Lecture 2

Development of CG

Prof Dr. Mohd Fairuz Md. Salleh

 CG in Malaysia

• Gourevitch and Shinn (2005) – The story of CG in Malaysia

began almost one hundred years ago, when a company called
Kuala Kangsar Plantations became the first publicly listed
company in Malaysia.

• Early days, most publicly listed companies tended to be trading,

plantation or tin companies which had their origin in the United
Kingdom, or were subsidiaries of United Kingdom companies.

Exhibit 1-2
 CG in Malaysia (cont’d)

• After 1957, many ventured into different sectors for

example construction, property, infrastructure,
technology, trading and services, consumer products,
industrial products and plantations.

• Listed companies in Malaysia:

 1997 : 708
 2000 : 795
 2003 : 874
 2022 : ? 3
 CG in Malaysia (cont’d)

• 1998 – Small companies were permitted to be listed for the first

time, enabling them to raise capital from the public.

• Consequence : Very quickly, an owner-entrepreneur who had

been the ego-led manager of this own private firm now found
himself the director of a publicly listed company that needed to
follow a huge range of regulatory requirements, the significance
of which he neither understood no appreciated (Gourevitch &
Shinn, 2005)

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 CG in Malaysia (cont’d)

• Many of these companies had been established using the

financial and human capital of one particular family
(McConaughy, 2000)

• Consequences – Even after these companies had been publicly

listed, shareholders maintained intimate relationships with their
businesses. Redding (1996) shown that the entrepreneurs’
wealth and esteem were often linked with the companies’
performance. With their large initial contribution, the
entrepreneurs found it important to concentrate shareholding in
order to maintain a dominant voice in the companies’ policy and
decision-making. In addition, these entrepreneurs wished to
maintain control of their firms so that they could pass the
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business down to future offspring (Anderson & Reeb, 2003)
 CG in Malaysia (cont’d)

• The rapid growth of Malaysia’s economy has not diluted the

concentrated structure in Malaysian companies (Tan & Tan, 2007)

• In 2002, the nominee firms (family?) held 56.5 % of the total

shares of an average non-financial public limited company while
the rest were shared by non-financial firms (22.5%, the
government (20.5%), finance companies (5.9%), individuals
(3.4%) and foreign investors (1.2%) (Bank Negara Malaysia, 2003).

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 CG in Malaysia (cont’d)

• Consequences of concentrated ownership:

 Resulting in significant risk to minority shareholders (Claessens
et al., 2000)

 Scepticism about the ability of boards, especially the non-

executive directors, to monitor management, as they are often
perceived as a “rubber stamp’ only and are selected for reasons
other than monitoring (Haniffa & Cooke, 2002)

 Governmental activism in the corporate sector may diminish

incentives for institutional investors to actively monitor returns
on their investments, leading to greater information asymmetry
and free rider problems (Suto, 2003), 7
 CG in Malaysia (cont’d)

• Foreign companies are unlikely to be active in this

area because their ability to compete is limited due to
the nature of highly personal and close-knit business
networking and informatics sharing in Malaysia, as in
many Asian countries (Redding, 1996)

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 Economic Downturn 1997 :
Poor CG?

• Some truth to the claim that poor CG was partly to

blame (Salim, 2007)

• Political influence was found to be an additional

contributing factor to the financial crisis such as
through crony alliances, a relatively easy access to
credit or other facilities enjoyed by the particular
companies resulted in unproductive and unviable
investment and ventures (Johnson & Mitton, 2003)
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 CG Intiatives and Reforms

• The Malaysian government began a renewed program to enhance

minority shareholder protection, promoted as ‘top-down reforms’

• Began with the establishment of the High Level Finance Committee on

corporate governance by the Ministry of Finance in March 1998, which
unleashed a series of regulatory changes through the Securities
Commission (SC), the Kuala Lumpur Stock Exchange (KLSE), AND THE
Registrar of Companies.

• These changes led to the creation of Malaysian Code on Corporate

Governance, the Malaysian Institute of Corporate Governance, and the
Minority Shareholder Watchdog Committee- each of which attracted
strong participation by representatives of the Employees Provident Fund.
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• The motives for these changes were to reassure investors, both domestic
and international, so as to hold and attract capital.
 The Malaysian Code on CG

• Recommends that the BOD appoints remuneration

and nomination committees other than the audit
committee, which has been mandatory since 1993.

• The establishment of other committees such as risk

management committee and corporate governance
committees are also recommended but are less
frequently set up by listed companies.
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 The Malaysian Code on CG
(cont’d)

• The code strongly recommends the separation of responsibilities

between the board chair and the CEO even though the LRs Bursa
Malaysia (2001) do not require the segregation of these positions.

• The code also states the BOD should maintain a sound system of
internal control. This led to the issue of a Guide on Statement of
Internal Control in May 2000. This guide explained the key areas that
directors must pay attention to before they present a Statement of
Internal Control in their company’s annual reports.

• A listed company is required to address in their annual reports the

principle and best practices of the Malaysian Code on CG relating to
internal controls such as identifying principal risks and ensuring
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implementation of appropriate systems to manage risks.
 The Malaysian Code on CG
(cont’d)

 The Code has set a minimum of 50 percent

independent non-executive directors on boards.

 To date the obvious to strengthen and enhance the

CG framework can be seen with a revision of the
Malaysian Code on CG and amendments to
Companies Act 2016.

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 The Malaysian Code on CG
(cont’d)

• This code was specifically revised to strengthen boards

of directors and audit committees and accordingly to
ensure both effectively perform their roles and
responsibilities.

• In this revision, the eligibility criteria for appointment

of directors, the role of nominating committees, the
eligibility criteria for appointment as an audit
committee member, the committee composition, the
frequency of meetings and the need for continuous
training were spelt out. 14
 ASSIGNMENTS

• Assignments:
 Group 1 - CG in a Global Arena
 Group 2 – Issues and problems : CG in Malaysia.

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