CORPORATE GOVERNANCE IN MALAYSIA - Asia-Pacific ...

OCTOBER 2017

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CORPORATE GOVERNANCE IN MALAYSIA | OCTOBER 2017

CORPORATE GOVERNANCE IN MALAYSIA Family ties and government control heighten governance risks.

October 2017

Contents Ownership Snapshot 2 Family Ownership 3

Family Control 4

Family Generational Succession 6 Financial Institutions 10

Strong Board Oversight 11 Grandfathered Institutions 12

State Participation 13 Poor GLC Performance 14 Weak Leadership 16

Appendices

Regulatory Developments 19 Corporate Overview 21 Board Overview 22 Gender Diversity 23

Key Metric Overview 24

Best & Worst Scores 25

Ownership Diagrams 26

CORPORATE GOVERNANCE SCORE DISTRIBUTION

0 1 2 3 4 5 6 7 8 9 10

MSCI Malaysia Index MSCI Emerging Markets Index MSCI ACWI Index

This report is based on the 41 constituents of the MSCI Malaysia ACWI Index as at 11 September 2017. Some references are made to other Malaysian companies in coverage.

Top 5 Scores Bottom 5 Scores

CIMB Group 7.6/10 IHH Healthcare 2.7/10

Alliance Financial Group 7.5/10 Genting Malaysia 2.4/10

Hong Leong Bank 7.4/10 Genting Plantations 1.7/10

Malayan Banking (Maybank) 7.3/10 YTL Power 1.4/10

RHB Bank 7.1/10 YTL Corporation 0.4/10

Tight family control and convoluted conglomerate structures preclude thorough investor analysis.

Uncertainty is compounded by looming succession questions surrounding aging patriarchs. Concerns

related to board entrenchment and infrequent board meetings leave minority investors at family firms

exposed to risks of decisions which heavily favor family groups.

As a response to the Asian and global financial crises, enhanced banking regulations have strengthened

independent oversight and ensured increased executive pay disclosure at Malaysian banks.

Government-linked Companies (GLCs) are fundamental to Malaysia’s economy but we have identified

concerns about poor performance, weak leadership structures and government intervention placing the

national interest ahead of minority shareholders.

The MSCI Malaysia Index constituents underperform on corporate governance relative to both the MSCI

Emerging Markets and MSCI ACWI Indexes as a whole.

AUTHORS

Damion Rallis and Zanele Mtshali | Senior Associates

Laggards Leaders

OCTOBER 2017 MSCI.COM | PAGE 2 OF 30

© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.


OWNERSHIP SNAPSHOT

Governance risks vary widely depending on the nature of the company’s ownership, the separation of ownership and management, and the design of the capital

structure and its impact on shareholders’ voting rights. In 2016, Bursa Malaysia reported that foreign institutions held 27% of the Malaysian market on average, 53%

was held by domestic institutions and 20% by retail investors.

Largest Owner Classification Key Owner Types Complex Ownership Structures Control Enhancing Structures

Controlled ownership dominates in

Malaysia. 80.5% of MSCI Malaysia

Index constituents include a

shareholder or shareholder group who

control 30% or more of the voting

rights. No companies are widely held.

State-owned and family firms are most

common, with each present in 34.1% of

MSCI Malaysia Index constituents. At 31.7%,

subsidiaries are the next most significant

group.

Pyramid structures are relatively common

at Malaysian family conglomerates to

help preserve family control at the

various listed entities. There are no

recorded incidents of cross

shareholdings.

Multiple share classes with unequal voting rights are

not permitted in Malaysia. On the other hand, foreign

ownership limits are common, particularly in strategic

sectors including telecommunications, banking and

transportation. In addition, golden shares are still in

effect at several state-owned firms.

Controlling – Largest shareholder or

shareholder group holds 30% or more of

the voting rights.

Principal – Largest shareholder or

shareholder group holds between 10%

and 30% of the voting rights.

Widely Held – No shareholder or

shareholder group holds greater than 10%

of the voting rights.

Founder – Founder serves as Chairman or CEO.

Family – Family hold 10% or more of the voting

rights and maintain at least one board seat.

State – State directly or indirectly controls 10%

of the voting rights.

Corporate Parent – Issuer is a subsidiary (30% or

more) of a corporate, which itself may be listed.

*Owner types may overlap or separate owners owner

may be of different types at a company

Pyramids – Control is exercised through a

chain of non-controlled companies that

ultimately results in a shareholder gaining

voting power which is misaligned with their

economic interests.

Cross shareholdings – Two or more entities

hold at least 0.5% of shares in each other, or

via a circular or more complex cross-

shareholding arrangement.

Multiple share classes with unequal voting rights (or no

voting rights for one class) or classes which carry different

rights to vote on director appointments.

Voting rights mechanisms include ceilings on ownership or

voting rights, voting rights limits based on nationality, or

additional voting rights accruing depending on ownership

duration.

Golden shares – Government veto rights for transactions or

changes to governing documents.

80.5%

19.5%

0.0%

68.3%

24.2%

7.5%

37.3% 28.2% 34.5%

Controlling Principal Widely Held

MSCI Malaysia Index

MSCI Emerging Markets Index

MSCI ACWI Index

24.4% 34.1% 34.1% 31.7%

5.4% 10.5%

8.9% 10.4% 12.1%

18.6% 11.8%

15.1%

Founder Family State CorporateParent

MSCI Malaysia Index


MSCI ACWI Index

0.0%

14.6%

7.2% 3.5%

6.3% 1.7%

CrossShareholdings

PyramidStructure

MSCI Malaysia Index


MSCI ACWI Index

0.0%

87.8%

0.0%

12.2% 9.7% 16.0%

2.3% 1.8% 4.2%

9.2%

0.0% 1.2%

Multiple ShareClasses w/

Unequal VotingRights

Voting RightsLimits

Extra VotingRights -

OwnershipDuration

Golden Shares

MSCI Malaysia Index

MSCI ACWI Index





MARKET CHARACTERISTIC | FAMILY OWNERSHIP

Controlled companies form the dominant ownership group in Malaysia (31 of 41 companies). Family firms, where the

dominant shareholder group includes more than one family member and at least one family member is a current

director, are a defining subset of the MSCI Malaysia Index. There are 14 family firms1, more than one-third of the market,

that hold 23% of the total market capitalization. Out of the 14 family firms, nine companies are representatives of family

conglomerates2, family-led groups consisting of at least two listed companies, with at least one of these constituent of

the MSCI Malaysia Index.

Figure 1 | TSR Performance of MSCI Malaysia Index Family Ownership versus Peers (Average 5-Year TSR %)

n. MSCI Malaysia Index Family Conglomerates = 9; n. MSCI Malaysia Index Family Firms = 14; n. MSCI Malaysia Index (ex. Family Firms) = 27; n. MSCI ACWI Index Family Firms (ex. Malaysia) = 445 Source: MSCI ESG Research. Data as at 11 September 2017.

1 Herein referred to as “family firms”: Genting, Genting Malaysia, Genting Plantations, Hong Leong Bank, Hong Leong Financial, Hartalega, IOI, IOI Properties, PPB, RHB Bank, Sapura Energy, Westports, YTL and YTL Power. 2 Herein referred to as “family conglomerates”: Kwek/Quek family (Hong Leong Group); the Lee family (IOI Group); the Lim family (Genting Group); and the Yeoh family (YTL Group).

83

306

609

2717

-10 -22 -63 -70 39 50 57

147

-500

0

500

1000

1500

2000

2500

3000

MSCI Malaysia Index FamilyConglomerates

MSCI Malaysia Index FamilyFirms

MSCI Malaysia Index (ex.Family Firms)

MSCI ACWI Index Family Firms(ex. Malaysia)

TSR

(%

)

5 Yr TSR High 5 Yr TSR Low 5 Yr TSR Average

NOTABLE DEVELOPMENTS | HONG

LEONG GROUP

Changes afoot at Hong Leong include a possible

generational shift in power. Will the empire lean

on external leadership to aid the succession?

Quek Leng Chan stepped down as Gouco Group

chair, one of the key firms of the family’s Hong

Leong empire, handing the reins to his younger

brother. A reconsolidation of the empire may be

in effect, splitting it up by region among various

younger brothers and sons. Outsider Grant

Kelley replaced Kwek Leng Joo as CEO at City

Developments, will the trend continue as Quek

Leng Chan continues to hand over the reins?

BIGGEST CONCERN | IOI CORP

In April 2016, for the second time in five years,

the certification for IOI’s sustainable palm oil

was suspended by RSPO, an industry-backed

standards organization. The suspension led

several major clients (including Kellogg’s, Nestle

and Unilever) to terminate their supply contract

with IOI. While the suspension was lifted in

August, several contracts may be lost

permanently.

A closer look at the board reveals low

independent oversight: four of eight directors

are Lee family members, including the CEO and

Chair. Despite pressures in the market, there are

no female directors at IOI and the board met

only five times in 2016.

OCTOBER 2017



RISK – FAMILY CONTROL & LACK OF INDEPENDENT OVERSIGHT

Tight family control and potentially convoluted family conglomerate

structures preclude thorough investor analysis.

Board entrenchment and infrequent board meetings leave minority

investors exposed to risks of being shut out of decision-making.

As family firms move through generations and founders’ original stakes are

diluted, the lack of independent leadership may deter growth.

A high incidence of related party transactions, especially compared to the

rest of the MSCI ACWI Index, suggests a higher risk of potential loss of

value for minority shareholders.

Shareholder returns for family firms in the MSCI Malaysia Index underperform

both the rest of the constituents of the MSCI Malaysia Index and MSCI ACWI

Index family firms (ex-Malaysia). One of the main negative drivers is the TSR

underperformance of family conglomerates (see Figure 1).

Overall, the center of power at these firms is too tightly wound around family

control, leading to diminished independent oversight and leadership. There is

strong evidence that decision-making is hidden from public view, indicated by

infrequent board participation at publicly-listed enterprises.

Figure 2 | Ownership Diagram of Hong Leong Empire (Malaysia)

Source: MSCI ESG Research. Data as at 11 September 2017.

Hong Leong Company (Malaysia) Bhd (Quek Leng Chan)

Hong Leong Financial Group (78.5%)

Hong Leong Bank (65.6%)

Hong Leong Capital (83.2%)

Guoco Group Ltd (75.6%)

GL Ltd (66.5%) The Rank Group

plc (52%)

GuocoLand Assets (Pte.) Ltd

GuocoLand Ltd (65.2%)

GuocoLand Malaysia (65.2%)

Hong Leong Manufacturing Group

Hong Leong Industries (74.6%)

Malaysian Pacific Industries (53.6%)

Southern Steel (69.6%)

Hume Industries (71.7%)

Key: Unlisted Company MSCI Malaysia Index constituent Other Malaysian listed

HK listed Singapore Listed UK Listed

OCTOBER 2017



COMPLEX OWNERSHIP STRUCTURES

As family businesses expand and require more capital, family conglomerates

have spun off subsidiaries or created new companies to help retain family

control – or in some cases, acquired companies to bring them under family

control. Through this process, the number of companies which are included in

family conglomerate structures has grown over time. Complex ownership

structures built to preserve family empires by expanding regional and

operational reach may represent one key area of potential loss of value for

minority shareholders.

One of the main risks of these complex ownership structures is lack of

disclosure at the top of family-run pyramids, as the ultimate holding

companies are sometimes private. Having ownership groups led by family-

owned private firms allows the family to avoid the burden of regulated

disclosure which occurs at listed companies. This may be an intentional

mechanism to shield minority investors from the family’s primary decision-

making bodies. A good example of this is the Hong Leong Group, run by the

Quek/Kuek family (See Figure 2). See also Appendix G for the ownership

diagrams of other Malaysian family conglomerates).

CONTROL ENHANCING STRUCTURES

Effective family control uses structures beyond mere share ownership. As

Malaysian firms are not permitted to make use of dual share classes, other

key control mechanisms are in play. At seven of nine family conglomerates,

we identify a sizable subset of the board comprised of a combination of family

members, former executives, or long-serving independent directors. Boards

dominated by a combination of family members and trusted associates are a

key mechanism used by family conglomerates to maintain and consolidate

power.

Figure 3 | More Entrenched Boards at Family Conglomerates


Family influence on Nomination Committees may help ensure that the Board

comprises directors loyal to the family. All 12 listed companies in the Hong

Leong empire in this study have appointed family members to the

Nomination Committee. The family representative on the Nomination

Committee is usually the Chairman in control of the company.

For family firms, a key governance risk is the generational succession process

with the possibility of family feuds over succession distracting management

focus. Companies can also struggle with the right balance of family versus

external leadership. Entrenched boards, comprising long-tenured family firm

directors, have naturally constrained the benefits of external leadership.

78%

13% 18%

MSCI Malaysia IndexFamily Conglomerates

MSCI Malaysia Indexex. Family Conglomerates

MSCI ACWI Index




BOARD MEETINGS

Another notable feature of family-led companies is a lower frequency of

board meetings than at other Malaysian companies. We identify concerns

that the lower number of overall board meetings suggests that the board may

in fact merely act as a rubber stamping authority and that key strategic

decisions may be made elsewhere.

As complex ownership structures are often headed by private companies

under family control, we suspect that centralized decision-making may be

occurring out of sight of investor scrutiny, particularly at the private family

holding companies at the top of these pyramids.

Figure 4 | Board Meetings at MSCI Malaysia Index Family Firms


Among some of the family conglomerates, we note an even lower frequency:

At the three Genting companies, the board met an average of less than

five times in 2016.

Within the YTL group, each company met only five times in 2016.

Combined with a lack of independent board leadership, this risk is multiplied.

MINORITY PROTECTIONS – INDEPENDENT BOARDS AND INDEPENDENT

LEADERSHIP

For minority shareholders at family conglomerate firms, the role of

independent directors in protecting the interests of minority shareholders is

fundamental to investor confidence.

One clear characteristic of control at family conglomerates is a trend toward

the lack of independent board leadership. Coupled with the presence of

family members and/or founders, boards of this kind may diminish the

effectiveness of minority voices.

Figure 5 | Board & Leadership at MSCI Malaysia Index Family Conglomerates

No

Ind

ep

en

de

nt

Bo

ard

Maj

ori

ty

% In

de

pe

nd

en

t

fro

m M

anag

em

en

t &

Ow

ne

rsh

ip

Fam

ily D

ire

cto

rs

Entr

en

che

d B

oar

d

No

Ind

ep

en

de

nt

Ch

air

No

Ind

ep

en

de

nt

Lead

Dir

ect

or

Genting 43% 2

Genting Malaysia 44% 2

Genting Plantations 50% 2

Hong Leong Bank

56% 2

Hong Leong Financial 50% 1

IOI 38% 4

IOI Properties 50% 4

YTL 31% 8

YTL Power 31% 8


A concern is that the lack of diversity of experience and background

represents a major area of weakness for these boards. At all but one family

conglomerate, this is compounded by the lack of an independent chair. Only

two of nine family conglomerate firms have truly independent board

9

6 5

MSCI Malaysia Index ex.Family Firms



w/ Entrenched Boards




leadership. We note that while Genting Plantations has named an

independent lead director, he is a former company executive. While the

company considers him independent, MSCI Governance Metrics criteria does

not.

Figure 6 | Independent Leadership at MSCI Malaysia Index Family Conglomerates


Despite the presence of independent directors on family conglomerate

boards, there is a trend at some family conglomerates is to appoint the same

individuals as “independent” directors on multiple boards within the

conglomerate. Many serve for an extended period of time, raising concerns as

to their ability to adequately represent the interests of minority shareholders

(we note Lean See Lim at Hong Leong and Chek Tin Quah at Genting).

At the three Genting firms, five of 10 independent directors have served

for at least a decade; and

at the two YTL firms four of eight independent directors have served for

at least a decade.

Long-tenured directors can often form relationships that may compromise

their independence and therefore hinder their ability to provide effective

oversight.

RELATED PARTY TRANSACTIONS

In the MSCI Malaysia Index, there is only one company (Hartalega) where

MSCI has not identified related party transactions (RPTs), in comparison to

the MSCI ACWI Index where less than half of companies are flagged.

Furthermore, nearly two-thirds of RPTs at Malaysian companies are identified

by MSCI Governance Metrics criteria as being high risk.3

Figure 7 | Related Party Transactions (RPTs)


The risks of RPTs are considerable, representing not only potential conflicts of

interest but also loss of value for minority shareholders, where financial

transactions may favor company insiders over minority investors. In Malaysia,

these risks are highlighted by the amount of recurrent revenue and expenses

being transacted through these RPTs. The average ratio of recurring revenue

is nearly 4%, a significant percentage of a company’s total revenues for a

given period. Common transactions in this market include the purchase and

sales of goods, and the rendering of professional services.

3 High Risk criteria include, but are not limited to, RPTs with controlling shareholders or family

members, both common in Malaysia.

67%

43%

16% 18%

No Independent Leadership Percentage of Executive Directors

MSCI Malaysia IndexFamily Conglomerates

MSCI Malaysia Indexex. Family Conglomerates

97%

62%

48%

22%

RPTs High Risk RPTs

MSCI Malaysia Index MSCI ACWI Index ex. Malaysia




Like in many markets, Bursa Malaysia listing requirements4 covering RPTs

have been enacted to minimize the transactions’ negative potential.

Malaysian companies must disclose RPTs that meet certain conditions,

including the type and valuation of the RPT. Where any one of the percentage

ratios of an RPT is 5% or more, a listed issuer must send a circular to

shareholders and obtain approval at the AGM before the terms of the

transaction are agreed upon. Related parties involved in the transaction are

not permitted to vote on the matter. This prevents family conglomerates

from merely rubberstamping all RPTs.

Figure 8 | RPT Recurring Revenue and Expenses Ratios (%)


While the requirement to vote on certain RPTs may lessen overall concern,

especially since the vote typically includes only independent investors,

Malaysian disclosure in this area is not quite at the level of other markets. As

an example, YTL Power’s 2016 annual report cites transactions “with entities

that are controlled, jointly controlled or significantly influenced directly or

indirectly by any key management personnel or their close family members.”

Unlike more heavily regulated markets, like the US, typical Malaysian

companies only present RPT amounts in aggregate, without any connection to

4 Chapter 10 Transactions; Bursa Malaysia Securities Berhad Main Market Listing Requirements,

December 2016.

individual related parties, precluding thorough analysis. Shareholders in

markets like Malaysia need to cautiously scrutinize any RPTs where disclosure

is incomplete, even if they satisfy local market norms. Boards with sufficient

independent oversight help to minimize risks associated with RPTs,

representing an additional level of oversight even before potential

shareholder votes.

3.9%

2.8%

1.5% 1.2%

Recurring Revenue Recurring Expenses

MSCI Malaysia Index MSCI ACWI Index ex. Malaysia

http://www.bursamalaysia.com/misc/system/assets/15737/MAIN_Chap10_DiscCG_clean29June2016.pdf

OCTOBER 2017



RISK – GENERATIONAL SUCCESSION AT FAMILY CONGLOMERATES

Succession risks are highest where family members continue to hold key

board roles and the current leadership is approaching retirement.

Outside influence in leadership roles may lessen the exposure to

succession risks.

PRESERVING GENERATIONAL SUCCESSION

For family firms, a key governance risk is generational succession.

Diversification of revenue streams and simplifying the ownership structure

are two key ways family firms can survive beyond the second generation of

control. Three of four Malaysian family conglomerates, however, have opted

against this type of ownership pruning and continue to spread outside of

Malaysia, listing in other markets. As we have seen, these complex ownership

structures pose risks of too tight family control coupled with a potential lack

of key disclosure. Second and third generation firms may be exposed to the

risk of family feuds diverting attention from running the business, including

internal power struggles and searches for potential heirs coming up empty.

Figure 9 | MSCI Malaysia Index Family Conglomerate Generations


FAMILY PRESENCE IN LEADERSHIP

Strong family leadership and board presence may limit the influence of

outside voices, potentially silencing the expertise and experience necessary to

carry off a successful leadership transfer at international conglomerates. Key

executive roles in the hands of outsiders may reduce risks associated with

generational succession. By and large, family members control leadership

roles at Malaysian family conglomerates and dominate the board room.

All but one family conglomerate, Genting, has separated the roles of

Chairman and CEO – the separated roles providing more opportunity to

appoint family members in prestigious leadership roles. Only the Quek family

at Hong Leong combines non-family external leadership with minimal family

board presence. IOI and YTL handle generational turnover with father as chair

and son as CEO, combined with overloaded family involvement on the board.

Figure 10 | Family Involvement at MSCI Malaysia Index Family Conglomerates

Family Leadership

Family Company CEO (Generation) Chair (Generation)

Family Directors

Kwek/Quek

Hong Leong Financial External Quek Leng Chan (2nd) 1

Hong Leong Bank External Quek Leng Chan (2nd) 2

Lee IOI Lee Yeow Chor (2nd) Lee Shin Cheng (1st) 4

IOI Properties Lee Yeow Chor (2nd) Lee Shin Cheng (1st) 4

Lim

Genting Lim Kok Thay (2nd) Lim Kok Thay (2nd) 2

Genting Malaysia Lim Kok Thay (2nd) Lim Kok Thay (2nd) 2

Genting Plantations Lim Kok Thay (2nd) External 2

Yeoh YTL Yeoh Sock Ping (2nd) Yeoh Tiong Lay (1st) 8

YTL Power Yeoh Sock Ping (2nd) Yeoh Tiong Lay (1st) 8


2nd

•Yeoh family: •YTL

•YTL Power Intl.

3rd

•Lim family: •Genting

•Genting Malaysia

•Genting Plantations

•Kwek/Quek family: •Hong Leong Bank

•Hong Leong Financial

•Lee family: •IOI

•IOI Properties




The generational and geographic reach of some Malaysian family

conglomerates poses significant ongoing risks for successive family control.

The Hong Leong Group led by the Kwek/Quek family is one with particular

challenges. Overall, more than 15 family members control Hong Leong, which

is now into the third generation. There are signs of the family attempting to

stretch generational leadership as the second generation ages and begins to

retire.

CASE STUDY – HONG LEONG’S GROWING FAMILY TREE

1st Generation: Hong Leong Group—founded by Kwek Hong Png, a

Chinese migrant who settled in Malaysia—established in Singapore in

1941.

2nd Generation: The company is split up by its 2nd generation owners;

Quek Leng Chan, son of Kwek Hong Png, expands family empire to

Malaysia while his brother, Kwek Leng Beng, leads the family’s empire in

Singapore. In all, four brothers (including Kwek Leng Hai and Kwek Leng

San control about 20 listed firms in Hong Kong, Malaysia, Singapore, and

the United Kingdom.

3rd Generation: There are 15 male offspring. In 2016, Kwek Hong Png’s

grandson and Kwek Leng Beng’s son, Sherman Kwek Eik Tse was

appointed Deputy CEO of City Developments, the Group’s property unit.

Nephew Kwek Eik Sheng is named Head of Asset Management and Quek

Leng Chan’s youngest son, Kon Shean, launches e-commerce company

GEMFive, part of the Group’s ongoing effort to groom leaders internally

while expanding its overall infrastructure.




MARKET CHARACTERISTIC | ENHANCED GOVERNANCE

REQUIREMENTS AT FINANCIAL INSTITUTIONS

After the impacts of the Asian financial crisis in 1997 and the even bigger global financial crisis of 2008, Bank Negara

Malaysia (Malaysia’s central bank) has consistently introduced forward-thinking governance principles5 that have

strengthened Malaysia’s financial regime and led to notable improvement at Malaysian banks. During the Asian financial

crisis, Malaysia refused to accept economic aid packages from the World Bank and IMF6. As a result of this refusal to

accept centralized austerity measures, Malaysia’s economic recovery outpaced other Asian countries.

OWNERSHIP LIMITS AT FINANCIAL INSTITUTIONS

Banking regulations call for a clear separation between controlling shareholders and the management function. On top

of that, under the Financial Services Act (FSA) 2013, individuals are prohibited from owning more than 10% of any local

financial institution. While only 10 of 41 MSCI Malaysia Index firms are not dominated by a controlling shareholder, four

of these are banks. Of those, one is controlled by pension funds associated with the Malaysian state and three others

take advantage of unregulated “grandfather rules” which allow more than 10% ownership.

GRANDFATHER RULES

An unwritten rule still in effect at Malaysian banks is the “grandfather rule” which allows three Malaysian banks (AMMB,

Hong Leong Financial and Public Bank) to ignore rules established in 1989 that limit individual share ownership to no

more than 10%7. The Financial Services Act 2013 does not directly address any future implications of these

grandfathered rules. As of 2017, these rules have not been challenged and remain active.

5 Corporate Governance Guidelines are aligned with the principles of the Malaysian Code of Corporate Governance and the Bank of International Settlements Guidelines on “Enhancing Corporate Governance for Banking Organisations.” 6 https://www.cnbc.com/id/49411589 and http://www.essentialaction.org/imf/asia.htm

7 “Will the grandfather rule still apply?” The Star Online, May 28, 2016.

NOTABLE DEVELOPMENTS | PUBLIC

BANK

Public Bank, the top performing bank in

Figure 11, announced in July 2017 that

Chairman Teh Hong Piow (87), who

founded the company in 1965, will be

relinquishing his role of Chairman in

January 2019 but will stay on as Chairman

Emeritus and Adviser. While no clear

succession plan has been announced, the

early announcement gives the bank 17

months to name its new leader. None of

the Chairman’s four children are employed

at the bank so it appears that succession

will not be a family affair. While speculation

on his replacement has been taking place,

the bank’s early disclosure may bode well

for the change in leadership.

BIGGEST CONCERN | BOARD

SUCCESSION AT GRANDFATHERED

BANKS

At the three grandfathered banks, where

the controlling chairs are all at least 75

years old, is the prospect of succession. At

Hong Leong, there is specualtion that Quek

Leng Chan is grooming his youngest son,

Quek Kon Sean, to take over the family

empire. Uncertainty also looms at AMMB

where Hashim Azman deso not have an heir

in place to continue family control. It

remains to be seen whether they will

merely sell their stakes or find some other

way to maintain control.

https://www.cnbc.com/id/49411589

http://www.essentialaction.org/imf/asia.htm

http://www.thestar.com.my/business/business-news/2016/05/28/will-the-grandfather-rule-still-apply/

OCTOBER 2017



OPPORTUNITY – STRONGER GOVERNANCE STANDARDS

DRIVING BETTER QUALITY BOARD DECISIONS?

Enhanced governance standards have strengthened independent

oversight and led to more active boards (holding more board

meetings) at Malaysian banks, suggesting that these firms may be

better able to make effective board decisions.

Independence concerns, however, are pronounced at

“grandfathered” financial institutions.

Boards marked with a higher percentage of independent directors

and greater gender diversity, mixed with the lack of overcommitted

directors, tend to be more active boards, increasing the likelihood

of better quality decisions.

ENHANCED INDEPENDENT OVERSIGHT

Key regulatory enhancements—highlighted by limiting boards to one

executive director and a non-executive chair—have strengthened

independent oversight at Malaysian banks. As a result, regulators’ efforts to

promote financial sector stability are reflected in better board performance,

both relative to other MSCI Malaysia Index constituents and to other

Emerging Markets banks8 (see Figure 11).

Additional progress in this area includes the central bank’s requirement to

limit the tenure for independent directors to no more than nine years,

reducing risk of entrenched boards.

However due to the grandfathered rules, the three grandfathered banks lag

other Malaysian banks on independence standards. Neither AMMB nor Hong

8 MSCI ESG Research independence standards differ from local market standards.

Leong Financial have a majority of independent directors on their boards, the

only MSCI Malaysia Index banks that fail in this key area of oversight.

Figure 11 | MSCI ACWI Index Banks Board Characteristics

Board Criteria MSC

I Mal

aysi

a

Ind

ex

- B

anks

MSC

I Mal

aysi

a

Ind

ex

- Ex

-

Ban

ks

MSC

I

Eme

rgin

g

Mar

kets

Ind

ex

- B

anks

Independent Board majority 87% 33% 65%

1 or more female director 87% 78% 79%

No entrenchment concerns 75% 72% 87%

No attendance concerns 100% 97% 92%

No overboarding concerns 100% 81% 80%

Financial Expertise (Audit Committee) 100% 97% 97%

Industry Expertise (Audit Committee) 63% 33% 59%

Risk Expertise 37% 15% 52%

Source: MSCI ESG Research. Data as at 11 September 2017. Green shaded = best.

HIGH FREQUENCY OF BOARD MEETINGS

Similar to MSCI Malaysia Index companies that are not controlled by families

or founders, there is a higher frequency of board meetings occurring at MSCI

Malaysia Index banks. Recent regulatory enhancements9 stipulate that board

meetings should be held monthly or no less than bimonthly.

Figure 12 | Number of Board Meetings at MSCI Malaysia Index Companies


9 http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/16_corporate_governance.pdf

13

7

MSCI Malaysia Index Banks MSCI Malaysia Index ex.Banks

http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/16_corporate_governance.pdf

OCTOBER 2017



MARKET CHARACTERISTIC | STATE PARTICIPATION

MSCI ESG Research identifies state-owned enterprises (SOEs) as those where the State directly or indirectly controls at

least 10% of the voting rights or has the right to appoint a majority of the directors10. There are 15 companies in the

MSCI Malaysia Index that are categorized as state-owned under the MSCI ESG Research criteria. The Malaysian

government refers to these 15 companies as Government-Linked Companies (GLCs) because they are companies in

which it retains a significant stake either directly or through government investment companies (GLICs)11. The

remaining shares are listed on the Malaysian Stock Exchange, Bursa Malaysia (Bursa), and are available to all

investors. “Golden shares” in five GLCs are held by the Ministry of Finance (MoF Inc.) and grant it special powers, such

as appointing directors to the board.

Figure 13 | Malaysian Government Ownership (%)


10 MSCI ESG Research Governance Metrics Methodology, December 2016 11 The Summary of Transformation Manual, March 2006

19%

29%

38%

42%

42%

43%

26%

29%

37%

39%

59%

61%

63%

64%

70%

25%

22%

14%

12%

1%

0% 50%

IJM

CIMB Group

Axiata Group

UMW Holdings

Malayan Banking

Sime Darby

Telekom Malaysia

TNB

Malaysia Airports

FGV

IHH Healthcare

Petronas Gas

MISC

Petronas Chemicals

Petronas Dagangan

Government Holding (%) Golden Share

Government Investment Companies (GLICs) in Malaysia

Minister of Finance (Incorporated) [MOF (Inc.)]

Khazanah Nasional Berhad (Khazanah)

Employees Provident Fund (EPF)

Lembaga Tabung Haji (LTH)

Armed Forces Fund Board

Retirement Fund (Incorporated)

Permodalan Nasional Berhad (PNBP)

NOTABLE DEVELOPMENTS | SIME

DARBY

Sime Darby announced plans to break up

the company into three publicly traded

entities in order to create value, promote

growth and reduce debts. This

restructuring is intended to take place in

2018 and the shares in the property and

plantation divisions will be distributed

among current Sime Darby shareholders in

proportion to their holdings. After the spin-

off, Sime Darby will not be a shareholder in

either Sime Darby Plantation or Sime Darby

Property but the government will maintain

a controlling stake in all three companies.

BIGGEST CONCERN | FELDA GLOBAL

VENTURES HOLDINGS (FGV)

In June 2017, four senior FGV executives including the CEO and CFO, were suspended by the board while it investigates corruption allegations at a subsidiary, Delima Oil Products, where debts grew from USD 8.3 million in 2015 to USD 11.7 million in 2016. The Malaysian Anti-Corruption Commission is also conducting its own investigation into the allegations, and the government has appointed a former cabinet minister to look into the executives’ suspensions. The FGV Chair stood down in June 2017 which the government said would help to preserve the integrity of the investigations. Three new government representative directors were appointed to the FGV board in July 2017.

http://www.pcg.gov.my/media/1028/summary-of-transformation-manual-eng.pdf

OCTOBER 2017 MSCI.COM | PAGE 14 OF 30 © 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.


BACKGROUND ON MALAYSIAN STATE OWNED ENTERPRISES

Malaysian GLCs are integral to the Malaysian economy and play an important

role in implementing the government’s national economic policies. Following

independence from British colonial rule in 1957, the new Federation of

Malaya government pursued an economic diversification strategy in order to

reduce the country’s reliance on commodities such as rubber and tin. The

government established the New Economic Policy (NEP) to reduce poverty,

improve economic participation for ethnic Malaysians and restructure the

economy by 199012. State owned companies were established under the NEP

to stimulate economic growth, provide public services and supply investment

in sectors where there are high initial investment costs such as oil and gas.

TRENDS IN MALAYSIAN STATE OWNERSHIP

GLCs were privatized in line with the Economic Planning Unit’s Guidelines on

Privatization in order to hasten the achievement of the NEP’s goals and

reduce the government’s role in providing essential services. These

companies subsequently listed a portion of their shares on the Bursa Malaysia

and made them available to ordinary investors, including foreign institutions.

However, the government has maintained substantial ownership stakes

through government-linked investment funds (GLICs), government

investment funds that allocate a portion of their funds to GLCs13. The

government holdings comprise around 30% of the aggregate market

capitalization of Bursa Malaysia listed14.

12 Z.A. Yusof and D. Bhattasali: Economic Growth and Development in Malaysia: Policy Making and Leadership, 2008 13 The Summary of Transformation Manual, March 2006 14 The World Bank Report on the Observance of Standards and Codes (ROSC): Malaysia, July 2012

RISK – POOR GLC PERFORMANCE

The GLC Transformation Program was developed by the government to

improve GLC performance, but GLCs continue to underperform private

MSCI Malaysia Index companies and global MSCI ACWI Index SOEs.

IHH Healthcare has the highest shareholder returns, while FGV is the

worst financial performer despite its large 2012 IPO.

The government continues to intervene in GLCs in order to resolve

governance issues, as illustrated by the recent board reshuffle at FGV.

LONG-TERM GLC UNDERPERFORMANCE

Our study shows that as in the ACWI generally, GLCs underperform the other

MSCI Malaysia Index constituents. State owned firms may carry obligations to

a wider range of stakeholders, including the public interest15.

Figure 14 | Financial Performance (5 Year Average TSR %)*

15 R. Marshall: Ownership Forms & Governance Control, June 2015 https://www.msci.com/www/research-paper/ownership-forms-governance/0254448434

40 56 71

-200

-100

0

100

200

300

400

500

600

700

TSR

(%

)

5YR High 5YR Low Average

MSCI Malaysia Index GLCs

MSCI Malaysia Index (ex. GLCs)

MSCI ACWI Index SOEs (ex. Malaysia)

http://siteresources.worldbank.org/EXTPREMNET/Resources/489960-1338997241035/Growth_Commission_Working_Paper_27_Economic_Growth_Development_Malaysia_Policy_Making_Leadership.pdf

http://siteresources.worldbank.org/EXTPREMNET/Resources/489960-1338997241035/Growth_Commission_Working_Paper_27_Economic_Growth_Development_Malaysia_Policy_Making_Leadership.pdf

http://www.pcg.gov.my/pdf/Summary%20of%20Transformation%20Manual%20March%2006%20-%20Eng.pdf

http://documents.worldbank.org/curated/en/216211468088741775/pdf/908220ROSC0Box0laysia0201200PUBLIC0.pdf

https://www.msci.com/www/research-paper/ownership-forms-governance/0254448434



n. MSCI Malaysia Index GLC = 14, n. MSCI Malaysia Index (ex. GLCs) = 27, n. MSCI ACWI Index SOE (ex. Malaysia) = 274. *IHH Healthcare and FGV not included, IPO in 2012. Source: MSCI ESG Research. Data as at 11 September 2017.

The 15 GLCs have under-performed financially in comparison to MSCI

Malaysia Index (ex. GLCs) and MSCI ACWI SOE (ex. Malaysia) constituents

from 2012 – 2016.

Tenaga Nasional Berhad (TNB) has the highest performance at 141% TSR

over a five-year period to the date of this report. As the country’s sole

electricity provider and largest utility, TNB is not exposed to competitive

risk and is only affected by overall industry changes.

FGV’s shareholder returns are the lowest at -50%. This reflects the

negative impact of the commodities price slump in 2014, along with labor

and human rights problems in its supply chain that were reported by NGOs

and the international media.

FUTURE PROOFING THROUGH THE GLC TRANSFORMATION PROGRAM?

In 2005, Malaysia implemented the GLC Transformation Program (GLCTP), a

ten year strategy to improve GLCs’ governance, deliver financial performance,

and increase their contribution to national development. The main driver

behind this program was the underperformance of GLCs in comparison to

other Malaysian listed companies and international peers. Among the ten

major GLCTP initiatives were the introduction of key performance indicators,

improving board effectiveness and composition, and director training and

education.

As shown above, GLCs continue to underperform financially in comparison to

the rest of the MSCI Malaysia Index and they also provide lower average

returns than their SOE counterparts in other countries. This indicates that the

program did not have the expected outcome while in operation, but the

GLCTP board and corporate governance enhancements place GLCs in a

position to recognize and take advantage of opportunities to improve their

future performance.

PERFORMANCE-RELATED DIRECTOR PAY

One way to encourage improved performance under the GLCTP was the

introduction of performance-related pay for management and non-executive

directors (NEDs). The aim was to introduce a culture of performance by

linking pay to corporate performance to align the board’s interests with those

of shareholders.

Shareholder dissent to NEDs’ pay at poor performing GLCs was significantly

higher than dissent at the best performers during the recent AGM season.

This shows that shareholders are not satisfied that these boards are

sufficiently aligned with their interests, and they will not support pay

increases for NEDs who do not improve company performance. At TNB and

IJM, which have had good long-term performance, there was no shareholder

dissent to pay. Telekom Malaysia had the highest pay dissent although

performance was better relative to most GLC peers.

Figure 15 | Shareholder Dissent to Director Pay at AGMs (% of Total Votes Cast)*

*IHH Healthcare and FGV not included, IPO in 2012. Source: MSCI ESG Research. Data as at 11 September 2017.

22% 18% 17% 17% 16% 13% 11% 11% 3% 0% 0% 0% 0%

-15%

5%

25%

45%

65%

85%

105%

125%

145%

TSR

(%

)

Shareholder Dissent (%) 5 YR TSR (%)



GOVERNMENT INTERVENTION IN GLC BOARDS

The 15 GLCs continue to dominate the Malaysian business environment. The

pace of the divestment initiative that formed a cornerstone of the GLCTP has

slowed following the global financial crisis and commodity price downturn in

2014 – 2015.

Instead, there has been a recent increase in government intervention in GLCs

when governance issues have arisen (see Notable Developments above). The

presence of the government as an active shareholder provides reassurance to

international shareholders that it will intervene to protect the company if

there is a governance or ongoing concern risk. However, minority

shareholders should be aware that the government places the national

interest first so interventions may not be always be beneficial for minorities,

as demonstrated by the case of Malaysia Airlines.

CASE STUDY – NATIONALISATION OF MALAYSIA AIRLINES

Malaysia Airline System Bhd (MAS) was delisted following large financial

losses sustained after flight MH370 disappeared over the Indian Ocean and

flight MH17 was shot down over Ukraine in 2014. Khazanah Nasional, a GLIC,

was the majority shareholder and bought out the remaining shareholders at a

30% premium on the 2014 share price. It implemented a five-year program

involving cutting 30% of the workforce and restructuring the company.

MAS had been underperforming for a number of years before these incidents,

but the severe impact prompted the government to intervene and propose a

strategy that should return the company to profitability. While this is a

positive development, minority shareholders in MAS suffered losses over the

course of their investment and their interests were not protected by the

company’s leadership or the controlling shareholder.

RISK – WEAK LEADERSHIP

GLCs’ operations are expanding regionally and globally, which means that

robust board oversight is required to protect all shareholders’ interests.

40% of GLCs do not have majority independent boards, which is a risk to

minority shareholders.

Only 36% of GLC Audit Committees are fully independent and there are

concerns about rigorous related party transaction oversight.

INSUFFICIENT BOARD INDEPENDENCE

The Malaysian Code on Corporate Governance (MCCG) recommends that the

boards of large companies should be composed of a majority of independent

directors16. The Bursa’s listing requirements define an independent director

as being independent of management17, which is in line with MSCI ESG

Research independence criteria. 60% of GLC boards are majority

independent, which exceeds non-GLC boards (31%), but there are no fully

independent GLC boards. GLCs also outperform their global MSCI ACWI Index

SOE counterparts on this governance indicator.

Figure 16 | Board Independence (%)


16 Malaysian Code on Corporate Governance, April 2017 17 Chapter 1 Corporate Governance; Bursa Malaysia Securities Berhad Main Market Listing

Requirements, December 2016

5%

4%

52%

31%

60%

42%

65%

40%

1% MSCI ACWI Index SOE (ex.

Malaysia)



Fully Majority Minority None

https://www.sc.com.my/wp-content/uploads/eng/html/cg/mccg2017.pdf1

http://www.bursamalaysia.com/misc/system/assets/14717/listing_requirement_main_market_chapter_1.pdf

http://www.bursamalaysia.com/misc/system/assets/14717/listing_requirement_main_market_chapter_1.pdf



60% of GLC Chairs are non-independent NEDs, which is slightly less than

Malaysian non-GLCs at 65%. There is no MCCG recommendation that the

Chair should be independent, but it does recommend that the roles of

Chair and CEO should be separate18. It is notable that only one GLC (IHH

Healthcare) has an executive Chair compared with 30% of the MSCI

Malaysia Index (ex. GLCs).

10% of GLC NEDs are classified as government representatives under the

MSCI ESG Research criteria, which means that they are either a serving

state official or their role is designated as representing the government.

Overall, GLCs have more independent representation at board level than

Malaysian non-GLCs. This indicates that the efforts to improve board

effectiveness and composition under the GLCTP are taking hold.

Figure 17 | MSCI Malaysia Index Director Independence (%)


SHAREHOLDERS’ BOARD COMPOSITION CONCERNS

Shareholders expressed concerns about MSCI Malaysia Index GLC board

composition during the recent proxy season by significantly dissenting to the

re-election of directors at a number of AGMs. IHH Healthcare had the highest

shareholder dissent against an executive, however shareholder concern was

18 Malaysian Code of Corporate Governance, April 2017

focused on government representative NEDs at FGV, Sime Darby and

Telekom Malaysia. Axiata recorded the most votes against independent

NEDs.

This indicates that while shareholders are broadly in favor of MSCI Malaysia

Index GLC board performance, they are concerned about government

directors’ effectiveness at companies with poor financial and governance

performance. It also indicates that minority shareholders are not necessarily

in favor of the government’s recent action in FGV’s board struggles.

Figure 18 | % Shareholder Dissent to MSCI Malaysia Index GLC Directors (All Votes Cast

Excluding Government Votes)


GLC AUDIT COMMITTEE CONCERNS

The 2016 Bursa Malaysia Listing Requirements oblige listed companies to

have an audit committee made up of only NEDs, a majority of whom are

independent19. Audit committees are responsible for overseeing companies’

financial reporting and risk management functions, and independent directors

19 Chapter 15 Corporate Governance; Bursa Malaysia Securities Berhad Main Market Listing


60%

7%

58%

30%

12%

65%

31%

50%

20%

31%

Non-IndependentChair

Executive Chair IndependentNEDs

Non-independentNEDs

Executives

MSCI Malaysia Index GLCs MSCI Malaysia Index (ex. GLCs)

31% 28%

14% 14%

26%

14%

33%

0%

50%

FGV Sime Darby TelekomMalaysia

Axiata IHH Healthcare

Government Representative Independent NED Non-independent NED Executive

https://www.sc.com.my/wp-content/uploads/eng/html/cg/mccg2017.pdf





with an objective view of companies’ operations should provide rigorous

oversight of existing systems.

Figure 19 | Audit Committee Independence (%)


Only 40% of GLCs’ audit committees are fully independent, under-

performing Malaysian non-GLCs at 65% and non-Malaysian MSCI ACWI

Index SOEs (61%).

Nine GLCs including FGV, Maybank and Malaysia Airports, do not have

completely independent audit committees based on the MSCI Governance

Metrics criteria. The MCCG 2017 recommends that the audit committee

should be completely independent as a “step up” practice, but it is not a

standard Code recommendation20.

Five GLCs with non-independent audit committees also have designated

directors serving on this committee. This is a risk to minority shareholders

because the government’s interests could be put before theirs in the event

of audit-related concerns. FGV’s issues illustrate the importance of having

completely independent audit oversight.

20 Malaysian Code on Corporate Governance, April 2017 A designated director as defined by the MSCI ESG Research methodology “has ties to other (non-

management) interests, including employees, government or shareholder interests”

MONITORING RELATED PARTY TRANSACTIONS

All 15 GLCs are involved in related party transactions (RPTs) with the

government although the World Bank has noted that there is often

incomplete corporate disclosure of RPTs with GLCs and GLICs. There is a

requirement under local accounting standards for disclosure of transactions

with government-related entities, but this disclosure does not have to be as

detailed as those with other related parties21.

The audit committee is responsible for reviewing and reporting to the board

on RPTs, and any conflicts of interest that could compromise management’s

integrity22. Figure 20 shows a breakdown of the GLC NEDs’ classification under

the MSCI ESG Research criteria. To protect minority shareholders from

potential loss of value, it is important that GLCs’ audit committees are

brought in line with the MCCG 2017’s step up recommendation for complete

independence in order to improve transparency and disclosure.

Figure 20 | MSCI Malaysia Index GLC Audit Committee Composition (% NEDs)


21 The World Bank Report on the Observance of Standards and Codes (ROSC): Malaysia, July 2012 22 Chapter 15 Corporate Governance; Bursa Malaysia Securities Berhad Main Market Listing


61%

65%

40%

34%

35%

60%

4% MSCI ACWI Index SOE (ex. Malaysia)



Fully Not Fully Independent None

73%

14%

7% 5%

Independent NED Government NED

Non-independent NED GLIC NED

https://www.sc.com.my/wp-content/uploads/eng/html/cg/mccg2017.pdf1

http://documents.worldbank.org/curated/en/216211468088741775/pdf/908220ROSC0Box0laysia0201200PUBLIC0.pdf



CORPORATE GOVERNANCE IN MALAYSIA

OCTOBER 2017


APPENDICES

APPENDIX A | REGULATORY DEVELOPMENTS

COMPANIES ACT 1965

In 2016, the Companies Act 1965 was amended to elevate the Malaysian corporate landscape on par with existing

international standards. Key changes include a push for increased oversight and transparency of board director pay by

requiring listed companies to approve directors’ fees and benefits of at the annual general meeting.

BURSA MALAYSIA MAIN MARKET LISTING REQUIREMENTS

Following media reports that it was considering the introduction of dual share classes, Bursa Malaysia announced in

August 2017 that it had no plans to facilitate dual share class listings and would maintain its “one share one vote”

system. This is a positive move for Malaysian minority shareholders, as their ownership rights will remain protected.

MALAYSIAN CODE ON CORPORATE GOVERNANCE (MCCG)

The MCCG was updated in April 2017 and it has shifted from “comply or explain” to “apply or explain an alternative”.

This is meant to encourage listed companies to apply more thought and consideration when adopting and reporting on

their corporate governance practices. There is also the introduction of “Step Up” practices, to encourage companies to

go further than recommended principles in achieving corporate excellence.23

BOARDS

The board should be comprised of a majority of independent directors. This is in contrast to MCCG 2012 where boards

were recommended to be comprised of at least 2 independent directors or ⅓ of the board (whichever was greater) or a

majority of independent NEDs where the chair was not independent.

23 A proportionality approach is used to differentiate large companies from others. In this context, ‘large companies’ refer to these companies which are on

the FTSE Bursa Malaysia Top 100 Index or have a market capitalization of at least RM 2 billion. In this report, all 41 Malaysian constituents of the MSCI ACWI Index are considered ‘large companies.’

Exchanges

Bursa Malaysia www.bursamalaysia.com/market/

Regulators

Securities Commission Malaysia www.sc.com.my/ Bank Negara Malaysia www.bnm.gov.my/ Companies Commission of Malaysia www.ssm.com.my/

Investor Associations

Minority Shareholder Watchdog Group www.mswg.org.my

Institutional Investor Council Malaysia mswg.org.my/institutional-investor-council-malaysia-iic

Malaysian Institute of Corporate Governance www.micg.net/

Corporate Governance Code

Malaysian Code on Corporate Governance www.sc.com.my/wp-

content/uploads/eng/html/cg/mccg2017.pdf

Company Law

The Companies Act 1965 www.ssm.com.my/acts/fscommand/CompaniesAct.htm

Takeover Rules

Rules on Take-overs, Mergers and Compulsory

Acquisitions www.sc.com.my/wp-

content/uploads/eng/html/resources/guidelines/tom/160815/to

m_rules_160815_complete.pdf

Stewardship Code

The Malaysian Code for Institutional Investors https://www.sc.com.my/wp-

content/uploads/eng/html/cg/mcii_140627.pdf

http://www.bursamalaysia.com/market/

https://www.sc.com.my/

http://www.bnm.gov.my/

http://www.ssm.com.my/

http://www.mswg.org.my/

https://mswg.org.my/institutional-investor-council-malaysia-iic

http://www.micg.net/



https://www.ssm.com.my/acts/fscommand/CompaniesAct.htm

https://www.sc.com.my/wp-content/uploads/eng/html/resources/guidelines/tom/160815/tom_rules_160815_complete.pdf



https://www.sc.com.my/wp-content/uploads/eng/html/cg/mcii_140627.pdf

https://www.sc.com.my/wp-content/uploads/eng/html/cg/mcii_140627.pdf



The board should be comprised of at least 30% women. MCCG 2012 recommended the establishment of a policy on boardroom diversity, but MCCG 2017 takes

a giant leap forward by establishing an actual target. Boards are recommended to disclose policies to appoint women to the board, targets and measures to

meet those targets.

Increased scrutiny of independent directors’ tenure. Director tenure

should not exceed nine years but a board may decide to extend it. In

those cases, annual shareholder approval will be required from years 9 –

12 but a two-tier voting process is to be adopted thereafter. Under this

process, both tier 1 (shareholders who hold 33% or more of the company)

and tier 2 (all other shareholders) must simultaneously approve the vote

in order for the long-tenured director to remain independent.

PAY

One of the key changes to MCCG 2017 is a call for increased disclosure of

director and executive pay. While enhancements to the code may not yet

match the pay disclosure seen in other markets (non-binding in markets

with a ‘comply or explain’ model), a call for greater transparency may

soon yield similar results.

MCCG 2017 recommends detailed disclosure on a named basis of the

remuneration paid to directors (this includes all fees, salary, bonus, and

benefits), and the remuneration paid to the top 5 named executive

officers within the bands of RM 50,000 (including all fees, salary, bonus,

and benefits).24

Malaysian Central Bank rules provide greater disclosure and transparency

on pay practices for Malaysian banks. As a result, no MSCI Malaysia Index

Banks have been flagged for a lack of rigorous executive pay disclosure,

unlike the majority of other MSCI Malaysia Index companies (Figure 21).

24 As ‘Step Up’ best practice suggestions may be a harbinger of a future code release, MCCG 2017 encourages companies to fully disclose the detailed pay of each member of senior management.

Figure 21 | Lack of Executive Pay Disclosure at MSCI ACWI Index Banks (%)


It is also worth noting that the Companies Act 2016 introduced a new

requirement for all fees and benefits payable to directors (including any

pay for loss of employment) to be approved by the shareholders at a

general meeting. As of yet, there is still no say on pay for executive

compensation.

0%

70% 66%

MSCI Malaysia IndexBanks

MSCI Malaysia Index ex.Banks

MSCI ACWI Index EMBanks ex. Malaysia


OCTOBER 2017


AUDIT & ACCOUNTING

MCCG 2017 was enhanced to support effective audit, risk management

and internal control. A key change is that the board chair should not also

be Audit Committee chair to avoid impairment of objectivity.

All members of the Audit Committee should be financially literate and

the board should disclose whether internal audit personnel are free from

conflicts of interest.

The board should disclose the features of its risk management

framework, including a discussion on key risk areas such as finance,

operations, regulatory compliance, reputation, cybersecurity and

sustainability.25

25 Establish a risk management committee comprised of a majority of independent directors as a ‘Step Up’ suggestion.

CASE STUDY – CORPORATE SCANDALS DRIVING REGULATORY CHANGE

There have been a number of financial scandals in Malaysia since 1981

involving government officials, GLCs or GLICs, which led to changes in the

regulatory environment. The latest scandal concerns 1Malaysia Development

Berhad (1MDB), an investment fund established in 2009 as a vehicle for

foreign investment and promotion of economic development.

The alarm was raised about the 1MDB fund in 2015 because its debt levels of

around USD 12 billion threatened Malaysia’s credit rating. The fallout from

1MDB has had a negative effect on Malaysia’s political and economic

environment. Global investigators believe more than USD 1 billion from the

fund entered Malaysian Prime Minister Najib Razak's personal bank accounts.

The Public Accounts Committee’s investigation cleared Prime Minister Najib of

any wrongdoing, saying that a USD 681 million deposit in his accounts was a

donation from the Saudi Arabian royal family.

The scandal has caused a political crisis and threatens to upset years of one-

party rule in the country. A general election is expected to be called in 2018

and the 1MDB scandal will be referenced by opposition politicians to cast

doubt on Najib’s competence. However, the regulatory landscape is once

again positioned to gain from a swift, strong and binding response from the

election victor as a means of bringing the 1MDB scandal to an end.


OCTOBER 2017


APPENDIX B | CORPORATE OVERVIEW

Shareholder rights are correlated to the jurisdiction of incorporation and the type of corporate entity that has listed or traded securities. The sector distribution

across the market may offer insights to the broader economy and the exposure to market and commodity cycles.

Incorporation Corporate Types GICS Sectors

All ACWI constituents with a Home

Market of Malaysia are also

incorporated in Malaysia.

All listed entities are public

companies. No limited partnerships,

co-operatives or other types of

corporate entities are identified

among Malaysian ACWI constituents.

The 41 ACWI constituents with a Home Market of Malaysia are overweight in Consumer Staples,

Telecommunication Services, and Utilities, and underweight in Consumer Discretionary, Materials, and Real

Estate. Notably there are no companies with GICS sector of Information Technology. Companies in the

materials and energy sectors may be particularly exposed to the commodities cycle, where periodically we

see companies required to report write-downs in the values of assets due to cyclical commodity price

movements.

Incorporation, combined with the type of corporate entity, determines which

corporate laws apply to the company. Corporate law typical provides many of

the fundamental rights of shareholders.

Global Industry Classification Standard (GICS) is a four-tiered, hierarchical industry classification system. It

consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries. Companies are classified

quantitatively and qualitatively. Each company is assigned a single GICS classification at the sub-industry

level according to its principal business activity.

100%

Malaysia

100%

Public Company

MSCI Malaysia Index MSCI Emerging Markets Index MSCI ACWI Index

MSCI.COM | PAGE 23 OF 30



OCTOBER 2017

APPENDIX C | BOARD OVERVIEW

Governance risks vary widely, depending on the nature of the company’s ownership and on the separation of ownership and management, and on the design of the

capital structure and its impact on the voting rights of shareholders.

Board Types Leadership Independence Committees

All Malaysian companies have a Board of

Directors as the sole board type.

Only two companies have combined roles

(Genting and subsidiary Genting Malaysia),

despite local best practice recommendations

set by the MCCG. Lead Independent Directors

are common, less than 25% of companies

lack an independent chairman or a lead

director.

Based on MSCI Governance Metrics

independence criteria, less than half of

Malaysian boards are majority independent

of management. Several directors are not

deemed independent by virtue of their

relationships with shareholders.

All Malaysian companies have established all

three key committees – Audit, Pay and

Nomination. However, only Audit

Committees are required to be fully

independent.

Malaysian companies follow the unitary

board model, largely predominant at APAC

countries in the ACWI save China, Indonesia,

and Japan.

The roles and offices of Chairman and CEO

should be separated, per MCCG 2017. No

best practice recommendation for

independent chairman or lead independent

director.

Per MCCG guidelines, companies should be

comprised of a majority of independent

directors. Previously, the greater of two

directors or ⅓ of the board was to be

independent; or, if a non-independent chair,

the board was to be majority independent.

Audit Committees required which should

include at least three directors, at least ⅔

being independent. Nomination Committees

required, which should have a majority of

independent directors.

100%

Board of Directors

Supervisory Board & Management Board

Board of Directors & Audit Board

Board of Directors & Board of Supervisors

36.6%

58.5%

36.6%

22.0%

4.9%

41.5%

Chair Lead Director

NoneCombined with CEOExecutiveNon-executive, Not IndependentNon-executive, Independent

2.4%

31.7% 39.0%

68.3% 58.5%

Independent ofManagement

Independent ofOther Interests

Fully Majority Minority None

56.1%

29.3%

43.9%

65.9%

100%

4.9%

Audit Pay Nomination

None

Not fully Independent

Fully Independent

OCTOBER 2017


APPENDIX D | GENDER DIVERSITY

A formalized push for gender diversity in Malaysia began when Prime Minister Najib Razak announced formal national policy targets for the Female Labour

Participation Rate (FLPR) in 2010 and a target for women in leadership in the corporate sector in 2011. While neither was an official quota and targets are still

unfulfilled, dramatic shifts continue to occur, especially in the context of other Asian markets. In April 2017, the newly revised MCCG has introduced a 30% target for

female directors on listed boards, however there is no sanction for companies that do not meet this target. The importance of this formal inclusion is not to be

understated; Malaysia is a pioneer in Asian markets in its codification of gender diversity. India is the only other market in Asia which mandates gender diversity,

calling for at least one female director.

Figure 22 | Female Directors

% Women in Board Population Number of Female Directors Female Leadership

As at the date of this report, 10 MSCI Malaysia Index companies did not any women directors including MISC, a GLC. 29.3% of MSCI Malaysia Index constituents have reached the tipping point

of female board representation in comparison

to 11.8% MSCI Emerging Markets and 31.2% of global MSCI ACWI Index constituents.

Companies Where Tipping Point Reached (3+ Female Directors)

AMMB Gamuda Sime Darby

Astro Malaysia Maybank Telekom Malaysia

Dialog Group Malaysia Airports TNB

Digi.com Petronas Gas UMW

Similar to other markets, there is a lack of women in leadership roles in Malaysia as there is only one MSCI Malaysia Index constituent with a female CEO. However, there are 11 companies with female CFOs which indicates that the female talent pipeline is stronger than in other MSCI Emerging Markets and ACWI Index constituents.

Three women on a corporate board represents a “tipping point” in terms of influence (MSCI Women on Boards Report 2016)

19.3%

10.1%

17.3%

% Female Directors as %Total Director Population

MSCI Malaysia Index


MSCI ACWI Index

19.5%

26.8% 24.4% 29.3%

40.6%

30.6%

17.1% 11.8%

22.5% 23.4% 22.9%

31.2%

0 1 2 3+

MSCI Malaysia Index MSCI Emerging Markets Index

MSCI ACWI Index

2.4% 4.8%

26.8%

6.1% 3.1%

9.4% 6.1% 3.8%

9.4%

Chairman CEO CFO

MSCI Malaysia Index MSCI Emerging Markets Index

MSCI ACWI Index

OCTOBER 2017


APPENDIX E | KEY METRIC OVERVIEW

Never Flagged Always Flagged Selected Problem Areas

A number of Key Metrics (noted below) are

never flagged due to the strengths of

Malaysian regulatory provisions.

Shareholder rights are generally set in the

Companies Acts, which are drawn from the

experience of other jurisdictions, especially

Australia and the United Kingdom.

There are some areas where the regulatory

framework in Malaysia does not yet reflect

emerging best practices around the world.

In particular, the demand for annual director

elections has not extended to this market –

directors only stand for re-election every three

years.

In addition, equity holding requirements for

executives and/or directors are not required in

this market. As most companies are family or

state controlled, executives’ interests are

already considered to be aligned with those of

shareholders.

Benchmarking MSCI Malaysia Index constituents against MSCI ACWI constituents globally,

identified areas of weakness in governance arrangements include certain voting rights

related to foreign ownership, state-owned enterprises and controlling shareholders.

Board Independence issues in this market reflect the absence of majority independent

boards at almost half of firms despite best practice recommending majority independent

boards in certain circumstances.

Related party transactions are widespread in this market, reflecting the nature of the

predominant ownership structures.

Figure 23 | Key Metric Outliers – Malaysian Constituents of MSCI ACWI Index

Multiple Equity Classes with Different Voting

Rights

Majority Voting

Bylaws Amendments

Charter Amendments

Poison Pill

Annual Director Elections

CEO Equity Policy

Director Equity Policy


97.6%

70.7% 58.5%

19.5% 12.2%

48.1% 46.4%

32.0%

10.2% 2.7%

Related PartyTransactions

Pay CommitteeIndependence

IndependentBoard Majority

ControllingShareholder

Concerns

AuditorIndependence

MSCI Malaysia Index MSCI ACWI Index

OCTOBER 2017


APPENDIX F | BEST & WORST COMPANY SCORES

Top Scores

Company Score Overall Board Pay Ownership &

Control Accounting Relative Strengths

CIMB Group 7.6 Best In Class Above Average Best In Class Below Average Average Board Skills & Diversity, Board Effectiveness, Strategic

Oversight

Alliance Financial Group 7.5 Best In Class Above Average Above Average Average Best In Class Board Leadership, Board Effectiveness, Ownership

Structure

Hong Leong Bank 7.4 Best In Class Average Best In Class Average Above Average Board Effectiveness , Strategic Oversight, Audit

Oversight

Malayan Banking

(Maybank) 7.3 Best In Class Above Average Above Average Above Average Average

Board Skills & Diversity, Board Effectiveness,

Ownership Structure

RHB Bank 7.1 Above Average Above Average Best In Class Below Average Below Average Board Effectiveness, Severance & Change of Control,

Strategic Oversight

Bottom Scores

Company Score Overall Board Pay Ownership &

Control Accounting Key Areas of Concern

IHH Healthcare 2.7 Worst In Class Average Worst In Class Worst In Class Average Board Independence, Pay Figures, Ownership Structure

Genting Malaysia 2.4 Worst In Class Worst In Class Below Average Average Average Board Independence, Pay Figures, Board Skills &

Diversity

Genting Plantations 1.7 Worst In Class Worst In Class Average Average Worst In Class Accounting Risk, Board Independence, Board Skills &

Diversity

YTL Power 1.4 Worst In Class Worst In Class Average Below Average Below Average Board Independence, Pay Figures, Ownership Structure

YTL Corporation 0.4 Worst In Class Worst In Class Average Below Average Worst In Class Accounting Risk, Board Independence, Pay Figures

EXPORT THE FULL SET OF SCORES FOR MALAYSIAN MSCI ACWI CONSTITUENTS

Using the Screening and Issuer Tabs on ESG Manager it is possible to export an updated dataset including all ACWI companies for this Home Market (as used for this

report) and/or a broader dataset, as required.

Company Rankings are assessed against other Malaysian companies in MSCI coverage (includes non-ACWI constituents).

OCTOBER 2017


APPENDIX G | SIMPLIFIED OWNERSHIP DIAGRAMS – FAMILY CONGLOMERATES

Ownership Diagram of Genting Group (Lim Family)


Ownership Diagram of IOI Group (Lee Family)


Ownership Diagram of YTL Group (Yeoh Family)


Genting Group (Lim Kok Thay and Lim Keong Hui)

Genting Berhad (39.7%)

Genting Plantations (51.9%)

Genting Malaysia (49.3%)

Genting Singapore (52.8%)

IOI Group (Lee family)

IOI Corporation (54.5%) IOI Properties Group (60.5%)

YTL Group (Yeoh Tiong Lay & family)

YTL Corporation (49.9%)

YTL Power International

(63.2%)

YTL Hospitality REIT (61.1%)

YTL Land & Development

(68%)

Starhill Global REIT (35.2%)

MSCI Malaysia Index

Other Malaysia listed

MSCI Singapore Index

Private company

OCTOBER 2017


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CONTACT US

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OCTOBER 2017

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OCTOBER 2017

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