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Malaysia’s Securities Commission Issues Tough New Corporate Governance Measures with Immediate Effect to Boost Board Policies, Composition, Effectiveness and to Address Sustainability Risks and Opportunities

With a motley of directives relating to ESG, SDG, Climate-related, Sustainability, Diversity and Corporate Governance emanating in recent times from the various gatekeepers of international finance and regulators, the Securities Commission Malaysia (SC) has updated the Malaysian Code on Corporate Governance (MCCG), which sees the introduction of new best practices and further guidance to strengthen the corporate governance culture of listed and other companies.

The update issued in April 2021, focuses on, among others, board policies and practices on the selection and nomination processes/criteria for directors, and further guidance for practices with low levels of adoption as reported in the SC’s annual Corporate Governance Monitor reports.

The MCCG 2021 also focuses on the role of the board and senior management in addressing sustainability risks and opportunities of the company. The last update of the MCCG was in 2017 and the SC has observed encouraging adoption of the Code by listed companies since then with majority of the best practices recording adoption levels of more than 70%.

According to SC Chairman Datuk Syed Zaid Albar, “there is a strong need for good corporate governance and board leadership, especially as companies navigate the prolonged post-pandemic recovery period. The MCCG 2021 supports boards to build long-term resilience through the adoption and implementation of corporate governance policies and practices which will sustain listed companies in meeting challenges in a fast evolving business landscape.” The MCCG 2021 also addresses the urgent need for companies to manage Environmental, Social and Governance (ESG) risks and opportunities, with the introduction of new best practices that emphasise the need for collective action by boards and senior management.

“The global commitment and acceleration of efforts to transition towards a net zero economy has resulted in demand for greater action on the part of corporates. The SC’s review of sustainability statements by large listed companies found that some have begun to address climate-related risks but more can and needs to be done,” added Datuk Albar.

In order to promote the exercise of objective and independent judgment in line with global best practices, the MCCG 2021 discourages the appointment of active politicians on the boards of listed companies. The SC also found that issues relating to re-appointment of long-serving independent directors remain a concern. As at 31 March 2021, 434 independent directors have tenures of more than 12 years, out of which 49 independent directors have served on the same board for more than 20 years.

To encourage periodic refreshing of board composition, the MCCG recommends that the two-tier voting process be implemented for re-appointment of independent directors with tenures of more than nine years. The two-tier voting process, which was first introduced in 2017, acts as a speed bump for boards and shareholders to carefully evaluate the decision to retain independent directors with tenures of more than 12 years and provide minority shareholders the opportunity to vote against such retention in the second tier voting process.

Following this review of the MCCG, Bursa Malaysia will introduce a 12-year tenure limit without further extension for independent directors in the Listing Requirements with targeted issuance in Q4, 2021. Bursa will solicit feedback from listed issuers and industry before finalising the implementation timeline. In terms of Diversity and Gender Composition, the participation of women on boards currently stands at 25.3% for the top 100 listed companies, although the target was to reach at least 30% by end 2020. To accelerate the progress of women participation on boards, the MCCG 2021 recommends all listed companies to have boards that comprise at least 30% women directors. The 2017 edition of the MCCG had recommended having 30% women directors on boards of Large Companies.

The MCCG 2021 took effect on 28 April 2021, and the first batch of companies to begin reporting on their adoption of these practices will be those with financial years ending 31 December 2021. The two-tier voting process will be applicable for resolutions tabled at general meetings held on or after 2 January 2022.

The MCCG measures come in tandem with a number of other updates and revisions by the Commission in April 2021 including on the ‘Conduct of Directors of Listed Corporations and their Subsidiaries’ effective 12 April 2021; The revised Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework (Guidelines) issued by the SC pursuant to section 377 of the Capital Markets and Services Act 2007 (CMSA) on 26 April 2021; and The Guidelines on Prevention of Money Laundering and Terrorism Financing for Reporting Institutions in the Capital Market issued pursuant to section 66B, section 66E and section 83 of the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) effective 26 April 2021 and to be read together with section 158(1) and section 160A of the Securities Commission Malaysia Act1993 (SCMA).

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