Public Consultation on draft Governance Code for Malaysian Micro, Small, Medium and Enterprises
21 March 2024
The SME Governance Working Group (‘
the Working Group’) issued a draft
Governance Code for Malaysian MSMEs (‘
Code’) on 11 March 2024 for public consultation.
The Working Group was formed with the support of the Ministry of Entrepreneur and Cooperative Development (‘
MECD’) and is chaired by the Securities Commission Malaysia (‘
SC’) with members comprising representatives from MECD, SME Corporation Malaysia (‘
SME Corp’) and the Malaysian Institute of Corporate Governance (‘
MICG’).
The development of the Code is aligned with the goal and strategic thrust under the 12
th Malaysia Plan and the National Entrepreneurship Policy 2030 to improve transparency and integrity and ensure a competitive business environment.
The development of the Code was initiated as part of SC’s corporate governance strategic priorities to inculcate early understanding and application of governance practices by small and medium enterprises. The Code serves as a stepping stone for such enterprises to progress towards adopting the Malaysian Code on Corporate Governance (MCCG) which is targeted at listed companies. It also complements other existing guidance available for such enterprises including the ESG Quick Guide for MSMEs by SME Corp and Capital Market Malaysia's Simplified ESG Disclosure Guide.
Adoption of the Code by Micro, Small, Medium and Enterprises (‘
MSMEs’) is
voluntary.
The implementation of the Code will be led by the MICG, working with SME Corp and other relevant agencies.
The Code comprises five fundamental principles, namely:
- decision-making and strategic oversight
- culture and commitments
- risk governance and internal controls
- sustainability
- disclosure, transparency and data protection.
The Code is divided into two main parts:
- Part 1 sets out the Governance and Sustainability Matrix that provides an overview of the principles and practices of good governance and sustainability practices under each of the five guiding principles for each category of MSMEs; and
- Part 2 elaborates further on the principles and practices outlined in the Governance and Sustainability Matrix and provides recommended best practices that MSMEs can adopt.
Each practice will be assigned a reference as follows:
- "M" - represents a mandatory requirement. Failure to comply may result in enforcement action. These mandatory requirements are provided/ stipulated under existing statutes and/or regulations (e.g. Companies Act 2016, Personal Data Protection Act 2010, Employment Act 1955 and Income Tax Act 1967); It is to be noted that these requirements are non-exhaustive; or
- "R" - recommended as best practices for MSMEs offering practical guidelines for integrating good governance and sustainability into daily operations.
Part 2 : The Principles
The principles set out in Part 2 of the draft Code substantially replicate the principles summarised in the Governance and Sustainability Matrix and in certain instances elaborate on the latter. In addition Part 2 also recommends best practices in relation to certain of the principles. For example, in relation to directors in the context of decision making and strategic oversight under Principle 1, Part 2 provides the following guidance:
- directors who delegate their powers are reminded that they remain accountable for the delegate’s actions;
- in relation to directors’ meetings, the Code recommends that directors meet at the minimum, on a quarterly basis to discuss matters relating to the company; and
- the pre-requisites for a director to be considered as an independent director.
In relation to risk management under Principle 3, paragraph 3.7 of Part 2 recommends a company to establish standard operating procedures (SOPs) to manage business operations, enhance efficiency and accountability, ensure quality assurance and promote continuous improvements and robust oversight. The Code also states that effective SOPs should prioritise risk management by incorporating comprehensive control oversight measures that entails careful consideration and integration of the three lines of defence model – the first being the focus on operational management, the second being risk management and compliance oversight, and the third, internal audit and assurance.
Further recommendations relating to sustainability under Principle 4 includes:
- conducting a comprehensive assessment to identify specific aspects of the company’s business operations that have an environmental impact or are susceptible to environmental factors; including evaluating processes, resource utilisation, and supply chain elements to understand the ecological footprint better;
- systematically assessing environmental risks that may threaten the business, such as regulatory changes, resource scarcity and climate-related risks to enable effective risk mitigation strategies to be developed; and
- establishing clear and robust procedures to prevent significant environmental impact or reduce emissions, which includes implementing sustainable practices, adopting green technologies and integrating environmentally friendly policies into day-to-day operations.
Deadline for submission of feedback
Comments on the draft Code can be submitted to
www.micg.org.my/msmecode by 30 April 2024.
Comments
The Working Group is to be commended for making the contents of the Code easily comprehensible and, where appropriate, differentiating the principles that apply to different categories of MSMEs.
As stated in the introduction section of the draft Code, MSMEs form an important backbone of the Malaysian economy, accounting for 97.4% of business establishments in the country (of which 78.7% of SMEs are micro-enterprises) and contributing to 38.4% of the country’s Gross Domestic Product (GDP).
2 It also emphasised that as key suppliers and service providers to larger enterprises, MSMEs impact the supply chain significantly.
It is hoped that the Code will be the north star of the MSMEs that are now embarking on the journey to improve their corporate governance.
Article by Sheba Gumis (Partner) and Francine Ariel Paul (Senior Associate) of the Corporate Practice of Skrine.
1 The Code clarifies that it has included public listed companies within the Governance and Sustainability Matrix to showcase a mature end for the spectrum of practices.
2 Statistics from Department of Statistics of Malaysia for Year 2022.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.