Besides that, the downfall of Sime Bank, the Bumiputera Malaysian Finance (BMF) scandal, the irregularities in Renong Berhad, the Perwaja fiasco and the internal management problem faced by Malaysian Airline System (MAS) forced government to enhance corporate governance regulations (Norwani, Mohamad, & Chek, 2011).
The High Level Finance Committee Report 1999 on Corporate Governance in Malaysia defined corporate governance as the “process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long term shareholder value, whilst taking into account the interest of other stakeholders. ” (Malaysian Code on Corporate Governance, 2012). The code that governs the corporate governance in Malaysia is called the Malaysia Code of Corporate Governance (MCCG).
This code was recently revised in March 2012 and it is known as the MCCG2012. Besides providing relevant information to investors, this code also aims to encourage transparency management of companies, to enable investors to guide the direction of the company (Nor Azizah Zainal Abidin, 2007). The MCCG 2007 was revised with the aim to enhance the directors’ duty to the companies. With the revised MCCG 2012, there are still many issues arising from corporate governance. However, to some extent there are improvements in some area of the corporate governance.
The revised MCCG 2012 contained a few improvements in the recommendation. This Code now establishes clear roles and responsibilities where ethical standard should be formalized through the code of conduct by the board to ensure its compliance. Through the company’s code of conduct, it mandates the board to formulate system of compliance and ethical standards. Besides, it also includes ensuring that the company’s strategies promote sustainability. There are many improvements made under reinforcement of independence. 3. 1 mandate boards to undertake an annual independent director assessment.
For an individual to serve as an independent director, 3. 2 mandate a cumulative term to nine years. Under 3. 3, justification and shareholder’s approval is needed if the board retains as an independent director. And lastly MCCG 2012 recommends that a majority of independent directors must be in the board and the board chairman is not an independent director. These were not in the MCCG 2007. The most important improvement under the MCCG 2012 is to ensure timely and high quality disclosure. Under this the board should make certain the appropriate disclosure procedure and policies of the company.
Also, for effective dissemination of information, board should encourage the company to leverage on information technology. This is to promote better use of technology. Furthermore, with the existing recommendation, MCCG 2012 also state that the board should also encourage pool voting in order for strengthening the relationship f the company and shareholder. This imposes duty to inform the shareholders of their right to demand a poll vote by the general meeting chairman. The concern here is whether the revised MCCG have enhanced the corporate governance of the companies in Malaysia.
This code calls for voluntary compliance, coupled with the requirement in the listing rules of KLSE which make mandates disclosure of the extent of compliance with the best practice sets out in the Code, while allowing for some flexibility in its implementation by companies. The aim here is to provide necessary information and encourage disclosure to investors who entrusted their funds to companies, so that they can monitor the way it is being run (Finance Committee on Corporate Governance, 1999). This Code has somehow reduced the number of financial scandal but definitely not completely clear it off.
There are many scenarios that company collapsing due to financial scandal as what was initiated by the BMF (Bank Bumiputera Finance) scandal. The law governing director’s duty consist of various forms of law. These duties have been observed also contain a plurality of legal fields such as company law and employment law (Hee, 2003). Section 132(1) of the Companies Act 1965 requires a director to use reasonable diligence and to act honestly in the discharge of his duties. The duty to act in the best interest of the company as a whole also from common law covers the collective interest of both existing and prospective shareholders.
It is suggested that the common law fiduciary duty to avoid conflicts of interest should be codified to allow directors to be clear about their obligations in conflict situations. KLSE listing Requirements stipulates that public listed companies must got at least two independent directors. Individuals who are expressly excluded from being eligible to act as independent directors include major shareholders, professional advisers or relatives of an executive director or major shareholder of the listed company (Hee, 2003). This provides a better equilibrium of powers between directors and independent directors.
The auditor actually provides a check on the information aspect of the governance system rather than having a direct corporate governance responsibility. As widely recognized, the duties of the audit committees have been related to internal audit financial reporting and external auditor. The importance of an audit committee in the framework of corporate accountability is where audit committees are expected to act as the guardian of investors’ interests and corporate accountability suggested by the wide adoption of audit committee (Saidin, 2007).
The main duties are to inspect and form an opinion as to whether the financial statements have been drawn up in accordance with the financial reporting standards of Malaysia and the Companies Act 1965; to obtain reasonable assurance that the financial statements are free from material misstatements; and to examine and form an opinion whether the financial statements give a true and fair view of the financial position of the Company as of the financial year end and of its financial performance and cash flows of the year end (Yycadvisors, 2012).
The pertinent issue in corporate governance is due to mismanagement, director’s duty not well performed, abusing the minority projection / shareholders and not having meetings often to update what is going on. Management or board should practice the commonly accepted principles of corporate governance such as independence, accountability, roles and responsibilities, integrity and ethical behavior, and transparency. A company’s board should have a number of independent directors. They should be individual with no connection with the company other than a seat in the board.
Also, selected independent directors should meet the “independence” test under the regulatory rules and also to serve with independence of minds. This process of selecting independent directors is likely to maintain their independent mindedness (Rahman & Salim, 2010). To create a system that holds decision makers accountable while according proper respect to their authority over corporation is a challenging thing for corporate governance. The market, shareholder voting, and civil and criminal liability is the regular accountability mechanism.
In theory, to create incentives for deterring self-dealing and other forms of misconduct and for responsible decision making these mechanisms work together. However, in reality, these contain flaws that allow individuals to occasionally exercise an irrational discretion when making decisions that will affect many others. The impact can be distressing for investors, employees, and the economy when the governance system fails (Jones, 2010). Given the control of publicly held companies, management should be accountable to its board of directors.
The board, in turn, should be accountable to the shareholders and other stakeholders. The principle of accountability can be enhanced by many ways, such as enforcing rules and laws, protecting shareholders’ rights, imposing duties on officers and ensuring the scrutiny of the company’s financial statements by independent auditors (Rahman & Salim, 2010). To provide creditors, depositors and shareholders creditable assurance that they will abstain from fraud activities, financial transparency would be an important mechanism.
Timely and accurate disclosure should be made regarding all materials matter concerning the corporation is one way to ensure excellent corporate governance. The voluntary items disclosed in the annual reports, the time of the information to be released and quantity of information influenced by the board of directors. In disclosing all the relevant information in the financial reporting, the BOD will be transparent when they are independent and examine their responsibility to be accountable to the shareholders.
To ensure the quality of the financial reporting process is one of the main functions corporate governance play. Financial reporting should be prepared with integrity which relies on corporate governance. Dependency of the integrity of financial reporting is highly on the performance and conduct of individual involved. What lead the company to reporting failure is when the corporate governance fails where most of them manipulated their financial statement to meet the performance expectation.
Research also has found that there is a connection between weaknesses in corporate governance with bad financial quality, fraudulent financial statement weak internal control and earnings manipulations (Norwani, Mohamad, & Chek, 2011). Problems that arise in companies in Malaysia regarding corporate governance have to do with the political interference to certain extent. State/government can be said as the “real” company controller compared to law/policy regulated under corporate governance. For example, the famous corporate governance failure in Malaysia - the scandal of Perwaja Steel Sdn.
Bhd.. Perwaja, a company owned by the government in collaboration with a Japanese company, Nippon Steel Corporation that was established by HICOM Bhd. in 1982, to fulfill the government’s mission in implementing the heavy industrial policy (Nor Azizah Zainal Abidin, 2007). This can be seen as an example where the state, as a shareholder in the company, has direct interest to it. Fraud and corruption can easily happen with the existence of this relationship. Due to the misconduct of directorship the corporate governance of Perwaja collapsed.
Perwaja faced with corruption and mismanagement in tender and contract awarding. Furthermore, doubtful trading transactions and payments were carried out to non existing companies (Netto, 2004). There are one sided contracts between Perwaja and both local and foreign companies plus with erroneous records and many of millions ringgit were unauthorized (Norwani, Mohamad, & Chek, 2011). This shows the failure of corporate governance in Perwaja Steel Sdn. Bhd.. However, with fresh funds being injected by the government today, Perwaja is still in business (Netto, 2004).
In other case, like the Malaysian Airlines System Bhd. (MAS) faced with internal management problems. Tan Sri Tajuddin Ramli, the largest shareholder in MAS who held both Chief Executive Officer plus with chairman position, entered into unprofitable business activities whereby he had over expansion the flight destination, has caused the occurrence of governance failure (Norwani, Mohamad, & Chek, 2011). The new management under Tajuddin Ramli had already cause MAS to suffered huge debts, prior to the Asian Financial Crisis.
This had put MAS at risk during the crisis as all their transaction were done is UD dollars (Nor Azizah Zainal Abidin, 2007). Due to the veto power of the government in MAS’s management the decision on airlines destinations were subjected to government’s decision and approval. To comply with Malaysian foreign policy, MAS had to oblige and extend its services, where at that time, not popular destinations or less concentrated areas were decided by the government. This decision contributed lower return to MAS.
From this point of view, we can see that the government/political involvement in business have a huge influence in the management of the company. Besides another reason of governance failure of MAS was due to increased in capital expenditure caused by many orders on planes from 1998 to 2001. It was simply a mismatch between earnings and expenditure in the financial reporting, whereby earnings were is ringgit while the latter was in US dollar. MAS ended up paying a higher cost than what was originally ordered for. MAS was then repurchased for more than double of the market price.
The question here was before the government’s buyback, why an audit was not conducted which would have a very important bearing on the proper price of the government buyout. An international case study example would be the Satyam Linggam scandal, the biggest corporate scam in India has come to the most respected businessman. Satyam founder resigned as its chairman after admitting to cooking up the account book. The CEO was responsible for the board accounting improprieties that reported a large amount of cash holding that does not exist and overstating the company’s profit and revenue.
With a successful effort on the part of investor’s in order to prevent an effort by the minority shareholding promoters to use the firm’s cash reserves to buy two companies owned by them, the scandal all came to know. Consequently, this failed the attempt of expansion on Satyam’s part, which in turn led to a collapse in company’s stock prices, followed by a shocking confession from Raju. History has played a part in the development of corporate governance in India. The first code for corporate governance was published in 1988, but by the Confederation of Indian Industry (CII) entitled desirable Corporate Governance.
Unlike codes in some other countries, the CII code did not make statements of principle but addressed specific business issues in India. The code called for “professionally competent, independent non-executive directors” to make up the board. None should hold more than ten listed company. The code also called for audit committees. A year later 1999 a government committee released India’s National Code on Corporate Governance (Ticker, 2009). Reflecting international standards, the code had the approval by the SEBI and incorporated into stock exchange rules.
The government issued guidelines on corporate governance in central public sector enterprises in 2007, covering the composition of the boards, audit committees, accounting standards and risk management (Ticker, 2009). However, corruption remains entrenched in India, not at least in the government administration. The Ministry of Company Affairs and the Securities and Exchange Board need more competent staff experience in corporate governance matters. But rapid economic growth and potential in India suggest that the next few years will see significant changes in both attitude and practice (Ticker, 2009).
The failure in corporate governance forced rules and regulations to be enacted (Norwani, Mohamad, & Chek, 2011). Recent corporate scandals and the near-collapse of the global ? nancial system all demonstrate the importance of maintaining an effective corporate governance regime (Jones, 2010). With the revised MCCG 2012, duties of all the board of directors are clearly stated, and this will serve as guidance and should improve the corporate governance of the company.