Need to improve board practices, including director sourcing, report says


ICDM president and CEO Michele Kythe Lim said: “Now more than ever, a company’s board architecture and composition is critical to ensure boards are able to effectively and successfully direct or guide a company through increasingly volatile, uncertain, complex and ambiguous (VUCA) environments.

KUALA LUMPUR: The inaugural Malaysian Board Practices Review 2020 launched on Thursday reveals a greater need to improve board practices including director sourcing, skills and competencies, board evaluation and training.

The thrust of the review is to improve board practices in line with the Malaysian Code of Corporate Governance (MCCG), the Institute of Corporate Directors Malaysia (ICDM) said in a statement.

ICDM said the review is to strengthen best practices of the boards, in tandem with the Securities Commission’s (SC) recent update on the MCCG to enhance the corporate governance culture.

The review, which was in collaboration with Russell Reynolds Associates (RRA) and Bursa Malaysia Bhd, is to establish paradigms and standards for Malaysian boards through a deeper overall understanding of prevailing industry culture, practices and processes relating to board nomination, selection, appointment and evaluation.

Some key observations from the review revealed a greater need to improve board practices in line with the MCCG:

i. Director sourcing – personal network referrals (74%) remain the most common director sourcing method, following by nominations by major shareholders or parent companies (14%), and only 8% of companies used independent, third-party search institutions, which is the best practice recommended in the MCCG.

ii. Skills and competencies – gaps in board skills and knowledge call for greater and more effective adoption of skills such as digital, social media & technology and innovation, Environmental, Social & Governance (ESG), human resource, culture & succession, communications & public relations, marketing & sales, branding & reputation, business, e-commerce, treasury & actuarial sciences, etc.

iii. Board evaluation – only 25% of companies had independent external board evaluations in the last 10 years.

iv. Developmental programmes and training – majority of programmes undertaken (90%) were based on individual director requests; there is lack of adequate structure, planning or pathway to ensure holistic, consistent and long-term development of directors.

ICDM said the review explored feedback and insights from over 100 local public listed companies, covering 799 board members, across large (39%), mid (9%) and small (52%) market capitalisations and industries.

These include industrial products and services, consumer products & services, property, technology, construction, plantation, telecommunications and media, utilities, healthcare, energy, financial services as well as transportation and logistics.

Primarily, the review examined common practices and key appointment and reappointment considerations of independent directors, board evaluation, as well as board training and development.

ICDM president and CEO Michele Kythe Lim said: “Now more than ever, a company’s board architecture and composition is critical to ensure boards are able to effectively and successfully direct or guide a company through increasingly volatile, uncertain, complex and ambiguous (VUCA) environments.

Lim said companies need to adapt the current culture and approach to their board composition:

These can be done by firstly, expanding their director sourcing methods, next through vigorous internal and external evaluations of the existing board, and thirdly, by driving the ongoing development and competency levels, balancing technical-based with performance- and behavioural-based trainings to build sustainable and effective boards.

“The Review provides valuable insights on the board leadership culture in Malaysia, as well as improvement areas for companies.

“As Malaysia heeds the call to raise the standards of corporate governance through stronger market and self-discipline, boards will continue to be at the forefront in ensuring a transparent, holistic and structured approach to board evaluation, refreshment and development – to shape effective boards as well as build greater stakeholder trust, ” she said.

RRA managing director Stephen Langton said the refreshment of boards continues to be key for a board in maintaining adequate independent oversight, which is in line with a previous study that illustrated a strong link between critical director behaviours with higher company performance.

He added that board evaluation and peer review also provide potential value for a well-functioning board.

“The review highlighted an important observation: companies are generally compliant with the MCCG and listing requirements for board composition; however, it also highlighted that 19% of independent directors have been on their respective boards for over nine years.

“This brings to question the independence of the board – a significant factor in allowing for more considered decision-making and protection of shareholders’ interest.

“It is also vital for companies to conduct periodic board evaluations by professional, experienced and independent parties, where the objective insights gained will facilitate better board-management relationships, director nomination and appointment, as well as assist in determining board remuneration.”

Bursa Malaysia CEO Datuk Muhamad Umar Swift said boards need to continually evolve and improve to properly discharge their role as effective stewards.Bursa Malaysia CEO Datuk Muhamad Umar Swift said boards need to continually evolve and improve to properly discharge their role as effective stewards.

Bursa Malaysia CEO Datuk Muhamad Umar Swift said boards need to continually evolve and improve to properly discharge their role as effective stewards.

“The regulatory framework that we have put in place is intended to support the good governance of our PLCs.

“It aims to inculcate the right culture and approach, from the rigour of governance practices put in place, to the maturity of the market and PLCs in recognising the need for competence, diversity and independence from their board leadership as they do for their management team.

“The review offers valuable insights and a clear call to action that companies need to rethink their current approaches to their board selection and evaluation practices and ongoing development to remain competitive and sustainable, ” Muhamad Umar said.

The review said in line with the findings, it is imperative that boards continue to take steps to build robust and effective board selection, appointment and evaluation processes to strengthen corporate governance in Malaysia.

The review listed four overriding measures which boards can endeavour to adopt immediately:

1. Expanding the director sourcing process to access a much more diverse and larger pool of candidates with relevant skill sets by incorporating independent and alternative sources, considering first-time directors, and looking beyond the established selection of non-executive talent.

2. Establishing a rigorous evaluation and feedback mechanism to enable meaningful board collaboration and periodic refreshment, ensuring that its structure, composition, and culture continue to be aligned with the business landscape and the company’s strategic goals in the short- and long-term.

3. The nomination committee (NC) must retain oversight of the board’s overall leadership refreshment and development, to ensure it has, not only the technical competencies, but also the right mindsets and behaviours to be effective amidst the intensity of change.

4. Corporate secretaries must serve as strategic advisors and partners to boards. Hence, they should work proactively with the NC Chair to drive the desired board practice outcomes and actively stay up to date with the latest corporate governance trends, methodologies and resources to execute their strategic role effectively.

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