Transparency
It should to ensure timely and disclosure is made on all relevant matters about the company. Good transparency means that there be:-
- Adoption of accurate accounting methods;
- Full and prompt disclosure of information relation to the company;
- Timely disclosure of information;
- Disclosure of conflicts of interest of the directors or majority shareholders; and
- Adequate advance notice of meetings and voting so shareholders may prepare.
The disclosure is effective only if it is made on a timely basis and in affair manner so that all shareholders have equal access to the information. The quality of the information should follow high financial and non-financial standards, and an independent auditor should audit financial reports. The OECD states that disclosure should not be conservative and not limited to a few variables. Besides the more obvious operating results of the company, the shareholders should be provided with facts on the remuneration of the board and key executives, material foreseeable risk factors and materials issues regarding employees and other shareholders.
Transparency provides the protection against improper management actions or policies that treat minority shareholders unfairly especially when the company control group or management is trying to act fraudulently and conceal its actions. Equally importantly, transparent practices force those managers in control of a company to exercise more care and diligence. This encouragement of better management will usually translate into better corporate performance and earnings for the company that, in turn, usually leads to higher share prices and better returns for the shareholders.
Minority Investor Protection Measures
Transparency and accountability are not enough if minority investors are not treated fairly because of faulty basic market measures.
Sime Darby Pilipinas (SDP) can be taken as an example of blatant disregard of the rights of minority shareholders. The company earned a significant amount of cash (USD 68 million) in 1996 through the sale of its tyre production business. In 1998, the directors of SDP approved the acquisition of a money losing subsidiary of the parent company, LEC Refrigeration in the UK for USD 31 million, in effect, allowing the illicit transfer of funds from one related company to another. This related party transaction was initiated without the permission of minority shareholders. Minority investors stepped in to protect the rights of the shareholders that it represented, by filing suit and requesting a restraining order against the transfer of assets to the UK.
In year 2000, Malaysia became the first to have an organisation representing minority shareholder interest name Minority Shareholder Watchdog Group. It is a not-for-profit company with founding members comprising government-linked institutional investors.
Enforced Regulations
By clearly set out the regulations and laws for investor protection to ensure that controlling shareholders and management cannot simply use power with which they have been entrusted or abuse the interests of other shareholders. It also requires prompt and full disclosure of significant events and conflicts of interest. Other requirements should include holding annual general meetings; the usage of audit committees; management obligations to provide timely and full accounts; independent valuations of assets and mandatory exposure of corporate documents to investors asking for them.
These regulators must be afforded adequate resources and authority to monitor the market, investigate possible abuses and punish offenders.
Only when this forth area is implemented then other three areas of corporate governance mention above can be implemented.
Good corporate governance can monitor transparency and accountability that serve to govern those who control the company’s affairs. It discouraged the manager from mismanaging the company, be it through a lack of diligence or care, excessive spending (like their own remuneration packages) and improper decision-making.
Several studies have shown that a company’s performance improves when investor have greater confidence in companies that are responsible, observe some core values and there is evidence of good discipline and having regard for shareholder views.
When the company performance enhanced, it contributes significantly to the company’s share price, would increase the value of a shareholder’s holdings. Hence, there could be a strong fundamental bond between good corporate governance and strong company performance. After the company is known to be better than its peers in its accountability to minority shareholders and in its competence (to deliver good earnings and returns for shareholders), a premium name “Corporate Governance Premium” for that company’s stock often develops. The more comfortable a company’s management makes investors feel about investing in them, results the greater the demand for the shares contributes to higher share prices, which then results in the premium.
The benefits do not stop with higher share prices for outstanding companies. Where markets have good corporate governance regulations that are constantly monitored and enforced, the roster of well-run companies respecting minority shareholders invariably lengthens. If the market is open to outside investment, the international investment community will start to take notice of the market’s good companies and begin to place more confidence in the market as a whole. When this market starts commanding more confidence from investors than other markets, investors will not mind paying more or a premium for investing in it. Consequently, it will increase the supply of investment capital seeking to enter that market. This in turn, allows those companies in the market to raise more capital and to do it at rates that are more favourable.
The effect of poor corporate governance may let the investors not satisfied with the company’s treatment of minority shareholders or its poor management of the company’s affairs, the investors can always just “vote with his feet”, simply sell out of the stock. When the market perceives poor corporate governance, all investors may head for the exit at the same time, resulting in a rapid decline in liquidity. Some stock market regulators will go to delisting companies once found to violate rules and regulations. This is the worst possible outcome for minority investors since they are then locked into an illiquid investment and find themselves even more at the mercy of the unscrupulous company managers.
The financial crises in Asia, Russia and Brazil have shown that a lack of regards for core values of corporate governance does have a negative impact globally. Countries, markets and companies that have not been able to survive or that have fared badly in a crises have one thing in common: poor corporate standards. When everything is going well, poor standards may be hidden by profits. However, when the going gets tough, it is those companies that have implemented sound practices that are able to survive and continue attracting capital investments.
Corporate Governance in Malaysia
In April 2001, a World Bank report rating Malaysia near the bottom of corporate governance standings for Asian countries because of the corporate scandals like Renong Group and Malaysia Airline System (MAS), the country's image has received some battering in the eyes of both foreign and domestic investors.
After that, Malaysia had taken substantial initiatives to overcome this disadvantage rating. Over the pass 3 years, at least on paper, it reigns supreme over its regional counterparts in a number of key areas. PricewaterhouseCoopers chairman for Asia Ian Rickword said “In some respects, Malaysia has overtaken the US and may be leading the way”. Rickword was speaking to reporters at the East Asian Economic Summit 2002 in Kuala Lumpur. In Jul/ Aug 2003 Euromoney, the leading subscription-based global financial magazine, had ranked three Malaysian companies top 20 in the list of companies in the world’s emerging markets in a rating study on corporate governance. The three companies are IJM Corp (construction) rated joint 13th, Tanjong Plc (leisure) rated joint 18th and Computer Systems Advisers (technology) rated 20th.
To overcome about the poor rating, Malaysia had collaborated with World Bank and the Asian Development Bank to examine ways to improve corporate governance. It has established the Malaysian Institute of Corporate Governance to express and give opinions to the management of the business and affairs of corporations in Malaysia with the view to enhancing long-term shareholders value and financial viability of enterprises. The Institute also responsibility to promote public awareness of corporate governance and encouraging interaction for the furtherance of corporate governance practices in Malaysia.
The introduction of the Malaysian Code on Corporate Governance for the formulation of a new set of rules to streamline compliance by companies which were being overburdened by the myriad of existing laws, regulations and guidelines. The Code has two primary inter-related objectives. First, it aims to encourage disclosure by providing investors with timely and relevant information upon which investment decisions may be made and the performance of the companies evaluated. Secondly, it serves as a guide to boards of directors by clarifying their responsibilities and providing prescriptions to strengthen the control that they exercise.
The establishment of Minority Shareholders Watchdog Group (MSWG) to become a platform for initiating shareholders activism against unethical or questionable activities by the management of public listed companies influence and continuously monitor breaches of and non-adherence to good corporate governance practices that may be detrimental to the interest of minority shareholders.
Education is vital to raising the standards of corporate governance and is equally applicable to both investors as well as management of companies. To promote the professional standard of directors in Malaysia, directors of all public listed companies must now undertake the Mandatory Accreditation Programme – comprising nine modules to qualify for the office. Thereafter, they will be required to go through the Continuing Education Programme to certify their status on an annual basis. These programmes serve to ensure that directors of public listed companies are aware of the existing regulatory frameworks and have an appreciation of the constantly changing environment to which their businesses are exposed.
In view of the increasing instances of company related offences, the Malaysia’s Registrar of Companies has mandated the training of all directors of companies known as the Corporate Directors’ Training Programme. It has been specifically designed to expose directors to six key areas as follows:
- The duties and responsibilities of company directors;
- The law and practice of board and company meetings;
- The Malaysian code on corporate governance;
- Common offences committed by company directors;
- Economic crimes, corporate offences and corruption;
- Business strategies and accounting standards.
The failure to comply with the Code will come at a cost not only to errant public listed companies but also to their directors and advisors. Sanctions range from caution and reprimand, imposition of fines and to the delisting of companies in cases of blatant abuses. The real test is with the enforcement, like Malaysia where the government has significant interest in the corporate sector. This may well provide for some degree of political favouritism, which may collectively undermine the credibility of corporate governance practice in Malaysia.
The internationalisation and globalisation is driving a demand for common standards. Malaysian companies operating internationally will have increasingly to see greater financial and non-financial disclosure and accountability to all shareholders as in their commercial interests. The principles of corporate governance should be flexibility enough to meet the varying circumstances of individual companies, given the diversity of entities listed on the Kuala Lumpur Stock Exchange.
Good corporate governance should not be seen as just a matter of prescribing particular corporate structures or checklists of the hard and fast rules; it requires a complete change in the mind set of the management of the companies. Although there is still a long way to go before the Malaysian companies achieve corporate governance to the satisfaction of Western investors, Malaysia is moving in the right direction by creating an environment where corporate governance is nurtured.
(Total 2422 words)
Bibliographies
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Low Chee Keong (2002) Corporate Governance – An Asia-Pacific Critique, Sweet & Maxwell Asia
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Jamie Allen (Jan 2000) Article for “Corporate Governance International”
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Tunku Abdul Aziz (Jun 2002) Speeches : Good governance is a global business necessity
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CIMA (2000) Corporate Governance : History, Practice And Future, CIMA Publishing
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The Business Times (09 Oct 2003) 3 Local Firms Rated Highly For Corporate Governance
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Mohd Khairi Mohd Isa (14 Oct 2002) The Heightening of Local Corporate Governance, New Strait Times
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Frank Lyn (04 Nov 2001) What is Corporate Governance?, FinanceAsia.com Ltd
