Industry Council administers
Corporate governance is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with its all stakeholders (financiers, customers, management, employees, government, and the community).
The corporate governance framework consists of (1) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.
Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.
• Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to
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• Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment • Integrity and ethical behaviour: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.
• Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.
THE ENVIRONMENT Legal environment – General Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These may vary in many respects between countries, but a corporation’s legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation.
The statutory granting of corporate existence may arise from general purpose legislation or from a statute to create a specific corporation, which was the only method prior to the 19th century. In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries, and various laws and regulations affecting business practices. In most jurisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers.
This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum and] Articles of Association. The capacity of shareholders to modify the constitution of their corporation can vary substantially. Codes and guidelines Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations of directors and managers with the support of governments and international organizations.
As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. For example, companies quoted on the London, Toronto and Australian Stock Exchanges formally need not follow the recommendations of their respective codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance.
One of the most influential guidelines has been the OECD Principles of Corporate Governance—published in 1999 and revised in 2004. The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure.
This internationally agreed benchmark consists of more than fifty distinct disclosure items across five broad categories: • Auditing • Board and management structure and process • Corporate responsibility and compliance • Financial transparency and information disclosure • Ownership structure and exercise of control rights The investor-led organisation International Corporate Governance Network (ICGN) was set up by individuals centered around the ten largest pension funds in the world 1995. The aim is to promote global corporate governance standards.
The network is led by investors that manage 18 trillion dollars and members are located in fifty different countries. ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics. The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on accountability and reporting, and in 2004 released Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks.
This document offers general information and a perspective from a business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda. In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate Governance – the Foundation for Corporate Citizenship and Sustainable Business, linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability. Most codes are largely voluntary.
An issue raised in the U. S. since the 2005 Disney decision is the degree to which companies manage their governance responsibilities; in other words, do they merely try to supersede the legal threshold, or should they create governance guidelines that ascend to the level of best practice. For example, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting other companies to adopt similar practices. CORPORATE GOVERNANCE IN MALAYSIA
The year 1997 witnessed the worst financial crisis to hit the developing world since the 1982 Latin American debt crisis. What started out as a localized currency crisis in Thailand, rapidly turned into a financial and economic crisis in the East Asian countries. From being one of the best performing region in the world, even up to as late as May 1997, the region became one that required the largest financial rescue in history. The speed at which the crisis spread and the severity of the contagion effects were never experienced before.
There is still no international consensus on the causes surrounding the financial crisis. The economies of the East Asian countries contracted in 1998 as a result of the crisis. Adverse developments unfurled. Economic outlook was changed from positive to very negative. The expectations of both foreign and domestic investors changed abruptly. The region was perceived as one beset with high risks which prompted a massive reversal of capital flows from the region. This resulted in the financial panic, investors behaviour became irrational and overreacted to the changed economic and financial situation.
Malaysia was not spared from the crisis. The Malaysian Ringgit experienced waves of speculative pressure. It depreciated 40% against the US Dollar by the end of August 1998 from its level in June 1997. The Kuala Lumpur Stock Exchange (KLSE) Composite Index fell by 79% from a high of 1,271 points in February 1997 to 262 points in September 1998. 2 The vicious cycle of massive withdrawal of funds from the domestic financial markets to safer offshore havens started. The effects then spread through the banking and corporate sector. High interest rates
and marked drop in domestic demand crippled the financial performance of the corporate sector. Companies borrowed heavily from banks to finance their rapid expansion during the good times, sometimes expansion to areas of non-core business. This made them very vulnerable to interest rates fluctuations. With the high interest rates and the economic contraction the debt servicing capacity of these companies were greatly affected. This in turn created large number of non-performing loans for the banking sector. As a result banks began overly cautious in extending new loans even to viable businesses.
The financial crisis brought to the foreground the weak corporate governance practices: the weak financial structure of many companies; over-leveraging by companies; lack of transparency, disclosure and accountability; existence of a complex system of family control companies; little or no effective laws to ensure that controlling shareholders and management treat small investors fairly and equitably; assets shifting; conglomerate structures that were perceived to be given preferential treatment; allegations of cronyism – “the aggrandizement of a politically connected few”3; lack of transparency and ambiguity in the regulatory processes; and weaknesses in the credit evaluation processes by the banks. Weak corporate governance practices by these companies, though did not cause the financial crisis, but certainly contributed to the economic crisis.
Against this backdrop, the Malaysian Code of Corporate Governance (the Code) was introduced in 2000, after detailed study and recommendations made by the high level Finance Committee which was formed in 1998 with the objective of improving the corporate governance practices by the corporate sector. The Malaysian Legal and Institutional Framework Malaysia, even before the financial crisis in 1997 had already in place a relatively high standard of corporate governance framework. Malaysia inherited a strong common law system together with a corporate law regime from the British and has largely followed the developments of other commonwealth jurisdictions with variations to suit local environment.
Because of this strong heritage, the Malaysian capital market had a plethora of provisions designed to create a sound corporate governance framework. Further the KLSE listing rules have a number of provisions to provide for checks and balances to enhance transparency and accountability. For instance, it introduced the requirements for independent directors on boards of public listed companies in 1987 and for the establishment of audit committees in 1993 which took effect the following year. CORPORATE GOVERNANCE IN SINGAPORE The Singapore corporate governance system is loosely based on the Anglo-American model, which revolves around capital market controls of managerial behavior (Prowse, 1998).
However, because the capital market in Singapore is thin (there are less than 501 listed companies on the Singapore Stock Exchange or SGX in 2002), and equity is tightly held among a small group of investors including the Government of Singapore, multinational and regional corporations, wealthy individuals and entrepreneurial families, takeovers, when they occur, tend to be friendly rather than hostile. Furthermore, relative to the U. S. , unclear accounting standards and inconsistent enforcement, means that the quality of publicly available corporate information is generally poor. In Singapore, the Companies Act of 1990 governs the registration of companies and is the primary source of law protecting the rights of shareholders.
Most of the rights of shareholders are specified in Articles of Association that companies are required to adopt. A model set of Articles of Association is contained in the Fourth Schedule of the Act. The Model applies to companies that have not adopted their own Articles, or where the companies’ Articles are silent on specific issues. Under the model Articles of Association, companies are allowed to issue shares with different rights pertaining to dividends, voting or return of capital. However, Section 64 of the Act requires all ordinary shares to carry one vote per share (the exception being a management share issued by a newspaper company under the Newspaper and Printing Presses Act).
Other major features of company legislation relating to shareholders’ rights include voting by proxies must be in person and not by mail, and cumulative voting for directors is not permitted. The major source of guidance on the conduct and procedures to be followed in takeover and merger transactions is the Singapore Code on Takeovers and Mergers (hereafter, “The Code”). The Code is non-statutory and supplements and expands on the statutory provisions on takeovers found in sections 213 and 214, and the Tenth Schedule of the Companies Act. The Code is modelled after the UK model, whereby shareholders, rather than directors decide whether to accept or reject an offer.
Companies listed on the SGX that are parties to a takeover or merger also have to comply with the provisions in the Listing Manual of the SGX. The Securities Industry Council administers the Code, which is divided into General Principles, Rules and Practice Notes. It was developed to aid directors and officers in the discharge of their duties in the event of a merger or takeover of a listed company. In general, the Code was set up as a way to protect the minority shareholder from possible adverse impact. As the concentration of stockholdings is very high in Singapore, the likelihood of minority oppression is very real because many takeover resolutions require only majority, rather than super-majority assent by the shareholders.
For example, a principle in the Code states that at no time after a bona fide offer has been made can the board of a target firm take action to prevent the shareholders of the target from assessing the merit of the offer. In effect, such a principle prevents the ex-post adoption of poison pills as a method of entrenching management. The Code reinforces the principle that directors have a duty to all shareholders with preference given to none, including and especially to those with personal relationships to the board. In this regard, the Code imposes a rule that there can be no termination of directors’ service contracts within a 12-month period if the contract has more than 12 months to go prior to an impending takeover.
This is to prevent directors from taking their own interests into consideration during a tender offer, and such interests being to prevent the loss of a position or to capitalize on a golden parachute. Unlike generally accepted practices in North America the Takeover Code makes no mention or encouragement for boards to hold auctions. Partly this is a reflection of the thinness of the market and the concentration of shareholdings that can lead to minority oppression. In North America, the initiation of an auction by the board is seen as a way to maximise shareholder value. Rather, in Singapore the Code promulgates a principle that all parties to a transaction must take special care to prevent the creation of a ‘false market’, which is left undefined and thus implies a proscription on auctions.
While the Code states that information on the takeover must be made available to all shareholders, it holds the target company responsible for unusual movements in the price of its stock. Rule 7 emphasises the ‘vital importance of absolute secrecy before an announcement’. Thus, it appears that the Code is primarily concerned with friendly mergers and not hostile takeovers, in which the very real possibility of an auction 8 may exist. In large part, this is due to the fact that hostile takeovers are rare in Singapore because the concentration of stockholdings in family trusts, related institutions, and government linked corporations renders hostile takeovers very difficult if not impossible.