| When the Asian financial
crisis hit Malaysia in 1997-1998, few rested on their
laurels waiting to ride out the storm. The government
moved forward quickly.
Early examination of the issues and “adopting,
strengthening, and adapting global corporate governance
best practices to the [local] environment” has
made Malaysia a pioneer in the area of corporate governance
reform, says Dato’ Mohd Azlan Hashim, Executive
Chairman of the Kuala Lumpur Stock Exchange (KLSE).
On April 25, 2002 the results of the joint KLSE-PricewaterhouseCoopers
(PwC) Corporate Governance Survey 2002, a follow-up
to the first joint survey conducted in 1998 to “gauge
the level of understanding and importance of corporate
governance practices,” were released.
Designed to review Malaysian corporate governance
practices and to benchmark stakeholders’ perceptions
of Malaysian corporate governance standards, the 2002
survey found positive development taking place in
public-listed companies’ practices.
“All three target groups – the institutional
investors, the independent non-executive directors,
and the public-listed companies – confirm that
the corporate governance regime in Malaysia has improved,”
said Raja Datuk Arshad Tun Uda, Executive Chairman
of PricewaterhouseCoopers, YM, at the survey report’s
launch.
“One of the charges by critics against corporate
Malaysia during the 1997 financial crisis was that
corporate governance standards were lacking and inadequate,”
stated Acting Prime Minister Badawi in a March 2003
address at the 2002 KLSE Corporate Awards. The KLSE
Corporate Awards recognize Malaysian listed companies
that have demonstrated consistent success in raising
the standard and practice of corporate conduct.
In response to these charges, one of the many committees
formed to guide the restructuring process was the
Finance Committee on Corporate Governance, headed
by industry leaders and accountants among others.
The committee spent one year studying established
corporate governance codes like the Cadbury, King,
and Hempel reports. The group’s output was the
Code on Corporate Governance, published in 1999.
As a result “rules, requirements, standards and
best practices have been gradually put in place to
strengthen the governance framework for the benefit
of investors and Malaysian companies,” said Badawi.
In putting the code into practice, the KLSE reviewed
and expanded the scope of listing requirements, incorporating
many other codes’ aspects, and created an “automatic
enforcement” with an added focus on transparency
and the protection of minority shareholders.
One of the more unique aspects of Malaysia’s
reform process was the institution of mandatory training
for directors, resulting in a formalized accreditation.
The KLSE also required ongoing training programs before
directors’ membership renewals. Despite objections,
4,500-5,000 directors were trained in a 12-month period.
To date 5,191 people have attended training classes.
New restrictions were also implemented, limiting the
number of directorships held by any individual to
10 public companies.
At the time there was no precedence established in
limited directorships or required training. The U.S.’s
Sarbanes-Oxley Act of 2002 has only suggested that
the U.S. should consider training for directors.
With a focus on transparency and significantly enhanced
disclosure, the KLSE also requires mandatory quarterly
reporting.
The result of these and other measures has been raised
accountability for directors because they can now
be held personally responsible for the actions of
companies. Pleas of ignorance are pre-empted.
“All of this was implemented as a reaction to
a crisis year,” says Mohd Azlan. “The 1997-1998
economic crisis was a blessing in disguise. We went
through our trials and challenges early,” and
now we “can see transformation taking place.”
“We know that regulators to a large extent set
the standards [and that] advisors, including auditors,
advise public-listed companies to see that those standards
are met, if not exceeded. The creation of a culture
that subscribes to and adheres to corporate governance
best practices, being voluntary behavior, lies mostly
with the board of directors and senior management,”
says Mohd Azlan.
According to many observers, a culture of compliance
is setting in. “The number of enforcement cases
is coming down significantly,” says Mohd Azlan.
In another bold move, the KLSE announced in November
2002 that it is moving toward demutualization to improve
cost efficiency, flexibility, and global competitiveness.
With demutualization, the KLSE, which currently operates
as a cooperative, will transform into a profit-making
business entity. As a result, the exchange expects
to raise capital more easily as it won’t be dependent
on members’ limited resources. Its shares will
be traded on the exchange itself.
Significant changes will also be made to change the
governance structure of the demutualized exchange.
Many of the exchange’s current regulatory functions
will be transferred to an agency akin to the U.S.’s
Securities and Exchange Commission (SEC).
After passage of special legislation now under parliament’s
review, the KLSE plans to demutualize in July 2003
and be listed near the end of the year. According
to the World Federation of Exchanges, over 50 of the
organizations 59 members have already demutualized.
The KLSE is now reaching out to international participation.
“Today one finds that investments are borderless,”
says Mohd Azlan. “Demutualization allows us to
cater to changing needs.”
For more information on the
KLSE, visit www.klse.com.my.
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