Malaysian Code on Corporate Governance 2012

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PwC Alert

Issue 103August 2012PP 9741/10/2012(031262)

Malaysian Code onCorporate Governance 2012

In this issue:

Page 2An overview ofthe MCCG 2012

Page 58 principles

Page 12Our point ofview

On 29 March 2012, the Securities Commission (SC)released the Malaysian Code on Corporate Governance2012 (MCCG 2012), the first major deliverable of theCorporate Governance Blueprint 2011*.

The MCCG 2012 supercedes the Malaysian Code on CorporateGovernance 2007. It sets out broad principles and specificrecommendations on structures and processes which companiesshould adopt in making good corporate governance an integralpart of their business dealings and culture.

The objectives of MCCG 2012 are to:

Achieve excellence in corporate governance throughstrengthening self and market discipline and promoting goodcompliance and corporate governance culture.Focuses on strengthening board structure and composition.

MCCG 2012 advocates the adoption of standards that gobeyond the minimum prescribed by regulation. While it is notmandatory for companies to observe the MCCG 2012, listedcompanies are required to explain in their annual reports howthey have complied with the recommendations. They shouldalso explain and justify the reasons for non-observance of any ofthe recommendations.

* The SC’s Malaysia’s five-year Corporate Governance Blueprint, which was launchedon 8 July 2011, provides the action plan to raise the standards of corporategovernance in Malaysia by strengthening self and market discipline and promotinggreater internalisation of the culture of good governance. It seeks to engender a shiftin corporate governance culture from mere compliance with rules to one that morefittingly captures the essence of good corporate governance; namely a deepening ofthe relationship of trust between companies and stakeholders.

An overview

2 Malaysian Code on Corporate Governance 2012 PwC Alert Issue 103, August 2012

Definition of Corporate Governance

“The process and structure used to direct and manage the businessand affairs of the company towards enhancing business prosperityand corporate accountability with the ultimate objective ofrealising long-term shareholder value, whilst taking into accountthe interests of other stakeholders.”

When does it take effect?

The MCCG 2012 takes effect on 31 December 2012. However,listed companies are encouraged to make an early transition to theprinciples and recommendations.

Where a company's financial year ends on 31 December 2012,disclosure will be required in relation to the financial year 1January 2012 - 31 December 2012 and should be made in theannual report published in 2013. Where a company's financial yearbegins on 1 July 2012, disclosure will be required in relation to thefinancial year 1 July 2012 - 30 June 2013 and should be made inthe annual report published in 2013.

A copy of the MCCG 2012 can be downloaded from the SC’swebsite (www.sc.com.my).

"In essence, the Malaysian Code on Corporate Governance 2012and the Blueprint seek to embed a culture of good corporategovernance, addressing the key components of the corporategovernance ecosystem to strengthen self and market discipline.Boards and shareholders must embrace the fact that goodbusiness is not just about achieving the desired financial bottomline by being competitive. It is equally about creating shareholdervalue, which can only be sustained by well-informed strategicdirection and engaged oversight, which stretch beyond short-term financial performance."

Tan Sri Zarinah Anwar,Former Chairman, Securities Commission29 March 2012

PwC Alert Issue 103, August 2012 Malaysian Code on Corporate Governance 2012 3

The MCCG 2012 sets out 8 broad principles followed by26 corresponding recommendations. Among others, theprinciples and recommendations focus on:

laying a strong foundation for the Board and its committeesto carry out their roles effectivelypromoting timely and balanced disclosuresafeguarding the integrity of financial reportingemphasising the importance of risk management andinternal controlsencouraging shareholder participation in general meetings.


1.1 The Board should establishclear functions reserved for theBoard and those delegated tomanagement.

1.2 The Board should establishclear roles and responsibilitiesin discharging its fiduciary andleadership functions.

1.3 The Board should formaliseethical standards through acode of conduct and ensure itscompliance.

1.4 The Board should ensure thatthe Company’s strategiespromote sustainability.

1.5 The Board should haveprocedures to allow its membersaccess to information andadvice.

1.6 The Board should ensure it issupported by a suitably qualifiedand competent Companysecretary.

1.7 The Board should formalise,periodically review and makepublic its Board charter.

others, the following responsibilities:ó Reviewing and adopting a

strategic plan for the Companyó Overseeing the conduct of the

Company’s businessó Identifying principal risks and

ensuring the implementation ofappropriate internal controls andmitigation measures

ó Succession planningó Overseeing the development and

implementation of a shareholdercommunications policy for theCompany

ó Reviewing the adequacy andthe integrity of the managementinformation and internal controlssystem of the Company.

strategies on promotingsustainability, attention shouldbe given to environmental, socialand governance (ESG) aspects ofbusiness.

and complete information to theBoard in a timely manner to enablethe Board to discharge its dutieseffectively.

the Board should amongst others setout the key values, principles andethos of the Company; division ofresponsibilities and powers betweenthe Board and management; thedifferent committees established;and the processes and proceduresfor convening Board meetings. Thecharter should be made public.

1 Establish clear rolesand responsibilities

Recommendations Key commentariesPrinciples

8 principles

Text in italics refer to newrecommendations that werenot included in MCCG 2007.


2.1 The Board should establish aNominating Committee whichshould comprise exclusivelyof non-executive Directors,a majority of whom must beindependent.

2.2 The Nominating Committeeshould develop, maintain andreview the criteria to be usedin the recruitment process andannual assessment of Directors.

2.3 The Board should establishformal and transparentremuneration policies andprocedures to attract and retainDirectors.

Committee should be a SeniorIndependent Director identified bythe Board.

policy formalising its approach toboardroom diversity and explicitlydisclose in the annual report itsgender diversity policies and targetsand the measures taken to meetthose targets.

3.1 The Board should undertake anassessment of its independentDirectors annually.

3.2 The tenure of an independentDirector should not exceed acumulative term of nine years.Upon completion of the nineyears, an independent Directormay continue to serve on theBoard subject to the Director’s re-designation as a non-independentDirector.

3.3 The Board must justify and seekshareholders’ approval in theevent it retains as an independentDirector, a person who has servedin that capacity for more thannine years.

3.4 The positions of Chairman andCEO should be held by differentindividuals, and the Chairmanmust be a non-executive memberof the Board.

3.5 The Board must comprise amajority of independent Directorswhere the Chairman of the Boardis not an independent Director.

on the Nominating Committee.

should develop the criteria toassess independence. In assessingindependence, the Board shouldfocus beyond the independentDirector’s background, economicand family relationships andconsider whether the independentDirector can continue to bringindependent and objectivejudgement to Board deliberations.

has conducted such assessments inthe annual report and in any noticeconvening a general meeting for theappointment and re-appointment ofindependent Directors.

Recommendations Key commentaries

2 Strengthencomposition

3 Reinforceindependence

Principles

8 principles



4.1 The Board should setout expectations on timecommitment for its membersand protocols for accepting newdirectorships.

4.2 The Board should ensureits members have accessto appropriate continuingeducation programmes.

sufficient time to carry out theirresponsibilities, and the Boardshould obtain this commitmentfrom its members at the time ofappointment.

about the estimated time that willbe spent on the new directorshipappointment before accepting anynew directorship.

5.1 The Audit Committee shouldensure financial statementscomply with applicable financialreporting standards.

5.2 The Audit Committee should havepolicies and procedures to assessthe suitability and independenceof external auditors.

establish policies governing thecircumstances under which contractsfor the provision of non-auditservices can be entered into andwhat periodic internal assessmentof external auditors needs to beundertaken.

written assurance from the externalauditors confirming that theyare, and have been, independentthroughout the conduct of the auditengagement in accordance with theterms of all relevant professional andregulatory requirements.


4 Foster commitment

5 Uphold integrity infinancial reporting

Principles

8 principles




7.1 The Board should ensure theCompany has appropriatecorporate disclosure policies andprocedures.

7.2 The Board should encouragethe Company to leverage oninformation technology foreffective dissemination ofinformation.

practices and compliance with BursaMalaysia's disclosure requirementsin formulating these policies andprocedures.

usage of information technology incommunicating with stakeholdersincluding establishing a dedicatedsection for corporate governance ontheir website, which would includeinformation such as the Boardcharter, rights of shareholders andthe annual report.

8.1 The Board should take reasonablesteps to encourage shareholderparticipation at general meetings.

8.2 The Board should encourage pollvoting.

8.3 The Board should promoteeffective communication andproactive engagements withshareholders.

Company to disclose all relevantinformation to shareholders toenable them to exercise their rights.

shareholders of their rightto demand a poll vote at thecommencement of the generalmeeting.

6.1 The Board should establish asound framework to managerisks.

6.2 The Board should establish aninternal audit function whichreports directly to the AuditCommittee.

to articulating, implementing andreviewing the Company’s internalcontrols system. Periodic testingof the effectiveness and efficiencyof the internal controls proceduresand processes must be conducted toensure that the system is viable androbust.

6 Recognise andmanage risks

7 Ensure timely andhigh quality disclosure

8 Strengthenrelationship betweenCompany and shareholders

Principles

8 principles



"The successful development of a robust and credible corporate governanceenvironment must be premised on a collaborative effort..... Shareholdersmust exercise their rights and voice their expectations on investee companies.Directors must embrace the right mindset and lead by example. Industryassociations must foster self-discipline among their members. Reputationalintermediaries must uphold gatekeeping responsibilities. And, the media alsohas an important role in showcasing the good corporate governance practiceswhere prevalent."

Datuk Ranjit Ajit Singh, Chairman, Securities Commission"Raising the Bar: the Malaysian Code on Corporate Governance" seminar8 June 2012


Is timely information provided to the Board of sufficient depth and quality tofacilitate a robust Board discussion on the risks and benefits of a particularproposal?

including strategy and succession planning?

planning?

of the continued viability of the Company’s strategy?

organisation’s code of conduct in encapsulating such values?

opportunities faced by the Company regarding sustainability? How does theCompany benchmark with its peers?

Company's corporate ambitions? Has your CFO robustly and transparentlyreported the company's sustainability activity?

Key questions that the Board should be thinking aboutWhat's new in MCCG 2012?

Roles and responsibilities of theBoardThe Board is required to formaliseethical standards through a code ofconduct and ensure that Companystrategies promote sustainability. Itis also expected to formalise a Boardcharter.

Does the composition of the Board comprise independent-minded individualswho ask relevant and challenging questions in Boardroom discussions?

of needed skills and diversity of views?

certain skill sets/attributes (e.g. international, technology, financial, legal,accounting, marketing expertise)?

Nominating Committee to assist them in performing their duties moreeffectively? Examples would be the use of an industry-led independentDirectors registries or a recruitment specialist.

Ultimately, what the Nominating Committee is trying to strive for is a Board mixthat is effective, balanced and diverse, as well as comprising members capableof and willing to offer contrarian views, who possess attributes that contributeto the right Board dynamics and has the right chemistry for robust Boardroomdiscussions.

Composition of the BoardThe Board should establish aNominating Committee, chairedby a Senior Independent Director,who is responsible in overseeingthe selection and assessment ofDirectors. The Nominating Committeeis charged with developing a set ofcriteria including policies formalisingits approach to diversity of the Board.


Has the Board formulated a policy on the terms of service of independentDirectors?

the roles of Chairman and CEO are combined?

between the CEO and the independent Board members?

Key questions that the Board should be thinking aboutWhat's new in MCCG 2012?

Independence of independentDirectorsThe tenure of independent Directorsis capped to a cumulative period ofnine years unless approved by theshareholders. Upon completion ofthe nine years, such Directors can bere-designated as non-independentDirectors.

In addition, the positions of Chairmanand CEO should be held by differentindividuals. If the Chairman is notan independent Director, the Boardshould comprise a majority ofindependent Directors.

How did your Board conduct the annual Board evaluation process this year?

conducted through self-assessment or by more objective measurements?

calibre and required expertise to the Board?

responsibility of the Directors, and is there a difference between executive andnon-executive Directors?

Remuneration of DirectorsThe Board should establish formaland transparent remuneration policiesand procedures to attract and retainDirectors. A Remuneration Committeecan perform this function.

Has the Board considered how risk integrates with the Company’s overallstrategy as part of its responsibility for overseeing risk?

know enough and understand the risks of operating in foreign countries (e.g.regulatory, political and cultural risks)?

legal and information technology matters?

identified?

Risk management framework andinternal controls systemThe Board is required to establish asound framework to determine theCompany's level of risk tolerance andactively identify, assess and monitorkey business risks.

reporting processes? What was the level of audit adjustments or issues in thepast?

financial reporting?

preparation? Is the Board being kept up-to-date by management on keydevelopments in financial reporting?

management to close the financial reporting books?

internal and external) to facilitate accurate financial reporting and strategicdecision-making?

Integrity of financial reportingThe Audit Committee should ensurefinancial statements comply withapplicable financial reportingstandards.


Rising to the occasionOur point of view


The MCCG 2012, being the firstmajor deliverable of the SC’sCorporate Governance Blueprint,has certainly placed a spotlighton the quality of directors onMalaysian PLC boards. Also beingemphasised is the role of theNomination Committee – chargedwith the responsibility of selecting,evaluating and nominatingcandidates for Board andCommittee memberships.

The Nomination Committee has achallenging task indeed. Not onlyis it responsible for selecting theright directors with high standardsof professionalism, integrity,expertise and experience, butalso those who can add value tothe Board as a whole. For this tohappen, the Committee has toensure diversity from the industry,technical, business and genderaspects. This helps to providefor robust discussions, variedpoints of views and avoiding thegroupthink syndrome. In addition,the Nomination Committeeneeds to help the Board selectindependent directors - who areindeed independent – based on adetermined set of criteria (whichwill likely be another responsibilityof the Nomination Committee).

However, the road ahead for theNomination Committee is notwithout bumps. Based on feedbackfrom Boards we have had theopportunity to work with, amongthe challenges the NominationCommittee faces on Boardmembership selection include:

Talent shortage in the countryRelatively low DirectorremunerationPressure from shareholders toconsider certain individuals ascandidates.

The Board needs to realise that theNomination Committee has a toughtask on their hands. However, beforethe Committee can even begin itsjob, the Nomination Committeeitself needs to comprise the rightmembers. In addition to providingguidance on Nomination Committeemembership, the MCCG 2012 nowadvocates the appointment of theSenior Independent Director asthe Chairman of the NominationCommittee. This move shouldprovide additional independenceand objectivity to the Directorappointment process.

A study done in the UnitedStates (Catalyst 2011 report)shows that companies with 3or 4 female Directors on theirBoards for at least 4 yearsfinancially outperformedcompanies with minimal femaleBoard representation. Althoughthis correlation between morewomen Directors and betterfinancial performance does notprove causation, it may supportthe notion that having broaderperspectives on the Board can bevaluable.


Next, the Nomination Committeeshould be equipped with the necessarytools and means to perform its duties.An example of these tools can be inthe form of the Board effectivenessevaluation (BEE), which, if performedwell, can provide the NominationCommittee and the Board withvaluable information on its currentstate of performance, strengths andareas for improvement.

Information from the BEE process can:

grid to analyse Directors’ neededskills, experience and attributes,both in light of current operationsand in anticipation of futurechallenges. The NominationCommittee can focus on buildingthe Board succession pipeline andconsider various ways to source forappropriate candidates.

Help to identify current andpotential gaps in Board composition,as well as required enhancements inBoard practices.

Highlight Directors’ training anddevelopment needs.

Nomination Committees canuse the following methods andsources to find suitable Boardcandidates:

Agencies and headhuntersCandidates nominated by fellowBoard members, managementand shareholders – which meetthe required criteriaSuitably qualified internalor external managementpersonnelCandidates from Directorregistries which employ robustscreening processes.

Rising to the occasion

In a 2010 PwC survey, 65% ofDirectors surveyed said they hadmade changes to their Boardpolicies and practices as a resultof Board evaluations.

The annual Board effectivenessassessment (including Directorassessments) is one of therecommendations in the MCCG 2012for continuous Board improvement.Performed regularly, with proactivefollow through, this iterative processwill help the Nomination Committeeand Board to focus on requiredimprovements and strengthen theBoard’s performance and dynamicsover time.


Without a doubt, the Nomination Committee’s responsibilities have increasedsignificantly with the introduction of MCCG 2012. While some of theserecommendations may seem tedious, it is a necessary evil.

The Nomination Committee is a Board committee that should perhaps share equalrecognition as the Audit Committee, which is typically regarded as the committeethat ‘works the hardest’. While the Audit Committee’s main role is to ensure theintegrity of financial reporting, the Nomination Committee’s task is to ensure thepresence of quality Board members, able to provide an organisation with properstewardship.

It is time for Boards to recognise this critical role.

In summary


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For more information on Corporate Governance, please contact the following:

Mohammad Faiz AzmiExecutive ChairmanPwC MalaysiaTel: 03-2173 0867Email: [email protected]

Regulatory and capital markets

Loh Lay ChoonPartnerPwC MalaysiaTel: 03-2173 1683Email: [email protected]

Herbert ChuaExecutive DirectorPwC MalaysiaTel: 03-2173 0649Email: [email protected]

Contacts

Performance Improvement -Governance Consulting

Sundara RajSenior Executive DirectorPwC Advisory Services, MalaysiaTel: 03-2173 1318Email: [email protected]

Lum Sook MingExecutive DirectorPwC Advisory Services, MalaysiaTel: 03-2173 1363Email: [email protected]

Documents

Malaysian Code on Corporate Governance 2012