With the latest version of the Malaysian Code of Corporate Governance (MCCG 2021), the focus of corporate governance has shifted more concertedly to the aspect of CARE. This was evident from the previous iteration of the Code but the sharper focus of MCCG 2021 is intended to build stakeholder confidence. “It’s about building substance, not just form,” said Ramesh Pillai in his presentation at the IERP’s latest Directors’ Networking Group event. “And it’s not just about shareholder value but stakeholder value.” He pointed out that there was also a push for adoption of best practices by all subsidiaries of companies, whereas this was previously targeted at holding companies.
While many companies tend to use governance in the context of compliance and box-ticking, the idea that the whole group of companies should be aligned, practice-wise, helps to improve overall governance. Ramesh remarked that large companies, especially, have long been encouraged to adopt this kind of step-up practice but the fact that this has to be pointed out, underscores the challenges faced in actually achieving this measure. The Code also expects this practice to be adopted within a reasonable timeframe, although what constitutes “reasonable” is not defined; nor is it clarified what the consequences of not adopting such practices will be.
On the matter of disclosure, MCCG 2021 stresses the need for information to be useful to stakeholders and shareholders, which is a matter of course. Mid-cap and small-cap companies are also expected to adopt practices of larger companies in the course of improving governance. This tends to happen in the business environment due to the trickle-down effect. The practices of big companies tend to be adopted by smaller ones over time, as everything in the MCCG can be applied across the board. Ramesh said that there was a tendency to regard the MCCG as a set of rules and regulations, rather than as an enabling tool that could help companies become more prosperous.
“A lot of explanation is missing, and there is a general lack of awareness of how the Code can add value especially to smaller companies,” he said. “Governance means doing the right thing all the time, regardless.” His presentation covered several aspects of the Code pertaining to the Chairman’s role and that of Non-Executive Directors; Board Evaluation, Appointments and Reappointments and Remuneration; the Audit Committee; Sustainability (including the Joint Committee on Climate Change and Climate Change & Principles-based Taxonomy); Engagement with Stakeholders; and AGMs.
The Code emphasises certain roles of the Chairman, particularly that the Chairman of the Board should not be a member of any of the Board committees, nor should Board and Board committee meetings be combined. This is to ensure that the Chairman remains impartial. “If the Chairman of the Board sits on any committee, that committee’s independence will be in dispute,” said Ramesh. “If problems (at that committee level) are deferred to the Board, the Board may defer to the Chairman.” The Chairman should be able to facilitate objective, independent discussions.
Non-Executive Directors are encouraged to meet annually without executive directors, and to enable open discussions without being influenced by executives and management – two measures that were already practised informally if not formally, Ramesh said. In the matter of Board Evaluation, companies will now have to disclose what action has been taken, and how this affects the composition of the Board; the explanation has to be comprehensive, historical and forward-looking. There is a concerted thrust for gender diversity on Boards, and for 30% of Boards to consist of women. “Firms need to get the best people at the end of the day,” Ramesh said. “Dissenting views are good for debate, and to find the middle ground.”
Where Board Remuneration is concerned, the Code emphasises that remuneration should reflect the different roles and responsibilities of EDs, NEDs and senior management, besides being linked to the company’s performance from the perspective of managing sustainability risks and opportunities. The Code also stresses that controlling shareholders with a nominee or connected director on the Board should abstain from voting when it comes to resolutions on directors’ fees. Additionally, separate resolutions should be tabled on the fees of each NED. There were also differences in the MCCG 2017 and the MCCG 2021 where the Audit Committee was concerned.
Where before the cooling-off period for former key audit partners was two years before joining the client’s audit committee in MCCG 2017, this was extended to three years under MCCG 2021. The suitability, independence and objectivity of the external auditor would also be considered in the light of the audit firm’s Annual Transparency Report. Sustainability is quite extensively dealt with, in MCCG 2021. Firms need to disclose their targets to stakeholders, and how they intend to manage them. The “step up” component sees a person designated within management whose task it will be to integrate sustainability into the firm’s operations.
Companies need to be aware of the expectations of the Joint Committee on Climate Change and the Climate Change and Principles-Based Taxonomy (CCPT). The Joint Committee’s 2021 priorities focus on developing guidance documents on risk management and scenario analyses; supporting voluntary disclosure; conducting stakeholder engagement; and technical capacity-building. The CCPT’s Five Guiding Principles stress climate change mitigation and adaptation; not significantly harming the environment; transitional remedial measures; and prohibited activities. The Taxonomy is intended for financial institutions, in particular, with classification and reporting in support of risk management.
This is to encourage financial flows to support climate objectives as well as design and structure green finance solutions and services. Assessments of existing and prospective customers should be made against these Principles. Some companies have been removed from ESG indices because they were identified as being on the prohibited activities list. Board ESG Committees and Board Risk Committees have examples to follow. The Code also encourages greater engagement with stakeholders – employees, shareholders, potential investors and consumers – to understand their concerns, expectations and the company’s impact on them.
On AGMs, the Code places emphasis on online conduct, such as more robust discussion and smoother operations amid the growing number of online meetings due to pandemic restrictions. Discussions on financial and non-financial performance should be robust, with interactive participation. All participants should be able to view the questions posed, and meeting minutes are to be circulated within 30 days. Also, there should be feedback channels established outside the AGM. However, despite the general beefing up of guidelines, increased explanation and information added to the MCCG 2021, there appear to still be some areas which need work, said Ramesh.
“What is missing in the Code? It’s the input from qualified risk management professionals,” he said. “The input has been from auditors, accountants, lawyers and regulatorss, whereas good governance is about risk management. There are references to administration but these are more about managing operational missteps. Risk management principles have not been strengthened although these are directly related to good governance. The Code stresses managing the lack of compliance and bolstering integrity, which is missing now. But the MCCG has still left things unclarified, particularly how to strengthen existing risk management frameworks and principles.” Ramesh shared his hopes that future revisions would include the views and participation of ERM practitioners so that the code becomes more practical and meaningful in its ERM impacts.
