Thursday, 25 August 2011

Hitting corporate crooks where it hurts


"A Question of Business" by P. GUNASEGARAM

The Star, July 3 2010

"This year (2010) has been a rough, tough one for corporate governance. Issues have arisen which raise questions anew as to the role of management, directors and shareholders in the running of companies, particularly listed companies, and the role of auditors and regulators.

For some companies, directors and key shareholders have colluded to cause prices of shares to fluctuate wildly, leading to losses and gains. Insiders gained and those who had no information lost, wondering what caused the winds that sent share prices tumbling, flying and then tumbling again.

In other companies, fraud and/or incompetence of management caused huge losses to even some of our best companies raising questions as to how such losses could arise and why boards, internal auditors and external auditors and others who should know were unable to pick them up.

In theory, the management, board and major shareholders are often considered to be separate entities, each with their own rights, responsibilities and interests. But in practice, they often overlap and produce peculiar problems of conflicts of interest. Often management, the board and major shareholder are virtually the same person.

In Malaysia, it is common for a single shareholder or for a few shareholders to have majority control of a listed company. Thus, these shareholders control the composition of the board and through the board the management.

That gives major shareholders complete control over the listed company. This has often resulted in the companies doing things which are not beneficial to all shareholders of the listed company although the law, especially the Companies Act, requires the board to act in the interest of the company and all shareholders.
But, despite all the anecdotal evidence over the years of boards and management acting against the interests of companies, there has been hardly any prosecution by the Companies Commission of Malaysia which administers the Companies Act (please see our cover story this issue).

Thus, it is that many miscreants get away with not quite blue murder but quite a bit and Corporate Malaysia’s crooks still not only remain outside the bars but continue on their own merry way of lining their own pockets at the expense of their companies and ultimately the investment community.

Apart from the direct loss that such crime inflicts on companies, the risk premium that investors demand for investing in our capital markets may mean that many billions more in valuation is lost as well. In other words, our companies will be worth a lot more if the risk of loss was minimised.

While the Securities Commission (SC) has maintained that it is not quite possible to legislate completely good corporate governance and ethical behaviour, it nevertheless stands to reason that proper enforcement of existing laws and rules will be a major deterrent to wrongful behaviour and will be one of the pillars of good corporate governance.

In this respect, one must lament the lack of a unified body that can handle all corporate crime by perhaps incorporating all the relevant legislation under one all-encompassing one and putting a single regulator in charge of this.

The long-mooted idea of merging the Companies Commission and the SC still continues to be an idea despite being proposed as a measure under the mid-term review of the Ninth Malaysia Plan several years ago. That would have brought the securities and companies laws under one roof and made enforcement of overlapping and related offences that much easier. But it was not to be.

But still, one can take comfort in the passing of Section 317A of the Capital Markets and Services Act which came into force on April 1 (2010). This enables the SC to take action against a director or officer of a listed company when his actions cause loss to the company.

Unfortunately, this covers only the period after April 1 this year and offenders prior to that cannot be prosecuted under this Act. And it applies only to listed companies. But still it is a powerful tool that the SC can use to bear upon miscreants who routinely get away with offences because no one is prosecuting them.
Still this is something that will enable some action to be taken at least with respect to the listed companies while the authorities finalise their long-overdue plans to rationalise the functions of the various regulatory bodies."

A good and frank article, but why did Gunasegaram not include Bursa Malaysia? They also play a large part in enforcement:
With yearly staff cost of RM 92,000,000 and on top of that a 5-year allocation of 53,000,000 ESOS options I think the public could expect some decent enforcement from Bursa Malaysia. Apart from some fines (much too late, much too little and very selective, never against the major players) I haven't noticed any improvement in that field.

I agree with Gunasegaram to join the enforcement agencies Securities Commission and Companies Commission, but then all, including the enforcement division of Bursa Malasia.

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