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  1. Corporate Governance


1. Corporate Governance Assessment And ROSC Module


Section Contents:

1. Summary fact sheet

2. Market overview

2.1 Structure of the corporate sector and capital market in the country

2.2 Legal, regulatory and professional/best practice bodies

3. Registration and listing requirements

3.1 Capital markets regulator

3.2 Stock exchange

4. Treatment of shareholders

4.1 Legal rights/treatment of shareholders

4.2 Minority shareholders

4.3 Statutory and other remedies

4.4 Insider trading and self-dealing

4.5 Share registration

5. Oversight of management

5.1 Structure and powers of the ultimate body governing the corporation

5.2 Legal duties owed by the members of the governing body

5.3 Process for nominations to the governing body

5.4 Independent oversight of management

6. Disclosure and transparency

6.1 Disclosure of material financial and non financial performance

6.2 Independent audit

6.3 Disclosure of ownership

6.4 Disclosures relating to the company’s directors, managers and advisers

6.5 Disclosures for related party transactions

6.6 Other disclosure provisions, risk management

Annex Malaysia OECD principles matrix

1 Summary fact sheet

Market and Regulatory Overview


Market Cap (percent of GDP)

As of 12/30/99: RM 553 billion (US$145.4 billion) or approximately 184% of 1999 GDP

Turnover Ratio


Number of Listed Companies

757 as of 12/30/1999

Legal System (Origin)

Common Law system with a comprehensive legal framework (UK)

Autonomy of Capital Markets Regulator

SC. Chairman and commission appointed by and report to the minister of finance (MOF). Accounts annually tabled in parliament. Self funded.

Powers of the Capital Markets Regulator

Administrative, including powers to conduct investigations and to prosecute with consent of attorney general. No judicial powers.

Stock Exchange Governance

KLSE; 4 board members chosen by MOF and five by its members. Supervised by the Securities Commission.

Corporate Ownership Structure

Concentrated. In half of the listed companies the five largest shareholders typically own more than 60% of shares.

Shareholders' Rights

Voting Rights

Each ordinary share carries one vote. Non-voting preferred shares are rare. Some companies have "special shares", which require holder’s consent over certain matters or confer rights over board appointments.

Proxy Voting


No need for notarization. Deposited before meeting/no postal ballot.

Cumulative Vote/Proportional Representation


Voluntary Code sets out best practice on proportional representation.

Ownership % required to call Shh Meeting

Two or more members holding ≥10% may call extraordinary meeting.

Redress against Violations/ Minority Oppression Remedies


Personal actions, representative actions and derivative actions. Proce- dural difficulties with recovery of damages in representative action.

Take-over Code


Mandatory Tender Offer in Change of Control


Required at ≥33% of share capital. The bidder must pay the highest price paid for the shares of the offeree in the preceding 6 months.

Insider Trading & Self-Dealing Prohibition


"Insider" includes all persons w/material non-public info. Investors allowed to seek full compensation. One case pending in court.

Preemptive Rights


KLSE listing requirements require preemptive rights to be worked into the articles of association.

Relationship to OECD Principles of CG

See annex.

Oversight of Management

Board Structure

One tier board, combination of executive and non-executive

Independent Directors


1998 survey indicated most companies have good mix. Anecdotal evidence suggests controlling shareholders sometimes act as "shadow directors", in which case the Companies Act imposes fiduciary duties. Getting prove and enforcing the law are difficult in practice.

Committee Practices


Audit comm w/at least 3 members – majority of independent directors.

Relationship to OECD Principles of CG

See annex.

Disclosure and Transparency

External Auditors


Appointed/removed at AGM.

Consolidated Statements


Required by listing requirements of KLSE.

Segment Reporting


Compliance is a statutory requirement.

Disclosure of Price Sensitive Information


Must disclose material information to the public immediately; clarify and confirm rumors/reports; provide response to unusual market action.

Accounting – Standards and Enforcement


Compliance with IAS in all material aspects. Compliance is a statutory requirement.

Company Officers related Disclosures


Aggregate remuneration is disclosed.

Related Party Transactions


Intl accounting standard (IAS24) on related party disclosures adopted; there are rules for both directors and related parties

Disclosure of Ownership

Lowered from 5% to 2%, but ownership structure is difficult to capture.

Risk Management and other Disclosures

Soon to be introduced KLSE listing requirements will require annual reporting on the state of internal controls in a company.

Relationship to OECD Principles of CG

See annex.


KLSE: Kuala Lumpur Stock Exchange IAS: International Accounting Standards

SC: Securities Commission AGM: Annual Shareholder Meeting


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2 Market overview

2.1 Structure of the corporate sector and capital market in the country

As of December 30, 1999, the market capitalization of the Kuala Lumpur Stock Exchange (KLSE) stood at Malaysian Ringgit (RM) 553 billion (US$ 145 billion), or 184 percent of 1999 GDP. Its turnover ratio was 34 percent. There were 757 companies listed, of which 474 on the main board and 283 on the second board.

Table 1: List of sectors represented on KLSE, December 30, 1999


Market cap (RM mn)

Market cap %


Market cap

(RM mn)

Market cap %

Main board

Second board

Consumer Products



Consumer Products



Industrial Products



Industrial Products










































Grand Total


















Source: Kuala Lumpur Stock Exchange

Companies are usually majority controlled by a small group of related parties and managed by owner-managers. In December 1998 an analysis of a sample of companies comprising over 50 percent of KLSE’s market capitalisation showed that the five largest shareholders in these companies owned 60.4 percent of the outstanding shares and more than half of the voting shares. Some 67.2 percent of shares were in family hands, 37.4 percent had only one dominant shareholder and 13.4 percent were state-controlled. About 85 percent of the public limited companies (PLCs) had owner-managers; the post of CEO, chairman of the board or vice-chairman belonged to a member of the controlling family or a nominee. While less prevalent than in neighboring countries, three tier pyramid structures are common.

Malaysian corporate ownership has two other striking features. Reflecting its UK legal history, nominee accounts are common. At the end of 1997, nominees represented the largest type of shareholders among the top five shareholders. They owned 45 percent of all PLCs and 47 percent of non-financial companies. About half of the beneficial owners of nominee accounts were foreigners. However, in 1998, amendments to the Securities Industry (Central Depositories) Act 1991 introduced the authorized nominee concept, prohibited omnibus accounts, and obliged the beneficial owners to reveal their identity. The second feature is the prevalence of Bumiputera (ethnic Malay) ownership. This is the direct result of the government’s New Economic Policy (NEP) to strengthen the Bumiputera business community started in 1970. The government decided to influence the pattern of corporate ownership, so as to reach 30 percent Bumiputera ownership by 1990. This is being pursued by requiring a quota of thirty percent Bumiputera ownership in primary offerings.

Securities are traded in immobilized form. The Malaysian Central Depository (MCD) is the exclusive depository. Brokers executing transactions hold a securities account with MCD and a cash account with a clearing bank. Cash settlement between brokers is handled by KLSE’s wholly owned subsidiary, Securities Clearing Automated Network Services (SCANS). KLSE is compliant with the ISSA and G30 recommendations, except for securities lending and borrowing and for trade comparison for indirect market participants who are not member of SCANS for the Institutional Settlement Service (ISS). Clients have their MCD accounts debited and credited with securities by T+5 morning (9 am). Cash settlements are carried out on T+5 at 10:00 am between SCANS and its members and by 12:30 p.m. between member companies and their clients.

2.2 Legal, regulatory and professional/best practice bodies

Malaysia is a common law country. Three major acts govern corporate activity: the Companies Act 1965; the Securities Industry Act 1983 (SIA); and the Securities Commission Act 1993 (SCA). In addition, KLSE’s listing requirements play an important role in regulating issuers and intermediaries.

The Companies Act ("Act") is the principal piece of legislation in such corporate matters as pre-incorporation, incorporation, operations and the duties and obligations of directors. It also deals with the rights of shareholders. The Registrar of Companies (ROC) under the Ministry of Domestic Trade and Consumer Affairs administers and regulates the Companies Act. It is empowered to investigate potential violations and performs prosecution functions. However, the Registrar does not have the power to institute civil action on behalf of an investor suffering loss or damage.

The Securities Industry Act 1983 (SIA) and the Securities Commission Act 1993 (SCA) make up the legislative and regulatory framework of Malaysia’s capital markets, under the authority of the ministry of finance. The Securities Commission (SC) has wide administrative powers, but does not have the judicial power of a court. It reports to the minister of finance and its accounts are tabled in parliament annually. The chairman holds office for a period of up to three years. The finance minister has the right to remove any member of the commission from office, including the chairman. The SC is financially independent.

KLSE is responsible for market surveillance; enforcement of listing requirements; and supervision of its subsidiaries, SCANS and MCD. It is an organization overseen by a nine-member committee with its own memorandum and articles of association. Four of the committee members, including the chairman, are appointed by the minister of finance, and the remaining five are elected from among the stock exchange members. KLSE is subject to the statutory duty to act in the public interest and the regulatory oversight of the SC. Any amendment to its rules requires the approval of the SC.

There has been criticism about lack of autonomy and transparency of the regulatory authorities in Malaysia. The SC has enhanced its enforcement capacity by restructuring the enforcement department and putting greater emphasis on corporate compliance. Senior officials from the attorney-general’s chambers are assisting SC’s enforcement efforts. In 1999 the SC investigated 54 cases and initiated 23 prosecutions for offences ranging from submission of false or misleading information, using schemes to defraud, engaging in acts to defraud and short-selling. It is the responsibility of the attorney general to initiate prosecution.

A comprehensive report on corporate governance was approved in February 1999. It was based on the recommendations of the High Level Finance Committee on Corporate Governance, which comprised members from the government, SC, KLSE, ROC and the business community. Some of the recommendations implemented or where implementation is imminent are the following:

  • Law reform – The Securities Commission (Amendment) Act 2000 was passed by both houses of parliament in April 2000 and received royal assent on May 30th. The act introduces enhanced disclosure obligations on issuers and stringent sanctions for false and misleading information in prospectuses. It gives investors the right to pursue civil action against companies, directors and their advisers where there has been a contravention of the law. The SC is also empowered to pursue civil action on behalf of investors where it is in the public interest to do so.
  • Malaysian Code on Corporate Governance – Voluntary in nature, the code sets out broad principles of good governance and best practices for listed companies. The amendment to KLSE’s listing requirements will require companies to disclose in their annual reports a narrative account of how they applied the principles of the code to their structures and processes and the extent to which they have complied with it.
  • Mandatory accreditation of directors – The new listing requirements will require directors to attend compulsory training programs.

In March 1998, the Malaysian Institute of Corporate Governance (MICG) was created to raise awareness and create a pool of independent directors through education and training programs. There is also an Institute of Directors in Malaysia (MID).


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3 Registration and listing requirements

3.1 Capital markets regulator

Companies seeking a listing must submit an application to the SC. The criteria are set out in the SC’s policies and guidelines on issue/offer of securities. Failure to comply, or submitting false and misleading information in connection with an application for listing, is punishable by a fine of RM 10 million (US$ 2.6 million) or a term of imprisonment of ten years or both. There are special requirements for the listing of certain companies, for example infrastructure projects or closed-end funds.

The SC is taking a phased approach to move from a merit based system to a disclosure approach. Introduced in January 1996, it has now moved to phase 2 and full completion is expected in 2001. Until recently, the regulation of prospectuses was within the scope of the ROC. In May/June of this year the Securities Commission (Amendment) Act transferred the regulation of prospectuses to the SC.

3.2 Stock exchange

KLSE listing requirements include minimum quantitative standards, admission procedures, a disclosure policy and, in some cases, a moratorium on disposal of shares. A copy of the prospectus must be submitted to KLSE followed by the final prospectus registered by the ROC. There are three quantitative standards. First, companies must have an issued and paid-up share capital of at least RM 60 million (US$ 15.7 million) for the main board, and RM 40 million (US$ 10.5 million) for the second board. Second, they must have, after the floatation, a minimum number of shareholders holding at least 1,000 shares and at least 25 percent of their share capital must be in the hands of public shareholders. In this percentage the company can include up to five percent of shares in the hands of employees and ten percent held by Bumiputera investors in compliance with the National Development Policy. Third, companies seeking a listing on the main board must have an uninterrupted profit record of either three years or five years, with an aggregate after-tax profit of not less than RM 30 million (US$ 7.9 million) over the same period, and an after-tax profit of not less than RM 8 million (US$ 2.1 million) in the most recent financial year. For listing on the second board, the company must fulfill the same requirement, but the amount is RM 12 million (US$ 3.1million) over three or five years and RM 4 million (US$ 1 million) in the most recent year. Securities are quoted three market days after receipt of the application for quotation if they are found to be in order.


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4 Treatment of shareholders

4.1 Legal rights/treatment of shareholders

The memorandum and articles of association set out the rights and powers of shareholders in Malaysian companies. Terms may be altered subject to the provisions of the Companies Act 1965. KLSE’s listing requirements prohibit listed companies from deleting, amending, or adding to their articles of association unless the company has sought and obtained the written approval of the exchange.

There are two types of shares in Malaysia: preference and ordinary shares. Preference shares give their holders the right to a fixed dividend, with or without the right to vote, but they are not commonly used. Ordinary shares pay variable dividends, but offer the right to vote. The Companies Act confers additional rights to shareholders, including secure methods of ownership registration, free transfer of shares, as well as the rights to information, to requisition a general meeting, and to have the company’s assets protected from misuse or misappropriation by directors, managers, and controlling shareholders. The Act requires companies to hold an annual general meeting (AGM) to approve the profit and loss account, balance sheet, auditors’ and directors’ reports. Minutes of the AGM must be kept in a minute book for inspection by shareholders. Section 145(2) of the Act requires that notice be given at least 14 days before the date of the meeting. The

notice must set out the date, time and venue, and give details of the business to be transacted. If a material fact is not disclosed in the notice, AGM resolutions may be invalidated by a shareholder. Shareholders holding ten percent of the share capital can requisition a general meeting. If directors do not convene a meeting within 21 days, the shareholders may convene the meeting themselves within three months at the expense of the company. Frequently, attendance at AGMs is poor and dominated by retail investors.

The rules and regulations relating to changes in company control is embodied in the Code on Take-overs and Mergers of January 1, 1999. Directors are under fiduciary duty to make full and honest disclosure to shareholders before they vote on resolutions regarding a take-over. The SC is statutorily obliged to ensure that (i) shareholders, directors and the market are aware of the identity of the buyer and have reasonable time and sufficient information to assess the offer; (ii) shareholders have equal opportunity to partake in the offer, including control premium, and are treated fairly and equally; and (iii) directors of the offeree and acquirer act in good faith. In response to alleged abuses in the case of back door listings, the SC also introduced the requirement for prior permission to be sought before a back door listing can be effected.

Under subsection 33B of the SCA and in accordance with the provisions of the Take-over Code, an acquirer who obtained 33 percent of the voting rights in a company must make a mandatory general offer for the remaining shares. The Take-over Code makes the SC the sole authority to grant waivers from such requirements. This rule is seen to be in response to the public dissatisfaction that followed the purchase by UEM Berhad and its concert parties of a 32.6 percent stake in Renong Berhad in November 1996. UEM was granted a waiver from the requirement to make a mandatory general offer for the remaining shares in Renong by the Foreign Investment Committee (FIC). The acquisition was perceived as a bailout of a cash starved company and its majority shareholders by a financially strong company, with scant regard for UEM shareholders’ interests. This gave the impression that the bailout was supported by the authorities. In late 1996 Malaysian United Industries Berhad (MUI) launched a successful hostile take-over bid for the remaining shares in Pengkalen Holdings Berhad. The Take-over Code requires the bidder to pay the highest price paid for the shares of the offeree in the preceding six months. The SC directed MUI to pay the difference between the revised offer price and the price at which the shares were originally bought by MUI.

While the Take-over Code contains no inhibition on hostile take-overs, the concentration of shareholding imposes a constraint on the market for corporate control. In certain strategic industries such as financial institutions, barriers are included in policies issued by the regulatory authorities and any take-over bid is void without the consent of the regulatory authority.

4.2 Minority shareholders

The right of minority shareholders to participate and vote in company meetings and shareholder ballots is embodied in the Companies Act. Section 55 provides that each share may carry only one vote, thereby prohibiting the existence of multiple voting and non-voting ordinary shares. Companies are not allowed to set a maximum number of votes per shareholder. In a cross country study carried out in 1996, Malaysia was found to be one of only 11 countries out of 49 which impose a genuine one-share-one-vote-rule. However, "special shares" with extraordinary voting rights exist in certain companies considered of strategic interest. The terms of the special share may vary from company to company. For example, they may require the express consent of its holder over certain prescribed matters or may confer special rights over appointments to boards of directors.

Voting may be by show of hands or through a written ballot. Each member is entitled to one vote on a show of hands unless the articles of association provide otherwise. In case of a ballot, a shareholder has as many rights as his shareholding entitles him. The right to demand a poll is an integral right of shareholders. It is the practice for PLCs to appoint an independent firm of chartered secretaries or accountants to conduct polls, thus ensuring their independence.

The Companies Act guarantees shareholders the right to vote on the election of directors, on amendments of the articles of associations, and on key corporate transactions, including where an insider has an interest in the sale of company assets, or mergers and acquisitions. The Act provides for two types of resolutions: ordinary and special. An ordinary resolution is a resolution passed by a simple majority, while a special resolution must be passed by a three-fourths majority. To prevent the abuse of minority shareholders by controlling shareholders and other insiders, there are legal and regulatory provisions requiring the approval of shareholders on substantial and related party transactions.

A member may appoint a proxy to vote on his behalf. A proxy has the right to speak at a meeting, in the absence of a contrary provision in the articles of association. The proxy may demand a poll. Generally, the articles of associations require proxy forms to be deposited with the company some time before the meeting to facilitate checking and validation of the forms. Any provision requiring forms to be deposited more than 48 hours before the meeting is void. Postal ballots are not allowed.

4.3 Statutory and other remedies

Shareholders whose rights have been violated may invoke legal remedies under section 181 or section 218 of the Companies Act. Section 181 covers arbitrary and capricious conduct by the board, the appropriation of business or property or corporate opportunity at the expense of the company or its minority shareholders, unjustifiable failure to pay dividends, or director’s neglect of the duty of care, skill and diligence. The court has discretion to choose from a wide range of remedies. These include prohibiting, canceling, altering a transaction or resolution; regulating the future conduct of affairs; providing for the purchase of common shares by other shareholders; altering the memorandum or articles of association; and providing for the winding up of the company. Section 218 gives the shareholder the right to petition the courts for a winding up order. The court grants the order in circumstances where the company is insolvent; the directors have acted in their own interests instead of the interests of the shareholders; or acted unfairly or unjustly to other shareholders in the company; and if the court is of the opinion that it is just and equitable for the company to be dissolved. Shareholders do not have the right to access company records for the purpose of taking action.

Common law remedies include personal actions, representative actions, and derivative actions. Anecdotal evidence suggests that there are significant procedural impediments to shareholders undertaking representative action. The biggest drawback is that the relief sought cannot be a recovery of damages. This means that once the plaintiff has established his claim, each shareholder must bring his own action to establish damage suffered by him. The regulator cannot take action on behalf of an aggrieved investor for breach of company legislation, duty, fraud or negligence .

If a shareholder believes that certain board decisions are not in the best interest of the company, he/she may request the board of directors to take remedial action. Failure by the board to take appropriate action entitles shareholders representing ten percent of the share capital to call a general meeting in order to pass a resolution to commence litigation. If this also fails, the shareholder may approach the court on behalf of the company. According to market analysts, investors face practical obstacles in the pursuit of legal action against directors for breach of fiduciary duties. The costs of funding an action and the complexities of the substantial and procedural requirements are often insuperable to minority shareholders. It is estimated that cases take on average two to three years from filing to completion of trial, although anecdotal evidence suggests that most cases involving company law are settled out of court. There has been increasing use of arbitration and mediation processes in settling disputes under the auspices of the Center for Arbitration in Kuala Lumpur. Arbitration and enforcement of awards are guaranteed to be unimpaired by court intervention and have a finality to their status.

4.4 Insider trading and self-dealing

Insider trading is a criminal offence. Since 1999, insiders include all persons who have in their possession material non public information. Additionally, SC’s policies and guidelines on the issue/offer of securities set out certain closed periods where directors and persons connected to directors and principal executive officers cannot trade, regardless of whether or not they are in possession of material non-public information.

The Companies Act provides for a fine of RM 30,000 (US$ 7,895) or imprisonment of five years for perpetrators of insider trading offences. The SIA is more stringent; the fine is no less than RM one million (US$ 263,192) or three times the insider’s gain, and the imprisonment can go up to ten years. The new civil penalties also allow investors to seek full compensation for loss from the offenders. To date there has not been any successful prosecution of insider trading in Malaysia, but one case is pending in court.

4.5 Share registration

Listed securities must be deposited with MCD. MCD’s operations are effected electronically without the need for physical delivery. Shares are registered either in the name of beneficiaries or in nominee form (see section 2.1 above). Applications to open a direct account with MCD must be made through an Authorised Depository Agent (ADA). An investor may change or update his/her particulars by contacting the ADA where the account is held, or going in person to the ADA and completing an application form for updating the individual/corporate account.


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5 Oversight of management

5.1 Structure and powers of the ultimate body governing the corporation

Malaysian boards have a single tier structure. Section 122 of the Companies Act makes it mandatory for all companies to have at least two directors, but the Act does not set out the functions of the board of directors. These are set out in the articles of association which often confer broad powers to their board. In 1998, KLSE and Price Waterhouse Coopers (PWC) conducted a corporate governance survey focused on boards of directors. The survey indicated a proportionate mix of independent directors, non-executive directors, and executive directors. On average, a company had eight directors; 2.6 were independent directors; 2.6 non-executive directors; and 2.9 executive directors. Only 20 percent of the companies surveyed had a structured process for selecting independent non-executive directors. In practice, many independent directors in small, family owned companies listed on the second board, are non-executive rather than independent.

The board of directors considers major policies and changes, leaving the daily conduct of business to a group selected from amongst their rank as managers. The Companies Act provides that the board may appoint one of their own to the office of managing director. The latter is then responsible for the day-to-day operations of the company. However, there is neither explicit statutory nor judicial mention of the board’s collective duty to oversee management in the event it delegates its management powers.

5.2 Legal duties owed by the members of the governing body

Board members owe their duties to the company and not to the shareholders. According to the Companies Act, directors have "trustee-like" fiduciary duties in addition to the duty to exercise care, skill and diligence. The "trustee-like" duties consist of acting in the best interest of the company, avoiding conflicts of interest and acting for a proper purpose. The Act carries stiff civil and criminal penalties for offenders. There are two principal components to the no-conflict rule. First, directors have the duty not to make secret profits; second they may not hold directorships in rival companies. Directors can enter into specific contractual arrangements with shareholders. Such arrangement is often insisted upon by foreign joint venture parties making a major investment in the country.

There is anecdotal evidence that controlling shareholders sometimes act as "shadow directors". This means that they exercise control over the board of directors and its decisions even though they do not officially sit on the board. Section four of the Companies Act defines a shadow director as a person "in accordance with whose directions or instructions the directors of a corporation are accustomed to act". Section four tries to make shadow directors subject to the duties imposed by law on directors generally, but it is often difficult to prove their existence.

The powers of KLSE were strengthened in 1999 through the amendments to the Securities Industry Act. KLSE can now take action against directors and any person involved with its listing rules instead of being confined to the listed entity. In addition, the SC has the power to apply to court for disqualification of chief executives and directors where he/she has been convicted of offences under securities laws or has had an action taken against him/her for breach of listing rules or civil action for breach of the insider trading or market manipulation provisions.

While directors are subject to extensive laws and regulations regulating their conduct, awareness of the extent of their responsibilities appears to be limited. According to the High Level Finance Committee on Corporate Governance, this is due to the complexities of the laws, their multiple sources, and ineffectual enforcement.

5.3 Process for nominations to the governing body

Directors are appointed by shareholders at the general meeting, or by the board. Usually they are appointed by fellow directors by virtue of the powers granted to them under section 68 of the Companies Act. A director appointed to fill a casual vacancy holds office until the next AGM and is eligible for re-election. Despite the requirement to take all such appointments to the general meeting, boards essentially control the selection of directors, unless the company is controlled by a significant shareholder, in which case he/she controls the board. Cumulative voting rights do not exist in Malaysia. Listed companies must file every appointment with the ROC, and notify KLSE and the SC.

Section 128 of the Companies Act preserves the right of shareholders to remove directors at any time during their term of office. Special notice is required for tabling a resolution to remove a director or to appoint someone else in his/her place. While this provision is crucial, the law does not safeguard against random removals by significant shareholders. While the company removing a director is required to notify KLSE, it is not bound to give reasons for the removal. The ROC and the SC can apply to court to disqualify a director.

A director needs no special skill to be appointed. In fact there is a striking contrast between directors' heavy fiduciary duties and their relatively light obligations of skill and diligence. Section 130 of the Companies Act prohibits a person convicted of offences related to the promotion or management of a company or involving fraud, dishonesty or breach of duty, from acting as director, promoter or manager of a company within a period of five years from his conviction. Foreigners may sit on boards, unless the bylaws expressly prohibit it.

5.4 Independent oversight of management

KLSE’s listing rule 344A requires that all listed companies have an audit committee comprising three members, a majority of whom must be independent. The rule also sets forth the minimum functions of the committee, including the review with the auditor of the audit plan; the evaluation of the system of internal accounting control; the audit report; the assistance given by company officers to the auditors; the scope and results of internal audit procedures; the balance sheet and profit and loss account; and related party transactions. The audit committee is responsible for nominating the auditor of the company. According to market analysts, audit committees have difficulties to be effective due to a lack of expertise or because they do not have the necessary means or access.

Other issues delegated to committees in larger companies include nominating directors and the compensation of directors and senior management. The results of the KLSE/PWC survey indicated that one in five companies have a remuneration committee. Of those who did, some 64 percent had at least one independent director on the committee.


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6 Disclosure and transparency

6.1 Disclosure of material financial and non financial performance

A PLC is required to publish annual audited accounts, auditors’ and directors’ reports within four months from the close of each financial year; and quarterly financial statements within two months after the end of each quarter. Financial statements are to be prepared and presented in accordance with the approved accounting standards of the Malaysian Accounting Standards Board (MASB) and the ninth schedule of the Companies Act. Financial statements include a balance sheet, income statement, a statement showing changes in equity, a cash flow statement, accounting policies and explanatory notes. The institutions entrusted with enforcement are Bank Negara Malaysia for financial institutions; SC for listed companies, and the registrar for unlisted companies. Although full compliance with IAS has not been achieved in all respects, considerable progress has been made in the last few years.

A listed company is required to make immediate public disclosure of all material information concerning its affairs, except under exceptional circumstances. Part two and ten of KLSE’s listing requirements set out the obligation to immediately divulge any information which is necessary to avoid a false market. Such disclosures embrace e.g. changes in dividend policy, substantial shareholders, directors, company secretary or auditors; acquisition of shares beyond a certain threshold; valuation of assets and/or those of subsidiaries; and any proposed issue of new securities.

However, there are no statutory provisions attaching civil liability to decisions as to the timing and content of disclosures and consequently, adherence to the prevailing regulation is lax. Securities legislation does not provide for recovery of damages by the investor from the person who has made the misleading or deceptive statement or failed with respect to his/her continuing obligation to disclose information. This right exists only with respect of disclosures in prospectuses under section 46 of the Companies Act.

Under the SCA, if the company submits information that is false or misleading, or from which there is a material omission in connection with an application for approval to undertake certain corporate actions, the offender can be fined up to RM 3 million (US$ 789,577) or be imprisoned for a term not exceeding ten years or both. An officer of a corporation who refuses or otherwise hinders, obstructs or delays an auditor in the performance of his duties or the exercise of his powers faces a penalty of either a fine of RM 30,000 (US$ 7,895) or imprisonment for two years or both.

6.2 Independent audit

The Companies Act requires the profit and loss statement and the balance sheet to be duly audited before they are presented at the annual general meeting. The external auditor is appointed by shareholders via company resolution at the AGM. Section 172 (4) Companies Act provides that an auditor may only be removed from office by resolution at a general meeting, of which special notice has been given.

The Companies Act places a duty on auditors to report in writing where a breach of the Act has occurred and where he/she has no confidence that the directors will deal adequately with the matter. However, on a practical level, breaches of the law are hard to detect and even harder to prove, especially in cases of fraud, forgery, collusion or management override of control systems. The Companies Act does not require an auditor to give an opinion as to whether the information given in the directors’ report is consistent with the audited accounts and there are no KLSE rules requiring directors to agree with auditors on the content of preliminary announcement of financial results.

Aside from the above requirements of the Companies Act, the Malaysian Institute of Accountants (MIA) imposes certain minimum standards of professional conduct on all practicing accountants and auditors.

6.3 Disclosure of ownership

Given the predominance of ownership concentration, pyramid structures, and cross-holdings within corporate groups, the threshold for reporting acquisition of shares has been lowered from five percent to two percent. In compliance with the Companies Act and the Securities Industry Regulations 1998 (reporting of substantial shareholding), a substantial shareholder has to notify the stock exchange, the listed corporation and the SC of his shareholding and of any changes thereto; the date of the change of interest; circumstances giving rise to the change; the number of securities acquired or disposed of, both in absolute terms and expressed as a percentage of the issued capital; the amount of consideration received or paid for the securities, and the number of securities held before and after the change, both in absolute terms and expressed as a percentage of the issued capital. The period of reporting has also been shortened from 14 to seven days, and the penalties for failure to make the required disclosures increased. Breach of these regulations entail a fine of RM 500,000 (US$ 131,596) or imprisonment for a term not exceeding five years or both. Additionally, the courts have powers with respect to defaulting substantial shareholders.

6.4 Disclosures relating to the company’s directors, managers and advisers

KLSE’s listing rules set forth the disclosures concerning directors and senior executives that are required in the prospectus for a new issue of shares. These disclosures include: the persons’ name, address, age and position or occupation; their business experience in the past five years; any other directorships held; the nature of the family relationship between the directors and senior executive officers; if he/she or his/her employer is bankrupt, convicted or facing criminal action, or has been restrained by a court from engaging in any business practice; aggregate remuneration paid by the company or its subsidiaries during the last financial year; details of all securities options received or exercised during the last financial year; as well as particulars of material contracts involving the interests of directors.

The Companies Act requires periodic disclosure in the annual report of the shareholding interest of each director in the company or in a related corporation; the total number of securities bought and sold by him during the year; and particulars of material contracts involving directors’ interests, either still subsisting or entered into during the financial year. Auditors are not allowed to hold shares in the companies audited by them.

Section 99B of the Securities Industry Act provides that chief executives and directors must disclose to the SC their interest in securities of the listed corporation or associated corporations of which they are directors or chief executives. In addition, section 131 Companies Act requires every director of a company to disclose to the board of directors any interest, direct or indirect, which he/she may have in a contract or proposed contract with the company and the nature of his interest. This rule extends to directors' spouse, children and parents. Failure to disclose is an offence that carries with it a fine of up to RM one hundred and fifty thousand RM 150,000.- (US$ 39,500.-) or imprisonment of up to seven years or both. However, the law does not mandate that they abstain from voting.

6.5 Disclosures for related party transactions

IAS 24 on related party disclosures has been adopted as accounting standard in Malaysia. KLSE’s listing rules on related party transactions cover transactions involving the interests, direct or indirect, of directors, substantial shareholders, and persons connected with directors or substantial shareholders. The rules specify that a listed company is required to make a public announcement, send a circular and seek the approval of shareholders on all material related party transactions with the following disclosures: a) the date of the transaction, the parties thereto and a description of their relationship, and the nature and extent of the interest of the related party in the transaction; b) particulars and purpose of the transaction; c) the total consideration, together with the basis of arriving at the consideration, and how it is to be satisfied; d) the effects of the transaction on the company including any benefits to be accrued; e) an opinion by an independent corporate adviser whether the transaction is fair and reasonable to shareholders setting out the key assumptions and factors taken into account; f) a statement by the directors that the transaction is in the best interest of the company; and g) a statement that the related party will abstain -and has undertaken to ensure that persons connected with him/her will also abstain- from voting on the relevant resolution.

Directors are subject to penalties and criminal sentences for breach of disclosures with respect to directors’ interests in their company or a related company. This is punishable by imprisonment for a term of three years or a fine of RM 15,000 (US$ 3,947).


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