MCCG 2021: A boon to minority shareholders (part 1)
By the Minority Shareholders Watch Group (MSWG)
ON 28 April 2021, the Securities Commission (SC) announced a revision to the Malaysian Code on Corporate Governance (MCCG). The MCCG 2021 has introduced new practices and enhancements. Key focus areas are as follows:
- Board policies and practices on the selection and nomination processes/criteria for directors;
- The role of the board and senior management in addressing sustainability risks and opportunities;
- Engagement between the company and its stakeholders;
- Gender diversity;
- Guidance for practices with low levels of adoption.
- We believe these changes are positive for minority shareholders and minority shareholder activism.
Two-tier voting for IDs of more than nine years
One of the most notable changes in the MCCG 2021 is the adoption of the two-tier voting approach to retain independent directors (IDs) with tenure of more than nine years.
The two-tier voting process was introduced in MCCG 2017. It was to be applied by PLCs to retain IDs with tenure of more than 12 years.
The two-tier voting is a powerful empowerment tool for minority shareholder activism as it empowers them to have a say in the re-election of long-serving IDs. It provides minority shareholders the opportunity to vote against such retention as they comprise the second tier in the voting process.
Stern action should be taken against PLCs which do not adopt two-tier voting when they should.
As of March 31, 2021, 434 IDs have tenures of more than 12 years, out of which 49 IDs have served on the same board for more than 20 years and one ID in his 42nd year.
Long tenure tends to compromise independence as, over time, IDs become less and less independent as they become more and more familiar with management. There is a risk that long-tenure IDs will lose the motivation and the will to challenge management and exercise tactful scepticism; they may become subservient to management.
A 12-year tenure limit for IDs
Following the MCCG 2021 update, Bursa Malaysia will introduce a 12-year tenure limit for IDs in the Listing Requirements (LRs). The targeted issuance of this cap is in fourth quarter of 2021. Bursa will solicit feedback from listed issuers and industry before finalising the Requirement.
The LRs provide ‘more bite’ as they are rules which PLCs must comply with. Failure to comply with LRs may result in sanctions by Bursa Malaysia.
The MCCG, however, is a principle-based code of practices which PLCs must ‘apply or explain an alternative’. Some PLCs have been ingenious in explaining alternatives that are not satisfactory alternatives to the advocated practice; they do not achieve the intended outcome.
An example is when PLCs explain, in their Corporate Governance Report, that the two-tier voting is against the Companies Act 2016, that it is against the principle of one-share-one-vote and that it goes against the principle of ‘majority rule’. Sometimes, such explanations are accompanied with legal opinion and case law to try and justify the non-adoption of the two-tier voting process in the retention of long-serving IDs.
The SC has made it clear in its FAQs that the two-tier voting approach does not go against the Companies Act 2016 nor the one-share-one-vote principle. Perhaps only a judicial review will put an end to this issue.
Appointment of active politicians on Boards
A PLC is now discouraged from appointing active politicians on its board. A person is considered politically active if he is a Member of Parliament, State Assemblyman or holds a position at the Supreme Council, or division level in a political party.
It is believed that there are two main reasons for this discouragement.
Firstly, an active politician may have time constraints as serving the constituents can be a substantial time commitment. There may not be much time left over to address PLC matters.
Secondly, there may be a risk of conflict of interest between the political interests (including the citizens’ interest) and the shareholders’ interest when making decisions at the PLC level.
Bank Negara Malaysia, under its CG guideline, already prohibits the appointment of active politicians as directors of financial institutions.
Conduct of general meeting including e-AGMs
The importance of meaningful engagement between the Board, senior management and shareholders could not be stressed enough in the MCCG 2021. PLCs should have the required infrastructure and tools to support the smooth broadcast of the AGM and the interactive participation by shareholders.
Besides, questions raised by shareholders should be made visible to all meeting participants during the meeting itself. Doing so will enhance the transparency and accountability by the Board.
To ensure that all questions receive meaningful response from the Board during virtual meetings, PLCs should not pre-fix a duration for the Q&A session. One of the common reasons given for cutting short the Q&A session is ‘time constraint’, despite MCCG stating that shareholders should be given the opportunity to ask questions during meeting, and the Board should provide meaningful response to questions addressed to them.
Hence, all relevant questions must be answered; and answered meaningfully during the meeting itself – no beating around the bush or vague and ambiguous answers.
Another common pitfall in virtual general meetings is the practice of stating that the board will respond to the shareholder’s questions after the end of the meeting. This should be prohibited unless it is such a complicated question that the board does not have the answer at hand.
A virtual general meeting should strive to emulate a physical meeting as far as possible. As such, PLCs should strive to allow for audio-visual shareholders participation at general meeting.
The Chairman of the board should not be a member of the Audit Committee, Nomination Committee or Remuneration Committee.
The Chairman of the Board also should not chair a Board’s sub-committee due to the persuasive and influential role that a chairman plays at Board and committee meetings.
It would be awkward for a chairman of a sub-committee to address himself (as chairman of the board) when he presents the sub committee’s findings to the Board.
In the same vein, it is untenable for the Chairman of the Board to sit as a member of a Board’s sub-committee; the chairman and other members of the sub-committee will feel obliged to defer to the Chairman of the Board who is sitting as a member of the sub-committee.
If this advocated practice is difficult to achieve, the PLC should re-examine the board size – maybe, there are not enough directors to go around the various sub-committees. – May 10, 2021
The MSWG was established as a government initiative in the year 2000 as part of a broader capital market framework to protect the interests of minority shareholders through shareholder activism. It has evolved into an independent research organisation on corporate governance matters.
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