Update SC to strengthen corporate governance; protection for investors against mis-selling of financial products

Tags: corporate governance | Securities Commission | Zarinah Anwar

Written by Aishah Mustapha
Saturday, 20 March 2010 05:30

KUALA LUMPUR: The Securities Commission (SC) will strengthen corporate governance among the stakeholders which are crucial to ensure the quality and future success of the Malaysian capital market while also raising the benchmarks for effective boards on public listed companies (PLCs).

SC chairman Tan Sri Zarinah Anwar said on Friday, March 19 the key to improving corporate governance hinged on shaping boards to be more effective in providing leadership on corporate governance.

“Therefore, the SC's agenda for 2010 is premised on the belief that the quality and future success of our capital market rests greatly on how well its stakeholders govern themselves,” she said in her speech when delivering the highlights of the annual report for 2009.

Aside for strengthening corporate governance, the SC would also seek to ensure more effective boards on PLCs. Its agenda for 2010 was to ensure more protection for the investing public against the mis-selling of financial products.

This would see a review of sales practices, especially after the SC has received many complaints from investors on selling practices, including difficulties in assessing the performance and risks of products, the suitability of products and the transparency of costs.

“Therefore, we are undertaking a review of sales practices to address mis-selling of financial products. As part of this effort, we will also review the definition of sophisticated investors,” she said.

Long-term prospects, corporate governance, SC's vision


Long-term growth prospects can only be sustained through strengthening governance arrangements such that the benefits of market and economic activities are fairly shared by society, she said.

Zarinah said the SC’s vision for corporate governance was to see boards of PLCs move beyond meeting compliance requirements towards enlarging their role where boards can wisely guide the growth and value of their businesses.

She said Malaysian companies, under the active stewardship of quality boards, will surely emerge among the most attractive and dynamic companies in the region and this will strengthen the competitiveness of the Malaysian market and economy.

Most importantly, she said the SC wanted to see Malaysian PLC Boards emerge as role models in an increasingly transparent society where the decisions and conduct of large companies are scrutinised by all stakeholders.

“The benefits of good reputation from meeting the high expectations of the public are immeasurable and these benefits will not only lead to sustained and healthy returns to owners and shareholders, but also to society,” she added.

Zarinah said it was crucial for the boards to recruit more high-calibre and experienced individuals who can demonstrate passion and commitment as a member of the board.

“Finding talent is always a challenging exercise that requires creating attractive conditions, including providing commensurate renumeration,” she said, adding there was an under-representation of women on PLCs.

In the SC’s extensive review of all PLCs to identify how boards can strengthen the effectiveness of their corporate governance practices, she said the SC was concerned about the weaknesses in board structure. “These need to be addressed,” she stated.

The findings showed that many PLCs chose merely to comply with the form rather than the substance of the Malaysian Code of Corporate Governance.

“The current composition of PLC Boards naturally gives rise to situations where Boards are generally passive and unquestioning and this opens up the opportunity for domination by owners and top management without adequate checks and balances. In some recent shareholder disputes, independent directors have not risen to the occasion to act as stewards of the interests of the ordinary investor, as they should,” she pointed out.

Zarinah also hit out at the “lackadaisical attitude and a lack of knowledge and commitment towards corporate governance and the importance of ethics amongst some directors”.

She cautioned that where quality is poor, problems will occur.

Among the points raised were independent directors; long tenure of independent directors; relationship between chairman and CEO; sizeable number of executive directors and large board sizes.

The findings showed a significant number of PLCs have independent directors who are related to each other. This raises concerns about the ability of independent directors to discharge their responsibilities effectively.

While a large majority of PLCs comply with the requirement to have one-third independent directors, half of these companies have independent directors with tenures exceeding nine years. Some 20 PLCs have independent directors with tenures exceeding 30 years.

“Boards cannot disregard the risks that independence may be undermined by long tenure,” she said.

Zarinah also expressed concern that while around three quarters of PLCs separate the role of the chairman and CEO, in many instances the chairman and the CEO are related.

“This nullifies the benefits of having dual roles on the board,” she said.

She pointed out the independence of the board may also be compromised by large numbers of executive directors.

For instance, one quarter of PLCs have more than three executive directors on the board and, in some instances, more than half the board comprises executive directors. Additionally, there are instances where the executive directors are themselves related.

“We are also increasingly coming across situations where an individual serves in an executive director capacity in more than one company,” she added.

She highlighted where PLCs with very large boards, for instance 17 directors, would make the board unwieldy and reduce its effectiveness.

Audit Oversight Board (AOB)

Zarinah said the bill for the Audit Oversight Board (AOB), which was passed by Parliament last December, would start operations on April 1.

The AOB would provide independent audit oversight over public interest entities and to ensure Malaysia’s regulatory framework for auditors was on par with international standards.

“An Implementation Steering Committee has already been established to formulate the registration criteria for auditors of public interest entities. This will be followed by the development of a supervisory oversight programme for inspection, inquiry, enforcement and standards setting,” she said.

Review of sales practices to resolve mis-selling of financial products.

Zarinah also said the SC has received many complaints from investors on selling practices, including difficulties in assessing the performance and risks of products, the suitability of products and the transparency of costs.

“Therefore, we are undertaking a review of sales practices to address mis-selling of financial products. As part of this effort, we will also review the definition of sophisticated investors,” she said.

On Friday, the SC also released a consultation paper to seek feedback on the proposals which included:

1. Improving the assessment of client suitability

2. Improving disclosure through requiring product highlight sheets;

3. Tightening requirements for advertising, marketing and promotional material:

4. Improving disclosure of monetary and non-monetary benefits;

5. Mitigating potential conflicts of interest from the use of gifts in promoting investment products;

6. Extending the cooling-off period for all unlisted capital market products;

7. Requiring continuous disclosure on investments; and

8. Introducing a code of conduct for all licensed intermediaries



Alternative Dispute Resolution body

Zarinah also said the SC has been working with industry to establish an Alternative Dispute Resolution (ADR) body by July this year.

Such a body was crucial for investor protection framework. The ADR would ensure retail investors have appropriate access to a mechanism that will enable them to have their grievances addressed in an efficient manner.

Protecting investors

The SC had also been working with Bursa Malaysia as it seeks to review takeovers to protect investors. It was also proposing improvements to the quality of independent advice in take-over situations.

“It is important to ensure that takeover transactions and other transactions, which in substance result in the same effect as takeovers, are regulated in the same manner and that investors are afforded the same level of protection,” she said.

Zarinah said it was also important that in takeover situations, minority investors should be provided with clear, meaningful and useful advice to enable them to make informed decisions.

Major structural reforms

Later at a press conference, Zarinah said major structural reforms such as market liberalization, and initiatives to maintain investor’s confidence and trust were contributing factors to the growth.

To maintain investor’s confidence and trust, SC says its heightened surveillance on the local bond market showed total bond defaults were RM1.1 billion last year, higher than the RM0.6 billion in 2008. However, it is still less than 1% of the total RM 644 billion.

For the capital market, Bursa saw a five-fold increase over 2008 in total fund raised through initial public offering (IPO) and other equity exercise, raising RM28.4 billion in 2009.

Zarinah said the tight conditions in bond market and rising risk aversion led companies to shift from bond market to seek equity funding. Thus, debt securities fund raising exercises fell 59% to RM57.5 billion last year.

However, the total number of approvals in 2009 was 110, down from 251 in 2008. This number covers proposals across the board such as IPO, transfer to main board, merger and acquisition, and issues of private debt securities.

Zarinah believed that structural reform such as the merging of the main and secondary board coupled with the liberalization measures have managed to attract foreign interest with three China-based companies listed on Bursa main market last year.

Overall review

In her review, she said as global financial risks increased, the SC stepped up its surveillance of markets and business conduct; and also the local bond market and reviewed the business conduct of intermediaries.

“This led to on-site examinations of all 15 registered bond trustees as well as increased supervision on credit rating agencies,” she added. Due to the quality of Malaysia's corporate bond market, corporate securities default rate was only 0.36% in 2009.

As for the bond market, she said the tight conditions in the bond market and rising risk aversion led companies to shift from the bond market to seek equity funding so as to reduce leverage and to strengthen their balance sheet resilience.

“Approvals for fund-raising through IPOs and other equity exercises rose to RM28.4 billion in 2009; a five-fold increase over the previous year. Approvals for debt securities fund-raising exercises fell 59% to RM57.5 billion,” she added.

On the local fund management sector, she said assets under management (AUM) rose by 40.9% to RM315 billion in 2009. Unit trust industry net asset value (NAV) rose by 47% to RM191.7 billion with net inflows sustained at a healthy RM24.8 billion.

Industry penetration rates (as measured by the unit trust NAV divided by equity market capitalisation) remain high at 19%, reflecting the increasing maturity of Malaysia's unit trust industry.

“We continued to implement initiatives to broaden participation, widen product range and strengthen investor safeguards to promote sustainable growth in the industry,” she added.

On the Islamic capital market (ICM), she said the size of Malaysia's ICM grew by 40% to RM894.5 billion in 2009.

While approvals were lower by 21% at RM34 billion, net issuance tripled to RM44 billion – this was despite sentiment in the global sukuk market was dampened by the developments in Dubai and reflected the strength of credit quality and liquidity demand in Malaysia's sukuk market.

During 2009, the default rate for Malaysian sukuk was very low at 0.46%.

Malaysia’s move to be a premier ICM saw maiden sukuk listings and by end-2009, Bursa Malaysia had become the leading exchange with 12 sukuk listings valued at RM60.1 billion.