News
SC’s Enforcement Actions - Enhancing Corporate Responsibility and Accountability
22 November 2007
The clarion call has gone out to directors and public listed companies (plcs) to get their corporate governance in order. The Securities Commission (SC) will move swiftly into enforcement actions to ensure corporate responsibility and accountability. As to what good corporate governance is all about, many by now would have been alerted that it is not about “ticking boxes”. It is about creating a culture of appropriate behaviour and responsible conduct. Only truthful compliance can be effective and persuasive to drive a strong governance attitude within the organization. The plcs that fail to uphold accountability of their directors for corporate oversight, may soon find themselves likely to face with substantial liabilities.
Directors are judged on their performance by the markets and the stakeholders, so is their self-regulation and discipline. Possibly, directors may be reasonably excused for their lack of performance if they are found to closely comply with the required rules and requirements. Yet, why companies still fail at times? Is it for their lack of policy, processes, procedures? Or for their lack of clear corporate conscience or no due diligence? At any rate, it is their attitude that usually lets them down, proving their behaviour and conduct to be out of order.
The SC and Bursa Securities will continue to tighten their rules and processes under the mantle of compliance. However, this tends to be preventive measures to curb wrongdoings. It is the directors and management of plcs working together effectively as responsible individuals who will make compliance with good corporate governance work to make their organizations successful. However, why certain plcs have yet to get their act right? Why is there still lip service, empty rhetoric, or all-too-easy attitude for slipshod practices?
The recent revised Code has renewed emphasis on non-executive directors’ responsibilities and put a concerted effort on plcs to elect quality directors. At the heart of this effort is to deter dishonest or incompetent directors. With increased responsibilities, the non-executive directors are no longer decorative ornaments when they become more exposed to risk and liability. In reality, not all boards are imperiously callous to the shareholders’ interests but only few boards could be if they so wished. In this regard, shareholders must perceive non-executive directors to be truly effective and independent for a check-and-balance on the board.
Although plcs in Malaysia has thus far witnessed only limited number of directors’ liability cases, several factors are now combining in effect to make this a real possibility in the future. These include the recent corporate and securities law reforms to lessen the burden of proof for offences, whistleblowing provisions, the shift from a merit-based to disclosure-based regime for full and appropriate disclosure, due diligence and increasing activism among minority shareholders. There is a growing multitude of statutory liabilities under the Securities Industry Act, 1983, Securities Commission Act 1993 and the Capital Market and Services Act, 2007 that will expose directors to a greater variety of risk factors than before.
Good governance entails compliance with sound rules and practices. These rules and practices require directors to review results and management’s actions appropriately. Although there is no perfect set of rules, truthful compliance is essential to promote vigilance.
Non-executive directors are required to be financially literate. This means that they understand approved financial reporting standards, how such standards and their principles can be applied relating to accounting for estimates, allowances, accruals, impairment, or provisions. They also must understand internal controls and risk management, as well as how audit committees function. All this will increasingly subject the directors concerned to greater personal liability. In-depth checks would be warranted only if they find executive directors incompetent and management corrupt.
The pressure is always on management to play safe by referring any concerns to the board. Management is then led to protect itself by ensuring that the board sees everything, even if the non-executive directors do not fully grasp the issues. How should the audit committee members including independent directors play their role? They need to be proactively engaging with management and auditors. Their role is to properly monitor financial reporting and review business operations, implement proper controls on management and staff on performance and reporting, and properly understand the nature of business that is being conducted, and the level of risks associated with the particular type of business.
Tighter surveillance from the top level down to areas of risk and sensitivity rests on the non-executive directors to take the lead with their eyes wide open. Most might argue that the devil is in the detail. But, in concentrating on the detail, the non-executive directors must not overlook their role as corporate watchdogs. They need to gauge investors’ expectations.
Markets and investors do not like surprises. Even good ones can be detrimental to the company’s image and management’s reputation. After all, PLCs must avoid surprising the market and management must be able to see ahead, make appropriate announcements to give the right signals to the market and investors. Their awareness of shareholder base is also important. In particular directors need to know who shareholders are and how often, the shareholder base changes.
Inadequate, inappropriate or incomplete disclosures, accounting irregularities, erroneous announcements, false and misleading statements or company law violations lie at the root of most potential liabilities in shareholder-related claims. Directors may be covered for any wrongful act, such as any actual or alleged breach of duty and breach of trust to minority shareholders. However, they would not be covered for criminal acts if their behaviour and misconduct are deemed to be willful, fraudulent and intentional.
MSWG is of the view that it is particularly important for directors to have relevant and timely information. Effective accountability depends crucially on the supply of information. Often, conscientious non-executive directors are constrained in their role by information available. They are as productive and useful as the Chief Executive Officer or executive directors will allow them to be. Yet, why have few directors resigned when they were denied access to information they felt they needed? The relevance and timeliness of information can never be over-emphasised. It is often the lack of the understanding of this requirement that undermines directors’ performance and their conformance to best practice.
Plcs must move beyond compliance to thrive on governance dimension that will lead to better financial performance. In this regard, independent and non-executive directors need to be professional to oversee not only the risks of the plc but also the risks of their own performance or otherwise.
Abdul Wahab Jaafar Sidek
Chief Executive Officer
Minority Shareholder Watchdog Group (MSWG)
Dated: 22 November 2007
22 November 2007
The clarion call has gone out to directors and public listed companies (plcs) to get their corporate governance in order. The Securities Commission (SC) will move swiftly into enforcement actions to ensure corporate responsibility and accountability. As to what good corporate governance is all about, many by now would have been alerted that it is not about “ticking boxes”. It is about creating a culture of appropriate behaviour and responsible conduct. Only truthful compliance can be effective and persuasive to drive a strong governance attitude within the organization. The plcs that fail to uphold accountability of their directors for corporate oversight, may soon find themselves likely to face with substantial liabilities.
Directors are judged on their performance by the markets and the stakeholders, so is their self-regulation and discipline. Possibly, directors may be reasonably excused for their lack of performance if they are found to closely comply with the required rules and requirements. Yet, why companies still fail at times? Is it for their lack of policy, processes, procedures? Or for their lack of clear corporate conscience or no due diligence? At any rate, it is their attitude that usually lets them down, proving their behaviour and conduct to be out of order.
The SC and Bursa Securities will continue to tighten their rules and processes under the mantle of compliance. However, this tends to be preventive measures to curb wrongdoings. It is the directors and management of plcs working together effectively as responsible individuals who will make compliance with good corporate governance work to make their organizations successful. However, why certain plcs have yet to get their act right? Why is there still lip service, empty rhetoric, or all-too-easy attitude for slipshod practices?
The recent revised Code has renewed emphasis on non-executive directors’ responsibilities and put a concerted effort on plcs to elect quality directors. At the heart of this effort is to deter dishonest or incompetent directors. With increased responsibilities, the non-executive directors are no longer decorative ornaments when they become more exposed to risk and liability. In reality, not all boards are imperiously callous to the shareholders’ interests but only few boards could be if they so wished. In this regard, shareholders must perceive non-executive directors to be truly effective and independent for a check-and-balance on the board.
Although plcs in Malaysia has thus far witnessed only limited number of directors’ liability cases, several factors are now combining in effect to make this a real possibility in the future. These include the recent corporate and securities law reforms to lessen the burden of proof for offences, whistleblowing provisions, the shift from a merit-based to disclosure-based regime for full and appropriate disclosure, due diligence and increasing activism among minority shareholders. There is a growing multitude of statutory liabilities under the Securities Industry Act, 1983, Securities Commission Act 1993 and the Capital Market and Services Act, 2007 that will expose directors to a greater variety of risk factors than before.
Good governance entails compliance with sound rules and practices. These rules and practices require directors to review results and management’s actions appropriately. Although there is no perfect set of rules, truthful compliance is essential to promote vigilance.
Non-executive directors are required to be financially literate. This means that they understand approved financial reporting standards, how such standards and their principles can be applied relating to accounting for estimates, allowances, accruals, impairment, or provisions. They also must understand internal controls and risk management, as well as how audit committees function. All this will increasingly subject the directors concerned to greater personal liability. In-depth checks would be warranted only if they find executive directors incompetent and management corrupt.
The pressure is always on management to play safe by referring any concerns to the board. Management is then led to protect itself by ensuring that the board sees everything, even if the non-executive directors do not fully grasp the issues. How should the audit committee members including independent directors play their role? They need to be proactively engaging with management and auditors. Their role is to properly monitor financial reporting and review business operations, implement proper controls on management and staff on performance and reporting, and properly understand the nature of business that is being conducted, and the level of risks associated with the particular type of business.
Tighter surveillance from the top level down to areas of risk and sensitivity rests on the non-executive directors to take the lead with their eyes wide open. Most might argue that the devil is in the detail. But, in concentrating on the detail, the non-executive directors must not overlook their role as corporate watchdogs. They need to gauge investors’ expectations.
Markets and investors do not like surprises. Even good ones can be detrimental to the company’s image and management’s reputation. After all, PLCs must avoid surprising the market and management must be able to see ahead, make appropriate announcements to give the right signals to the market and investors. Their awareness of shareholder base is also important. In particular directors need to know who shareholders are and how often, the shareholder base changes.
Inadequate, inappropriate or incomplete disclosures, accounting irregularities, erroneous announcements, false and misleading statements or company law violations lie at the root of most potential liabilities in shareholder-related claims. Directors may be covered for any wrongful act, such as any actual or alleged breach of duty and breach of trust to minority shareholders. However, they would not be covered for criminal acts if their behaviour and misconduct are deemed to be willful, fraudulent and intentional.
MSWG is of the view that it is particularly important for directors to have relevant and timely information. Effective accountability depends crucially on the supply of information. Often, conscientious non-executive directors are constrained in their role by information available. They are as productive and useful as the Chief Executive Officer or executive directors will allow them to be. Yet, why have few directors resigned when they were denied access to information they felt they needed? The relevance and timeliness of information can never be over-emphasised. It is often the lack of the understanding of this requirement that undermines directors’ performance and their conformance to best practice.
Plcs must move beyond compliance to thrive on governance dimension that will lead to better financial performance. In this regard, independent and non-executive directors need to be professional to oversee not only the risks of the plc but also the risks of their own performance or otherwise.
Abdul Wahab Jaafar Sidek
Chief Executive Officer
Minority Shareholder Watchdog Group (MSWG)
Dated: 22 November 2007
