SMEs and corporate governance


MAICSA PERSPECTIVE: A monthly series by The Malaysian Assssociation of The Institute of Chartered Secretaries and Administrators

BY KENNETH FOO POH KHEAN 

THOSE who have studied science will still recall that CG is an abbreviation for the centre of gravity. However, in corporate lexicon, CG refers to corporate governance. Surprisingly, both entail a study of the different shifts in momentum and focus of force. Perhaps the similarity ends where corporate governance involves human elements and factors affecting its general effectiveness.  

I am quite perturbed by the current concentration of efforts on instilling CG in public listed companies (PLCs) while the small- and medium-sized enterprises (SMEs) seemed to be left out of the loop. Even more disturbing is that the current hype over CG promotes the notion that it is not practised in private limited entities.  

However, the process of CG in PLCs involves an element of compulsion by the Securities Commission and the KLSE, and the need for publicity and a “feel good” factor, which encourages PLCs to get onto the bandwagon.  

Having examined the principles of corporate governance and best practices enunciated in the Malaysian Code of Corporate Governance, I deduce that by employing good corporate governance policies the end result could probably be summed up in three words - “Separation of Powers”. The Code encourages distinctive roles for the board, shareholders and the auditors. 

At the board, different individuals should separately hold the position of chairman and chief executive officer (CEO). The chairman will act as an overseer and ensure that the plans and policies formulated by the board are properly implemented. The CEO, on the other hand, is required to work with the chairman in attaining the objectives of such plans and policies. 

A general survey of small- and medium-sized companies will reveal that the role of the board is not very much different from what is written in the code. In the commercial arena, not every member of the board of a private limited company is involved in its day-to-day management, especially in smaller companies where the major shareholder takes on the leading role. 

Notwithstanding this, there will be healthy discussions among directors and shareholders because of the size of such enterprises. Therefore, the major shareholder may not always have his way. In the modern day business, any dispute among directors and shareholders attracts bad publicity, affects customer relations and trust and invites adverse credit ratings from financial institutions. In addition to this, certain provisions of the Companies Act 1965 may be breached if a major shareholder had his way. 

Generally, Malaysian SMEs have practised corporate governance policies from the day they were incorporated under the Companies Act 1965 (the Act) and registered with the Companies Commission of Malaysia (SSM). To give credence to this contention, the process of incorporating a company has to be considered. In the entire process of incorporating a company, one person plays an important role in ensuring that there is adequate compliance with all the procedures within the Act, and that person is the company secretary. 

By the appointment of a company secretary, the company takes its first step towards effective corporate governance. This then enables the company secretary to ensure that the company complies with all the requirements of the Act. At the heart of the Act is a very important compliance factor and that is to ensure that companies are legally incorporated.  

Notwithstanding this, the rampant cases of private limited companies being used as a front to dupe members of the public from parting with their hard earned savings is not a reflection of weakness in the Act, but rather the greed and avarice of the company directors. SSM will in such instances, have to go after the company directors. 

The company secretary, when advising the board and officers of a company to comply with the provisions of the Act, is instilling the practice of good CG. The company secretary, whether serving in a PLC or a private limited company, has one primary function – ensuring compliance - be it compliance with the Memorandum and Articles, KLSE Listing Requirements, the Companies Act 1965, Companies Regulation 1966 or any other legislature and statute.  

A company that practises good CG encourages the message of reliability, trustworthiness, efficiency and stability. A creditor would prefer to do business with a debtor who has lodged regular financial statements with SSM because a creditor may only be able to verify the financial situation of the debtor, where the statutory filing at SSM is the avenue for the public to view the financial records of a possible client.  

Oft times employees are reluctant to work for a company where the directors may be discharged or have been previously convicted of any offence. The risks of working for a company that may be used as a front for some dishonest scheme or illegal business might jeopardise the employees’ career prospects.  

With many companies applying and practising good corporate governance values it then means there are better-managed and reliable companies that bear little resemblance to their predecessors. The gradual and balanced amendments to the Act have also provided a wide range of protection for minority shareholders.  

Furthermore, the changes promote transparency and accountability, the very same principles of corporate governance. For example, Section 132C requires directors to seek shareholders’ approval for acquisition of any property of substantial value or disposal of a substantial portion of the company’s property.  

Perhaps under current requirements where PLCs have to issue corporate governance statements, Sections 132 and 135 of the Act have been forgotten.  

Although the Act contains all the relevant provisions to ensure corporate governance is practised, the Domestic Trade and Consumer Affairs Ministry in its current effort to revamp the Act should consider fortifying the position of the company secretary by equating their role and function with that of a compliance officer. For just as advocates and solicitors are officers of justice, so too are company secretaries officers of compliance.  

By fortifying the role and position of the company secretary, such a person would have the additional clout required to ensure better governance is adhered to as a result of stricter compliance in the following instances:  

  • The Act is amended to strengthen the position of a company secretary where his removal or resignation is similar to Section 172, which governs the appointment, resignation and removal of auditors, where it should be subject to shareholders’ approval and the person being removed should be entitled to circulate a letter of representation to all shareholders. 

  • Some specific duties and responsibilities of the company secretary should be inserted into the Act such as entitling him with the right to attend all board and general meetings as currently, there are no provisions in the Act requiring the company secretary to be present at all meetings. 

  • The Act is amended to provide the secretary with an avenue to report on instances of non-compliance whether these are committed by the board or the company and be given adequate protection if the report is in good faith.  

    The full implementation of sound corporate governance by all companies has to be ensured not only by SSM but also company secretaries, who, as advisors to the board and custodians of the statutory records are in a special position in all companies.  

  • Article type: metered
    User Type: anonymous web
    User Status:
    Campaign ID: 46
    Cxense type: free
    User access status: 3
       

    Next In Business News

    CPO futures to see volatile trading next week, eyes on MPOB data
    Pfizer, BioNTech seek US emergency nod for COVID-19 vaccine in adolescents
    Eyes on next generation as Singapore succession is thrown into question
    Oil price falls, ends week about 2% lower on supply increase, new lockdowns
    BlackRock, Mustier's blank-check firm eye Credit Suisse fund management arm
    GLOBAL MARKETS-S&P 500, Dow scale new heights, Treasury yields rise on strong inflation data
    Mah Sing: Extend HOC until year-end
    Kerjaya Prospek wins RM154mil construction job
    MCMC expects DNB to open 5G tender soon
    Ramsay Sime Darby Health Care acquires Manipal Hospitals

    Stories You'll Enjoy


    Vouchers