Decent CG score, but could do better


JUDGING from a press release last week, the Securities Commission (SC) is pleased with how Malaysia has fared in a well-known biennial assessment of corporate governance in the region.

The regulator highlighted a number of positives in the Corporate Governance Watch 2014 (CG Watch) report, the product of a collaboration between CLSA Ltd, an independent brokerage and investment group, and the Asian Corporate Governance Association (ACGA). Both are based in Hong Kong.

The first thing the SC pointed out was that the country’s overall score for corporate governance quality has climbed from 49% in 2007 to 58% this year. The latest figure has allowed Malaysia to stay in fourth place (held jointly with Thailand) among the 11 markets covered in the survey.

Its No. 4 rank in CG Watch 2012 was based on a score of 55%.

“The report drew attention to the sustained and concerted efforts by Malaysia in driving governance reforms, resulting in Malaysia becoming the only market out of the Asia Pacific countries assessed that consistently improved its scores in each of the last four surveys,” said the SC in the Oct 9 press release.

The commission added that areas of significant improvement, as reflected in CG Watch 2014, included corporate governance culture, rules and practices, enforcement, accounting and auditing, and enforcement.

Much of this can be attributed to recommendations made in the SC’s Corporate Governance Blueprint launched in 2011.

The five-paragraph press release from the SC is a summary of the bright spots, but we should bear in mind that CG Watch 2014 is basically a 224-page report card.

The profile on Malaysia alone takes up 10 pages, plus a lot more is said elsewhere in the report about corporate governance in Malaysia.

A score of 58% is respectable – the others ahead of Malaysia are Hong Kong (65%), Singapore (64%) and Japan (60%) – but it also means that there are considerable gaps and weaknesses. The report is specific about these too. Here are some aspects in which CLSA and ACGA say Malaysia can (and should) do better:

>Too top-down

In his analysis of corporate governance in Malaysia, ACGA secretary-general Jamie Allen noted that Malaysia is the only market whose overall score has gone up in each of the four CG Watch surveys conducted between 2007 and 2014.

This is unusual because corporate governance reform is hard to sustain, with most markets losing momentum after three or four years.

“Yet Malaysia has done this largely through a mix of government-driven reform (see its CG Blueprint 2011 report), gradually improving enforcement, a state-grandfathered push to require domestic institutional investors to take corporate governance seriously and the creation of one of the region’s better independent audit regulators,” said Allen.

This suggests that market participants such as listed companies and investors can’t match the regulators’ appetite for stronger corporate governance.

> GLCs in the CG  spotlight

CLSA head of Malaysia research Anand Pathmakanthan wrote that while listed companies under private-sector control had seen neutral-to-improving corporate governance trends, the track record of government-linked companies (GLCs) had been “much more chequered of late”.

In particular, he said, many GLCs fell short when it came to discipline and independence.

With such companies, he argued, there was the risk of minorities playing second fiddle to strategic agendas.

“By virtue of their state-sponsorship (including support by government-linked investment companies such as EPF and PNB), GLCs are less obliged to market discipline and prone to being vehicles to satisfy political or social priorities,” he added.

He said developments in the GLC space will be the key influence on Malaysia’s corporate governance perception.

> What to fix

The report helpfully provides a list of quick fixes:

  • Provide more detail on regulatory enforcement cases, including a statistical analysis of enforcement trends.
  • Make voting by poll mandatory.
  • Encourage companies to disclose more detail in AGM agendas.
  • Encourage companies to provide commentary on services covered by non-audit fees.

> What to avoid

The report also lists factors that could downgrade Malaysia’s score in the next assessment in 2016:

  • No improvement in non-financial reporting
  • A continuation of voting by a show of hands at general meetings
  • No progress in making it mandatory for annual reports to contain management discussions and analyses
  • Poor implementation of the Malaysian Code for Institutional Investors

Executive editor Errol Oh finds it hard to choose between a pat on the back and a piece of constructive criticism.