Corporate Governance Practices in Malaysia

1. Corporate Governance Practices in Malaysia Group 5 Name Matric No Ng Ee Ley 114967 Soon Pei Foon 115190 Yap Hwee Ching 119508 Jaykanthan Jayaraman 127982

2. Topics to be discussed • Introduction- definitions of corporate governance and cultural differences • Corporate Governance in Malaysia • Government actions in the wake of the Asian Financial Crisis 1997/98 • Corporate Governance Reform • Other bodies related to Corporate Governance • Conclusion

3. Corporate GovernanceIntroduction • Many definitions of corporate governance • Eva Parum: a set of principles concerning the governing of companies and how these principles are communicated externally. • J. Wolfensohn: corporate governance is about promoting corporate fairness, transparency and accountability.

4. Introduction- Cont’ • There are many definitions of corporate governance but there is no one set of corporate governance code that fits all corporations around the world. • This is because various countries have different cultures and practices. • No “one size that fits all”

5. Introduction- Cont’ • Prof. Geert Hofstede, Emeritus Professor, Maastricht University cited, “Culture is more often a source of conflict than of synergy. Cultural differences are a nuisance at best and often a disaster.” • Has defined 5 cultural dimensions to assist differentiating cultures.

6. The extent to which people are expected to stand up for themselves or act primarily as a member of a group The degree to which less powerful members of society expect there to be differences in the levels of power describes a society's "time horizon," or the importance attached to the future versus the past and present Value placed on traditionally male or female values. Masculine cultures value competitiveness, assertiveness and ambition, whereas feminine cultures place more value on relationships and quality of life the extent to which a society attempts to cope with anxiety by minimizing uncertainty

7. Introduction- Cont’ • According to his study, he found that Malaysia has a high correlation between the Muslim religion and the Power Distance (PDI) and Uncertainty Avoidance (UAI) scores. • Highly rule-oriented with laws, rules, regulations, and controls- reduce uncertainty

8. Corporate Governance in Malaysia • Malaysia is a multi-racial country – Malays, Chinese, Indians • New Economic Policy (NEP) initiated in 1970 reflects the government’s efforts to reallocate corporate shares to indigenous Malaysians, where the bumiputras usually holds 30% equity in a public listed company. • Created after the May 13th, 1969 incident

9. Corporate Governance in Malaysia • Caused of a much debated problem that was highlighted by the media after the 1997/98 financial crisis; ownership concentration. • Malaysia PLCs are typically characterized with high levels of ownership concentration, and significant participation of owners in management. • Agency problem-between minority shareholders, and the majority shareholders

10. Corporate Governance in Malaysia • Benefits of corporate ownership • provides the controlling shareholders with both sufficient private incentive, as well as the power to monitor and control management, and to achieve profit maximization. • may in general be a more efficient way of resolving agency problems between shareholders and management • implicit contract among family members, like responsibility toward the family, may discourage owner-managers from abusing their power and transferring corporate funds to themselves

11. Corporate Governance in Malaysia • family members have excellent information on the firm • However, a salient problem in this structure- expropriation of minority shareholders by the major shareholders. • Many forms of expropriation • Concentration of ownership creates private benefits of control and a large shareholder may hurt the interest of small shareholders or debt holders

12. Corporate Governance in Malaysia • minority shareholders and institutional shareholders in Asia are generally passive, preferring exit over voice. • Many boards and audit committees do not function as effective oversight mechanisms- causing information asymmetry.

13. Corporate Governance in Malaysia • Malaysian perspective- existence of ownership concentration, thus separation of management from ownership control is rare. • high ownership concentration creates conflict between large and small shareholders- this contributed to the Asian Financial Crisis 1997/98 • the Finance Committee on Corporate Governance (FCCG) proposed that efforts be made to carry out checks and balances against abuses by strengthening the law on related party transactions.

14. Government’s Actions • Malaysia- common law country. • 3 major acts govern corporate activity • Companies Act 1965 • Securities Industry Act 1983 • Securities Commission Act 1993

15. Government’s Actions • Besides that, there is also Bursa Malaysia’s Listing Requirements. • However, there criticism that these bodies lack of transparency and autonomy. • Steps taken by these bodies in response to these criticisms:- • The Securities Commission (SC) has restructured its enforcement department

16. Government’s Actions • A comprehensive report on corporate governance was approved in February 1999 –based on recommendations of the High Level Finance Committee on Corporate Governance. • In March 1998, the Malaysian Institute of Corporate Governance (MICG) was created • Institute of Directors in Malaysia (MID) was also created.

17. Corporate Governance Reform • Finance Committee on Corporate Governance was formed in March 1998 to identify and deal with weaknesses highlighted by the crisis in the then existing governance framework. • Consequently, an Implementation Project Team, subsequently formed and tasked to lead and oversee the implementation of the recommendations of the Report

18. Corporate Governance Reform • Summary of corporate governance reform agenda are as follows:- • Fair treatment of all shareholders and protection of shareholder rights, with particular focus on the rights of minority shareholders • Transparency – through the timely disclosure of adequate, clear and comparable information concerning corporate financial performance, corporate governance and corporate ownership

19. Corporate Governance Reform • Accountability and independence of the board of directors • Strengthening regulatory enforcement • Promoting training and education at all levels to ensure that the framework for corporate governance is supported by the necessary human resource capital.

20. Corporate Governance Reform • Capital Market Masterplan • released in February 2001 • contributes towards furthering the development of the Malaysian corporate governance reform agenda

21. Corporate Governance Reform • Corporate Law Reform Committee (CLRC) • Established in August 2003 • spearhead the corporate law reform programme with the objective to undertake a comprehensive review of the corporate law in Malaysia

22. Other Bodies Related to Corporate Governance • The Malaysian Code of Corporate Governance (MCCG) • introduced in March 2000 as a result of the recommendation made by the Finance Committee on Corporate Governance (FCCG) • sets out the principles and best practices for companies with the aim to increase standards of corporate governance in Malaysia • At first, its compliance was voluntary but after revamped by the Bursa Malaysia require that companies disclose the degree to which they have applied and complied with the principles and best practices in the Code with effect from the financial years ending on June 30th 2001 onwards

23. Other Bodies Related to Corporate Governance • The Minority Shareholders Watchdog Group (MSWG) • was established as a non- profit public company limited by guarantee on 2nd July 2002 to encourage shareholder activism among the minority shareholders. • It seeks to remind minority shareholders, particularly institutional investors, of their rights and responsibilities, and aims to protect minority shareholders from being pressured by the management of listed companies.

24. Other Bodies Related to Corporate Governance • The Malaysian Institute of Corporate Governance (MICG) • was established under the Companies Act 1965 on 10th March 1998 as a public company limited by guarantee • aim to be a leading centre for development of corporate governance and best practices through continuing education programmes for industry practitioners

25. Other Bodies Related to Corporate Governance • The Malaysian Institute of Corporate Governance (MICG)- Cont’ • played significant role in the training and education of the investing public and other capital market participants • currently active in organising and participating seminars, conferences and workshops to inculcate investor activism and awareness of rights.

26. Conclusion • Pressure of globalization- a need for gppd corporate governance practices. • Although “one size does not fit all”, 4 fundamental ideas must exist; responsibility, accountability, fairness and transparency

27. Conclusion • Mr. Danish Crawford-continue with his plan to invest in Malaysia as the highest standards of corporate governance in Malaysia’s capital market has always been Malaysia’s priority. • Credit Lyonnais Securities Asia (CLSA) 2002 Report on Corporate Governance gave Malaysia improved scores across all aspects of corporate governance

28. Conclusion • McKinsey’s survey- gave Malaysia the highest score for transparency among 6 emerging markets and second highest for Board oversight. • ABN Amro in May 2002 mentioned that “Apart from Korea, Malaysia could be the best regulated and most transparent market in Asia right now.”