Wednesday, 1 February 2012

ACGA gives feedback on CG Blueprint 2011

"The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership organisation dedicated to working with investors, companies and regulators in the implementation of effective corporate governance practices throughout Asia. ACGA was founded in 1999 from a belief that corporate governance is fundamental to the long-term development of Asian economies and capital markets."

ACGA gave its feedback on the Corporate Governance Blueprint 2011 from the Securities Commission. The full feedback (7 pages) can be found here:

Some items:

II. Mandate poll voting via amendments to the Listing Requirements and CG Code

The arguments presented by the SC for mandating voting by poll on only “substantive” resolutions, such as related-party transactions, as opposed to resolutions that were “administrative or procedural in nature”3, do not address the fact that companies and shareholders may disagree on what constitutes an administrative resolution and what is a substantive one. As has been seen over the past few years in Asia and globally, issues such as director re-elections and approving audited financial accounts may seem “administrative”, but are now considered substantive by many shareholders. The argument that a show of hands empowers minorities also fails to take into account that controlling shareholders can easily ask for a vote by poll should they not “like” the results from a vote by a show of hands.

In other words, ACGA likes poll voting on all issues.

Chapter 2: Role of Institutional Investors

I. Formulate a new code for institutional investors
• Institutional investors to drive the formulation of a new code and publish their commitment to the new code for institutional investors.

II. Create an industry driven umbrella body for institutional investors
• Institutional investors to work together towards the establishment of an umbrella body.

ACGA: These suggestions are well-intentioned and we fully support the idea of institutional investors taking on a more proactive role in corporate governance. However, we question whether these ideas will bear fruit at this stage in Malaysia? Is the investment industry ready? As one fund manager in Malaysia pointed out, unit trust fund managers, government fund managers and other fund managers do not belong to the same institutional framework and are often lobbying against each other; hence the idea of an institutional investor-driven stewardship code might not be feasible at the moment.

It is worth noting that Malaysia has not seen a great deal of engagement or activism by local institutional investors, whose usual policy has been and, for the most part, continues to be “voting with their feet”.

Khazanah Nasional, the investment holding arm of the government, has a mandate to transform certain industries “with the objective of pursuing the nation’s long-term economic interests”. While this makes them active investors, their specific mandate is not necessarily closely aligned to other institutional investors. The Employees Provident Fund, another government agency, has also become increasingly interested in the governance of its investee companies, and in 2010 published its “Corporate Governance and Voting Guidelines”. Yet, beyond these two institutions we have seen little evidence of engaged shareholders, other than a few institutional investors, such as Aberdeen Asset Management and Corston Smith.

"It is worth noting that Malaysia has not seen a great deal of engagement or activism by local institutional investors": this must be the understatement of the year, and not only applies to institutional investors but also to retail investors. Shareholder activism in Malaysia is, as far as I can judge, almost non-existent. SC and BM should take a good deal of the blame for this.

The praise for the EPF is really too much in my opinion, except for initial funding of MSWG and publishing its voting guidelines it has been very quiet, much too quiet. This is a large institute with all the necessary facilities, manpower and money, they could have done such a better job if they had wanted to do so.

We also agree that creating an industry umbrella body for institutional investors is a good idea. Once again, however, some fundamental questions need to be asked. Who will lead it? Who will fund it? Moreover, such a body needs to be independent. It should not be set up by the government or with government funding. We believe this would defeat the purpose of such a body.

Chapter 3: The Board’s Role in Governance

We agree that the chairman and CEO should be separated. While we understand that most companies that currently have a separate chairman and CEO only follow the letter of the guideline rather than the substance, imposing an independence criteria on a company’s chairman could, we fear, only lead to more box-ticking.

In this context, it is worth emphasising that the quality and authority of an independent chairman is critical. Most Asian listed companies—and Malaysia is no exception—are either family-controlled or majority state-owned, hence it is very likely that any “independent chairman” will be loyal to the majority shareholder. We would suggest that it would be better to mandate the recommendation made in the Corporate Governance Code that a board nominates an INED to be the senior independent director to whom concerns may be conveyed. The lead independent director would be responsible for, among other things, ensuring that independent directors can perform their duties responsibly; call meetings of the independent directors as needed; serve as principal liaison between the independent directors and the chairman and senior management; and respond to shareholder and other stakeholder questions and comments.

With regard to the question of allowing a former CEO to become the chairman after a “cooling-off” period, it is extremely unlikely that a former employee would ever be completely free of their loyalty to the company in the Asian context. A “cooling-off” period, therefore, would not have a great deal of meaning in this context.
One of the expectations that the SC has for the Code is the “diligent exercise of voting rights”5. We suggest that the SC starts with this first and mandate a policy whereby institutional investors would need to publish their voting policies and also how they have voted at AGMs annually. The Thai Securities and Exchange Commission put such a policy in place in 2005.

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