Chapter 15 of the Listing Requirement sets out the requirements that must be complied with by a listed issuer and its directors of listed issuers and their subsidiaries in relation to corporate governance.
To further strengthen board governance and oversight in listed issuers and their subsidiaries, the Securities Commission Malaysia (SC) has, on 30 July 2020, issued new Guidelines on Conduct of Directors of Listed Issuers and Their Subsidiaries (“Guidelines”).
The Guidelines comprises 5 chapters i.e. Introduction (Chapter 1), Definitions (Chapter 2), Conduct Requirements for Directors (Chapter 3), Maintaining Proper Records and Accounts (Chapter 4) and Group Governance (Chapter 5). The Guidelines comes into effect on 30 July 2020, with the exception of Chapter 5 on Group Governance which will come into effect on 1 January 2021.
The summary of the key points in the Guidelines are as follows:
(i) Conduct of directors (Chapter 3)
• A director of listed corporation and their subsidiaries must:
(i) exercise his powers for a proper purpose and in good faith in the best interest of the corporation (and not his nominator if he is a representative of a shareholder in the event of conflict) in which he sits as a board member;
(ii) exercise reasonable care, skill and diligence; and
(iii) not accept a benefit from or provide a benefit to a third party by reason only of him being a director or him doing something or refraining from doing anything as a director.
• A listed corporation and its directors must establish policies and procedures to manage potential conflict of interest situations including potential conflict of interest between any director and the corporation; and the listed corporation and its subsidiaries.
Commentary: The above fiduciary duties requirements are nothing new but generally a restatement of the standards that are expected of directors under the Companies Act 2016.
However, this restatement is a very important milestone for the SC, as it enables the SC to take action against directors for breaching their fiduciary duties, something which is of a challenge in the past. This is due to the fact that breach of fiduciary duties is not a violation of securities laws under the Capital Markets and Services Act 2007 (CMSA) but under the scope of the Companies Act 2016, which is under the purview of the Companies Commission of Malaysia.
(ii) Maintaining proper records and accounts (Chapter 4)
• Listed corporation and their subsidiaries and their directors must cause to be kept the accounting and other records for not less than 7 years from the completion of the transactions or operations to which the entries or records relate, to: (a) sufficiently explain its business, transactions and financial position; (b) enable the preparation of true and fair financial statements; and (c) enable the accounting and other records to be conveniently and properly audited.
• Where the financial statements of a subsidiary are required to be consolidated into the financial statements of a listed corporation, the subsidiary and its directors must provide the listed corporation with all information and record necessary to enable the preparation of the consolidated financial statements in accordance with the approved accounting standards.
Commentary: A look at the SC’s website shows a number of cases of failure of directors of public listed companies in maintaining proper records and accounts. Some administrative actions taken by the SC in 2019 include reprimanding and/or fining directors (including independent non-executive directors).
(iii) Group governance (Chapter 5)
• A listed corporation and its directors must:
(i) ensure there is an adequate group wide framework for co-operation and communication between the listed corporation and its subsidiaries to enable it to discharge its responsibilities including oversight of group financial and non-financial performance, business strategy and priorities, risk management including material sustainability risks, and corporate governance policies and practices; and
(ii) establish and ensure the group wide framework on corporate governance including code of conduct and ethics, policies and procedures on anti- corruption, whistleblowing, managing conflict of interest, managing material sustainability risks, and policy on board diversity including gender diversity.
• A subsidiary of a listed corporation and its directors must provide the listed corporation with any information requested by the listed corporation to enable the board of the listed corporation to oversee the performance of its subsidiaries effectively, including assessing non-financial performance of the group.
The SC stated that the Guidelines take into account the evolving Malaysian corporate governance landscape, lessons learnt from the SC’s regulatory work in enforcing corporate governance breaches and the need to ensure that Malaysia’s framework remains relevant and effective. It is hoped that the corporate governance of the listed issuers and their subsidiaries will further improve with issuance of the Guidelines and with another regulator monitoring the conduct of their directors.