Topic 1: What is corporate governance (CG)?

 A legal entity
 separate and distinct from its owners and managers,
 easy transferability of ownership
 able to enter into contracts and make business transactions,
 can own assets and owe money to others
 can sue and be sued in law

 Types of corporations
 Statutory companies
o Petronas, SOCSO, EPF
 Registered companies
o Public companies; Berhad
o Private companies; Sdn. Bhd.

Public listed companies

 large businesses listed in the Stock Exchange

 require public funding
 invite the public to invest
 regulated by various Acts and government agencies
 who owns PLCs?
o members who are equity shareholders
 who manages PLCs?
o directors who plan and make decisions
o managers who manage and coordinate plans
o executives who execute plans

Private companies

 do not require public funding

 owners have full control
 usually operated by family members
 small to medium size businesses
E.g. SECRET RECIPE CAKES & CAFE SDN. BHD.
AIK CHEONG COFFEE ROASTER SDN. BHD.
AMPANG YOONG TOU FOO SDN. BHD.
Source from SME Corp
Types of Shareholders

 Private (small and large)

 individual shareholders in a company
 usually holds a small quantity of shares
 can also hold a large quantity of shares
 e.g. Tan Sri Lim Goh Tong in Genting Berhad

 Corporate
 Shareholders of a company who are themselves companies
 As legal persons companies may own shares in other companies

 Institutional Shareholders
 Institutions holding shares of PLCs
 e.g. EPF, SOCSO, PNB, Insurance Companies

Categories of Shareholders

 Majority shareholder
o a shareholder holding a majority of the equity or ordinary shares in a
company
 i.e. owns more than 50% of shares
o has controlling interest in the company
 e.g. has the voting power to remove directors from the Board of
Directors (can control the board)

 Minority shareholder
o shareholders whose combined shareholdings are not enough to affect
resolutions by the Company in Annual General Meetings
 i.e. own less than 5% of shares

 Substantial shareholder
o owns more than 5% but less than 50%
Corporate Officers

 Board of Directors
 the collective group of individuals elected by the shareholders of a
corporation to oversee the management of the corporation
 the higher decision making body in the corporation

 Executive Director
o a director who also has responsibilities as an executive manager
o a member of top management team
o e.g. Marketing Director, Finance Director, Operations Director

 Non-Executive Director (NED)

o a director who does not have any responsibilities for executive
management in the company

 Independent Non-Executive Director (INED)

 a director who does not have any responsibilities for executive
management in the company
 also independent from personal and business relationship with
the company or its officers

 Non-Independent Non-Executive Director (NINED)

 a director who does not have any responsibilities for executive
management in the company
 but the director has personal or business relationship with the
company or its officers

 Chief Executive Officer(CEO) or Managing Director (MD)

o the head of executive management team in an organisation
most powerful ‘officer’ in an organisation
 Who has power?
o board of directors are POWERFUL
o members are limited to voting rights
Why members have limited power?
 separation of ownership and control

 Separation of ownership and control

o ownership shareholders
 provide capital but do not manage daily operations
o control board of directors
 makes decisions and controls operations
o shareholders delegate power or authority to BOD

 Delegation of Power and Authority

o ownership and control separated

 shareholders (disperse) delegate power and authority to
BOD and
o BOD unable to manage daily operations
 delegates some decision making power to management
team

 Board Structure
 Unitary or one-tier
o means that the organisation is governed by a single decision making
body, which in the case of a company is a board of directors who have a
wide range of decision making powers.
o combine the management and supervisory functions
e.g. UK, US, Malaysia
o a single decision-making body
o makes all the decisions of the company
o consists of both executive and non-executive directors
o check and balance by non-executive directors

 Two-tier
o which key operational decisions are taken by a management board
which is accountable to a senior supervisory board.
o Eg: Germany, France

o management board
 comprises executive directors.
 makes decisions about KEY operational matters.
  led by the CEO/MD.
 accountable to supervisory board

o supervisory board
 monitors the management board
 makes strategic and non-operational decisions
 its chairman is also the chairman of the company
 all members are non-executive directors

Corporate Governance Defined

 No standard definitions
 Refers to the way companies are governed
 Concerns with
o practices and procedures to achieve objectives
o check and balance to minimise abuse of power and fair treatment to all
stakeholders

General definition
Governance refers to the way in which an entity or body of people is governed and to the
functions of governing e.g. governance of a country

Corporate governance refers to ‘the way a corporation is directed and controlled to

maximise shareholders value.’ (Cadbury, 1992)

MCCG’s (Malaysia Code of Corporate Governance) definition

“... as the process and structure used to direct and manage business and affairs of
the company towards enhancing business prosperity and corporate accountability with the
ultimate objective of realising long term shareholder value, whilst taking into account the
interests of other stakeholders”

Our preferred explanation

1. To describe the way corporations should be managed in accordance with legal

framework, rules and regulations
Purpose: to ensure proper compliance of laws
2. The sharing and balancing of powers between BOD and shareholders
Purpose: to maximise shareholders’ value by taking into account other
stakeholders’ interests
3. Therefore CG is a system or process by which a company is directed and controlled
Ultimate objective: To protect interests of shareholders
Sound Corporate Governance

 indicates mechanisms put in place by which the owners and management have the
ability to carry out their responsibilities and duties diligently
OR
 robust monitoring and oversight mechanisms put in place within and outside an
organisation in order to ensure that shareholders’ wealth maximisation objective is
always pursued and protected

 Oversight Mechanisms
o oversight mechanisms are legal and regulatory framework, BOD,
audit committee, remuneration committee, external auditors,
internal control and risk management systems and shareholders
o Purpose is to monitor the exercise of power and authority by BOD
and management team

Importance of CG

Corporate Governance is more important in Public Listed Company than Small Private
Companies. Why?

 small private company‘s directors are also the shareholders

 investors need to know that their money is safe
 poor management may cause value of investment to drop and difficulties to raise
additional capital
 capital market will be unable to attract foreign investment (illiquid market)

The Benefits of Sound CG

 Improves company’s performance

o better management and prudent allocation of resources
 Enhances investor’s and market’s confidence
 Important factor for investment decision
 Enhance the confidence of suppliers and lenders such as financial institutions
 Attract talents to join the Company
 Gain support from the consumers
 Improve company image
 Better relationships with the authorities
Issues of Corporate Governance

 Principal-Agent problem
o separation of ownership and management, conflicts of interest
 Financial disclosures and accountability
o creative accounting, ‘window dressing’
 Directors’ remuneration
o luxurious perks and benefits
 Decision making powers
o persons empowered to pursue shareholders’ interest
 Balancing the needs of corporation
o shareholders and stakeholders
 Poor information and communication between directors and shareholders
o timeliness and accuracy of annual and financial reports
 CG legislation and regulators
o Company law, Listing Requirements, Securities Commission, Companies
Commission of Malaysia
 Excessive business risk taking and lack of risk control
o investing without due regard on risks involved
o over rely on borrowing to finance expansion
o exposure to foreign exchange risk