Business

Saturday February 7, 2009

Avoiding a Malaysian Satyam


Securities Commission chairman Datuk Seri Zarinah Anwar spoke to Yap Leng Kuen, C.S. Tan and P. Gunasegaram on wide-ranging issues in a two-hour interview.

StarBizWeek: In the wake of the Satyam case that happened so near to home and rattled the confidence of a lot of people, is the SC taking extra steps to boost confidence in the markets?

Zarinah: A Satyam-like case would shatter confidence in any market. This serves as a reminder that we cannot take our eyes off the ball and that is why we have stepped up our surveillance activities.

We continue to engage with the PLCs and their directors. We will monitor corporate transactions to ensure that the interests of the companies and minority shareholders are not compromised.

We are mindful of the need to be very vigilant. At the same time, there is also a need for companies themselves to exercise good governance; for Bursa and professional advisers to be on their toes and alert us, should they suspect any irregularities.

StarBizWeek: Under current difficult situations, what do you think is the role of corporate governance in regulating corporate behaviour?

Zarinah: Difficult business conditions is not an excuse for non-compliance. On the contrary, if companies were to comply with good corporate governance practices, it would in the long run, help them to ensure their continued profitability.

If companies were to cut corners for immediate gains, then there could be adverse implications on their long-term interests. Boards of directors and senior management must ensure that they are fair and act with conscience, and that decisions are made in the best interests of the companies and minority shareholders.

Corporate governance standards must be complied with. It is not a mere box-ticking exercise on the part of directors. Compliance must not only be in form but also in spirit and substance.

In this regard, we have seen many instances of companies ignoring the spirit and substance of the code. Whilst some of the things they do may not be wrong in law, in terms of the substance of corporate governance, they do not meet the standards.

StarBizWeek: What are some of the instances when they do not meet the standards?

Zarinah: For example, it might not be against the law if you hold your meeting in between two public holidays, but certainly, it begs the question as to whether that was done to discourage attendance. There are companies that hold their general meeting on the last day of the year. They can argue that they have given requisite notices, but these are practices that we would discourage.

Most companies comply to have one-third independent directors on the board but the degree to which they are actually independent, in many cases, is also questionable. We want independent directors to exercise their role and discharge their responsibilities to provide constructive challenge.

StarBizWeek: What are further areas for improvement?

Zarinah: Sometimes, they are beholden to the majority shareholder and do not raise the challenge and enquiry that it is expected of them. Sometimes, by their nature, they do not like conflict, and therefore, they defer to the wishes of the board.

These are areas where we feel a lot of improvement can be made. A recent survey carried out by Bursa Malaysia to ascertain the extent to which independent directors understand their responsibilities revealed that 50% of directors surveyed did not understand the explicit responsibilities of the board.

This raises the question on the competence of directors before they come on the boards of companies. That is why we emphasise the need for directors’ education. Directors have to go through a mandatory accreditation programme when they first join the board but they also need continuing professional education.

I would like companies to take this very seriously. In the past, we used to have mandatory continuing professional education but there were a lot of objections to that. Bursa (Malaysia) changed their rules to allow directors to undertake this themselves and disclose in their annual reports what they have done. But this should not be taken merely as a matter of compliance. Continuing education programmes for directors must therefore be properly structured and undertaken systematically.

StarBizWeek: For directors to be beholden to the majority shareholders, independent directors get allowances, perks and a certain prestige being on the board.

Zarinah: If we expect directors of calibre to serve on boards of companies, we must recognize that they need to be acknowledged and compensated. Once appointed, directors have specific roles to play. These roles must be clearly prescribed by the law and the Code of Corporate Governance.

StarBizWeek: There is a perception in Satyam’s case that in spite of the presence of distinguished members of the corporate world on board, fraud has occurred.

Zarinah: I can’t comment on the Satyam case as it is being investigated by the Indian authorities. From our own experience in our market, we have seen shortcomings in terms of knowledge and capacity on the part of directors. They have to exercise a greater degree of vigilance when issues are presented to them for decisions and to require information from the companies or to seek advice.

In order for directors to do their job well, they must understand the nature of the business and be able to read financial statements, be vigilant, ask questions and challenge. It must also be remembered that the CEO and his management have a duty to act honestly.

StarBizWeek: The underlying problem is that independent directors are not really independent because the appointments are made by the major shareholders.

Zarinah: The need for having corporate conscience and to bring ethics into their judgment and decision-making is very important. Directors should understand that their role is to act in the interest of the company, and not compromise the interests of the minority shareholders.

That goes a long way towards overcoming the temptations or tendencies that might be present in terms of making decisions that might be detrimental to the company.

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