Business

Saturday February 21, 2009

Malaysia should embrace reforms

GOVERNANCE MATTER WITH SHIREEN MUHIUDEEN


WE have just co-signed a five-page letter to the president of the United States in support of US regulatory reforms with other asset owners and investment managers from around the world.

The letter has the support of 28 funds and institutions with more than US$1.3 trillion of assets under management, representing invested savings or pension assets for more than 15 million individuals.

The letter is written to the president to “express … strong support for the critical legal reforms to the US financial markets and corporate governance practices”.

Obama reached out to all those listening to his address when he stated that it was time for change in the financial markets, and that “the state of the economy calls for action, bold and swift”. We fully agree.

The letter specifically addresses the fundamental reforms needed to rebuild the foundation for growth in the US and describes what issues need to be addressed to encourage global funds to start to invest in the US again.

There are eight main issues that are discussed in the letter.

Three of them are of particular relevance to Malaysia, namely:

  • Shareholder access to the proxy;
  • The collaborative development of best corporate governance practices;
  • Transition to independent board leadership with a split chair and CEO.
As we were signing the letter, we felt an urgent need to highlight to our own regulators in Malaysia that we need to do something to attract capital back and encourage additional investment.

There is plenty of evidence that effective regulation and sophisticated Corporate Governance practice can benefit markets.

We have some concrete proposals on these changes.

First and foremost, shareholder access to proxy voting and AGMs should be facilitated. Without a framework that allows shareholders to hold boards to account if necessary, any corporate governance improvements are likely to prove ineffective.

The current law on proxy voting and AGMs is extremely outdated.

There are a few issues that need to be addressed. The first is that there are restrictions preventing fund managers who maintain omnibus accounts with their custodian bank from attending AGMs in person to vote.

The second is that fund managers have no idea and there is no way for them to check whether their votes are cast by the custodian bank and counted at the AGM.

Finally, even in the rare circumstances where it may be required in practice, minority shareholders do not have the right to call a shareholder’s meeting to remove directors that have underperformed or proved ineffective over time, and there is no practical way of putting forward candidates for the board without mounting an expensive proxy fight.

The domestic and international investment community generally prefer to invest in markets with regulation that allow shareholders to remove underperforming or ineffective directors and/or propose candidates for election at shareholder meetings.

In practice this happens rarely. However, the experience shows that boards whose directors may be removed and replaced by shareholders are more attuned to investor opinion and much more likely to engage in meaningful dialogue with their shareholders.

This generally results in better run companies.

Secondly, there should be a collaborative development of best corporate governance practices.

The Malaysian market, like the US market, would benefit from a regular interactive process involving listed companies, investors, regulators and other stake holders (which would include the accounting profession and custodian banks) to develop and regularly review corporate governance best practices.

Some may say, just another dialogue? In reality, a dialogue of all stakeholders is a very powerful tool.

And when the best practice guidance that will result from this dialogue is combined with a comprehensive disclosure regime using a “comply or explain” approach, the likely result will be improved governance practices.

Dialogue on corporate governance practices of this nature and self regulation to implement best practice do promote ongoing communication between companies and their owners about best practices, while ensuring that individual companies retain the flexibility to adopt practices that meet their needs.

For example, best practice guidance might suggest that board members should be elected every three years.

Under a “comply or explain” approach boards that decide to depart from that practice could deviate from that guidance but would be obligated to provide an explanation in the annual report to shareholders.

Our third suggestion is to have an independent board chair separate from the CEO. This is an area which is gaining more importance around the world.

The roles of chair of the board and CEO and the competencies, knowledge and experience required for them are different. As such, they are most effectively discharged by two persons. Boards without an independent chair should explain why they have adopted such a structure.

We see the absence of a strong, independent chair as a structural impediment to effective board oversight of management and a factor that may signal increased risk to shareholders.

We believe a split chair/CEO structure for independent board leadership should become standard practice at all public companies – including the US and Malaysia.

Over the last decade and a half, the market capitalisation of the Malaysian stock market has dropped significantly.

The Malaysian market used to be one of the largest in the region and was viewed as one with exciting growth opportunities and an entrepreneurial spirit.

Then billions of portfolio dollars left our markets as corporate governance scandals and opaque business decisions increasingly worried fund managers.

We strongly believe the way forward is to raise governance practices in Malaysia, and by this, we do not mean having more corporate governance awards or box ticking exercises, but regulatory reform that creates a framework in which best practice can be enforced through a comply or explain approach.

To remain competitive in this environment, we believe that Malaysia must promptly start and embrace the simple reforms that we have identified.

  • Shireen Muhiudeen is MD of Corston-Smith Asset Management in Malaysia, a fund management company which makes investment decisions based on corporate governance

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