5_Corporate Governance Amended

8/10/2019 5_Corporate Governance Amended

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aida and kamaruzzaman1

CORPORATE GOVERNANCE

Definition:Corporate Governance is a process and

structure used to direct and manage business and affairs ofthe company towards enhancing business prosperity andcorporate accountability with the ultimate objective ofrealizing long term shareholder value and at the same timetaking into account the interest of other stakeholders.

The High Level Finance Committee Report onCorporate Governance

Other definition:

Corporate governance is the corporate framework orstructure that an entity applies to direct and manage itsbusiness and affairs. Corporate governance to ensure thatthose managing the entity properly utilise their time, talentsand available resources in the best interest of owner.


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CORPORATE GOVERNANCE

Further explanation: Corporate Governance refers to the structure and

processes by which organisations are directed, controlled,managed and held to account. It involves establishing acontrol structure which consists of policies, procedures,

rules and regulations: and process comprising mechanismsand systems to facilitate decision making.

The objective of corporate governance is to realizing long

term shareholder value and at the same time taking intoaccount the interest of other stakeholders.


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THE PRINCIPLE PLAYERS IN CORPORATE

GOVERNANCE

SHAREHOLDERS

STAKEHOLDERS

REGULATORS

(Laws, regulations,standards)

BOARD OF DIRECTORS

MANAGEMENT EXTERNAL AUDITOR

AUDIT COMMITTEE

INTERNAL AUDIT


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THE PRINCIPLE PLAYERS IN CORPORATE

GOVERNANCE

Function of each Players

BOD provides leadership and direction to management

Management accountable to the BoD

Internal and external auditors monitor performance and

outcomes Board accountable to regulators for conformance with laws

and to shareholders/stakeholders for profit and corporateresults.

Shareholders have responsibility to make considered use of

their votes Ultimately the players should ensure the company is able to

have the right balance between conformance andperformance.


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DEVELOPMENT OF CORPORATE

GOVERNANCE IN MALAYSIA

Begun in 1992, after publication of the Cadbury Report in 1992. TheCadbury Report and its Code of Best Practice issued in December 1992by the Committee of Financial Reporting Council, the London StockExchange.

The formation of Cadbury Report because of two reasons:

Anglo-American companies were lagging behind their global competitiveness (due todefective functioning in corporate governance)

Significant corporate failure arising from fraud such Maxwell and B.C.C.I. scandals(UK scandals).

Due to that, the requirement for Board Audit Committee comprising

independent directors enforced immediately to the Malaysiansubsidiaries of British multinational. From there, auditors starts toadvise their clients to have audit committee and then corporategovernance became fashionable in Malaysia. In 1994, Governmentstepped in and legislates the requirement of an audit committee in theListing Requirement.



DEVELOPMENT OF CG IN MALAYSIA

Continuous effort was put in place by the Malaysians to raised

the standard of corporate governance and we can see from thechanges to its listing regulations and the establishment of newagencies, such as:

Revamped KLSE Listing Requirementsin January 2001, to

enhance corporate governance and transparency, enhanceefficient capital market activities, strengthen investorprotection and promote investor confidence.

Research Institute of Investment Analyst Malaysia (RIIAM)being established and being appointed to conduct themandatory continuous training for the directors of PublicListed Companies, as required under KLSE listingrequirements.



DEVELOPMENT OF CORPORATE

GOVERNANCE IN MALAYSIA

Malaysian Institute of Corporate Governancebeingestablish in 1998 with several objectives such as topromote awareness of corporate governance, to collectand circulate corporate information and data pertainingcorporate governance (Code on Corporate Governance).

Minority Shareholders Watchdog Group(BadanPengawas Pemegang Saham Minoriti Berhad) wasincorporated on 30 August 2000, a non-profit makingcompany limited by guarantee, under MoF. Purpose tooverseen management behaviour and enhancing boardindependence to ensure fairness treatment to allshareholders.



CONCEPT IN CORPORATE GOVERNANCE

Transparency: Financial and non-financial informationshould be easily available

Independence: Procedures and structures of companyshould be put in place to minimize conflict of interest

Accountability: Decision makers should be accountable onwhat they do. Responsibility: Directors should be liable for their

performance to stakeholder. Fairness: All shareholders should received equal

consideration regardless of the size of their holdings. Social responsibility: A well-managed company should be

aware of and respond to issues of social concern.


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BURSA MALAYSIAS REQUIREMENT ON

CORPORATE GOVERNANCE: Example of CG

On the DIRECTORS Composition of the BOD: 1/3 or nearest to 1/3 must be

independent directors. Rights of Directors: Directors in discharge his duties should

have rights to obtain full and unrestricted access to any

information of the company, getting assistance of companysecretary and hiring consultant. Vacation of office: The office of the director become vacant if

the director becomes of unsound mind, bankrupt and absentof more 50% BoD meeting (within a year).

Restriction of directorship: Limit directorship: 25, i.e. 10 inlisted company and 15 in other companies.

Directors training: Directors should undergo continuoustraining.


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BURSA MALAYSIAS REQUIREMENT ON

CORPORATE GOVERNANCE: Example of CG

On the Audit Committee All listed companies must establish an audit committee. The

composition of committee, function, role, duties will bediscussed later.

On the External Auditors

Appointment of external auditors: Must appoint a suitablefirm, i.e. they must have experience and resources

Removal of external auditors: a copy of a representationmade by the auditors need also be forwarded to BursaMalaysia.

Review of statements: External auditor should also review thestatement made by the board on internal control. Right to request for meeting: The auditor has a right to ask

for meeting with audit committee to bring any matter whichthe auditor believe should be brought to the attention of theDirectors or shareholders.


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EFFECTIVE GOVERNANCE: PRINCIPLES AND

BEST PRACTICES FOR BOD

Good governance depends on effective inter-relationshipbetween Board and management. Effective Board is aboard which able to establish good leadership, stewardshipand control.

LEADERSHIP

Effective Board will enhance the competitiveness of thecompany and shareholders confident. Effective board alsowill assure that the organization is trustworthy, honest andincorruptible. Board also should demonstrate their concernon social responsible, not just focusing on profits.Transparent, loyal, care and diligence among importantattitude and principle recognised globally for goodcorporate governance.


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BEST PRACTICES FOR BODSTEWARDSHIP Boards as stewards (person of responsible/care off) of the

company assets have a moral and statutory obligation to workwith management to add value to those assets by contributingin various ways:-

Strategic planning: strategic planning develops by

management and monitors by board on the achievement. Risk management: Board must ensure that key risk area of

the business are identified, analysed and managed. Human resources management: An organization must have

a highest standard of selecting, compensating andmonitoring performance of key personnel and seniormanagement as they are the key persons the BoD trust andassists BOD in discharged their duties.

Communication policy: communication line internal andexternal must be clear so as to effectively conveyinformation and accommodate feedback.


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BEST PRACTICES FOR BOD

STEWARDSHIP

Internal control assurance: The board should review theadequacy and integrity of the companys accounting andfinancial reporting system and internal control systems andother systems of the company and to ensure the systems

are compliance with current laws and regulations.

CONTROL

The third component of principles and best practice for BOD

ismonitoring. The company can have the best systems,procedures and technology in place but if they do not wellmonitor and control, the business is bound to fail. Continuousmonitoring will also provide assurance of things that aregoing right and identify matters which need to be put right.


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GOOD CG REQUIREMENTS RELATING TO

DIRECTORS RESPONSIBILITIES

The DIRECTORS must act in the best interest of the company, careand diligence in their function and in dealing with statutory duties.Must act honestly and avoid conflict of interest. He must act accordingto M&A, Companies Act, Securities Industries Act and comply to theListing Requirement.

Specifically, the directors responsibilitiesare:- Set corporate objectives, review and approve and guide corporate

strategies and business plan, budgets and to monitor theimplementation; To oversee the management of company business and to ensure

corporate performance; To oversee human resources management, staff selection and

compensation, etc; To develop and implement investor relations programs to

effectively communicate with the shareholders, other stakeholdersand the public;

To review the adequacy and integrity of the systems employed bythe company. i.e. accounting system, financial reporting systems,internal control etc;

To select CEO; and

To prescribe the transactions that require board approval.


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AUDIT COMMITTEE

In t roduct ion

Audit Committees is required on:All listed companies and those seeking listing on Bursa

Malaysia

All Federal Statutory Bodies

Banks and Financial Institutions

Audit Committee is to assist BOD in discharging their dutiesrelating to company/entity management and internal control,accounting policies and financial reporting and a line ofcommunication between the board and the auditors

Why an audit committee is needed: Major frauds, strong

criticism of the quality of executive management and theeffectiveness of board supervision, and financial institutionshave to made necessary action for strengthening accountabilityand corporate governance so as to provide greater protectionfor shareholders and the investing and depositing public.


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Reporting Level of Audit Committee

Board of Directors

Managing Director

Audit Committee Company Secretary

Department DepartmentDepartmentDepartment

Extracted from prospectus Tijari Resources Bhd


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Board of Directors

CompanySecretary

Audit Committee

Internal Audit ExternalAuditors

RiskmanagementCommittee

control assessmentReview process

ReportingRisk identificationand assessment

Risk mitigation

Reporting Level of Audit Committee


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To oversee the financial reporting and governance processes so as to:

1. Assist directors in discharging their statutory duties andresponsibilities: The directors liable on preparing companysfinancial statements and audit committee minimize theinvolvement of BOD.

2. Monitor company activities: Ability to access the accountingrecords and indirectly monitor the company activities

3. Increase public confidencein the credibility and objectivity offinancial reporting. The financial statement is free from bias.

4.Support the audit function: Audit committee becomes closelywith the whole audit process and it will strengthens theauditors independence.

5. Monitor disclosure requirements

AUDIT COMMITTEE

Role of an audi t comm it tee


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To oversee the financial reporting and governance processes so as to:6. Satisfy the board that adequate attentionis being given to risk

management. Organization should have prevention and responsemechanisms in place to help them keep risk at acceptable level. Auditcommittee should determine the systematic methods employed toevaluated business risks.

7. Satisfy the Board that internal control existand are effective. Aninternal control system is an integral part of the management processand the committee should ensure that the control framework in place isadequate to provide assurance on:-

Accomplishment of establish objectives

The economical and efficient use of resources Safeguarding of resources

The reliability and integrity of information

Compliance with policies, plans, procedures, laws

AUDIT COMMITTEE

Role of an audi t comm it tee


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1. The committee shall be among Directors of Company and shall

be appointed by the board.2. Should consist of not less than 3 members with a majority of

non-executive directors (independent directors)3. Audit committee to be chaired by an independent non-

executive Director.

4. A member shall not have any family relationship with theexecutive director of the company or related companies or anyrelationship that would interfere the independent judgment.

5. At least one member of the audit committee must be amember of MIA or if not a member of MIA, he or she musthave at least 3 years working experience and

i. Have passes the examination specified in Part I ofthe 1stSchedule of Accountant Act, 1967 or

ii. He must be a member of one of the associationspecified in Part II of 1stSchedule of Accountant Act,1967.

AUDIT COMMITTEE

Composition Members of Audit Committee Members
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Some of problems are:

1. Interference in executive decisionon operational matters whichwill tend to undermine the authority of the board. There may beconflict of mistrust and misunderstanding among the committee,management, internal auditors and the external auditors. How toovercome/prevent: Audit committee should have clear terms andresponsibilities and communication between all parties should bemade on timely basis on professional manner.

2. Audit committees have no teeth: Audit committee are justwindow dressing to comply Bursa Malaysia ListingRequirement. How to overcome/prevent: Audit committee mustbe and be seen to be independent, with authority given to backup their responsibilities. BOD must give their full support to thecommittee including financial and administrative resources tocarry out their duties.

AUDIT COMMITTEE

Drawbacks o f an audi t comm it tee


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Some of problems are:3. The full board is distanced from financial matters and the

external auditor.This happen when BOD has dischargedhis duty to audit committee BUT they still has fullresponsibilities on the financial matters of the company.How to overcome/prevent: the BOD must require oral andwritten report on all activities of the committee and mayeven call the auditors to attend the meetings.

4. Legal Liability of Audit Committee members: Auditcommittee does not relieve the BOD of its responsibilityfor the financial reporting process. However, auditcommittee members may increase their exposure topossible additional liability because the extraresponsibilities entrusted to them.

AUDIT COMMITTEE

Drawbacks o f an audi t comm it tee


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1. Assist in establish good internal control and riskmanagement policies

Provide assurance of integrity and reliability of the internalcontrol and risk management system of clients.

2. Measure to detect misstatement

Ensure awareness on and uses relevant measures todetectmisstatement in financial statement

3. Ensure independent in performing the audit

4. Ensure perform audit quality

5. Adhere to auditing standards

6. Reduce expectation gap through communication, educationand professional development.

AUDITORS ROLE

IN CORPORATE GOVERNANCE


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TYPES OF DIRECTORS (Additional Notes)Independent Director

Independent Directors are normally non executive and

considered outsider and appointed to sit on BOD of acompany.

The Malaysia Institute of Corporate Governance (MICG)defined an Independent Directors as one who has theknowledge, integrity and vision combined with personality,skill and experience to fulfill his role effectively.

There should be sufficient number of independent directoron the Board to create a suitable balance of power.

Duty of Independent Directors:- Help identify the right strategy that will improve shareholders value Balance up Board structure, give independent view and judgment in the

Board decision making process. As a watchdog particularly to minority shareholders and monitor board

process.

Appointed for a specific term and subject to retirement byrotation and re-election

They may appoint an alternate/substitute director

5_Corporate Governance Amended

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