Time for Boards to Up Their Game
@ the IERP® Global Conference, August 2023
Moderated by Dzafri Sham Ahmad, former INED, Bintulu Port Holdings Bhd, this session’s speakers were Aida Mosira Mokhtar, INED, MIMOS Bhd; Pankaj Bipinchandra, INED, OSK Ventures; and Yuzaidi Mohd Yusoff, INED, Petronas Dagangan and Prudential Malaysia. In his short overview, Dzafri cited some examples of where Boards did not do what they were supposed to, and the consequences of such actions. Today, Boards were under tremendous pressure to demonstrate their relevance when multiple forces threatened business, but could, simultaneously, create opportunities for growth and increased value.
To a question on how boards were structured, Pankaj said that it would depend on the representation of shareholders; small or family-owned businesses tended to have family members as directors. Larger companies have different representation, and the composition of directors would be more varied. This was not the case offor government-linked companies however, which tended to have directors appointed by the government. With the Malaysian Code of Corporate Governance (MCCG) in force, certain companies have a higher number of independent directors, although smaller companies would have a lower percentage.
“Another factor is regulation,” Pankaj said. “Bursa Malaysia’s listing requirements …dictate the structure. There is a push from regulators as to how the board needs to be structured.” Focus was also on the directors themselves – their experience, skill sets and what they could bring to the board. He cited an example of a CEO of one company being appointed to an independent directorship of another firm in a totally different industry, as an example of how different expertise could be obtained by boards. Board structures were being driven by shareholders and regulation, but how far are the narratives being moulded by shareholders?
Explaining how boards usually have to apply different perspectives, Yuzaidi said that while there was strategic direction for how the whole group should move forward, directors were responsible for their respective companies. “Because of the strategic manner and how a particular unit has to grow, we will have different emphasis,” he said. “Also, where the company is, in terms of risk maturity,… risk mitigation, risk appetite. GLCs, for example, are responsible for the national agenda. At the end of the day, you are being appointed to be independent. You have to toe the line, but you also have to take a stand.”
Pointing out that directors have to pull double duty on more than one board committee, Aida said that this could lessen their effectiveness. Also, having ministry representatives on the boards of GLCs could affect their performance. “It depends on where you are in the chain (or) how senior you are…you have to have quorum,” she explained. “You cannot start the meetings if ministry members are not there.” To a question on whether she has seen any changes in board structures, she said there were notable trends in how boards were being structured and operated to reflect the increase in focus on ESG. “This is the result of evolving expectations of stakeholders,” she said. “Boards are also more diverse now.”
Responding to Dzafri’s query if there had been changes to how boards were being run in the past five years or so, Yuzaidi said some components stood out; stricter adherence to regulations was one, and the expectation of better performance was another. “Directors need to be cognisant of the regulations that guide or direct board and director behaviour,” he said. “Independent directors always need to be up to speed and ahead of the game so that they can check on management’s performance – ask if this or that has been done according to regulations.” He stressed the need to prepare for more disruption in the next ten or 15 years, citing the example of internet banking, which was now a reality.
Are younger directors being increasingly taken on boards? Pankaj said that some boards had already taken steps in this direction, appointing board members in their 30s. But while younger members do bring different perspectives, they also needed to be on the ball, and be able to manage what was going on. Board composition is still driven by regulatory demands and the market, he added. Board members therefore have to be well-versed with financial matters. ESG issues, especially, may give rise to some concern as there were few people who were well-versed with these. “Sooner or later, there will be requirements from regulators that one board member must be certified for ESG,” he said.
On the responsibilities of board directors and large shareholders when confronting misaligned corporate values and strategies, and managing excessive compensation, Yuzaidi acknowledged corporate failure in these areas several times. The question was, how it happened in the first place, he said. “Where were the independent directors? Where were the checks and balances? Why wasn’t it addressed earlier? How did it slip past scrutiny?” he said. “Independent directors play an important role in how companies are run. Ask questions if you are an independent director! In the eyes of the law, as an independent director, your responsibility is equal (to that of other directors).”
He added that if a company was caught violating sections under the Companies Act, every director was liable. They thus had a fiduciary duty to ensure that things were done properly. Excessive executive compensation was happening increasingly; the remuneration committee had an important role to play here in terms of checks and balances, to ensure that directors were not excessively paid. However, he pointed out that while EDs and CEOs may be paid very well, independent directors were not, with some being barely paid a median wage, even though they bore equal responsibility for the company, together with other directors.
There is currently no standard fee for directors in Malaysia. Instead, fees are decided based on the range that is available according to industry, Aida said, adding that it should, ideally, be carefully designed as it was one way of retaining quality people, and ensuring good, effective governance. The lack of standardisation was due to company type, size and industry. “Compensation should strike a balance between competitive market rates and responsible stewardship of company resources,” she said. “It should be a mix of retainer fee, meeting fees for attending meetings, or stock options, and committee fees for serving on different board committees.”
Considering that directors’ responsibilities are onerous, and given the emerging risks and trends that they must be aware of, how much time should the board spend on discussing compliance and performance? Yuzaidi admitted that it was something difficult to balance but this was where risk professionals played a critical role. “Risk professionals help the board to ensure and give a certain level of comfort that things are on the right track,” he said. “The board and directors need to spend less time looking at compliance and making sure that every single thing is being taken care of, and can spend more time looking at value creation for the company.”
He stressed that an appropriate culture which supported this, should also be developed by the organisation. But what should boards do to step up their game? Yuzaidi advocated keeping constantly updated through conferences, seminars, reading and asking questions. “You are up against so many issues but you may not have the required skill sets,” he said. “Read a lot, ask questions. If you do not have the expertise, ask for outside help to understand what is going on. You need to make sure you keep up with what is happening.” He identified the lack of people with expertise, who may now be retired, as a major challenge to developing more effective boards.
Aida concurred, adding, “Being a board member does not mean you’ve reached the top and can stop learning. It’s about deep-diving into the subject matter. Board members have to guide management, enhance processes and controls. Make sure the board composition is right…move continuously together. We have to up our game before we improve anyone else’s.” Dzafri sought the panel’s view on balancing between having ministers, government officers and political appointees, and having corporate technocrats on the boards of GLCs and GLICs. “The MCCG states that boards should not appoint politically exposed people but we still see it happening,” Yuzaidi said. “That is the problem.”
He stressed that although the SC has been firm on this point, GLCs were still appointing political persons to their boards. “Even if they are retired, they are still political persons,” he pointed out. “GLCs should ensure that board appointees are above board…people with expertise in the required field…at the right level.” On the matter of diversity and women on boards, Aida remarked that Malaysia was generally mindful of diversity but stressed that women, like everyone else, should earn the right to be on the board, not because there was a seat or a quota to be filled. “It’s good that there is diversity and a quota or policy, but we have to be mindful that we are qualified for it,” she said.
Dzafri polled the panellists on how young corporate members should be groomed to be good board members, prompting Yuzaidi to remark that the first thing would be to educate current board members that these younger members have the will and drive, and should not be stifled. Advocating for “Fail fast but learn faster” he said that the inclusion of younger members on the board should not be viewed only from the process and technology perspective but from the agility approach as well. “At the board level, we need to be agile,” he stressed. “From the organisational perspective, (look at) how to manage. Leverage on plus points.”