Shareholder involvement is essential to sustainable value

Right direction: Malaysia’s landmark Petronas Twin Towers and other commercial buildings in Kuala Lumpur’s central business district. The Principles for Good Governance document released earlier this year is widely seen as a positive step going forward. — AFP

OVER the years, the corporate governance realm has witnessed a slew of systemic changes, so much so that selected mathematical descriptors may no longer fit the current governance realities.

For example, in a board evaluation exercise, a 90-degree assessment method, which entails a unilateral assessment by the chairman on the rest of the board members, may not be seen as right.

Likewise, a 360-degree board evaluation exercise that encompasses a self and peer assessment by all directors with input from C-suite members may still be deemed as not complete.

Instead, a 540-degree board evaluation exercise has emerged as a game changer whereby input from all directors and C-suite members is buttressed with feedback from other external stakeholders, particularly institutional investors.

This development serves as a testament to the clout that institutional investors possess and signifies their role in shaping corporate governance.

There is a growing belief that active shareholder involvement in governance, not just through the exercise of market power, is essential to the creation of sustainable value by companies.

By holding boards of directors and senior business leaders of companies accountable, institutional investors can foster an ownership culture that seeks to ensure the best interests of the company are always being prioritised.

In Malaysia, institutional investors are particularly well placed to exercise influence over investee companies.

To elucidate, the total assets under the control of the six main government-linked investment companies are worth RM1.7 trillion, making these institutional investors the central players in the domestic capital market.

The shareholdings of these government-linked investment companies in listed issuers also account for close to 30% of the total market capitalisation on Bursa Malaysia.

Given the significant stake they hold, these institutional investors clearly have the ability to engage in dialogue with investee companies and demand for corrective action to be taken.

In fact, since the launch of the stewardship code, or better known as the Malaysian Code for Institutional Investors (Code) in 2014 and the subsequent establishment of the Institutional Investors Council Malaysia, we have witnessed progressive actions from several domestic institutional investors through their demonstration of activism.

This includes making policy stances on current issues, availing voting guidelines and publishing voting intentions well ahead of the general meetings.

More starkly, we have also seen institutional investors vote against resolutions on the remuneration of non-executive directors when the amount is deemed excessive.

So too has this applied to the re-election of directors on grounds of potential conflict of interest and failures to adequately act on matters such as diversity and purported disproportionate remuneration to senior management personnel.

To this end, the recently revised Code, as released a few days ago, provides renewed rigour to facilitate a deeper understanding of stewardship actions.

Through an enhanced reporting framework, institutional investors who are signatories to the revised Code have now been called upon to highlight departures from the recommended principles in the revised Code as well as disclose measures taken and time frames required to be aligned with the recommended principles.

Such a reporting mechanism will serve to provide stakeholders with a reflection of institutional investors’ stewardship activities, outcomes for the reporting period, and future commitments, as premised on their investment philosophies.

In an environmental, social and governance (ESG) era, it is indeed heartening to note that the revised Code also features a new principle on collaborative response towards corporate governance and sustainability issues.

The revised Code establishes that institutional investors should collaborate where appropriate to respond to corporate governance and sustainability concerns or risks.

Simply put, the collective voice and views of institutional investors are recognised as an important lever in promoting good corporate behaviour.

Zoning on the collaborative effort of institutional investors, it must be said that the policy directions fashioned by these stewards have the potential to shape the adoption of better practices amongst investee companies.

Insights gleaned by KPMG Management and Risk Consulting Sdn Bhd from governance advisory engagements across Malaysian public listed companies reveal that leading practices can be in large part arrowed to the voting guidelines of several institutional investors.

Kasturi Nathan is head of Board Advisory Services for KPMG in Malaysia. Krishman Varges is director of the Board Advisory Services, KPMG Management & Risk Consulting Sdn Bhd. The views expressed here are the writers’ own.

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