2021 Updates to the Malaysian Code on Corporate Governance

“There is a strong need for good corporate governance and board leadership, especially as companies navigate the prolonged post pandemic recovery period.”
Datuk Syed Zaid Albar
Executive Chairman, Securities Commission Malaysia

Since the last revision in 2017, the Malaysian Code on Corporate Governance has been recently updated on 28 April 2021 (“MCCG 2021”). This 2021 edition focuses on globally accepted practices covering:

1. enhancement of board policies and practices;
2. strengthening board oversight and integration of sustainability in the company’s strategy and operation; and
3. adoption of best practices especially for companies with low levels of compliance.

While the landscape is still reeling from the effects of the COVID-19 pandemic, the MCCG 2021 supports the boards to build long-term resilience through the adoption and implementation of corporate governance policies and practices. Some of the key updates made to the MCCG 2021 are as follows:

Independent Directors

Two-tier voting is now required to appoint independent directors beyond 9 years tenure [P][updated].

• First introduced in 2017, the two-tier voting process provided shareholders and boards with a forum to critically review the decision to retain independent board members beyond their 12-year tenure and also allowed minority shareholders to have a say on such decision at the second-tier voting stage.
• However, the Securities Commission Malaysia (“SC”) noted that there are 434 independent directors with tenures of more than 12 years with 49 independent directors having served on the same board beyond 20 years, as of 31 March 2021. Considering the prevalence of long-serving independent directors and to facilitate the need of having fresh minds on boards every few years, the 2021 edition recommends that the two-tier voting process be implemented for the re-appointment of independent directors with tenures longer than 9 years.
• According to the SC, Bursa Malaysia vide amendments to the Listing Requirements (targeted to be issued in Q4, 2021) will also introduce a 12-year tenure cap for independent directors and prohibit further extension of tenure beyond the 12th year.
• MCCG 2021 also recommends a step-up practice requiring the board of listed companies to have a policy limiting the tenure of their independent directors to just 9 years without any further extension.

Women’s Participations in Decision-Making Positions

Board of listed companies comprise at least 30% women directors and the companies’ policy on gender diversity now extends to senior management [P][updated].

• The 2017 edition of the MCCG had recommended having 30% women directors on boards of Large Companies and the SC’s target was to reach a minimum of 30% women directors in listed companies by 2020. However, participation of women on boards currently stands at only 25.3% in the top 100 listed companies. In order to accelerate the progress of women’s board participations, the MCCG 2021 recommends 30% women directors across all boards.
• As gender diversity and inclusivity increasingly becoming the mainstay of good corporate practices, it is hoped that more independent women directors will be appointed to make up the numbers and not the existing directors or major shareholders’ wives and daughters. As for senior management, the listed companies are required to disclose in their annual reports policy on senior management’s gender diversity. This is in addition to the disclosure on the board’s gender diversity policy [P][updated].

Politicians on Board

Persons linked directly with the executive and active politicians are discouraged from holding board seats [G][new].

• In line with international governance standards and in the interest of promoting objectivity and independence of judgment, the MCCG 2021 not only defines who is considered politically active but also discourages the appointment of active politicians on the boards of listed companies.
• While this is certainly a laudable effort by the SC, it is merely a guidance and not a practice, hence, it is uncertain at this point in time what happens if certain listed companies choose not to follow this guidance. It will be interesting to see their disclosure in the Corporate Governance report.

No Chairman on Board Committees

Board chairman should not be a member of the Audit Committee, Nomination Committee or Remuneration Committee [P][new]. The rationale for this is obvious as it limits the influence of the chairman in the deliberation at the board committee levels which provides better checks and balances and ensures objective review.

Sustainability Taking a More Prominent Role

The MCCG 2021 requires companies to address sustainability risks and opportunities to support its long-term strategy and success [new].

• As more and more institutional investors and listed companies prioritising the relevance of Environmental, Social and Governance (ESG) risks and benefits in their overall business strategy and sustainability criteria, there is a need to integrate these risks and benefits in regulating board behaviour from the governance perspective.
• The MCCG 2021 introduced a new intended outcome for companies to address sustainability issues in an integrated and strategic manner. The practices to achieve this outcome are as follows:
  • Accounting for sustainability considerations when exercising its duties including in the development and implementation of company strategies, business plans, major plans of action and risk management;
  • Ensuring sustainability strategies, priorities and targets, as well as performance against those targets, are communicated to internal and external stakeholders;
  • Staying abreast of, and understanding, sustainability issues relevant to the company and its business, including climate-related risks and opportunities; and
  • Including the management of sustainability risks and opportunities in the performance evaluations of the board and senior management.
• There is also a Step-Up practice which requires companies to appoint a designated person within management to provide dedicated focus to manage sustainability strategically, including the integration of sustainability considerations in the operations of the companies.

Board Remuneration

Controlling shareholders with board member or connected director should abstain from voting on resolution to approve such directors’ fees and resolutions on the approval of the fees of each non-executive director should be separately tabled instead of bundling them all into one single resolution [G][new]. The rationale for the above is to allow the minority shareholders to have a better say on the director’s fees, as they can decide on whether the fees tabled are appropriate and thereafter, to approve or reject such fees.

General Meetings

The requirement to leverage on technology for voting and remote participation is now applicable to all listed companies instead of companies with large members/having meetings in remote areas as provided in the 2017 edition [P][updated].

MCCG 2021 also introduces further practices relating to general meetings such as on conduct of meetings, good cyber practices, rights of shareholders and responsibilities of the company, chairman and board [P][new]. Given the importance of virtual meetings and participations as a result of the COVID-19 pandemic, the revision to the existing practice and introduction of the new practices would guide companies in addressing key issues and glitches faced during meetings.

Group – Wide Adoption of MCCG

MCCG 2021 calls on listed companies to encourage their subsidiaries to adopt the MCCG 2021’s best practices for a more holistic corporate governance culture across the group [new]. This approach follows the Guidelines on Conduct of Directors of Listed Corporations and Their Subsidiaries issued by the SC.

Departure Now Comes with Timeframe for Compliance

While departure from any practice is allowed, MCCG 2021 now demands Large Companies to:

• Disclose the timeline, timeline’s justification and actions taken to adopt the departed practices. [new]
• Adopt the departed practices within reasonable period. A shorter timeframe signifies the board’s commitment to adopt good corporate governance practices and duration of 3 years or less are considered as a reasonable period. [new]

Additionally, members can hold the board accountable and seek explanation if the above are not met. [new]

Meaningful Disclosure Standards

The standard of meaningful disclosure should be viewed from the perspective of stakeholders and not just the board or management. [new]

• Corporate governance reports across various listed companies usually contain almost similar wordings with each other and certain disclosure made pursuant to the MCCG lacked information and clarity. The 2021 edition has clarified that a meaningful disclosure should not solely be what the board or management considers meaningful but what stakeholders, including what shareholders would perceive as informative and useful. In every disclosure, the yardstick is whether the disclosures would enable stakeholders to assess how the principles and practices of the MCCG 2021 have been applied.

The 2021 updates to the MCCG are timely and relevant in the hope of improving the governance score of companies but ultimately it all depends on the level of adoption and internalisation of these practices. The first batch of companies to begin reporting on their adoption of these practices will be those with financial years ending 31 December 2021. The two-tier voting process will be applicable for resolutions tabled at general meetings held on or after 2 January 2022. In the meantime, boards and senior management will require a briefing on the 2021 updates and certain tweaking to internal documents such as the board charter and terms of reference of the board committees are in order.

Abbreviations:

[P] – Practice [new] – newly introduced under MCCG 2021

[G] – Guidance [updated] – updated from MCCG 2017