Updates on Corporate Governance Policy in Malaysia

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Updates on Corporate Governance Policy in Malaysia

By Suhara Mohamad Sidik*

 

1.0       Introduction

 

On 3 August 2016, the Bank Negara Malaysia (“BNM”) issued a Corporate Governance policy document (“Corporate Governance Policy”) which is applicable to licenced banks, licenced investment banks, licenced Islamic banks, licenced insurers, licenced Takaful operators and financial holding companies (collectively, “Financial Institutions”). The Corporate Governance Policy comprises seven parts and sets out the BNM’s expectations for Financial Institutions to have in place effective corporate governance arrangements in regards the Financial Institutions’ board of directors (“Board”), senior management, culture and remuneration, group governance and transparency in corporate governance disclosure, consistent with the long-term viability of a financial institution.

 

This article highlights some of the corporate governance requirements which are provided under the Corporate Governance Policy.

 

2.0       The highlights

 

2.1       Board

 

a)        

The Corporate Governance Policy acknowledges the important role of the Board and senior management in determining the core value for the Financial Institution.

To ensure the Financial Institutions have “the right tone from the top” that can shape their good corporate culture, the Corporate Governance Policy sets out the key corporate governance practices that must be observed by the Board in respect of the following:

          (i)     their key responsibilities;

        (ii)     the board meetings;

        (iii)     the board appointment and removals;

        (iv)     the board composition;

        (v)     the board committees;

        (vi)     the board evaluation and development; and

        (vii)     the board conflict of interest.

 Some of the highlights in respect of the above are as follows:

 

No.

Requirement

(i)

Chairman

The chairman of the Board must not be an executive and must not have served as a CEO of the Financial Institution in the past 5 years (Paragraph 11.3).

(ii)

Limit on the number of executive on the board

The Board of a Financial Institution must not have more than one executive director, unless the BNM approves otherwise in writing (Paragraph 11.4).

Paragraph 11.5 recognizes the fact that executive directors bring to the Board technical expertise and useful insights about the Financial Institution’s operations, however, it impresses that the executive directors’ presence on the Board must not reduce the Board’s ability to independently scrutinise the proposals tabled and performance of senior management.

(iii)

Higher minimum ratio of independent directors

The Board must have a majority of independent directors at all times (Paragraph 11.6).

(iv)

Tenure of independent directors

The tenure limits for independent directors should generally not exceed 9 years, except under exceptional circumstances or as part of transitional arrangements towards full implementation of the succession plans of the Financial Institution (Paragraph 11.9).

(v)

Limit on common directorships between certain affiliates

Directors who are Board members of a Financial Institution and its affiliates must remain in the minority of the Financial Institution’s board if:

a)     one entity is a licensed insurer and the other is a licensed takaful operator;

b)     one entity is a licensed bank or licensed investment bank, and the other is a licensed Islamic bank;

c)     the affiliate is a holding company or subsidiary of the financial institution that is itself a financial institution; or

d)     there are strong operational dependencies between the financial institution and the affiliate.

This is to ensure that group interests are appropriately balanced against the fiduciary and statutory duties that directors owe towards each legal entity they serve (Paragraph 11.11).

Note: During consultation made before the Corporate Governance Policy was finalized, a number of industry respondents highlighted potential challenges for financial institutions to comply with the requirements. One of the key concerns is the potential impact on existing arrangements that are in place to promote greater group-level alignment and synergy.

This Paragraph 11.11 acknowledges the contribution that common directors on the Board of a financial institution and its affiliates have for group oversight and alignment. However, it also views that excessive overlaps in Board membership can also result in conflicts, particularly where issues affect the financial institution and its affiliates in different ways.

Our comment: Many companies out there especially those which are part of group of companies with diversified business, may be able to witness the fact that having too many common people on board is not the answer for group alignment. While it is important to have a uniformed group policy to align the group business, it also important to ensure that the group policy is implemented in line with each company’s special need, with variation allowed, if necessary.

(vi)

Board committees

Board committees must not have any executive director in its membership, except for board nomination committee (Paragraph 12.5).

 

2.2       Senior Management

 

Some of the highlights in respect of senior management are as follows:

 

No.

Requirement

(i)

Senior management position

A substantial shareholder of a Financial Institution must not hold a senior management position to preserve an appropriate separation between ownership and management of the Financial Institutions. This is because the Financial Institutions do not only have to take care of their shareholders but they also have responsibilities towards their depositors, investment account holders, policy holders and participants (Paragraph 17.3).

(ii)

CEO

A CEO must devote the whole of his professional time to the service of the Financial Institution unless the BNM approves otherwise in writing. However, the BNM’s approval is not required for a CEO to hold a non-executive position in a professional body, industry association statutory body, charitable body or other non-commercial public interest entity, unless the BNM specifies otherwise (Paragraph 17.4).

 

2.3 Group Governance

 

Some of the highlights in respect of group governance are as follows:

 

No.

Requirement

(i)

Responsibility to oversee subsidiaries

A Financial Institution is responsible for exercising adequate oversight over its subsidiaries while at the same time respecting the independent legal and governance responsibilities that apply to them (Paragraph 20.1).

(ii)

Group structure and risks

An apex entity1 must ensure that the group structure (which may be complicated) does not undermine its ability to exercise effective oversight.

The board and senior management must:

a)     know and understand the group structure (including its changes over time);

b)     asses the implications for the capacity to identify and manage all material risks across the group;

c)     understand the risks associated with the group structure;

d)     evaluate whether group controls and policies are adequate to address those risks

(Paragraph 20.4 read together with Paragraph 20.3).

 

3.0 Transitional arrangements

 

Financial Institutions have until the following dates to comply with the specific Requirements set out below:

 

Requirement

Effective Date

Limit on executive directors

3 August 2019

Limit on common directors

3 August 2019

Independent directors to make up at least half of the board membership

3 August 2019

Independent directors to make up a majority of the board membership

3 August 2019

Detailed requirements for remuneration2

3 August 2019

 

Under the Corporate Governance Policy, all appointments of directors during the transition period are expected to facilitate the Financial Institution’s full compliance with these requirements by the effective dates set out above.

 


 

1 “apex entity” refers to a financial institution that– (a) is not a subsidiary of another financial institution; or (b) is a subsidiary of a financial institution, and has one or more subsidiaries that is a licensed insurer or licensed takaful operator

 

2 As required under paragraphs 19.6(a), 19.6(e), 19.7 and 19.8(c) of the Corporate Governance Policy


*Suhara Mohamad Sidik is a senior associate in Mergers & Acquisition, Corporate Practice Group in the main office of Azmi & Associates. Ms. Suhara can be contacted at suhara@azmilaw.com.

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Kuala Lumpur,
Wednesday, May 10, 2017
Business Organizations, Finance & Banking