BWRR3123/ CORPORATE

GORVERNANCE

CHAPTER 4
THE MALAYSIAN CODE OF
CORPORATE GOVERNANCE
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Objective
To understand the Malaysian Code on
Corporate Governance.
To be aware of the main developments in
the Malaysian Code on Corporate
Governance.

INTRODUCTION
Efforts to improve corporate governance practices
of public listed companies started as early as 1993
when the KLSE listing requirements made audit
committees mandatory (Haniffa, 1999).
Good corporate governance practices were further
emphasised by the Malaysian Securities
Commission following the move from a merit-based
to a disclosure-based regulatory regime in 1995.
However, the economic crisis in 1997 that saw a
number of blue chip corporate failures, such as
Renong, UEM and KFC (due partly to a lack of
effective corporate governance mechanisms),
expedited the process.
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INTRODUCTION
The government was forced to intervene
through rescue packages and this
prompted the government to establish a
high level Finance Committee on
Corporate Governance (FCCG) in March
1998.

The Significance of a Code on

Corporate Governance for Malaysia
The Malaysian Code on Corporate Governance
was developed by the Working Group on Best
Practices in Corporate Governance (JPK1) and
subsequently approved by the high level Finance
Committee on Corporate Governance. JPK1 was
chaired by the Chairman of the Federation of
Public Listed Companies. The members of the
JPK1 comprise a mix of private and public sector
participation.
The Code is principally an initiative of the private
sector as indicated by the membership of JPK1.
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The Significance of a Code on

Corporate Governance for Malaysia
The Code essentially aims to set out principles
and best practices on structures and
processes that companies may use in their
operations towards achieving the optimal
governance framework.
The significance of the Code is that it allows
for a more constructive and flexible response
to raise standards in corporate governance as
opposed to the more black and white
response engendered by statute or regulation.
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The Significance of a Code on

Corporate Governance for Malaysia
The need for a code also results from
economic forces and the need to reinvent
the corporate enterprise, so as to efficiently
meet emerging global competition.
The role of the Code is to guide boards by
clarifying their responsibilities, and
providing prescriptions strengthening the
control exercised by boards over their
companies.
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The Significance of a Code on

Corporate Governance for Malaysia
The MCCG is largely derived from the recommendations
of the Cadbury Report (1992) and the Hampel Report
(1998) in the UK.
The recommendations set out in the MCCG are
prescriptive in nature and fall under four main headings:
o principles,
obest practices,
oexhortations to other participants and
omere best practices (FCCG,2000).
The code is hybrid in nature, which is similar to the
Combined Code on Corporate Governance (United
Kingdom).
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MCCG PRINCIPLES
The principles address four main issues:
board of directors,
directors remuneration,
shareholders,
accountability and audit.
The principles :
Part 1 sets out broad principles of good corporate governance
for Malaysia.
The objective of principles is to allow companies to apply
these flexibly and with common sense to the varying
circumstances of individual companies.
Companies will be required by the listing requirements of the
KLSE to include in their annual report a narrative statement
of how they apply the relevant principles to their particular
circumstances. This is to secure sufficient disclosure
so that
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investors and others can assess companies performance and

MCCG BEST PRACTICES

Part 2 sets out best practices for companies.
It identifies a set of guidelines or practices
intended to assist companies in designing
their approach to corporate governance.
While compliance with best practices is
voluntary, companies will be required as a
provision of the listing requirements of the
KLSE to state in their annual reports, the
extent to which they have complied with the
best practices set out in Part 2 and explain
any circumstances justifying departure from
such best practices.
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MCCG Exhortations to Other Participants

The heading exhortations to other
participants is mainly addressed to
investors and auditors to help them enhance
their role in corporate governance.
The explanatory notes, as the name
suggests, provide further explanations to the
principles, best practices and exhortations.
These are purely voluntary.

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MCCG MERE BEST PRACTICES

Part 4 provides explanatory notes to the
principles and best practices set out in Parts
1 and 2 and exhortations set out in Part 3.
Additionally Part 4 also sets out best
practices directed at listed companies that
do not require companies to explain
circumstances justifying departure from best
practices - mere best practices.

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Compliance
By virtue of paragraph 15.26 of the KLSE
Listing Requirements, all listed companies
should state in their annual report how they
have applied the principles set out in Part 1
of the Code and the extent to which they
have complied with the best practices set
out in Part 2 and identify and give reasons
for any areas of non-compliance, and where
applicable, state the alternative practice(s)
adopted.
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Sanctions for non-disclosure

Where a company fails to disclose the
matters in its annual report, it is open to the
Exchange to take any action against the
listed entity or its directors as set out in the
listing requirements and section 11 of the
Security Industry Act 1983.

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The Inception of Malaysian Institute of

Corporate Governance (MICG)

MICGs mandate was to raise the

awareness and practice of good corporate
governance in Malaysia.
Bursa Malaysia Berhad (formerly known
as Kuala Lumpur Stock Exchange) also
partake in the effort of enhancing
corporate governance in Malaysia by
revamping its Listing Requirements.

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The Mission of MICG

MICG
is
dedicated
to
facilitating
businesses and corporate development in
the country through improved corporate
governance best practices.
Corporate governance has succeeded in
attracting a good deal of public interest
because of its apparent importance for
the economic health of corporations and
society in general.

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Principal Objectives of MICG

To be a leading organization for enhancement of
corporate governance development and best practices
through continuing education programme for company
directors, chief executive officers, company secretaries,
company advisers, company auditors, accountants,
lawyers, members of audit committees and investors in
Malaysia;
To be a recognized organization for corporate governance
issues through roundtable forums and dialogues, public
seminars and conferences, and lecture series for
corporations, institutional investors, business and
professional bodies, educational institutions;
To establish linkages and networking with the leading
corporate
governance
references
and
research
organizations.
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Principal Objectives of MICG

To be an authoritative facilitator and the organization for
advisory,
technical
and
support
services
on
implementation of corporate governance best practices
and to work in collaboration with relevant authorities and
regulatory agencies to pursue this objective.
To work closely with various stakeholders as well as
company directors, private investors, institutional
investors, business and professional bodies, educational
institutions, relevant authorities and regulatory agencies.
To complement the regulators: Security Commission,
Company Commission Malaysia and Bursa Malaysia with
regards to Corporate Governance matters. MICG to the
best of its ability work closely and reciprocate with the
said organizations, other related bodies and Malaysian
Institute of Integrity in the uplifting of integrity and
Governance in the corporate sector.
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Principal Objectives of MICG

To act as an independent body to conduct Corporate
Governance Ratings and ensuring the ratings credibility,
especially for Public Listed entities.
To be able to be independent, fair and truthful in providing
input or information to enhance the performance of PLCs
companies to intended investors, from within and outside
Malaysia.
To publicize the countrys effort and commitments in
emphasizing corporate governance.

To conduct further research with local and foreign

organizations on topics: Corporate governance and investors;
Corporate governance and financial gain.
The ultimate objectives of MICG are to inspire companies in
creating longer term shareholder value and to bring business
prosperity in nation building and to contribute to sound
economic system for the well being of the society at large.
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MICCG Compliance
The requirement was aimed towards regulating
companies to be more transparent and accountable
in their actions in order to gain investors confidence.
It is hoped that this would reduce the effects of the
agency theory and signaling theory, thus paving the
way for a more efficient capital market.
Indirectly, it also envisaged that these efforts would
in turn boost the countrys economic growth as well
as encouraging inflow of foreign direct investments.
In other words, good corporate governance is the key
to a robust and competitive corporate sector, which
serves as a source for sustainable economic growth.

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GOVERNANCE MECHANISMS IN MALAYSIAN

CORPORATE SECTOR

Ownership Structure
Board Structure
Board Activity
Remuneration
Transparency and Disclosure

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Transparency and Disclosure

The financial transparency is an important mechanism

that provides depositors, creditors and shareholders
with credible assurances that they will refrain from
fraudulent activities. Financial reporting or disclosure
quality had been measured as one of the mechanism
in assessing the corporate governance of a firm
MCCG- It includes reports on income statement,
balance sheet and cash flow statement prepared in
accordance with approved Financial Reporting
Standards (FRS) of the Malaysian Accounting
Standards Board (MASB).
Listed companies are also required to include a
narrative statement of how they apply the governance
principles in their annual report.
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MCCG 2007 (REVISED CODE)

The MCCG 2007 Code was revised after
taking into account changing market
dynamics, international developments
and the need to continuously recalibrate
and enhance the effectiveness of the
corporate governance framework.

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MCCG 2007 (REVISED CODE)

1. The revised Code provides greater clarity on
the aspects which a nominating committee
should consider when recommending
candidates for directorships.
2. The revised Code places importance on the
process carried out by the nominating
committee in evaluating members of the
board, including the independent nonexecutive directors and chief executive officer.
A nominating committee should also ensure
that its assessments and evaluations are
properly documented.
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MCCG 2007 (REVISED CODE)

3. The revised Code requires the board to
properly record not only decisions made but
also all the issues discussed in arriving at the
decisions. This serves to provide a historical
record and insight into those decisions.
4. The revised Code strives to strengthen the
role of audit committees by requiring the
committees to comprise fully of non-executive
directors. In addition, all its members should
be able to read, analyse and interpret
financial statements so that they will be able
to effectively discharge their functions.
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MCCG 2007 (REVISED CODE)

5. The revised Code increases the frequency of
meetings between the audit committee and the
external auditor without the executive board
members present. This encourages a greater
exchange of free and honest views and opinions
between both parties.
6. The revised Code places greater emphasis on
continuous engagement between the chairman of
the audit committee and senior management of the
company, as well as the external auditors. Through
the engagements, relevant issues affecting the
company can be brought to the attention of the
audit committee in a timely manner.
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MCCG 2007 (REVISED CODE)

7. The revised Code recognises the
importance of the internal audit function
by requiring all companies to have an
internal audit function. In order to
preserve the independence of the
internal audit function, the head of
internal audit should report directly to
the audit committee.

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MCCG 2012
The MCCG 2012 is the first major deliverable
of the Corporate Governance Blueprint 2011
(Blueprint) launched by the SC in July 2011
and seeks to implement most of the
recommendations in the Blueprint.
The MCCG 2012 is specifically targeted at
companies listed on Bursa Malaysia. All
companies are however encouraged to adopt
the principles and recommendations of MCCG
2012 and make good corporate governance an
integral part of their business dealings and
culture.
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MCCG 2012
The MCCG 2012 adopts a new structure which
provides for greater clarity, more information to
companies and allows for simpler reading. Essentially,
each principle in MCCG 2012 is followed by
recommendations and commentaries.
The principles encapsulate broad concepts
underpinning good corporate governance that
companies should apply. The recommendations are
specific standards that contribute towards the
principles. Listed companies are expected to adopt
these standards as part of their governance structure
and processes. Each recommendation is followed by a
commentary which seeks to explain and assist
companies in understanding the recommendation.
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The key amendments made in the MCCG 2012

Roles and responsibilities of the board
The board is required to formalise ethical
standards through a code of conduct and ensure
company strategies promote sustainability. It is
also expected to formalise a board charter.
Composition of the board
The board should establish a Nominating
Committee, chaired by a senior independent
director, who is responsible to oversee the
selection and assessment of directors.The
Nominating Committee is charged with developing
a set of criteria including policies formalising its
approach to diversity of the board.
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The key amendments made in the MCCG 2012

Independence of independent directors
The tenure of independent directors is capped to a cumulative
period of nine years. Upon completion of the nine years, such
directors can be re-designated as non-independent directors or
in exceptional circumstances; the shareholders may decide that
an independent director can remain in that capacity after
serving a cumulative term of nine years. The board should
provide strong justification to the shareholders and approval
from the shareholders should be obtained on a yearly basis.
The cumulative period of nine years will begin from the time
when a person is first appointed as independent director of a
company.
In addition, the positions of Chairman and CEO should be held
by different individuals. If the Chairman is not an independent
director, the board should comprise a majority of independent
directors.
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The key amendments made in the MCCG 2012

Commitment of directors
The board is required to set out expectations
on time commitment for its members and
protocols for accepting new directorships.
Remuneration of directors
The board should establish formal and
transparent remuneration policies and
procedures to attract and retain directors. A
Remuneration Committee can perform this
function.
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The key amendments made in the MCCG 2012

Risk management framework and internal controls
system
The board is required to establish a sound framework to
determine the company's level of risk tolerance and
actively identify, assess and monitor key business risks.
Integrity of financial reporting
The Audit Committee should ensure financial statements
comply with applicable financial reporting standards and
assess the suitability and independence of external
auditors.
Relationship between company and shareholders
The board should encourage shareholder participation at
general meetings and voting on resolutions by way of
poll.
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