World Bank calls Malaysia a regional leader in corporate governance, but there’s more to be done

Saturday March 2, 2013

World Bank calls Malaysia a regional leader in corporate governance, but there’s more to be done

By ERROL OH

IT’S like a report card you can proudly bring home to show mum and dad. On Tuesday, the World Bank released the findings of its assessment of corporate governance in Malaysia, and the numbers indicate that we have done well.

In each of the six main areas of corporate governance policy framework that were examined in July last year, Malaysia’s score surpassed the average for six Asian countries (see chart), namely Indonesia, India, Malaysia, Thailand, the Philippines and Vietnam. The gaps ranged between five percentage points and 22 percentage points.

“The assessment confirms that Malaysia is a regional leader and has achieved high levels of compliance in a number of key areas, both fundamental ones, but also more sophisticated ones, like the prohibition of insider trading and implementation of high-quality accounting standards,” says the World Bank in the 52-page 2012 Corporate Governance ROSC for Malaysia.

ROSC refers to the Report on the Observance of Standards and Codes, which is a document prepared by either the World Bank or the International Monetary Fund after undertaking a summary assessment of the observance of selected standards relevant to private and financial sector development and stability.

In February last year, the World Bank published an ROSC on the accounting and auditing environment in Malaysia. The 2012 Corporate Governance ROSC is an update of an assessment conducted in 2005.

Naturally, the Securities Commission (SC) is pleased with the latest report. Said chairman Datuk Ranjit Ajit Singh: “It is important to have in place a strong corporate governance eco-system in order to sustain active investor interest and growth in the capital market.

“We are highly encouraged by the strong endorsement by the World Bank on the collective efforts by the regulators and the industry in strengthening corporate governance in Malaysia.”

But enough with the back-patting. The assessment was a lot of work, and plenty of information and insight is presented in the report. This can surely help us improve. Here are some highlights:

The case for corporate governance

Apparently, the arguments for good corporate governance have not changed at all. To explain why corporate governance is important, the2012 Corporate Governance ROSC for Malaysia uses exactly the same text as that in the 2005 report.

The World Bank points out that for emerging economies, good corporate governance supports public policy objectives such as reducing vulnerability to financial crises, reinforcing property rights, lowering transaction and capital costs, and developing the capital market.

“Weak corporate governance frameworks reduce investor confidence, and can discourage outside investment. Also, as pension funds continue to invest more in equity markets, good corporate governance is crucial for preserving retirement savings,” it adds.

“Studies have shown that good corporate governance practices have led to significant increases in economic value added of firms, higher productivity, and lower risk of systemic financial failures for countries.”

Too old an Act?

The World Bank acknowledges that the Companies Act 1965 (CA) had critical amendments in 2006 and 2007, but reminds that the legislation is decades old.

It says: “While these are important amendments, the CA, based on the 1948 UK Act, and amended several times, still shows its age.” The bank says the Act lacks clarity on a range of issues, including key shareholder rights, and has a number of gaps. It adds that the Act offers “a weak basis” for issues of creditor rights, insolvency and liquidation.

Not yet half-way through

The assessment benchmarks Malaysia’s laws and practices against the Organisation for Economic Co-operation and Development’s Principles of Corporate Governance. Of the 73 assessed principles, only five are implemented at 50% or less. These relate to availability to vote both in person or in absentia (38%), disproportionate control disclosure (38%), disclosure of management of material conflicts of interest by institutional investors (42%), custodian voting by instruction from beneficial owners (44%), and treat all shareholders fairly (50%).

Mind the gaps

The World Bank has found that basic shareholder rights are “largely in place” in Malaysia. However, there are some gaps and omissions in the CA. “There is no explicit right for shareholders to receive dividends in proportion to their shareholdings or to receive them in a timely manner, though company articles may allow for both,” says the bank.

“More generally, there is no explicit legal requirements for shareholders of a particular class of shares to be treated the same or confirmation that their shares carry the same rights.”

Who’s in control?

The report notes that Malaysia has an active market in corporate control. “Controlling stakes are periodically sold, and there have even been cases of proxy fights and hostile takeovers’ being launched when the controlling share was low enough or formerly friendly major shareholders disputed control,” says the World Bank.

It points out that the SC’s Takeover Code doesn’t address shareholder agreements or the golden shares’ that some government-linked companies have and that provide certain powers to government in the company’s articles. The bank says these could be used to hinder or limit changes in control.

“Market participants have also expressed skepticism about some control changes, and have advocated for open auctions of control instead of relying on the Takeover Code,” adds the bank.

Next steps

In making recommendations after the assessment, the World Bank says: “Malaysia has undertaken important reforms in recent years. However, protecting smaller shareholders and retirement savings, and maintaining investor confidence will require reform to continue.”

Key reforms mooted by the bank includes:

Fundamental reform to the company law to protect shareholders and improve legal clarity, including explicit equitable treatment of shareholders and more ways for shareholders to protect their interest.

Enhancing disclosure of beneficial ownership and other non-financial information.

Strengthen auditor independence and effectiveness of market intermediaries, including explicit limits on non-audit work for audit clients.

Revising the Malaysian Code on Corporate Governance and Bursa Malaysia’s Listing Requirements to reinforce board independence and support ongoing reform.

Reviewing the role of government-linked investment companies and other institutional investors and owners, including better management and disclosure of conflicts of interest and consistently considering governance in their investment decisions.

Maintaining the credibility and effectiveness of the SC, including reviewing ways to increase independence and sustain enforcement credibility.

Executive editor Errol Oh is fully aware that corporate governance standards are always being raised and that chasing moving targets is difficult. But we don’t get to be the best by doing the easy stuff.