For the first time since its introduction in March 2000, the Malaysian corporate governance code calls attention to the wisdom of drawing a line between business and politics. In effect, the Securities Commission has declared its stand – although not quite in definitive fashion, but more on that later – on whether politicians should be directly involved in the corporate sector.
In April 2021, the regulator updated the code to include new best practices and provide further guidance on how listed companies can strengthen their corporate governance culture. This is the code’s fourth review in two decades, which is apt because very little in corporate Malaysia stays the same for long.
Securities Commission chairman Syed Zaid Albar says: ‘There is a strong need for good corporate governance and board leadership, especially as companies navigate the prolonged post-pandemic recovery period. The [2021 version of the] code supports boards to build long-term resilience through the adoption and implementation of corporate governance policies and practices which will sustain listed companies in meeting challenges in a fast-evolving business landscape.’
Best practice
Among the latest changes to the code, the one that sends the weightiest message is the insertion of a passage that identifies a category of people who should not be directors of state-owned enterprises (SOEs), which are better known in Malaysia as GLCs (government-linked companies).
The Securities Commission’s guidance on this matter is mainly derived from the OECD’s corporate governance guidelines for SOEs. In its 2021 code, the regulator highlights three points taken from the OECD document.
The first recommends that the board composition of an SOE should allow the exercise of objective and independent judgment. A related principle is that all directors of an SOE, including public officials, should be nominated based on qualifications and have equivalent legal responsibilities. The third recommendation is that persons linked directly with executive powers (such as heads of state, heads of government, and ministers) should not serve on boards of SOEs ‘as this would cast serious doubts on the independence of their judgment’.
Then the code veers away from the OECD guidelines and says this: ‘Additionally, a listed company is discouraged from appointing an active politician as a director on its board.’ A member of parliament, a state assemblyman or a member of a political party’s leadership, either at central or division level, is deemed a politically active person.
It may sound something of an afterthought, but this new best practice is in fact a much awaited alignment with Bank Negara’s corporate governance policy, which bars active politicians from becoming directors of financial institutions.
Persuasion v prescription
However, the commission’s regulatory tone is lighter here. In its policy document on corporate governance, the central bank sets minimum standards and makes it clear that it expects financial institutions to implement them. On the other hand, the Malaysian corporate governance code operates on persuasion rather than prescription. The commission describes the code as reflecting global principles and internationally recognised practices of corporate governance that are ‘above and beyond the minimum required by statute, regulations or those prescribed by Bursa Malaysia’.
The commission adds that the code recognises that there are aspects of corporate governance where statutory regulation is necessary and others where self-regulation complemented by market regulation is more appropriate.
There are at least four listed GLCs in Malaysia whose chairmen are active politicians. And there are dozens of non-listed GLCs whose chairmen and directors are also legislators or office bearers of political parties. While the code is targeted at listed companies, other entities are encouraged to embrace it.
If the number of GLCs with politicians as directors does not decline significantly in the months to come, it will be hard to champion the concept of ‘self-regulation complemented by market regulation’.
