10091416 Topic 7 Corporate Governance

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INTRODUCTION

Have you heard of the term corporate governance? What does it mean?Occasionally business organisations would use this term due to the importanceplaced on it.

In the following sections, we will look into these aspects in order to learn moreon corporate governance:

Definition of corporate governance

The components in the definition of corporate governance

The perspective of corporate governance

Corporate governance dealing with the top management

The reason for studying corporate governance

The code of corporate governance

The future of corporate governance

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CorporateGovernance7

3. Explain the two perspectives of corporate governance; and

4. Interpret good corporate practices based on the Code of CorporateGovernance.

2. Identify the three components in the definition of corporategovernance;

By the end of this topic, you should be able to:

1. Explain corporate governance;

LEARNING OUTCOMES


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TOPIC 7 CORPORATE GOVERNANCE102

the risk of mismanagement. For example, the practicality to invest in a newproject abroad can be questioned and top management has to answer anyissues raised related to the project. The main objective of oversight is to

minimise top managements abuse of power.

(b) AccountabilityAccountability means how the decisions taken by the management alignwith the firms stated strategic direction. In simple words, did themanagement act based on their stated mission or vision? As promises aremade to the public, management has to be accountable to them or else theywill lose the publics trust. For example, a corporation promises to reduceits carbon emissions. The question raised will be: Did the corporationcommit or take any effort to fulfill its promises? If it did not, then theaccountability of the corporation is at stake due to its undelivered promises.

(c) ControlControl is a process of auditing and improving organisation decisions andactions. It is here that actual performance is compared with certain budget,standard or goal.

Ultimately, corporate governance aims to balance power, address mistakes,reduce risks and avoid misconduct in order to achieve integrity.

SELF-CHECK 7.1

1. In your own words, define corporate governance.

2. Explain briefly the components of corporate governance.

7.2 THE CORPORATE GOVERNANCEPERSPECTIVE

Do you know that corporate governance can be observed from two differentperspectives? The two perspectives are as shown in Figure 7.2.


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TOPIC 7 CORPORATE GOVERNANCE 103

Figure 7.2: Corporate governance perspectivesAll discussions, decisions and actions are made based on these perspectives.Therefore, the top management needs to be extremely clear of the perspective ofcorporate governance that they hold on to. From the shareholder perspective, the

spirit of practising good corporate governance is in the interest of theshareholders. Being the owners of companies, the purpose of corporategovernance is at the interest of the shareholders. The rationale according toFriedman (1962, 1970) is that shareholders are owners of the corporation.Therefore, the corporation should be responsible and accountable to itsshareholders.

For example, if the shareholders are pleased with the top managements decisionand action to clear a piece of land for development, top management willproceed with the process. All other stakeholders interests are of secondaryimportance.

However, from the stakeholder perspective, the spirit of corporate governance isin the interest of the stakeholders. This is because other stakeholders also investin the success of the firm. Another argument is that all corporate decisions andactions can affect its stakeholders and the stakeholders, in turn, can affect thecorporations decisions and actions (Freeman, 1984).

For example, if a corporation is involved in an insider trading, the followingsituations might happen:

(a) Shareholders might suffer losses

(b) Employees might lose their jobs

(c) Customers might decline the customer service they deserve

Consequently, loyal employees will leave the corporation and loyal customersmight discontinue purchasing and using the corporations products or services.This signifies the reflexive relationship between businesses and theirstakeholders.


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ACTIVITY 7.1

From the stakeholder perspective, if an organisation decided to

limit its budget, what will happen to its stakeholders? Discuss withyour coursemates.

CORPORATE GOVERNANCE DEALINGWITH THE TOP MANAGEMENT

7.3

In an organisation, corporate decisions, actions and operations are mainly theresponsibility of the top management. Corporate governance deals mostly with

the top management, specifically the board of directors (refer below).Board of directors and top management are fiduciaries to shareholders. Theyare the persons placed in a position of trust who use due care and loyalty inacting on behalf of the organisations best interest.

When top management practices due care, they make informed and prudentdecisions. These decisions range from merger, acquisition, investment todivesting. Top management and the board of directors are expected to be loyal. Itis only when they are loyal that all decisions are made in the interests of thecorporation and its stakeholders.

For example, when executive (the top management) compensation is decided, isthat decision beneficial only to a group of people or will it benefit thecorporation? A corporation with good corporate governance practice will makedecision based on the best outcome for the corporation.

WHY STUDY CORPORATE GOVERNANCE?7.4

After knowing what corporate governance is and what corporate governance ismade up of, the question lies in why it is so important to study it. It is part of acorporations corporate responsibility to observe some practices that areregarded as appropriate. As owners of the corporations, top managements areresponsible and accountable to their stockholders.

In addition, the incidences of recent malpractices placed companies undergreater scrutiny by all parties which include not only the stockholders but alsothe future investors, the government, the media and the industry. Corporations


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cannot afford to jeopardise their much needed reputation for support whenfacing stiff competition.

SELF-CHECK 7.2

1. Elaborate briefly on the two perspectives of corporate governance.

2. Explain why one needs to learn on corporate governance.

THE CODE OF CORPORATE GOVERNANCE7.6

The Malaysian Code of Corporate Governance (also known as the Code) is

formulated and governed by the Securities Commission (Securities Commission,2010). The Securities Commission, established on 1 March 1993 under theSecurities Commission Act 1993, is a self-funding statutory body withinvestigative and enforcement powers. It reports to the Minister of Finance andits accounts are tabled in Parliament annually.

The Securities Commission, which is a government agency, protects thestockholders rights by making sure that the stock markets are conducted fairlyand that investment information is fully disclosed. The objective is to give thestockholders more and better company information as disclosure is one of the

best ways to safeguard the investors interests. Figure 7.3 show us the regulatoryfuction of the Securities Commission.


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Figure 7.3: Regulatory functions of the Securities CommissionNow, let us move on to the Code. First issued in 2000, it covers the following

three main areas:(a) Directors

The Code covers director appointments, formality and transparency.

(b) ShareholdersThe Code emphasises on information for investment decisions and annualgeneral meetings.

(c) Accountability and AuditAccountability and audit refers to internal control and auditor relations.


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The Code, which aims to achieve optimum governance framework, is dividedinto two parts:

The principles of corporate governance

The best practices of corporate governance

The revised 2007 version of the Code mainly concentrates on strengthening theBoard of Directors and the audit committee. It focuses on the eligibility criteria of

board members on ensuring the effectiveness of the boards in carrying out itsresponsibility. For further information on the revised 2007 version of the Code,you may refer to this website: http://www.sc.com.my/eng/html/cg/cg2007.pdf

However, it is worth to note that compliance with the Code is NOT mandatory.The compliance is not regulated as to reduce the ticking-the-box exercise. Theflexibility is to promote self-regulation in responding to the markets bestpractices. Under the Listing Requirements of Bursa Malaysia, companies have toinclude a narrative account of how they have applied the principles and bestpractices set out in the Code. In other words, a corporation has to disclose how ithas complied with the Code. Failure to do so will result in the corporation havingto provide a narrative explanation of the reasons. The goal is to give investorsinformation of the corporations performance, both financially and itsgovernance, in which they can make informed and sound decisions.

Two other organisations supporting the best practices of corporate governance in

Malaysia are:

(a) The Malaysian Institute of Corporate GovernanceThe Malaysian Institute of Corporate Governance (MICG), which isestablished in 1998, is a non-profit public company. One of the objectives ofMICG is to be a leading establishment for promotion of best practices andcorporate governance development through continuous educationprogrammes for major corporate figures such as company directors, chiefexecutive officers (CEOs), company secretaries, company advisers,company auditors, accountants, lawyers, members of audit committees and

investors (Malaysia Institute of Corporate Governance, 2007-2008). Themission of MICG is as stated in Figure 7.4.


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Figure 7.4: The mission of the Malaysian Institute of Corporate Governance(b) The Malaysian Institute of Chartered Secretaries and Administrators

Established in 1958, Malaysian Institute of Chartered Secretaries andAdministrators (MAICSA) sets out to produce qualified companysecretaries and at the same time ensuring the professionalism of itsmembers (Malaysian Institute of Chartered Secretaries and Administrators,200). MAICSA seeks to maintain the highest standard of integrity and ethicsamong its members within the profession. It also aims to act as a changecatalyst by involving actively in enhancing corporate governance in thecorporate field. In addition, it sets out to champion the best practices incorporate governance and its importance by educating the Malaysiancorporate sectors. Figure 7.5 shows the mission of MAICSA.

Figure 7.5: Mission of MAICSA


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ACTIVITY 7.2Discuss how MICG and MAICSA help to instill good corporategovernance practices.

EXERCISE 7.1

Visit the Securities Commission website at www.sc.com.my and theMalaysian Institute of Corporate Governance (MICG) athttp://www.micg.net/history.htm.

Find out how they encourage good corporate governance practice.

THE FUTURE OF CORPORATEGOVERNANCE

7.7

Do you know that corporate governance will be a significant part of corporate

management in times to come? For management to manage the corporationeffectively and efficiently, it must take corporate governance guided by itsprinciples and best practices seriously.

Thus, in its effort to create good corporate governance, the management shouldlook into the following aspects which show the benefits of practicing goodcorporate governance:

(a) Involvement of Board of DirectorsBoard of directors will be held responsible for developing the corporations

mission and vision, which take stakeholders interest into carefulconsideration. In the business arena, the board of directors need to be alertthat corporations do not operate in isolation.

(b) Perform Self-AssessmentsApart from that, board members are required to perform self-assessments.This is set out to reflect on how effective the boards are in governing thecorporation. By conducting self-assessments, they are also able to realisehow relevant they are in the corporate decision-making process.Increasingly, board member selection will be more formalised.


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(c) Enhanced Role of Nomination CommitteeAs spelled out in the 2007 revision of the Code, the role of the nominationcommittee is enhanced. The committee is expected to play a more active

role in nominating qualified board members. Based on the fact that boardmembers operate in committees, they tend to work independently whichaffects the corporate governances function of oversight. Consequently,

boards are expected to perform more effectively as a team.

(d) Well-elaborated ExplanationIt is expected that more narrative information will appear in the annualreport. Corporations are expected to explain more of their decisions and

justify their actions and to report not only of their accomplishments but alsoof their weaknesses and failures.

(e) Shift of the ModelA shift to the stakeholder model as opposed to the shareholder model will

be more apparent.

(f) Conduct Training and SeminarA series of training and seminar are organised for corporations to realisethe importance of having a broader view of those whom they should beaccountable for.

(g) Greater Management SupportThere will be greater management support for corporate governance asthey begin to realise the importance of good corporate governancepractices.

(h) Well-informed Shareholders and StakeholdersShareholders and other stakeholders are now more well-informed andeducated. They are more sensitive towards current happenings in the

business world.

(i) Greater Government InvolvementBesides corporations, there will also be greater government involvementand presence in promoting good corporate governance practice in light ofeconomic reform efforts. Good corporate governance practice will ensurecontinuous support for businesses, which in turn will strengthen thenations economy.


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EXERCISE 7.2

Visit Bursa Malaysias website at www.klse.com.my in order to find

out its role in promoting good corporate governance practice inMalaysia.

Corporate governance is a formal system of oversight, accountability andcontrol of corporate decisions, operations and actions.

There are three components in the definition of corporate governance:oversight, control and accountability.

There are two perspectives of corporate governance and they are:

The shareholder perspective; and

The stakeholder perspective. Board of directors and top management are fiduciaries to shareholders. They

are persons placed in positions of trust who use due care and loyalty in actingon behalf of the organisations best interest.

In Malaysia, besides Securities Commission, there are other organisationswhich support the best practices of corporate governance such as theMalaysian Institute of Corporate Governance (MICG) and the MalaysianInstitute of Chartered Secretaries and Administrators (MAICSA).

Accountability

Board of directors

Code of Corporate Governance

Corporate governance

Directors

Institute of Corporate Governance

Institute of Secretaries andAdministrators

Securities commission

Shareholder

Stakeholder

Top management

10091416 Topic 7 Corporate Governance

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