The Rise of Shareholder Activism in Malaysia

A. Introduction

Gone are the days where investors and shareholders sit passively whilst allowing directors and the management of a company to steer the company without fear of repercussions. In an age whereby shareholders’ activism is globally on the rise[1], shareholders and investors in Malaysia are keeping up with the trend. Shareholders are more ready now than before to make their voices heard and their opinions known. They know what they want and how to get it; and are more organised now than before. Such consciousness has made the management of the companies and directors to be more cautious and answerable for their activities and as a result, companies have taken measures in order to address this rise.

So, what is shareholder activism?

B. What is shareholder activism?

For the purpose of this article, we consider two categories of share-holders, i.e., institutional and individual. Typically, institutional shareholders are large entities, including public and private companies, government agencies and banks, with huge investment capital. On the other hand, individual shareholders are persons who hold shares in a company on a personal account, who typically invest in much smaller amounts as compared to the former. Regardless of the category, share-holder activism, often linked with shareholder empowerment, can be defined as an act whereby share-holders voice out their concerns and make their dissatisfaction known in order to influence the policy and practice of a company; and to protect their interest and maximise value through the demand for good governance. Shareholder activism is not limited to certain methods or approaches. It can be done through confrontational and non-confrontational methods, from writing open letters, to speaking out at general meetings of a company and selling-off of shares in the company (also known as the ‘Wall Street Walk’)[2].

C. The History of Shareholder Activism in Malaysia

The concept of shareholder activism is not new in Malaysia[3]. Historically, the government were expected to take initiative when matters of rights and protection of shareholders were of concern. As an example, in order to address and ensure minority share-holder’s rights were protected, the Companies Act 1965 provided rights to shareholders to invoke legal remedies against a company in the event of oppression against the shareholders[4]. Rights were also afforded to shareholders to question the board at general meetings on matters relating to the management of the company.

However, these rights were not fully utilised. Academicians have argued that cultural embedment is one of the reasons why shareholders were slow in taking legal actions. In other words, it is claimed that due to the cultural values in Malaysia, share-holders seldom see criticism as constructive, but more of “personal attacks” and are not comfortable in providing comments to directors[5].

After the 1998 financial crisis however, shareholders in Malaysia could no longer afford to stay passive and rely solely on the Government for protection. This is because, at the time, it was also identified that shareholders’ control and protection were inadequate and that there was a lack of monitoring of boards and management[6].

In view of the need for corporate governance reform, in the year 2000, the Securities Commission Malaysia (“SC”) issued the Malaysian Code on Corporate Governance (“MCCG”)[7] in order to promote good governance amongst listed companies (which, in part, supports and encourages shareholder activism). In addition, the Minority Shareholder Watch-dog Group (“MSWG”) was also established in 2000 with a focus on fostering awareness of minority share-holders’ interests and enhancing corporate governance through shareholder activism[8].

The MSWG was set up to create awareness among minority share-holders of their three basic rights, i.e., to seek information, voice opinion and seek redress[9]. The mission statement of MSWG is to increase sustainable shareholder value in companies through engagement with relevant stake-holders, with a focus on minority shareholder interests[10].

As the consciousness started to grow[11] and shareholders became more aware, they have started to recognise the importance of having to depart from traditional mindsets and roles. In consequence of the evolving nature of this understanding, several key changes were made to the legislative framework in Malaysia, including the introduction of the Malaysian Code for Institutional Investors (“MCII”) in 2014 and revisions to the MCCG (in 2007, 2012 and 2017).

D. The Current Position of Share-holder Activism in Malaysia

i. Legal framework

Under the current legal framework, various avenues are available to shareholders which encourage shareholder activism. For example, under the Companies Act 2016, not only are shareholders empowered to question and comment on the management of a company, but they are also allowed to give binding recommendations on the management of a company. This is provided that such recommendations are in the best interest of the company, allowed under its constitution and given in the form of a special resolution[12].

Further, under the Capital Markets and Services Act 2007 (“CMSA”), shareholders are given the right to initiate civil proceedings if they have suffered losses or damages as a result of others acting in contravention of securities laws, breaches of securities offences such as market rigging, market manipulation, securities fraud and insider trading[13].

Proceedings under these provisions may also be commenced by share-holders in the absence of prosecution by the SC.

This was further reinforced in the High Court case of Mak Siew Wei v Dato’ Dr Norbik Bashah bin Idris & Ors[14] whereby the plaintiff, a shareholder of the eighth defendant, commenced a writ of action against seven defendants for their failure to undertake a mandatory offer for the shares in the eighth defendant company. The defendants alleged that the plaintiff did not have the requisite locus standi. The court, in dismissing the defendants claim, held at para-graphs 41 and 57 respectively the following:

“…the existence of the various provisions as legislated in the CMSA…reinforces the regulatory philosophy that promotes share-holder activism which includes encouraging them to initiate various actions directly”

“It is in my view both compelling and irresistible therefore that the intention of Parliament in this regard has been made crystal clear by [the provisions of the CMSA]…that it seeks to promote greater shareholder activism and encourage private litigation as a means to complement the enforcement initiatives of the SC in its regulation of the capital markets in the country”

Essentially, the court, in interpreting the intentions of the Parliament held that the provisions of CMSA promote shareholder activism through exercising the right to commence private litigation even in the absence of regulatory enforcements.

ii. Commitment to Shareholder Activism

With the growth of shareholder activism, MCII was introduced. It was a collaborative effort by the SC and MSWG.

It sets out best practices, aimed at setting out broad principles of effective stewardship by institution-al investors[15] and seeks to enhance the communication between institutional investors and its investee companies listed on Bursa Malaysia to help improve long term returns to shareholders and promote good governance. MCII further outlines the roles of institutional investors and how institutional investors can make their concerns known. To date, there are currently 21 signatories to the MCII[16].

As a show of commitment to the MCII’s cause, institutional share-holders like Khazanah Nasional Berhad (“Khazanah”)[17] and Employees Provident Fund (“EPF”)[18] have released their respective statement of compliance with MCII.

Further, numerous Malaysian institutional shareholders have risen to the challenge and have made known their willingness and openness in exercising their right. For example, Khazanah, one of Malaysia’s largest institutional shareholders released an Investment Policy Statement[19] stating, “We believe in creating sustainable value through appropriate engagement with the companies we invest in and the external investment managers and advisors we use.”, hence placing importance on engagement with investee companies, in line with MCII.

iii. Notable Instances of Exercise of Shareholder Activism

In July 2018, displeased with the RM72 million remuneration pack-age received by the CEO of Sapura Energy Berhad (“Sapura”), shareholders of Sapura, backed by EPF, attempted to make known their disapproval by an attempt to oust the CEO[20]. Despite being unsuccessful, the move in itself illustrates shareholder activism with the willingness of institutional and individual shareholders to be proactive.

In June of this year, the country was rocked by the news that shareholders of FGV Holdings Berhad (“FGV”) voted against several resolutions for the approval of directors’ remunerations[21] during their 5-hour long annual general meeting. Amongst the institutional shareholder who voted against the said approval was the Armed Forces Fund Board (LTAT). This unprecedented move was seen and regarded by many as a sign of shareholders’ activism being on the rise, as shareholders exercised their rights to vote against the resolution to show their disapproval towards the proposed remunerations for directors given the prevailing economic conditions and FGV’s financial standing at the time[22].

This further reiterates the point that shareholders, be it institutional or individual, will no longer sit still and will instead be more active in their role of the steering the direction of the company.

E. Advantages and Disadvantages of Shareholder Activism

In a general sense, shareholder activism seeks to promote good governance. Theoretically, as an advantage, this would lead to greater transparency, corporate democracy and responsibility[23] which may improve the performance of a company. Further, with greater engagement between share-holders and management as a form of check and balance, it may improve their working relationship which would be beneficial for the company as decisions would most likely be in the company’s best interest.

On the other hand, one of the apparent disadvantages of shareholder activism is the excessive interference on the part the shareholders which may jeopardise a company’s operations and can cause friction among various parties. Further, it is difficult to ascertain the true intentions of share-holder activism as it may be masked. For example, some shareholders may force a company to make an instant positive share-price reaction, with little care for the potential side effects for the wider organization or its employees and extreme pressure of this short-term focus can affect a company’s long-term health or growth. [24]

F. Challenges to Shareholder Activism in Malaysia

The key challenges to shareholder activism in Malaysia do not merely start and end at minority shareholders acting in silo, as highlighted earlier. Nor does it only have to do with cultural embedment. Instead, there are many underlying and foundational issues that are hindering shareholders activism.

As an example, numerous institutional shareholders in Malaysia and their investees are politically linked and interlinked. Due to this fact, the power and influence politics has on the practice and policies of the companies are great[25]. As such, resistance and shareholder activism could potentially be futile, and it can be seen as if there is not much minority shareholders could do except to monitor their investments closely and attempt to sell their shares[26].

Another matter that warrants highlight is government-linked companies (“GLC”). Naturally, the practices and policies adopted by GLCs are often (or at the very least expected to be) in line with government policies. When a GLC acts in line with Government wishes but contrary to the interests of shareholders, the shareholders, especially individuals, are limited in their methods of affecting and influencing change. Even if bringing about change could be successful, the process would not be speedy and would take time.

An equally important aspect of share-holder activism is collective and synchronised voting. However, in reality, shareholders would have diverse interests and that brings about a variety of opinions and voices. Regardless of the variety of voices, shareholder activism will be here for the long run.

G. How Companies Should Respond to Shareholder Activism

With the imminent rise of shareholder activism in Malaysia, it is important that companies embrace shareholder activism[27]. More often than not, the reason why shareholders become proactive is that they see that the company is going in the wrong direction.

Essentially, they want the best for the company. Hence, it is important for board and management of a company to stay current on activist trends. For example, the current trend right now is the pressing imposition of socially responsible investing to account for environmental, social and governance considerations[28].

Further, companies can enhance the communication level between management and shareholders. One way of doing this is to hire investor relations personnel to engage with shareholders in order to convey information so that they are better informed of how the company is being managed. Moreover, companies can appoint a minority shareholder representative into the board to expand the variety in their representation.

H. Conclusion

Although it can be seen that share- holder activism is on the rise in Malaysia; and institutional and individual shareholders are more willing to be proactive in their approach to voice their disapproval, there are factors which may hamper the progress.

Nonetheless, with greater awareness put forward by institutional share-holders and institutions like MSWG and the persistence of shareholders to exercise this right, shareholder activism can be said to be on the right track in its objective of protecting shareholders’ interest.

———-

1. Cover Story: The impact of shareholder activism accessible via https://www.theedgemarkets. com/article/cover-story-impact-shareholder- activism.
2. Shareholder Activism in Malaysia: Is It Effective? accessible via https://core.ac.uk/download/ pdf/82781742.pdf.
3. n2.
4. Section 181, Companies Act 1965.
5. The Consequences of Culture on Shareholder Activism in Malaysia accessible via https:// www.cmawebline.org/images/stories/ JAMAR%202006%20Winter/JAMAR-v4-1- Consequences%20of%20Culture.pdf.
6. Corporate Governance in Malaysia, Kamini Singam accessible via https://www.austlii.edu. au/au/journals/BondLawRw/2003/13.pdf.
7. The Malaysian Code on Corporate Governance, March 2000 accessible via https://ecgi.global/sites/default/files// codes/documents/mccg_mar2000.pdf.
8. https://www.mswg.org.my/who-we-are.
9. The Impact of Minority Shareholder Watchdog Group Activism on the Performance of Targeted Firms in Malaysia accessible via https://web.usm.my/journal/aamjaf/ Vol%205-1-2009/5-1-3.pdf.
10. Mission Statement of MSWG accessible via https://www.mswg.org.my/objective-vision-mission.
11. Shareholder activism comes to the fore in Malaysia, 20 January 2010 accessible via https://www.thestar.com.my/business/ business-news/2010/01/20/shareholder- activism-comes-to-the-fore-in-malaysia# PDR4QXjy05gJMu0K.99.
12. Section 195, Companies Act 2016.
13. Sections 199, 201, 210 & 357 of CMSA 2007.
14. [2016] 11 MLJ 772.
15. The Malaysian Code for Institutional Investors accessible via https://www.iicm.org.my/wp- content/uploads/2018/05/MALAYSIAN-CODE- FOR-INSTITUTIONAL-INVESTORS-MCII.pdf.
16. https://www.iicm.org.my/list-of-signatories/.
17. Commitment to institutional good governance accessible via https://www.iicm.org.my/wp- content/uploads/2018/10/Statement-of Compliance-Khazanah-2018.pdf.
18. Statement of Compliance with the Malaysian Code for Institutional Investors accessible via https://www.kwsp.gov.my/documents/ 20126/142907/EPF_Compliance_Statement_ FINAL__ENG__18052017.pdf/75b8d0e4-488f- 4b1d-2af0-60abb77bcff3.
19. Khazanah Nasional Berhad, Invesment Policy Statement accessible via https://www. khazanah.com.my/getmedia/6463a15a-5662- 4724-8005-7d3542a5dc8c/Khazanah-Nasional- Official-Investment-Policy-Statement_1.aspx.
20. Sapura’s CEO survives ouster move – 19 July 2018 accessible via https://www.thestar. com.my/business/business-news/2018/07/19/ shahril-survives-ouster-move-at-agm.
21. FGV shareholders voted against directors’ remuneration at 5-hour AGM – 25 June 2019 https://www.theedgemarkets.com/ article/fgv-shareholders-voted-against- directors-remuneration-5hour-agm.
22. LTAT defends decision to reject FGV directors’ fees accessible via https://www.theedge markets.com/article/ltat-defends-decision- reject-fgv-directors-fees-0.
23. Corporate Governance : Theory and Some Insights into the Malaysian Practices, accessible via https://pdfs.semanticscholar.org/4572/ d9df2f97be614b0b2d3bcdaa53fecad1f847.pdf.
24. The Influence of Shareholder Activism as a Corporate Governance Monitoring Mechanism in Malaysia accessible via https://www. researchgate.net/publication/327931127_The_Influence_of_Institutional_Shareholder_Activism_as_a_Corporate_Governance_Monitoring_Mechanism_in_Malaysia.
25. n5.
26. n5.
27. Best Practices for Shareholder Activism – 7 January 2019 accessible via https://insights. diligent.com/shareholder-activism/best- practices-for-shareholder-activism/.
28. Global Sustainable Investment Review 2018, accessible via https://www.gsi-alliance.org/wp- content/uploads/2019/03/GSIR_Review 2018.3.28.pdf.

Written by:

Sharizan Sarif (Partner) sharizan@azmilaw.com

Inamul Hassan Shah (Senior Associate) hassanshah@azmilaw.com

Muhammad Noor Azman (general@azmilaw.com)