THE Malaysian Code of Corporate Governance (MCCG) was first introduced in 2000 and along with the changing corporate landscape and financial scandals that came along with it, both internationally and locally, the MCCG has evolved to ensure it remains relevant, realistic and adopts the best practices.

Over the years, the MCCG has gone through four key upgrades in 2007,2012,2017, and the latest, the 2021 update, which was released last week by the Securities Commission (SC).

MCCG 2021 has had a makeover when compared with the 2017 code and several new practices have been introduced as well. This includes the adoption of best practices, which has now been extended to company subsidiaries, and having large companies adopt step-up practices.

MCCG 2021 also requires large companies that depart from any of the practice(s) to adhere to a certain time frame for the adoption of the practice(s). In addition, corporates have now been told to apply a standard of disclosure that satisfies stakeholders and not just shareholders.

More importantly, MCCG 2021 has strengthened a few loose ends which this column had highlighted in several articles before – for instance, the one entitled “Governance goes beyond corporates” dated Sept 22,2018.

Specifically, MCCG 2021 has addressed key concerns regarding the independence of directors, women’s representation on the boards of companies, and remuneration issues. Other than that, it is indeed a welcome move to see that MCCG 2021 has called upon the chairman of a board not to be appointed as a member of the three main board committees. This helps to provide a check and balance and at the same time limits the influencing aspect of the board chair on board committees.

In a bold move, MCCG 2021 now also defines who is a politically active person and discourages them to be appointed to the board of a listed company, which is certainly a welcome stance from the regulators.

Nine-year tenure

Malaysia has scored a few brownie points in its quest to improve its governance standards, especially in relation to the board composition of a listed company. MCCG 2021’s calls to restrict the tenure of an independent director to nine years is most welcomed. In addition, MCCG 2021 now recommends that should the independent director continue to serve the board, he/she should serve as a non-independent director.

MCCG 2021 also recommends a step-up practice whereby a listed company’s board has a policy that limits the tenure of its independent directors to nine years without further extension. Although this is indeed a positive move, this column’s view is that even nine years are far too long, and a more appropriate tenure should be not more than five years. Hopefully, in time to come, we can move towards a more robust environment in terms of independent directors’ tenure in office.

The new practice introduced by MCCG 2021 also calls upon the board to ensure shareholders have the information they require to make an informed decision on the appointment and reappointment of a director. According to MCCG 2021, for independent directors, in appointing or reappointing a board member, the board should consider the current composition of the board and the tenure of each director on the board.

The SC, in explaining this issue, found that there remain long-serving independent non-executive directors, with some as long as more than 40 years.

Directors have legal responsibilities

Another important aspect introduced by MCCG 2021 under its guidelines is appointments to the board, whereby all board members including public officials, should be nominated based on qualifications and have equivalent legal responsibilities. This is a critical statement as it shows that irrespective of whether a board member is an independent director or otherwise, the legal responsibility is the same under the eyes of the law.

Politicians to be kept at bay

MCCG 2021 has also gone one step further in defining a grey area, which in Malaysia has become the norm, especially on the appointment of state assemblymen or a Member of Parliament (MP) to the board of a listed company.

The MCCG 2021 guideline now recommends that persons linked directly with the executive powers, such as heads of state, heads of government and ministers, should not serve on boards as this would cast serious doubt on the independence of their judgment.

In addition, a listed company is discouraged from appointing an active politician as a director on its board. A person is considered politically active if he is an MP, State Assemblyman, or holds a position at the Supreme Council, or division level in a political party. MCCG 2021 also calls upon listed companies to disclose in their Corporate Governance Report how candidates for board positions were sourced, including, whether such candidates were recommended by the existing directors, members of senior management, or major shareholders.

30% women on boards is a must

Another milestone that MCCG 2021 has made is concerning women directors. The code now calls for the board to have 30% women directors and if the composition of women on a board is less, the board should disclose the action it has or will be taking to achieve the 30% or more and the timeframe to achieve it. MCCG 2021 now has defined this timeframe as a period that is three years or less.

On remuneration, MCCG 2021 has now been updated by calling the committee to comprise of only non-executive directors and a majority of them must be independent directors.

According to the guidelines of MCCG 2021 on remuneration, executive directors should not be involved in discussions to decide on their remuneration. In addition, directors who are shareholders and controlling shareholders with a nominee or connected director on the board should also abstain from voting on the resolution to approve directors’ fees at the general meeting.

Listed companies are now also encouraged to table separate resolutions on the approval of the fees of each non-executive director instead of bundling them all into one single resolution.

Of all the changes that MCCG 2021 recommends, the requirement of limiting the tenure of independent directors, defining who is an active politician and having 30% women directors on boards are the most drastic changes that we are now seeing coming from the regulator.

According to the SC, as of March 31 this year, some 434 independent directors had tenures of more than 12 years, out of which 49 independent directors had served on the same board for more than 20 years. These directors have overstayed their welcome and it is hoped that when MCCG 2021 is put to practice and the effective date is determined, these directors will gracefully retire.

With more than 400 new independent directors needed, it is hoped that companies seeking new and fresh faces on their boards will look beyond the traditional universe in seeking new directors.

They can seek the services of independent bodies like the Institute of Corporate Directors Malaysia (ICDM), which has an extensive registry of present and aspiring directors, to get new board members. This can also serve the purpose when explaining to stakeholders how independent directors are sourced.

As for women directors, Malaysia has made significant but slow progress in terms of gender representation at the board level. Today, other than ICDM, LeadWoman is another platform that has been driving this agenda, and corporates wanting to fill up vacant directors’ positions at the board level should use the services provided by these two institutions.

Proper remuneration necessary

As for remuneration, there is a huge gap between how much an independent director and a non-independent director is paid in the corporate world today. Some corporates use the position of independent directors merely to tick boxes and these independent directors are barely paid wages that commensurate with the risk undertaken under the eyes of the law. Hence, it is hoped that the “x times” amount of fees that are paid to a non-independent director is narrowed to reflect the changing legal dynamics when it comes to liabilities.

In conclusion, MCCG 2021 is a welcome and necessary change that corporate Malaysia needs to move forward and ensure issues related to governance and structures that are put in place at our boards have proper checks and balances.

However, most of these changes, which are done via MCCG 2021 mean that market regulation will dictate its compliance and not via the legal framework.

It is important for the regulators to recommend that statutory regulations be made, especially in relation to board composition and tenure as this will force listed companies to adopt the new practices instead of mere compliance and providing a leeway to depart. Only then can we reduce the risk of wrongdoings by our corporates and to a large extent improve our governance score.

Pankaj C Kumar is a long-time investment analyst. The views expressed here are his own.

This article was first published here.

Photo by Sean Pollock on Unsplash.