Securities Commission Malaysia updates the Malaysian Code on Corporate Governance

On 28 April 2021, the Securities Commission Malaysia (“SC”) issued an update to the 2017 edition of the Malaysian Code on Corporate Governance (“MCCG”). The updates took effect on 28 April 2021.
In this article we will examine the main updates made to the MCCG.
To put the updates in context, we will first provide some background information on the MCCG.
The MCCG is based on three key principles: (A) board leadership and effectiveness; (B) effective audit and risk management; and (C) integrity in corporate reporting and meaningful relationships with stakeholders (“Principles”). These Principles are supported by Intended Outcomes (“Intended Outcomes”).
The MCCG sets out a list of actions, practices and processes which a company is expected to adopt (“Practices”) and provides guidance (“Guidance”) that may be adopted when applying a Practice in order to achieve an Intended Outcome.
The Comprehend, Apply and Report (“CARE”) approach embodied in the MCCG requires a company to identify the thought processes involved in practising good corporate governance and to provide a fair and meaningful explanation on how it has applied the Practices. A company that departs from a Practice is required to provide an explanation for the departure, disclose the alternative practice adopted, and how the alternative practice achieves the Intended Outcome.
The MCCG also specifies enhanced practices (“Step Up”) which companies aspiring to achieve excellence in corporate governance are encouraged to adopt.
Changes to the CARE approach
Two changes have been made in respect of the “Apply” approach, namely:
  1. Paragraph 5.1 which requires a company to apply the principles and practices of the MCCG in substance and not in form has been expanded with a call that “companies think seriously about the reasons for their existence, how they deliver on their purpose and then explain how the company applies the principles and practices of the MCCG”.
  1. A new paragraph 5.4 addresses group enterprises and states that a listed company should advocate the adoption of the best practices in the MCCG by its subsidiaries to promote a holistic adoption of corporate governance practices and culture within the group.
The “Report” approach sees two changes being introduced:
  1. The MCCG requires Large Companies (i.e. those which at the start of their financial year (a) are on the FTSE Bursa Malaysia Top 100 Index; or (b) have a market capitalisation of RM2 billion or more) (“Large Companies”) that depart from any practice to disclose a reasonable time frame for adoption of that practice. Paragraph 6.4 now stipulates that three years or less is considered a reasonable time frame. Non-large companies are also encouraged to adopt the practices within three years or less.
  1. A new paragraph 6.5 states that the standard of meaningful disclosure should not be viewed solely from the perspective of the board or management, but also from the perspective of stakeholders. Companies are to consider whether the disclosures would enable stakeholders to evaluate how it has applied the principles and practices of the MCCG.
It is now clarified that although the MCCG identifies practices for Large Companies, mid-cap and small-cap companies are also encouraged to adopt such practices. In addition, all listed companies are encouraged to adopt the Step Ups, particularly Large Companies.
Board responsibilities have been updated to provide that effective board leadership and oversight require the integration of sustainability considerations (i.e. environmental, social and governance issues) into corporate strategy, governance and decision making due to their increasing impact on the ability of companies to create durable and sustainable value and to maintain confidence of their stakeholders. Boards are encouraged to adopt a more holistic view of the business coupled with proactive and effective measures to anticipate and address material ESG risks and opportunities.
The SC commented that companies with a well-articulated and long-term strategy, and a clear plan on sustainability, including supporting the global transition to a net-zero economy, will build confidence of their stakeholders, e.g. consumers, investors, policy makers and regulators, and that those that do not may see their businesses suffer.
Intended Outcome: Every company is to be headed by a board, which assumes responsibility for the company’s leadership and is collectively responsible for meeting the objectives and goals of the company
New Practice
  1. The Chairman of the board may not be a member of the Audit Committee, Nomination Committee or Remuneration Committee to ensure there are checks and balances and objective review by the board.
New/Updated Guidance
  1. Where the CEO or executive directors form part of the board, the non-executive directors should meet amongst themselves at least annually to discuss, among others, strategic, governance and operational issues. 
  1. The SC found that a prolonged vacancy in the position of the Chairman and the practice of appointing a different person as chairperson for each board meeting are against the principles of good corporate governance and accordingly, recommends a Chairman be appointed to ensure accountability on the execution of the Chairman’s role and the role of the board.
  1. The board is to ensure that all its directors are able to understand financial statements and form a view on the information presented.
  1. The Chairman is to ensure that adequate time is allocated for discussion of issues tabled to the board for deliberation.
  1. The Chairman is to ensure that board committee meetings are conducted separately from board meetings to enable objective and independent discussion during the meeting. 
Intended Outcome: The company addresses sustainability risks and opportunities in an integrated and strategic manner to support its long-term strategy and success.
This Intended Outcome concerning sustainability is newly introduced under the recent updates.
New Practices
  1. The board and management are to be responsible for the governance of sustainability in the company including setting the company’s sustainability strategies, priorities and targets.
  1. The board is to take into account sustainability considerations when exercising its duties including, among others, the development and implementation of company strategies, business plans, major plans of action and risk management.
  1. Senior management should drive the strategic management of material sustainability matters.
  1. The board is to stay abreast with and understand the sustainability issues relevant to the company and its business, including climate-related risks and opportunities.
  1. Performance evaluations of the board and senior management should include a review of the board’s and senior management’s performance in addressing the company’s material sustainability risks and opportunities.
New Guidance
  1. To ensure the company remains resilient, is able to deliver durable and sustainable value and maintains the confidence of its stakeholders, the board should proactively consider sustainability issues when it oversees the planning, performance and long-term strategy of the company.
  1. The role of senior management is critical in integrating sustainability considerations in the day-to-day operations of the company and ensuring the effective implementation of the company’s sustainability strategies and plans.
  1. The board and management should continuously engage and consider the views of its internal and external stakeholders to better understand and manage the company’s sustainability risks and opportunities.
  1. The board should have sufficient understanding and knowledge of sustainability issues that are relevant to the company and its business, to discharge its role effectively. To discharge this role, the board should identify its professional development needs concerning sustainability and ensure these are addressed.
  1. The board should consider whether a change in its composition or of its skills matrix is required to strengthen board leadership and oversight of sustainability issues.
  1. The performance evaluation of the board and senior management may include, where applicable, progress against the achievement of sustainability targets. The evaluation should promote accountability and identify issues that may require intervention by the board and/or senior management.
New Step Up
The board is to identify a designated management personnel to provide focus on managing sustainability strategically, and to integrate sustainability into the company’s operations.
Intended Outcome: Board decisions are made objectively in the best interests of the company taking into account diverse perspectives and insights.
New/Updated Practices
  1. A new Practice requires the Nomination Committee to ensure that the composition of the board is refreshed periodically and the re-election of a director should be contingent on satisfactory evaluation of his performance and contribution to the board.
  1. Paragraph 5.5 has been updated to provide that directors should be able to devote the required time to serve the board effectively, The board should consider the existing board positions held by a director, including on boards of unlisted companies.
  1. The use of a two-tiered voting process for shareholders’ approval for reappointment of an independent director has been reduced from twelve to nine years.
  1. Paragraph 5.6 which requires the board to utilise independent sources to identify suitably qualified candidates as directors has been updated to include a requirement (previously a Guidance) that if the selection is based solely on recommendations by existing directors, management or major shareholders, the Nominating Committee should explain why these source(s) suffice and other sources were not used.
  1. A new Practice requires the board to ensure that shareholders have the information they require to make an informed decision on the appointment and reappointment of directors. The board should also provide a statement (together with reasons) as to whether it supports the appointment or reappointment of a candidate.
New/Updated Guidance
  1. A new Guidance is introduced whereby the board is to consider the current composition and tenure of each director when appointing or reappointing a board member, to review its composition and evaluate the need to bring in new skills and perspective to the boardroom.
  1. The board should have a formal, rigorous and transparent process for the appointment of directors (including reappointment) and senior management. The board should consider, among others, whether a director is ‘over-stretched’ in terms of his commitments to meet the demands and expectations of the role.
  1. In relation to State-Owned Enterprises, the SC recommends that all board members, including public officials, should be nominated based on qualifications and have equivalent legal responsibilities. A listed company is discouraged from appointing active politicians (i.e. a Member of Parliament, State Assemblyman or a person holding a position in the Supreme Council or division level in a political party) as a director.
  1. Individuals standing for election should be transparent and declare any existing or potential conflict of interest, including business, family or other relationship, within or outside of the company, that could affect the execution of their role as directors.  
  1. The Guidance is updated to require a board that does not comprise at least 30% women directors to disclose the action it has or will take to achieve this target and the time frame required to do so. The SC has set a time frame of three years as a reasonable time frame for doing so.
  1. A new Guidance is introduced that the participation of women in decision-making positions is to be extended to senior management and the board should establish gender diversity policies to support participation of women on the board and senior management.
Updated Step Up
The Step Up has been updated to stipulate that the tenure of an independent director is to be limited to nine years without further extension.
Intended Outcome: Stakeholders are able to form an opinion on the overall effectiveness of the board and individual directors.
Updated Practice
  1. The requirement for Large Companies to engage independent experts to evaluate effectiveness of the board, its committees and each director has been updated to require such evaluations to be conducted at least once in every three years.
Updated Guidance
  1. Board evaluations should not focus entirely on a historical assessment of directors’ performance but include forward-looking considerations, such as mapping current board competencies against those required for the company’s future direction. The evaluation should also help to determine upskilling or development needs of individual directors individually or the board, collectively. 
Intended Outcome: The level and composition of remuneration of directors and senior management take into account the company’s desire to attract and retain the right talent in the board and senior management to drive the company’s long term objectives. Remuneration policies and decisions are made through a transparent and independent process.
Updated Practices
  1. In relation to remuneration policies, Paragraph 7.1 has been updated by the introduction of a requirement that remuneration policies and practices should appropriately reflect the different roles and responsibilities of non-executive directors, executive directors and senior management.
Updated Guidance
  1. The board is now required to take into consideration the company’s performance in managing material sustainability risks and opportunities when it determines the appropriate level of remuneration for directors and senior management.
  1. Listed companies are encouraged to table separate resolutions on the approval of the fees of each non-executive director.
Intended Outcome: There is an effective and independent Audit Committee. The board is able to objectively review the Audit Committee’s findings and recommendations. The company’s financial statement is a reliable source of information.  
Updated Practice
  1. Paragraph 9.1 has been updated in two respects. First, the policy precluding a former key audit partner of the external audit firm from becoming a member of the Audit Committee is extended to apply to all former partners of the external audit firm. Second, the cooling-off period is now increased from two to three years.
Updated Guidance
  1. The Guidance on the policies and procedures to be used by Audit Committee in assessing the suitability, objectivity and independence of the external auditors has been updated in several respects:
  1. the assessment should consider information presented in the Annual Transparency Report (“ATR”) of the audit firm. If the audit firm is not required to issue an ATR, the Audit Committee is nevertheless encouraged to engage the audit firm on matters typically covered in an ATR;
  1. non-audit services by the external auditor and its affiliates should be approved by the Audit Committee before they are rendered and must not result in the audit firm inadvertently assuming the responsibilities of management, thereby resulting in the breach of the independence requirements on the part of the audit firm; and
  1. the requirement to conduct an annual evaluation on the performance of the external auditors has been augmented by a requirement that follow-up measures should be taken, if required.
Intended Outcome: Companies have an effective governance, risk management and internal control framework and stakeholders are able to assess the effectiveness of such a framework.  
Updated Guidance
  1. In addition to assessing and improving the effectiveness of the risk management, internal control and governance processes, the internal audit function should now also include an assessment of the effectiveness of anti-corruption and whistle-blowing processes.
  1. Internal auditors are encouraged to undertake root-cause analysis in order to provide strategic advice and suggest meaningful business improvements.
Intended Outcome: There is continuous communication between the company and stakeholders to facilitate mutual understanding of each other’s objectives and expectations. Stakeholders are able to make informed decisions with respect to the business of the company, its policies on governance, the environment and social responsibility.  
Updated Guidance
  1. It is recommended that the board undertakes active engagements with relevant stakeholders, for example, employees, shareholders, potential investors and consumers, to gain a better understanding of the expectations and concerns (if any) of these stakeholders and the company’s impact on them.
  1. Companies are encouraged to establish channels for stakeholders to provide their views, feedback and complaints. Companies should also acknowledge and address stakeholders views, feedback or complaints appropriately.
Intended Outcome: Shareholders are able to participate, engage the board and senior management effectively and make informed voting decisions at general meetings.
New Practices
  1. A new practice is included in paragraph 13.4 to require the Chairman of the board to ensure that general meetings support meaningful, interactive and robust engagements between the board, senior management and shareholders. Shareholders should be provided with sufficient opportunity to pose questions during the general meeting and all questions should receive a meaningful response.
  1. The board must ensure that virtual (fully or hybrid) general meetings of the company support meaningful engagement between the board, senior management and shareholders, including an infrastructure that supports a smooth broadcast and interactive participation. Questions posed by shareholders should be made visible to all participants during the meeting.
  1. A new paragraph 13.6 requires minutes of the general meeting to be circulated to shareholders no later than 30 business days after the meeting.
New Guidance
  1. Shareholders should be given access to information they require to participate in discussion and cast informed votes. Responses should be provided to questions posed by shareholders during the meeting to enable all meeting participants to stay informed. A feedback channel outside of the general meeting should be established to enable shareholders to share feedback and questions and receive responses. The board should leverage on such channel if time does not permit further discussions during a general meeting.
  1. Virtual meetings should support meaningful engagement between the board, senior management and shareholders. A one-way monologue by the board should be avoided. The importance of shareholders being given the opportunity for real-time interaction, including responses to questions or remarks posed, has been emphasised.
  1. The minutes of general meeting to be circulated by listed companies should be complete and include details of the proceedings, issues or concerns raised by shareholders and the company’s responses.  
The updates to the MCCG has raised the game in relation to the corporate governance landscape in Malaysia. The introduction of sustainability considerations is timely and welcome.
Further, the additional matters that have to be considered in appointing directors, in particular the need to consider the skillsets of existing directors and the additional skills required by board members to meet the future challenges of the company means that simply appointing old chums who are ill-equipped to discharge their roles as directors will no longer pass muster.
Update by Kok Chee Kheong (Partner) of the Corporate Practice of Skrine.