Corporate governance: do we agree?

THE Malaysian corporate tea is still in preparation. In a turn of events, Serba Dinamik Holdings Bhd announced in June that it had sued its former auditor KPMG, alleging negligence and breach of contractual and statutory obligations on the part of KPMG. This came after a series of calamities in Serba Dinamik, including the resignation of five independent non-executive directors following audit concerns raised by KPMG on the company’s books.

Elsewhere, concerns about governance are less evident. Blackstone’s investment in vegan milk brand Oatly sparked an uproar among climate change and political activists who staged protests and threatened a boycott over Blackstone’s alleged links to Brazilian companies believed to be linked to deforestation in the Amazon.

While the “E” (environmental) and “S” (social) elements of ESG are all the rage in business today, “G” (governance) is arguably the only element that often catches the eye. due to the instinctive reactions to the stock markets when compromised.

This article discusses the impact of the two-level voting process for independent directors in promoting objectivity and good governance.

Sources and setting

Corporate governance (GC) is the process and structure used to direct and manage the affairs and affairs of a company, in order to promote corporate prosperity and corporate responsibility. The objective includes achieving long-term shareholder value while taking into account the interests of other stakeholders (Report of the High Level Finance Committee [1999]). In Malaysia, the CG framework is derived from various sources including the Malaysian CG Code (MCCG), Companies Act 2016 (CA 2016), Bursa Malaysia Securities Bhd registration requirements and 2007 in capital markets and services.

Independent directors

The registration requirements define an independent director (ID) as an “independent director of management and free from any business or other relationship that might interfere with the exercise of independent judgment or the ability to act in the best interests. of a candidate or a listed issuer ”. It has been recognized that the extended service of an ID can erode its objectivity (CG Guide: 3rd Edition). In this context, the MCCG offers guarantees in the form of a nine-year term limit for IDs and the two-tier voting process for the renewal of long-standing IDs.

The two-tier voting process

As part of the two-tier voting process, the ID seeking re-election will need to be approved by (i) all major shareholders (i.e. those who own at least 33% of the voting shares of the society) ; and (ii) the other remaining shareholders.

In April 2021, the Securities Commission revised the MCCG, making such renewals more difficult. Two-tier voting now applies to IDs with terms of more than nine years, instead of 12 years previously.

Bursa Malaysia followed suit and proposed, in the registration conditions, an occupancy limit of 12 years without further extension for identity documents. Although the MCCG does not have the force of law, failure to comply with the listing requirements could result in enforcement action by Bursa Malaysia against the listed company and its directors. These changes suggest a growing regulatory appetite for the composition and appointment of boards of directors.

Form or substance?

In 2019, a total of 181 listed companies used two-tier voting, of which 41 were first-time adopters. There were 268 renewals of IDs with terms of 13 years or more (using the two-tier voting process), compared to 172 renewals by annual shareholder approval (simple majority): Bursa Malaysia’s CG Monitor 2020 ( CGM 2020). While these numbers look promising at first glance, it’s safe to say that the two-tier voting process, along with its recent overhaul, is unlikely to be groundbreaking on its own.

CGM 2020 underlined that on average, only half of shareholders exercised their votes to decide on renewals of mandates of long-standing IDs. In addition, the participation of non-significant shareholders in Tier 2 was significantly low. Although the 2016 CA guarantees shareholders the right to vote in deciding crucial issues – including the appointment of directors – shareholder apathy, especially among minority shareholders, arguably makes the two-tier voting process less impactful. than regulators would have expected.

Additionally, the proposed 12-year term limit under the registration requirements could mean that two-tier voting would effectively only apply to a limited group of directors with terms between nine and 12 years. . For these changes to be meaningful, there needs to be a greater impetus from shareholders to engage and participate in board renewal and succession issues, which might be easier said than done.


Good governance is directly correlated with a company’s financial performance and competitive advantage (McKinsey survey, March 2018). While the regulatory intention has been to move from a myopic checkbox approach to one that is more robust and based on a meaningful and substantial application of good governance practices, only time will tell if recent changes are working. promising.

This article was written by Cheong Xin Chi of Christopher & Lee Ong.

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