In the wake of the Asian financial crisis, steps have been taken to improve accounting transparency and corporate governance in Malaysia. According to the World Bank's 2005 Report on the Observance of Standards and Codes (ROSC) on corporate governance in Malaysia, the incidence of concentrated shareholding is very pronounced in the Malaysian market, particularly through pyramid structures. Furthermore, companies are usually majority-controlled by a small group of related-parties and managed by owner-managers. The World Bank's 2005 ROSC, which benchmarks laws and practices against the Organization for Economic Cooperation and Development Principles of Corporate Governance, states that important corporate governance reforms have been implemented in Malaysia. Key reforms include the formulation by the Securities Commission of a ten-year Capital Market Master Plan in 2001, the demutualization of the Kuala Lumpur Stock Exchange, the introduction of a Code on Corporate Governance in 2000 (which was last revised in 2007), and changes in the composition and role of the Board of Directors. Weaknesses remained with regards to the overlapping authority of the regulatory institutions governing the securities market, the government's high level of equity ownership, low free float, weak protection of minority shareholders, and directors' accountability. In this regard, it was advised to enforce disclosure and reporting requirements in a continuous and consistent manner, to strengthen directors' independence and accountability to investors, and to enhance the role of institutional investors and shareholder activism in the corporate governance framework.

General Overview

In 2005, the World Bank published a Report on the Observance of Standards and Codes (ROSC) assessment of corporate governance in Malaysia, which benchmarked laws and practices against the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. The World Bank 2005 ROSC found that important corporate governance reforms had been implemented in Malaysia since 1998, when a High Level Finance Committee on Corporate Governance of the Ministry of Finance (MoF), consisting of representatives from both government and industry, was formed to identify and address weaknesses highlighted by the Asian financial crisis. Key reforms included the formulation by the Securities Commission (SC) of a ten-year Capital Market Master Plan (CMP) in 2001, the conversion of the Kuala Lumpur Stock Exchange (KLSE) from a mutually-owned company to a shareholder-owned company, the introduction of a Code on Corporate Governance in 2000, which was last revised in 2007, and changes in the composition and role of the Board of Directors. Disclosure rules were also strengthened in 2004, while government-linked corporations (GLCs) underwent major reforms in 2005. However, weaknesses remained with regards to the government's high level of equity ownership, the weak amount of public company shares available to investors (free float), directors' accountability, and protection of minority shareholders. In its 2005 ROSC, the World Bank advised the SC to enforce disclosure and reporting requirements in a continuous and consistent manner. It further recommended implementing legislative reforms to strengthen directors' independence and accountability to investors. Finally, there was a need to enhance the role of institutional investors and shareholder activism in the corporate governance framework.

The World Bank's 2005 ROSC reports that one of the key weaknesses that surfaced following the 1997 financial crisis was the overlapping authority and resulting ambiguous accountability of the regulatory institutions governing the securities market. Pursuant to the Securities Commission Act No 498 of 1993, the SC is responsible for investor protection, and the development of the securities and futures markets in Malaysia. The SC's enforcement powers have been enhanced since 1997, and it was given broad authority over companies seeking to issue or offer securities to the public. While the SC is the sole regulator for the corporate bond market, four other authorities are still involved in regulating the capital market, including the Central Bank of Malaysia - Bank Negara Malaysia (BNM), the Companies Commission of Malaysia (CCM), the Foreign Investment Committee (FIC), and the Ministry of International Trade and Industry (MITI). In this regard, the World Bank recommended ensuring the independence of the regulator, and rationalizing the regulatory framework to avoid ambiguities regarding the responsibilities of regulatory institutions. There was also a need to modernize the regulator's range of monitoring and regulatory enforcement powers. These problems were intended to be addressed by the ten-year CMP and amendments to the Securities Commission Act.

The legal framework for corporate governance in Malaysia is based on common law. The Malaysian Code on Corporate Governance was enacted in 2000, and later revised in 2007. The CMP was developed by the SC in 2001 to set the framework for the long-term development of the market and provide clarity for issuers, investors, and intermediaries. The CMP contains 152 recommendations dealing with the development of the institutional and regulatory framework for the capital market from 2001 to 2010. Ten recommendations address corporate governance issues, focusing on the fair treatment of all shareholders and protection of shareholder rights, including minority shareholders' rights, transparency and disclosure, corporate ownership, accountability and independence of the board of directors, regulatory enforcement, and training and education. The World Bank's 2005 ROSC noted that these recommendations were credible, and that, once fully implemented, would further improve the capital market in Malaysia. At end of December 2007, as stated on the SC's website, 129 recommendations (85%) of the CMP were completed, with the remaining 23 (15%) still in progress.

More than fifty prudential standards have been developed or reviewed under a more principle-based regulatory approach since 2001 in Malaysia, as stated in the BNM's 2007 Financial Stability and Payment Systems Report. The move towards a more principle-based regulatory framework is clearly reflected by the substantive revisions to the BNM's prudential standards on corporate governance, which focus on the role of the board and senior management in ensuring a sound risk management and internal control environment within financial institutions. The prudential standards further seek to promote strong independent members, the presence of relevant competencies on the board and senior management team, transparent board processes, and clearly delineated accountabilities for operating and internal oversight functions. The BNM report notes, however, that the implementation of a more principle-based regulatory regime for the financial sector remains at a relatively early stage.

According to the World Bank's 2005 ROSC, the incidence of concentrated shareholding is very pronounced in the Malaysian market, particularly through a pyramid structure. Companies are usually majority-controlled by a small group of related-parties and managed by owner-managers. The report highlighted that in the ten largest companies by market capitalization, 60.4 percent of the outstanding shares, and more than half of the voting shares, were owned by the five largest shareholders. Moreover, about 67.2 percent of shares were family-owned, 37.4 percent had only one dominant shareholder, and 13.4 percent were state controlled. As of December 2004, there were about 40 GLCs, with a combined market value of approximately USD 71 billion, accounting for 32 percent of the KLSE's market capitalization. In its 2008 Doing Business report, the World Bank rates investor protection in Malaysia in 2008 as being significantly higher than the regional and OECD averages.

In September 2007, according to the U.S. Department of Commerce (DoC) 2008 Country Commercial Guide, the government of Malaysia announced its intention to allow the establishment of wholly foreign-owned Islamic fund management companies, which would be permitted to invest all of their assets abroad, as part of its strategy to make Malaysia a global hub for Islamic financial services. In addition, the BNM and the SC signed three memoranda of understanding (MoUs) with the aim of enhancing cooperation in the joint surveillance of the capital market, strengthening the corporate governance framework for public listed companies, and developing Malaysia as an international Islamic financial center. Per the same report, Labuan, Malaysia, was established as an offshore financial center, where businesses receive preferential tax treatment for offshore banking activities, trust and fund management, offshore insurance and offshore insurance-related businesses, and offshore investment holding businesses.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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In its 2005 ROSC, the World Bank states that Malaysia largely observes all four sub-principles of Principle I, indicating that there are only minor shortcomings that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The Malaysian Code on Corporate Governance was enacted in 2000, and later revised in 2007. The CMP was developed by the SC in 2001 to set the framework for the long-term development of the market and provide clarity for issuers, investors, and intermediaries. Ten recommendations of the CMP address corporate governance issues, focusing on the fair treatment of all shareholders and protection of shareholder rights, including minority shareholders' rights, transparency and disclosure, corporate ownership, accountability and independence of the board of directors, regulatory enforcement, and training and education. Pursuant to the Securities Commission Act No 498 of 1993, the SC is responsible for investor protection, and the development of the securities and futures markets in Malaysia. The enforcement powers of the SC have been enhanced since 1997, and it was given broad authority over companies seeking to issue or offer securities to the public. The World Bank's 2005 ROSC reports that one of the key weaknesses that surfaced following the 1997 financial crisis was the overlapping authority and resulting ambiguous accountability of the regulatory institutions governing the securities market. While the SC is the sole regulator for the corporate bond market, four other authorities are still involved in regulating the capital market, including the BNM, the CCM, the FIC, and the MITI. This problem was intended to be addressed by the ten-year CMP and amendments to the Securities Commission Act. As part of efforts to put in place an efficient and effective collaborative framework, as stated in the U.S. DoC 2008 report, the BNM and the SC signed three MoUs with the aim of enhancing cooperation in the joint surveillance of the capital market, strengthening the corporate governance framework for public listed companies, and developing Malaysia as an international Islamic financial center.

Principle II: The Rights of Shareholders and Key Ownership Function

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In its 2005 ROSC, the World Bank finds Malaysia to largely observe the following sub-principles of Principle II. "Basic shareholder rights," "Shareholder's Annual General Meeting rights," "Disproportionate control disclosure," "The functioning of control arrangements," and "Shareholders' right to consult with each other." On the other hand, Malaysia only partially observes the following sub-principles: "Rights to participate in fundamental decisions," and "The facilitation of ownership rights." This suggests that, while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. Per the same report, basic shareholder rights are generally well-observed in Malaysia, and information is available in a timely and regular manner. Shareholders' rights are provided under the Companies Act, the Listing Requirements, and the Securities Commission Act. There was a need, however, to facilitate shareholders' ability to exercise their voting rights, including voting by mail and a longer notice period. Another area of reform identified by the World Bank was to improve the quality and effectiveness of the annual general meeting by encouraging institutional shareholders to attend and participate.

Principle III: The Equitable Treatment of Shareholders

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In its 2005 ROSC, the World Bank finds Malaysia to largely observe the following sub-principles of Principle III: " Prohibit insider trading" and "Board/management disclose interests." On the other hand, Malaysia only partially observes the sub-principle "Equitable treatment of shareholders." This suggests that, while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. Per the same report, equal rights of shareholders of different classes of shares are provided under the Companies Act. Shareholders are also treated in an equitable manner. The World Bank notes that while related-party transactions involving the directors of listed companies are regulated by the Listing Requirements, the sole reliance on Listing Rules to regulate related-party transactions may not be sufficient. In this view, the Companies Act should be amended to require interested parties to abstain from voting on a related-party transaction. Regarding the breach of legal provisions with respect to related-party transaction, sanctions should be reviewed and substantially increased, in line with penalties for insider trading violations. There is also a need to improve the quality of enforcement actions taken for breach of the provisions on related-party transactions.

At the time of the OECD's 2003 White Paper on Corporate Governance in Asia, the SC was undertaking steps to implement recommendations by the High Level Finance Committee on Corporate Governance of the MoF to make derivative actions more "user friendly" in terms of process and cost. The High Level Finance Committee on Corporate Governance, consisting of both government and industry, was formed in 1998, to identify and address weaknesses highlighted by the Asian financial crisis. The Asian Roundtable on Corporate Governance, organized by the OECD in partnership with the World Bank, met in Kuala Lumpur, Malaysia, in March 2003 to establish regional reform priorities and to develop a White Paper on Corporate Governance in Asia. During the Roundtable, Asian regulators identified bank governance and minority shareholder protection as priorities for corporate governance reform.

Principle IV: The Role of Stakeholders in Corporate Governance

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According to the World Bank's 2005 ROSC, Malaysia largely observes all six of the sub-principles of Principle IV, indicating that there are only minor shortcomings that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The World Bank notes that the interests of stakeholders are entrenched in the corporate governance framework in Malaysia, and in line with the OECD Principles of Corporate Governance. Proposals have been made to permit more active participation by other stakeholders, particularly the creditor banks and employees, in enhancing corporate governance. Effective January 2004, as noted in the World Bank's 2005 report, the SC has put in place whistle-blowing provisions to report breaches of securities laws or listing rules or any other financial matters, with the aim of protecting directors, management, and auditors of publicly listed companies. Enhanced provisions under the Companies Act for protection of corporate whistleblowers were under review at the time of the World Bank's 2005 ROSC.

Principle V: Disclosure and Transparency

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In its 2005 ROSC, the World Bank reports that Malaysia observes Principle V's sub-principle on standards of accounting and auditing. The following sub-principles are rated as "largely observed": "Independent audit annually," "External auditors should be accountable," "Disclosure standards," "Fair and timely dissemination," and "Disclosure of conflicts of interest by analysts, brokers, rating agencies," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. In the wake of the Asian financial crisis, Malaysia took steps to improve accounting transparency and corporate governance, according to the U.S. DoC 2008 report. The KLSE requires quarterly reporting of unaudited accounts, and issuance of annual audited accounts and reports for public scrutiny. In addition to the audited financial statements, per the World Bank's 2005 ROSC, companies are required under the Listing Requirements and the Companies Act to disclose in their annual reports the names and interests of major shareholders and directors, as well as the number of holders of each class of equity securities with their voting rights. The World Bank states in its report that the framework under which external auditors operate in Malaysia could be further improved by strengthening the relationship between external auditors and audit committees.

According to a regulatory and standard-setting framework assessment published by the Malaysian Institute of Certified Public Accountants in February 2005, all companies incorporated under the Companies Act are required to prepare financial statements in accordance with approved accounting standards issued by the Malaysian Accounting Standards Board (MASB). The MASB was established under the Financial Reporting Act No. 558 of 1997. Per the same report, all listed companies are required under the Listing Requirements of the KLSE to submit their annual audited financial statements, and quarterly reports to the Exchange for public release. The Securities Industry Act No. 280 of 1983 requires listed companies to submit their audited annual financial statements, as well as interim and periodic financial reports, to the SC. The Listing Requirements of the KLSE further provide that all listed companies appoint an audit committee. Per the October 2006 update available from the Deloitte & Touche IAS Plus website, the MASB announced that Malaysia's newly revised Financial Reporting Standards were generally consistent with the International Financial Reporting Standards issued by the International Accounting Standards Board, and would take effect as of January 1, 2007.

Principle VI: The Responsibilities of the Board

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In its 2005 ROSC, the World Bank finds Malaysia to largely observe the following sub-principles of Principle VI: "Fair treatment of all shareholders," "The board should fulfill certain key functions, "Exercise objective judgment" and "Access to information." On the other hand, Malaysia only partially observes the following sub-principles: "Apply high ethical standards," and "Acting with due diligence and care." This suggests that, while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. Pursuant to the Malaysian Code on Corporate Governance, per the same report, at least one-third of the Board of Directors should consist of independent directors. Furthermore, committees appointed to assist the Board of Directors, including audit and remuneration committees, should have clear responsibilities. These committees also ought to be comprised wholly or mainly of non-executive directors. According to the U.S. DoC 2008 report, all public and private company directors are required to attend classes on corporate rules and regulations as part of the Mandatory Accreditation Program. As noted in the World Bank's 2005 ROSC, there has been a discernible trend in Malaysia toward allocating decision making authority to shareholders at the annual general meeting. In addition, there appears to be increasing reliance on independent directors to strengthen the internal oversight framework. It was recommended to amend the law to provide for cumulative voting for company directors, allowing minority shareholders to place their representatives on the board. It was further advised to strengthen requirements that directors abstain from voting with respect to transactions in which they have interests. Finally, the Malaysian Code on Corporate Governance needed to be strengthened in order to require directors to represent the company as a whole, consistent with their fiduciary duty under the Companies Act.