MCCG 2012 FREQUENTLY ASKED QUESTIONS

MALAYSIAN CODE ON CORPORATE GOVERNANCE 2012

Legend:   QUESTION

               ANSWER

1.    Who is the Malaysian Code on Corporate Governance 2012 (“MCCG 2012”) targeted at?

     The MCCG 2012 is specifically targeted at companies listed on Bursa Malaysia. All companies are however encouraged to adopt the principles and recommendations of MCCG 2012 and make good corporate governance an integral part of their business dealings and culture.

2.    How do listed companies comply with the MCCG 2012?

     The MCCG 2012 advocates the adoption of standards that go beyond the minimum prescribed by regulation. Observance of the MCCG 2012 by companies is voluntary. However, listed companies are required to explain in their annual reports how they have complied with the recommendations of MCCG 2012. Listed companies should explain and justify the reasons for non-observance of any of the recommendations.

3.    When will the MCCG 2012 be effective?

      Listed companies with financial year ending 31 December 2012 onwards will be required to report on MCCG 2012. For example, where a company's financial year ends on 31 December 2012, disclosure will be required in relation to the financial year 1 January 2012 - 31 December 2012 and should be made in the annual report published in 2013. Where a company's financial year begins on 1 July 2012, disclosure will be required in relation to the financial year 1 July 2012 - 30 June 2013 and should be made in the annual report published in 2013.

    Listed companies are however encouraged to make an early transition to the principles and recommendations elaborated in the MCCG 2012.

4.   What is the rationale for revising the Malaysian Code on Corporate Governance 2007 (2007 Code) and replacing it with the MCCG 2012?

   The 2007 Code was revised after taking into account changing market dynamics, international developments and the need to continuously recalibrate and enhance the effectiveness of the corporate governance framework. The MCCG 2012 is the first major deliverable of the Corporate Governance Blueprint 2011 (Blueprint) launched by the SC in July 2011 and seeks to implement most of the recommendations in the Blueprint.

5.    How is the structure of the MCCG 2012 different from the previous codes?

    The MCCG 2012 adopts a new structure which provides for greater clarity, more information to companies and allows for simpler reading. Essentially, each principle in MCCG 2012 is followed by recommendations and commentaries.

     The principles encapsulate broad concepts underpinning good corporate governance that companies should apply. The recommendations are specific standards that contribute towards the principles. Listed companies are expected to adopt these standards as part of their governance structure and processes. Each recommendation is followed by a commentary which seeks to explain and assist companies in understanding the recommendation.

      The MCCG 2012 has included some of the best practices from the 2007 Code. For ease of reference, a comparison is provided under Table 1 in the MCCG 2012.

6.    What are the key amendments made in the MCCG 2012? 

       Some of the key areas that have been strengthened in the MCCG 2012 are as follows:

        

       Roles and responsibilities of the board

     The board is required to formalise ethical standards through a code of conduct and ensure company strategies promote sustainability. It is also expected to formalise a board charter.

       Composition of the board

       The board should establish a Nominating Committee, chaired by a senior independent director, who is responsible to oversee the selection and assessment of directors. The Nominating Committee is charged with developing a set of criteria including policies formalising its approach to diversity of the board.

       Independence of independent directors

      The tenure of independent directors is capped to a cumulative period of nine years. Upon completion of the nine years, such directors can be re-designated as non-independent directors or in exceptional circumstances; the shareholders may decide that an independent director can remain in that capacity after serving a cumulative term of nine years. The board should provide strong justification to the shareholders and approval from the shareholders should be obtained on a yearly basis. The cumulative period of nine years will begin from the time when a person is first appointed as independent director of a company.

      In addition, the positions of Chairman and CEO should be held by different individuals. If the Chairman is not an independent director, the board should comprise a majority of independent directors.

       Commitment of directors

      The board is required to set out expectations on time commitment for its members and protocols for accepting new directorships.

       Remuneration of directors

      The board should establish formal and transparent remuneration policies and procedures to attract and retain directors. A Remuneration Committee can perform this function.

       Risk management framework and internal controls system

       The board is required to establish a sound framework to determine the company's level of risk tolerance and actively identify, assess and monitor key business risks.

       Integrity of financial reporting

     The Audit Committee should ensure financial statements comply with applicable financial reporting standards and assess the suitability and independence of external auditors.

       Relationship between company and shareholders

      The board should encourage shareholder participation at general meetings and voting on resolutions by way of poll.

7.    Where can I obtain a copy of the MCCG 2012?

       The MCCG 2012 can be downloaded from here. 

NOMINATING COMMITTEE - MALAYSIAN CODE ON CORPORATE GOVERNANCE 2012 - Part 2

... continued

The following, a commentary, is provided for Recommendation 2.1 to 2.3 and 3.1 to 3.5 of MCCG 2012. The commentaries seek to explain and provide some guidance for the recommendations. 

PRINCIPLE 3: REINFORCE INDEPENDENCE

The board should have policies and procedures to ensure effectiveness of independent directors.

Recommendation 3.1

The board should undertake an assessment of its independent directors annually.

Commentary

Independent directors bring independent and objective judgment to the board and this mitigates risks arising from conflict of interest or undue influence from interested parties.

The existence of independent directors on the board by itself does not ensure the exercise of independent and objective judgment as independent judgment can be compromised by, amongst others, familiarity or close relationship with other board members.

Therefore, it is important for the board to undertake an annual assessment of the independence of its independent directors. When assessing independence, the board should focus beyond the independent director’s background, economic and family relationships and consider whether the independent director can continue to bring independent and objective judgment to board deliberations. The Nominating Committee should develop the criteria to assess independence. The board should apply these criteria upon admission, annually and when any new interest or relationship develops.

The board should disclose that it has conducted such assessment in the annual report and in any notice convening a general meeting for the appointment and re-appointment of independent directors.

Recommendation 3.2

The tenure of an independent director should not exceed a cumulative term of nine years. Upon completion of the nine years, an independent director may continue to serve on the board subject to the director’s re-designation as a non-independent director.

Commentary

The assessment criteria for independence of directors should also include tenure. Long tenure can impair independence. For this reason, tenure of an independent director is capped at nine years. The nine years can either be a consecutive service of nine years or a cumulative service of nine years with intervals. An independent director who has served the company for nine years may, in the interest of the company, continue to serve the company but in the capacity of a non-independent director.

Recommendation 3.3

The board must justify and seek shareholders’ approval in the event it retains as an independent director, a person who has served in that capacity for more than nine years.

Commentary

The shareholders may, in exceptional cases and subject to the assessment of the Nominating Committee, decide that an independent director can remain as an independent director after serving a cumulative term of nine years. In such a situation, the board must make a recommendation and provide strong justification to the shareholders in a general meeting.

Recommendation 3.4

The positions of chairman and CEO should be held by different individuals, and the chairman must be a non-executive member of the board.

Commentary

Separation of the positions of the chairman and CEO promotes accountability and facilitates division of responsibilities between them. The responsibilities of the chairman should include leading the board in the oversight of management, while the CEO focuses on the business and day-to-day management of the company. This division should be clearly defined in the board charter.

Recommendation 3.5

The board must comprise a majority of independent directors where the chairman of the board is not an independent director.

Commentary

A chairman who is an independent director can provide strong leadership by being able to marshal the board’s priorities more objectively. If the chairman is not an independent director, then the board should comprise a majority of independent directors to ensure balance of power and authority on the board.

NOMINATING COMMITTEE - MALAYSIAN CODE ON CORPORATE GOVERNANCE 2012 - Part 1

The following, a commentary, is provided for Recommendation 2.1 to 2.3 and 3.1 to 3.5 of MCCG 2012. The commentaries seek to explain and provide some guidance for the recommendations. 

PRINCIPLE 2: STRENGTHEN COMPOSITION

The board should have transparent policies and procedures that will assist in the selection of board members. The board should comprise members who bring value to board deliberations.

Recommendation 2.1

The board should establish a Nominating Committee which should comprise exclusively of non-executive directors, a majority of whom must be independent.

Commentary

The Nominating Committee is charged with the responsibility to oversee the selection and assessment of directors.

An effective Nominating Committee will contribute towards ensuring that board composition meets the needs of the company. The chair of the Nominating Committee should be the senior independent director identified by the board.

Recommendation 2.2

The Nominating Committee should develop, maintain and review the criteria to be used in the recruitment process and annual assessment of directors.

Commentary

The Nominating Committee’s responsibilities include assessing and recommending to the board the candidature of directors, appointment of directors to board committees, review of board’s succession plans and training programmes for the board. In assessing suitability of candidates, considerations should be given to the competencies, commitment, contribution and performance. The Nominating Committee should facilitate board induction and training programmes. The nomination and election process of board members should be disclosed in the annual report.

The board should establish a policy formalising its approach to boardroom diversity. The board through its Nominating Committee should take steps to ensure that women candidates are sought as part of its recruitment exercise. The board should explicitly disclose in the annual report its gender diversity policies and targets and the measures taken to meet those targets.

Recommendation 2.3

The board should establish formal and transparent remuneration policies and procedures to attract and retain directors.

Commentary

Fair remuneration is critical to attract, retain and motivate directors. The remuneration package should be aligned with the business strategy and long-term objectives of the company. Remuneration of the board should reflect the board’s responsibilities, expertise and complexity of the company’s activities.

The board should establish a Remuneration Committee to perform this function. The Remuneration Committee should consist exclusively or a majority of, non-executive directors, drawing advice from experts, if necessary. Companies without a Remuneration Committee should have board policies and procedures on matters that would otherwise be dealt with by the Remuneration Committee. Board remuneration policies and procedures should be disclosed in the annual report.

Continued ...

MALAYSIAN CODE ON CORPORATE GOVERNANCE 2012

The MCCG 2012, like all corporate governance codes, advocates the adoption of standards that go beyond the minimum prescribed by regulation. The observance of the MCCG 2012 by companies is voluntary. Listed companies are however required to report on their compliance with the MCCG 2012 in their annual reports. The MCCG 2012 takes effect on 31 December 2012.

Where a company's financial year ends on 31 December 2012, disclosure will be required in relation to the financial year 1 January 2012 - 31 December 2012 and should be made in the annual report published in 2013. Where a company's financial year begins on 1 July 2012, disclosure will be required in relation to the financial year 1 July 2012 - 30 June 2013 and should be made in the annual report published in 2013.

The following, a commentary, is provided for Recommendation 6.1 and 6.2 of MCCG 2012. The commentaries seek to explain and provide some guidance for the recommendations.

PRINCIPLE 6: RECOGNISE AND MANAGE RISKS

The board should establish a sound risk management framework and internal controls system.

Recommendation 6.1

The board should establish a sound framework to manage risks.

Commentary

The board should determine the company’s level of risk tolerance and actively identify, assess and monitor key business risks to safeguard shareholders’ investments and the company’s assets. Internal controls are important for risk management and the board should be committed to articulating, implementing and reviewing the company’s internal controls system. Periodic testing of the effectiveness and efficiency of the internal controls procedures and processes must be conducted to ensure that the system is viable and robust. The board should disclose in the annual report the main features of the company’s risk management framework and internal controls system.

Recommendation 6.2

The board should establish an internal audit function which reports directly to the Audit Committee.

Commentary

The board should establish an internal audit function and identify a head of internal audit who reports directly to the Audit Committee. The head of internal audit should have the relevant qualifications and be responsible for providing assurance to the board that the internal controls are operating effectively. Internal auditors should carry out their functions according to the standards set by recognised professional bodies. Internal auditors should also conduct regular reviews and appraisals of the effectiveness of the governance, risk management and internal controls processes within the company. 

Risk Identification and Assessment

Risk Identification and Assessment

Effective risk identification and assessment helps your business achieve its business objectives by focusing on two key goals:

• Identify and categorize risks across the enterprise, and
• Measure the intensity of the elements that drive each risk and assess the business' exposure to these elements.

Comprehensive business and industry-specific risk inventories provide risk identification and assessment scaled for the mid-size clients we serve. This framework considers four global categories of enterprise risks:

• Strategy — Risks that could impede or prevent the achievement of "high-level" performance goals tied to business' mission statement, business plan, or organisational purpose.
• Operations — Risks that impede or prevent the effective use of resources to execute business strategy.
• Finance — Risks that prevent accurate financial reporting, both internal and external. However, ERM methodology includes the financial management reports used to make business decisions.
• Compliance — Risks that impede or prevent your business from meeting requirements under contracts, laws, regulations, and other generally accepted standards. These risks are specific to business' requirements.

Ways of Identifying Risk

Some Simple Ways to Identify Risks

Sometimes the most simple way to identify risks for your business is by reviewing your business plan and processes then questioning yourself what are the areas that will go wrong. 

Use the 4Ws to assist you. Ask yourself:

• when, where, why and how are risks likely to happen in your business?
• are the risks internal or external?
• who might be involved or affected if an incident happens?

The following are some useful techniques for identifying risks.

Ask 'what if?' questions

Thoroughly review your business plan and ask as many 'what if?' questions as you can. Ask yourself what if:

• you lost power supply?
• key documents were destroyed?
• your premises was damaged or you were unable to access it?
• one of your best staff members quit?
• your suppliers went out of business?
• the area your business is suffered from a natural disaster?
• the services you need, such as roads and communications, were closed?

Brainstorm

Brainstorming with different people, such as your accountant, financial adviser, staff and other interested parties, will help you get many different perspectives on risks to your business.

Analyse other events

Think about other events that have, or could have, affected your business. What were the outcomes of those events? Could they happen again? Think about what possible future events could affect your business. Analyse the scenarios that might lead to an event and what the outcome could be. This will help you identify risks that might be external to your business.

Assess your processes

Use flow charts, checklists and inspections to assess your work processes. Identify each step in your processes and think about the associated risks. Ask yourself what could prevent each step from happening and how that would affect the rest of the process.

Consider the worst case scenario

Thinking about the worst things that could happen to your business can help you deal with smaller risks. The worst case scenario could be the result of several risks happening at once. For example, someone running a restaurant could lose power, which could then cause the food to spoil. If the restaurant owner was unaware of the power outage or the chef decided to serve the food anyway, customers could get food poisoning and the restaurant could be liable and suffer from financial losses and negative publicity.

Once you've identified risks relating to your business, you'll need to analyse their likelihood and consequences and then come up with options for managing them.

BIfrost Tech Sdn Bhd - Penang Based ERM Consultancy Company. Contact us at support@bifrostech.com

Risk Management for Project Management

Bifrost Advisory Can Assist in Risk Management for Project Management

Risk management is crucial for project management and should be developed in the planning stage of the project. Bifrost Advisory can help develop a risk registry which acts as a central storehouse for all risks identified in a project. The registry provides a structure in which all the underlying problems facing the project team are captured. Necessary actions are then taken to diminish the probability and severity of the identified problems. 

These risks may come from several sources such as: resistance to change, failure to deliver products in time or the pharmaceutical project exceeding the budget.

 Bifrost Advisory can assist the project manager in routinely manage a risk registry during the development programs.  Bifrost Advisory continually adding new risks while reviewing the existing ones. The risk items are appraised on regular bases by the project team so that actions to lessen or alleviate risks can be taken.

 

BIfrost Tech Sdn Bhd - Penang Based ERM Consultancy Company - Your Consultant for Risk Management
Call us for a risk management training for your board of directors to fulfil Bursa's training requirements for directors. support@bifrostech.com