corporate governance-ethics, government and business

• Corporate governance

  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 realising long-term stakeholder value, while taking into account the interests of other stakeholders
• Role of corporate governance

  To oversee the management that manages the business on a daily basis
• Corporate governance

  • Aims to ensure the company serves and protects the interests of its shareholders and stakeholders
  • Should ultimately lead to enhancement of accountability of the board and corporate wealth
  • Encompasses a broad spectrum of internal and external mechanisms intended to mitigate agency risk by increasing the monitoring of management's actions, limiting manager's opportunistic behaviour, and improving the quality of the firm's information flows
• Relationship between shareholders and board of directors in public corporations

  Shareholders are the owners but do not directly control all decisions, they have limited power over how the public corporation is managed<|>The board of directors hire professional corporate managers to manage and make decisions on daily operations
• Conflict of interest


  The tendency of the board of directors and corporate managers to pursue self-interests first, often making decisions that do not serve the interest of the shareholders
• Ownership of public corporations in Malaysia

  • Mostly concentrated in the hands of family groups and government institutions
  • Family owners tend to have a close or tight control over the company they own as they have longer investment horizons, helping such corporations to persevere and prosper
  • Privatised corporations, known as government-linked companies (GLCs), greatly influence the performance and vibrancy of the Malaysian capital markets and play a prominent role as one of the key engines of economic growth in Malaysia
• Type I agency problem

  Owner-manager conflict in a diffused type of corporate ownership
• Type II agency problem

  Principal-principal conflict between large and minority owners in a concentrated ownership environment
• Corporate governance received prominent attention during the Asian financial crisis, as poor corporate governance was identified as one of the key causes


  1997-98
• Development of corporate governance in Malaysia

  1. The government established a committee to look into corporate governance issues and establish a world-class corporate governance framework

  2. The committee identified weaknesses and established the Malaysian Code on Corporate Governance (MCCG) to strengthen the role of the board of directors and enhance financial reporting and transparency
• Evolution of Malaysian Codes on Corporate Governance

  • MCCG 2000
  • MCCG 2007
  • MCCG 2012
  • MCCG 2017
• Implementation approaches for corporate governance codes

  Prescriptive<|>Non-prescriptive<|>Hybrid (Malaysia adopted this approach, prescribing best practices for directors to follow while giving flexibility to implement based on needs and circumstances, but requiring disclosure of compliance level and reasons for non-compliance)
• Key features of MCCG 2017

  • CARE
  • Apply and Explain Alternatives
  • Focus and Clarity
  • Exemplary Practices
• Structure of MCCG 2017

  • Principles
  • intended outcome
  • practices
  • Guidance
  • Step-up
• Three broad principles of MCCG 2017

  • Board leadership and effectiveness
  • Effective audit and risk management
  • Integrity in corporate reporting and meaningful relationship with stakeholders
• Agency theory

  Attempts to explain the nature of the relationship between shareholders and professional managers, proposing that corporate governance problems exist due to the selfish tendencies of managers that prompt them to engage in conflict of interest situations (principal-agent problem)
• Stakeholder theory

  Offers a more inclusive approach to corporate governance by broadening the accountability of professional managers to serving both the interests of shareholders as well as other stakeholders
• Corporate governance mechanisms

  • Internal mechanisms (board of directors, independent directors, board committees, board compensation practices, director's training, internal control system and internal audit, external audit and shareholder activism)
  • External mechanisms (the market for corporate control/takeover market and the regulation/legal system)
• Board of directors

  • The most important corporate governance mechanism, should be the shareholders' first line of defence against the self-interests of managers, directly accountable to shareholders, and should be independent from the influence and control of professional managers
• Independent directors

  • Provide a check and balance element in the board of directors, ensuring corporate managers do not control the decision-making of the board and steer it to promote their self-interests and personal agenda
• Board committees

  • Help the board of directors examine specific issues of remuneration, nomination of directors, top executives and audits, and report to the board
• Board compensation practices

  • Remuneration of directors and top executives plays a crucial role, appropriately devised remuneration systems can motivate managers to forego their self-interests and realign their interests with those of shareholders
• Directors' induction and training

  • Directors need to be skilful and knowledgeable to carry out their functions effectively, and need to continuously update and upgrade their skills
• Internal control and internal audit

  • Internal control procedures help protect the company's investments and assets, subject to an internal audit process to review the effectiveness of the internal control procedures
• Risk management and external audit

  • External audit assists in reviewing the company's financial statements and internal control procedures
• Shareholder activism

  • Shareholders should not be passive owners, they should maintain regular dialogue with the board of directors and make use of this channel to relay their concerns and seek explanations
• Regulations


  • The regulatory framework aims to regulate corporate behaviour to ensure it is in line with established standards and rules
• Ethical issues in corporate governance

  • Financial manipulation
  • Inflated director's remuneration
  • Excessive business risk-taking and lack of risk control
  • Poor communication of information
  • Director's negligence