stronger requirements for nomination committees to consider small shareholder suggestions; > Boards should have the explicit responsibility to choose and remove the CEO; > Boards should have the explicit responsibility to manage conflicts of interest; > Stronger language on board evaluations and disclosure of criteria used in the evaluation; > Stronger language on director training and possibly reference to “credible director trainers or institutions”. For Listing Requirements, the key changes are those discussed above under non-financial Reconsider the general mandate for share disclosure. Beyond this, the current general mandate for share issues should be reconsidered and issuance limited. Shares should be issued for reasons given ex-ante. Certain very large transactions, should also require approval by 75 percent of shareholders. Some of the suggestions for the CG Code should also be considered, including stronger independence requirements for the board chairmen and directors and companies having codes of ethics. The takeover code should explicitly consider shareholder agreements and, company articles, including “golden shares”, and their impact both on shares controlled for purposes of launching a tender and as possible barriers to changes in control. Review the role of the GLICs and other institutional investors and owners As a new regulatory framework for pensions is developed and the PCG comes to the end of its Review the role of the current mandate, the role of the GLICs as shareholders should be reviewed. Issues that should be GLICs and the MoF in considered include: GLCs > The large fraction of corporate assets still held and directly managed by the GLICs, including the large number of controlling stakes retained and the impact on overall market liquidity; > How GLICs act as shareholders, including through the GMS and board appointment; > Potential conflicts of interest between companies that have the same GLIC as a major shareholder; 37 | Corporate Governance Rosc FOR malaysia recommendations > Extending efforts focused on the largest GLCs, in terms of both governance and other areas, such as performance management, to other GLCs; > The GLICs own governance arrangements and disclosure practices; > The various roles of the Ministry of Finance in financial markets: through their influence on the GLICs, through these on GLCs which include some of the largest banks and financial conglomerates as well as the Bursa; in their role in overseeing the SC and BNM; and as policy maker. Regarding the overall role of the GLICs in capital markets, some possible reforms include allowing greater leeway to move funds to privately managed pensions; selling more controlling stakes as Continue to diversify GLIC investments and consistent with the GLICs mandate; and continuing to diversify GLIC investments. The latter bring in a wider range includes investing more abroad, making greater use of independent, non-GLC, investment of asset managers managers, and encouraging and investing in funds focused on smaller listed companies. Other reforms, like managing conflicts of interest between GLICs, reviewing their own governance arrangements and disclosure, moving beyond the G20, including improving corporate governance, and better balancing the various roles of the MoF, may require a continued and greater role for the Putrajaya Committee (PCG) or a successor and a more fundamental review of government policy. Both the GLICs and other asset managers should develop and disclose policies on conflicts of interest and voting, and disclose how they vote. They should consistently consider governance in Disclose policies on conflicts of interest their investments, using, for example, the data provided by the MSWG and their own analysis. and voting The GLICs should seek to fully comply with RPT approval and disclosure requirements. BNM should review practices with respect to ownership of banks, and any group that includes a bank, government linked or private, should ensure full compliance with the spirit as well as letter of BNM’s requirements on connected lending. Maintain the credibility and effectiveness of the SC To maintain the SC’s strong reputation, there should be consideration of ways of reducing the role of the Ministry of Finance (MoF) and enhancing SC independence, in line with good Increase SC independence practice in other countries. This would probably require changes to or replacement of the Securities Commission Act 1993 (SCA) that would, for example, require the SC report directly to parliament and parliamentary approval of the SC members, who could only be removed with cause. Separation of the positions of chair and chief executive should be considered. Any possible conflict of interest involving members or employees of the SC, including their family members, or personnel financial interest, must be carefully regulated. The SC should also continue its active enforcement of laws and regulations, including the pursuit of case involving prominent individuals. Corporate Governance Rosc FOR malaysia | 38 recommendations In terms of effectiveness, the SC should seek to better coordinate its enforcement efforts in investment banks and financial conglomerates with BNM and where relevant Bursa. It should make greater use of joint inspections and seek to reduce redundant requests. It should seek to ensure effective cooperation with the CCM and related bodies, including the police, especially in pursuing serious corporate governance abuses. 39 | Corporate Governance Rosc FOR malaysia Annex Annex 1: Government Linked Companies and Government Linked Investment Companies As designated by the government, there are seven government linked investment companies (GLICs), each described below. Each have been established for particular purposes and are governed by their own founding acts and articles. Each has investments in a number of companies and other assets, including listed companies. Those companies in which they have a controlling stake are considered government linked companies (GLCs). While governance arrangements for each GLIC vary, each has some government oversight or board participation, usually through the Ministry of Finance (MoF). Most also have stakeholders represented on their boards, employee and employer representatives in the Employee Provident Fund (EPF) for example. Other practices, like disclosure, vary widely across the GLICs, with some coming close to listed companies or market intermediaries licensed by the SC, and others being more opaque and distinctive in their arrangements. The MoF exercises many of its ownership and shareholding functions through MoF Inc. This chooses GLIC board members and oversees the GLICs. Through “golden shares”, special rights in GLC articles, it also sometimes picks some board members and exercises certain ownership functions directly in certain GLCs. For example, the MoF chooses some board members in the Bursa and Pos Malaysia. The GLICs carry out their shareholder functions in the GLCs in the same way private sector owners would, that is by participating in the GMS, nominating board members, and so forth. Some GLICs have created groups of GLCs that mirror the groups found in the private sector. Others hold primarily or only relatively small stakes in any particular company. In many GLCs, along with the controlling shareholder, other GLICs may also have investments. Most of the GLICs participate in the Putrajaya Committee on GLC High Performance (PCG). Established in 2004 to ensure high performance and governance in the 20 (now 19) largest GLCs (listed below), the PCG is chaired by the Prime Minister. Khazanah, a GLIC, acts as the secretariat for the PCG. The PCG has sought to improve the effectiveness of the GLICs as shareholders and had 10 major initiatives, including Enhancing Board Effectiveness (the Green Book), Intensifying Performance Management (the Blue Book), and the establishment of MiNDA (the Malaysian Directors Academy) to provide training to directors in GLCs. In addition to providing guidance, the PCG actively monitors GLC progress and issues an annual report. Employees Provident Fund (EPF): the mandatory, defined contribution, retirement fund for all formal sector employees, employees must pay 11 percent or their salary to the fund, while employers contribute 12-13 percent. (Though higher earning individuals can divert some funds to other investments.) Currently the EPF has 13 million members. It has over RM 440 billion in assets (147 billion USD), of which about 150 billion are held in equities. The EPF has shares in over 100 listed companies, and stakes of 12 percent or more in 30, including many of the largest, and controlling stakes in 3. Corporate Governance Rosc FOR malaysia | 40 Annex Khazanah Nasional Bhd: the investment holding arm of the Government of Malaysia, Khazanah has over RM 100 billion in assets, 90 percent of which is invested in the equity of about 50 Malaysian companies, 13 of which are listed, and in 10 of which it has controlling stakes. Kumpulan Wang Persaraan (KWAP): the retirement fund for government employees, KWAP has about RM 75 billion in assets, including RM 22 billion in domestic equity. It only holds minority stakes, up to 8 percent of a company’s shares. Lembaga Tabung Angkatan Tentera (LTAT): the retirement fund for members of the armed forces, it has controlling stakes in a range of enterprises, including 5 listed companies. Direct holdings of listed companies are worth about RM 6 billion. Lembaga Tabung Haji (LTH): created to facilitate the Hajj and provide Syariah compliant investment opportunities. LTH main investments are in the 7 companies it controls. Permodalan Nasional Bhd (PNB): Created to encourage corporate ownership and wealth creation among Malaysians of Malay and indigenous origin, PNB has nearly RM 200 billion in assets and investments in over 200 companies, with stakes large enough to choose at least some board members in over 130 of them. ValueCap Sdn Bhd: wholly owned and financed by PNB, KWAP, and Khazanah, ValueCap is a long term investor in listed companies, with around RM 20 billion in assets. It generally holds stakes of 5 percent or less. 41 | Corporate Governance Rosc FOR malaysia Annex Table 8: “G20” Larger GLCs FY2010 Market Controlling GLCs Industry Cap (RMm) GLIC AFFIN HOLDINGS 4,618 Finance LTAT Axiata Group 40,114 Telecommunications Khazanah BIMB HOLDINGS 1,504 Finance LTH BOUSTEAD HOLDINGS 5,058 Diversified LTAT CHEMICAL COMPANY OF 733 Chemicals/ PNB MALAYSIA Pharmaceuticals CIMB GROUP HOLDINGS 63,179 Finance Khazanah MALAYSIA AIRPORTS 6,908 Airports Khazanah HOLDINGS MALAYSIA AIRLINE SYSTEM 6,985 Aviation Khazanah MALAYAN BANKING 62,239 Finance PNB MALAYSIA BUILDING 1,043 Finance KWSP SOCIETY MALAYSIAN RESOURCES 2,750 Property/Construction KWSP CORPORATION POS MALAYSIA 1,804 Postal Services (MoF) PROTON HOLDINGS 2,471 Manufacturing Khazanah SIME DARBY 52,883 Diversified PNB TH PLANTATIONS 1,016 Plantations LTH TELEKOM MALAYSIA 12,557 Telecommunications Khazanah TENAGA NASIONAL 36,498 Electrical Power Khazanah UEM GROUP NA Property/Construction Khazanah UMW HOLDINGS 8,097 Manufacturing PNB Corporate Governance Rosc FOR malaysia | 42 summary Summary of the Detailed Country Assessment: Malaysia Malaysia Country Assessment vs. Regional Averages 86 83 79 79 78 76 71 68 64 64 64 61 I. Enforcement II. Shareholder III. Equitable Treat- IV. Equitable Treat- V. Disclosure & Trans- VI. Board & Institutional Rights & ment of Share- ment of Stake- parency Responsibilities Framework Ownership holders holders Malaysia (2012) Selected Asia (Indonesia, India, Malaysia, Thailand, Philippines, Vietnam) 43 | Corporate Governance Rosc FOR malaysia summary OECD Principle Assessment: Corporate Governance Framework | MALAYSIA Overall corporate governance framework 80 Legal framework enforceable/transparent 85 Clear division of regulatory responsibilities 81 Regulatory authority, integrity, resources 86 Source: Detailed Country Assessment. Figures represent the percent implementation of each OECD Principle. 95% = Fully implemented, 75-95% = Broadly Implemented, 35-75% = Partially implemented, and less than 35% = not implemented. International Comparisons 83% 83% 72% 60% 41% Malaysia Indonesia Thailand Philippines Vietnam (2012) (2009) (2012) (2006) (2006) Source: Figures for other countries represent weight-averaging of scores from previous ROSCs. Averages should be interpreted with caution due to changing methodologies over time. Data from previous ROSCs are not directly comparable because reports were completed in prior years (year of ROSC publication in parenthesis). Corporate Governance Rosc FOR malaysia | 44 summary OECD Principle Assessment: Shareholder Rights | MALAYSIA Basic shareholder rights 94 Secure methods of ownership registration 91 Convey or transfer shares 100 Obtain relevant and material company information 94 Participate and vote in general shareholder meetings 100 Elect and remove board members of the board 100 Share in profits of the corporation 81 Rights to part in fundamental decisions 83 Amendments to statutes, or articles of incorporation 100 Authorization of additional shares 75 Extraordinary transactions, including sales of major corporate assets 75 Shareholders GMS rights 57 Sufficient and timely information at the general meeting 79 Opportunity to ask the board questions at the general meeting 75 Effective shareholder participation in key governance 55 Availability to vote both in person or in absentia 38 Disproportionate control disclosure 38 Control arrangements allowed to function 83 Transparent and fair rules governing acquisition of corporate control 91 Anti-take-over devices 75 Exercise of ownership rights facilitated 53 Disclosure of corporate governance and voting policies by inst. investors 63 Disclosure of management of material conflicts of interest by inst. investors 42 Shareholders allowed to consult each other 88 Source: Detailed Country Assessment. Figures represent the percent implementation of each OECD Principle. 95% = Fully implemented, 75-95% = Broadly Implemented, 35-75% = Partially implemented, and less than 35% = not implemented. International Comparisons 83 76 77 71 53 Malaysia Indonesia Thailand Philippines Vietnam (2012) (2009) (2012) (2006) (2006) Source: Figures for other countries represent weight-averaging of scores from previous ROSCs. Averages should be interpreted with caution due to changing methodologies over time. Data from previous ROSCs are not directly comparable because reports were completed in prior years (year of ROSC publication in parenthesis). 45 | Corporate Governance Rosc FOR malaysia summary OECD Principle Assessment: Equitable Treatment of Shareholders | MALAYSIA 72 All shareholders should be treated equally 92 Equality, fairness and disclosure of rights within and between share classes 63 Minority protection from controlling shareholder abuse; minority redress 44 Custodian voting by instruction from beneficial owners 77 Obstacles to cross border voting should be eliminated 85 Equitable treatment of all shareholders at GMs 94 Prohibit insider trading 95 Board/Mgrs. disclose interests Source: Detailed Country Assessment. Figures represent the percent implementation of each OECD Principle. 95% = Fully implemented, 75-95% = Broadly Implemented, 35-75% = Partially implemented, and less than 35% = not implemented. International Comparisons 79 76 75 60 35 Malaysia Indonesia Thailand Philippines Vietnam (2012) (2009) (2012) (2006) (2006) Source: Figures for other countries represent weight-averaging of scores from previous ROSCs. Averages should be interpreted with caution due to changing methodologies over time. Data from previous ROSCs are not directly comparable because reports were completed in prior years (year of ROSC publication in parenthesis). Corporate Governance Rosc FOR malaysia | 46 summary OECD Principle Assessment: Equitable Treatment of Stakeholders | MALAYSIA 75 Legal rights of stakeholders respected 79 Redress for violation of rights 84 Performance-enhancing mechanisms 100 Access to information 75 “Whistleblower” protections 100 Creditor rights and law enforcement Source: Detailed Country Assessment. Figures represent the percent implementation of each OECD Principle. 95% = Fully implemented, 75-95% = Broadly Implemented, 35-75% = Partially implemented, and less than 35% = not implemented. International Comparisons 86 85 70 56 48 Malaysia Indonesia Thailand Philippines Vietnam (2012) (2009) (2012) (2006) (2006) Source: Figures for other countries represent weight-averaging of scores from previous ROSCs. Averages should be interpreted with caution due to changing methodologies over time. Data from previous ROSCs are not directly comparable because reports were completed in prior years (year of ROSC publication in parenthesis). 47 | Corporate Governance Rosc FOR malaysia summary OECD Principle Assessment: Disclosure and Transparency | MALAYSIA VA: Disclosure standards 77 VA1: Financial and operating results of the company 94 VA2: Company objectives 50 VA 3: Major share ownership and voting rights 71 VA 4: Remuneration for board and key executives 73 VA 5: Related party transactions 88 VA 6: Foreseeable risk factors 63 VA 7: Issues regarding employees and other stakeholders 79 VA 8: Governance structures and policies 94 VB: Standards of accounting and audit 100 VC: Independent audit annually 76 VD: External auditors should be accountable 83 VE :Fair and timely dissemination 92 VF: Research conflicts of interests 63 Source: Detailed Country Assessment. Figures represent the percent implementation of each OECD Principle. 95% = Fully implemented, 75-95% = Broadly Implemented, 35-75% = Partially implemented, and less than 35% = not implemented. International Comparisons 87 79 73 64 48 Malaysia Indonesia Thailand Philippines Vietnam (2012) (2009) (2012) (2006) (2006) Source: Figures for other countries represent weight-averaging of scores from previous ROSCs. Averages should be interpreted with caution due to changing methodologies over time. Data from previous ROSCs are not directly comparable because reports were completed in prior years (year of ROSC publication in parenthesis). Corporate Governance Rosc FOR malaysia | 48 Annex OECD Principle Assessment: Responsibilities of the Board | MALAYSIA VIA: Acts with due diligence, care 80 VIB: Treat all shareholders fairly 50 VIC: Apply high ethical standards 55 VID: The board should fulfill certain key functions 79 VID 1: Board oversight of general corporate strategy and major decisions 96 VID 2: Monitoring effectiveness of company governance practices 68 VID 3: Selecting/compensating/monitoring/replacing key executives 70 AID 4: Aligning executive and board pay 70 VID 5: Transparent board nomination/election process 83 VID 6: Oversight of insider conflicts of interest 87 VID 7: Oversight of accounting and financial reporting systems 71 VID 8: Overseeing disclosure and communications processes 83 VIE: Exercise objective judgment 91 VIE 1: Independent judgment 85 VIE 2: Clear and transparent rules on board committees 88 VIE 3: Board commitment to responsibilities 100 VIF: Access to information 85 Source: Detailed Country Assessment. Figures represent the percent implementation of each OECD Principle. 95% = Fully implemented, 75-95% = Broadly Implemented, 35-75% = Partially implemented, and less than 35% = not implemented. International Comparisons 83 78 66 64 43 Malaysia Indonesia Thailand Philippines Vietnam (2012) (2009) (2012) (2006) (2006) Source: Figures for other countries represent weight-averaging of scores from previous ROSCs. Averages should be interpreted with caution due to changing methodologies over time. Data from previous ROSCs are not directly comparable because reports were completed in prior years (year of ROSC publication in parenthesis). 49 | Corporate Governance Rosc FOR malaysia summary Principle FI BI PI NI I. Ensuring the Basis for an Effective Corporate Governance Framework IA Overall corporate governance framework X IB Legal framework enforceable /transparent X IC Clear division of regulatory responsibilities X ID Regulatory authority, integrity, resources X II. The Rights of Shareholders and Key Ownership Functions IIA Basic shareholder rights IIA 1 Secure methods of ownership registration X IIA 2 Convey or transfer shares X IIA 3 Obtain relevant and material company information X IIA 4 Participate and vote in general shareholder meetings X IIA 5 Elect and remove board members of the board X IIA 6 Share in profits of the corporation X IIB Rights to part in fundamental decisions IIB I Amendments to statutes, or articles of incorporation X IIB 2 Authorization of additional shares X IIB 3 Extraordinary transactions, including sales of major corporate assets X IIC Shareholders GMS rights IIC 1 Sufficient and timely information at the general meeting X IIC 2 Opportunity to ask the board questions at the general meeting X IIC 3 Effective shareholder participation in key governance decisions X IIC 4 Availability to vote both in person or in absentia X IID Disproportionate control disclosure X Corporate Governance Rosc FOR malaysia | 50 summary Principle FI BI PI NI IIE Control arrangements allowed to function IIE 1 Transparent and fair rules governing acquisition of corporate control X IIE 2 Anti-take-over devices X IIF Exercise of ownership rights facilitated IIF 1 Disclosure of corporate governance and voting policies by inst. investors X Disclosure of management of material conflicts of interest by inst. IIF 2 X investors IIG Shareholders allowed to consult each other X III. Equitable Treatment of Shareholders IIIA All shareholders should be treated equally Equality, fairness and disclosure of rights within and between share IIIA 1 X classes IIIA 2 Minority protection from controlling shareholder abuse; minority redress X IIIA 3 Custodian voting by instruction from beneficial owners X IIIA 4 Obstacles to cross border voting should be eliminated X IIIA 5 Equitable treatment of all shareholders at GMs X IIIB Prohibit insider trading X IIIC Board/Mgrs. disclose interests X IV. Role of Stakeholders in Corporate Governance IVA Legal rights of stakeholders respected X IVB Redress for violation of rights X IVC Performance-enhancing mechanisms X IVD Access to information X IVE “Whistleblower” protection X 51 | Corporate Governance Rosc FOR malaysia summary Principle FI BI PI NI IVF Creditor rights law and enforcement X V. Disclosure and Transparency VA Disclosure standards VA 1 Financial and operating results of the company X VA 2 Company objectives X VA 3 Major share ownership and voting rights X VA 4 Remuneration policy for board and key executives X VA 5 Related party transactions X VA 6 Foreseeable risk factors X VA 7 Issues regarding employees and other stakeholders X VA 8 Governance structures and policies X VB Standards of accounting & audit X VC Independent audit annually X VD External auditors should be accountable X VE Fair & timely dissemination X VF Research conflicts of interests X VI. Responsibilities of the board VIA Acts with due diligence, care X VIB Treat all shareholders fairly X VIC Apply high ethical standards X VID The board should fulfill certain key functions VID 1 Board oversight of general corporate strategy and major decisions X VID 2 Monitoring effectiveness of company governance practices X Corporate Governance Rosc FOR malaysia | 52 summary Principle FI BI PI NI VID 3 Selecting/compensating/monitoring/replacing key executives X VID 4 Aligning executive and board pay X VID 5 Transparent board nomination/election process X VID 6 Oversight of insider conflicts of interest X VID 7 Oversight of accounting and financial reporting systems X VID 8 Overseeing disclosure and communications processes X VIE Exercise objective judgment VIE 1 Independent judgment X VIE 2 Clear and transparent rules on board committees X VIE 3 Board commitment to responsibilities X VIF Access to information X Note: FI=Fully Implemented; BI=Broadly Implemented; PI=Partially Implemented; NI=Not Implemented; This report is one in a series of corporate governance country assessments carried out under the Reports on the Observance of Standards and Codes (ROSC) program. The corporate governance ROSC assessments examine the legal and regulatory framework, enforcement activities and private sector business practices and compliance, and benchmark the practices and compliance of listed firms against the OCED Principles of Corporate Governance. The assessments: • use a consistent methodology for assessing national corporate govenance practices • provide a benchmark by which countries can evaluate themselves and gauge progress in corporate governance reforms • strengthen the ownership of reform in the assessed countries by promoting productive interaction among issuers, investors, regulators and public decision makers • provide the basis for a policy dialogue which will result in the implementation of policy recommendations To see the complete list of published ROSC’s, please visit http://www.worldbank.org/ifa/rosc_cg.html To learn more about corporate governance, please visit IFC/World Bank’s corporate governance resource Web page at http://www.worldbank.org/corporategovernance Contact us at CG-ROSC@worldbank.org