Corporate Governance

Remuneration of board members and managers

The recommendations containing in codes of the different countries on this problem, are consolidated to the following:

• Remuneration has to include the mechanism of stimulation of activity of the company's managers on achievement of long-term successes. Such mechanism has to be based that remuneration consists of the fixed and variable part, and the last has to depend in very big degree on results of activity of the company. The main form of variable part of remuneration is the option for actions — possibility of managers to reserve non-executive board members right to get actions at in advance determined price and through any time (usually — not earlier than in 2 years) to sell them at the price which will be in the market at that moment (calculation becomes on that directors of the company will seek to provide achievement of higher price level on an action of the company).
• Reports of the company have to be opened in a very detailed information on the principles used by the company and all forms of a directors' emolument, including information on remuneration of each director and the highest manager separately (with the instruction both total amount of remuneration, and its separate components).

Recommendations of different codes contain provisions which sometimes treat these or those questions connected with a directors' emolument, from opposite positions. So, while the majority of codes recommend that remuneration of all directors was attached to results of activity of the company.

Some codes recommend that non-executive directors of the board were not included in insurance or pension schemes of the company.

Contents and disclosure of information on company activity

The main contents of the recommendations containing on this aspect of board activity in codes of the different countries, are directed on the solution of the following tasks:

• Development of a format of providing information on financial and operating activities of the company in annual, semi-annual and quarterly reports, and also annexes to them.
• Disclosure by the company of information on observance/non-compliance by it with these or those principles (code) of corporate governance and providing necessary explanations in this regard.
• Disclosure of information on functioning of the mechanism of corporate governance in the company (information on board members, number of meetings of board of directors and its committees, attendance of meetings by members of council and so forth).
• Full disclosure of information on the principles and volume of the rewards earned by its managers and directors

In Malaysia, The board of directors has to disclose the information concerning details of activity of audit committee, also the number of its meetings within a year and the attendance of each member of board on these meetings.

Accuracy of disclosure of information council and responsibility for it

The main recommendations containing on this aspect of board activity in codes, are directed on that in the companies there was a clear procedure of preparation and disclosure of information on their activity a key role in which plays the board, and also responsibility of public officials for granting unreliable information. Concrete recommendations differ.

In Malaysia for example, board has to have in writing recorded and transparent procedure of the relations with auditors of the company... Board has to have clear and effective system of financial, operational control and risk management... Obligations of committee on audit, according to listing rules, have to include monitoring of scale and results of audit, its efficiency, independence and objectivity

Practice of preparation and carrying out meeting of shareholders

The main contents of the recommendations containing on this aspect of board activity in codes of the different countries, are directed on fixing of the next procedural moments of carrying out general shareholder meetings:

• Confirmation of the rights of meeting of shareholders as supreme body of management on a number of the key moments of management.
• Definition of the list of the questions demanding obligatory approval by general shareholder meeting.
• The notice of shareholders on the forthcoming meeting of shareholders in a definite time prior to carrying out meeting with their informing on date, a place of meeting and its agenda (with notices in due course about changes in the agenda).
• Granting to shareholders of all necessary information on company activity before carrying out meeting they had time for its analysis and adoption of the reasonable decision.
• Use of such forms and procedures which facilitate to shareholders implementation of their right of control of management and board of directors activity.

Practice and voting procedures of shareholders

The main contents of the recommendations containing on this aspect of board activity in codes, are directed on fixing of the following principles and the procedures connected with vote of shareholders in the course of carrying out their general meetings:

• Recommendations concerning situations in which cumulative vote, and situations in which simple vote is used is used.
• Use of open and confidential voting.
• Admission procedure to vote of representatives (authorized representatives) of shareholders.
• Principle observance "one action — one voice".
• Formation of the maintenance of items on the agenda on which vote is taken.

Scope of Corporate Governance

Below the Corporate Governance statement of Dominant Enterprise Berhad will be compared with the above principles.

• As it was written above, the Malaysian company can choose any number of board members. Dominant Enterprise bhd. has 9 members.
• The chairman and other 4 members of this company are non-executive as per requirement.
• Out of 5 non-executive directors’ majority are independent.
• As it was written above, the board has to provide the availability of meeting the objectives for management. This aspect is included in Dominant Enterprise bhd.
• Teo Ah Bah @ Teo Chuang Kwee (Alternate Director : Teo Yu Chin) and Tan Meng Poo have attended to 75% of meeting. In most cost it is the required minimum attendance.
• According to CG statement, all assessment carried out by the NC were properly documented. The Committee also reviewed the structure, size and composition of the Board and recommended the retiring directors for re-election at the Company’s forthcoming Annual General Meeting. It is required according to the principles.
• Supply of information provided as per requirement. The Board members have full and timely access to all relevant information, records and the unrestricted access to the advice and services of the company secretary and auditors. Notice of meetings, agenda and accompanied by detailed reports will be circulated to all Board members for their perusal in advance of the Board meeting date. All issues discussed during the Board meetings are recorded by the company secretary and all minutes of meetings are kept in the minute’s book at the registered office. Where necessary, the Directors may seek independent professional advice at the Group’s expense in order to discharge their duties and responsibilities effectively.
• Appointment and Re-election. All new nominations for appointment to the Board are assessed by the Nomination Committee. In accordance with the Company’s Article of Associations, at least one-third (1/3) of the Directors shall retire from office once in every three (3) years, but shall be eligible for re-election.
• Remuneration. There is no salary for Independent Director, only the fees.
• Shareholders and Investors. The Board continues to acknowledge the need for shareholders and investors to be provided timely disclosure of all material business matters affecting the Company. Therefore, information is released to all shareholders through quarterly results, annual report and public announcements on timely basis. In addition, shareholders are encouraged to participate at AGM where members of the Board, Senior Management and the external auditors are available to respond to shareholders’ questions. It is required in Code too.

 

Below the Corporate Governance statement of Eksons Corp Bhd will be compared with the above principles.

 

• As per the Code the Board is responsible for determining strategic plan, monitoring and overseeing the activity of management. Eksons Corp Bhd has done it as it requires. The Board of Directors of Eksons is primarily responsible for determining the strategic direction of the Group, monitoring and overseeing the performance of the Group’s business while taking into account the principal risks involved and the management of these risks through the establishment and implementation of appropriate operating procedures, adequate internal control, and management and compliance systems. The roles and responsibilities of the members of the Board are more specifically spelt out in the Charter of the Board of Directors of Eksons whereby the responsibilities of Executive Directors and Independent Non-Executive Directors are spelt out. In addition, there is also a clear division of responsibility between the Chairman and the Group Managing Director to ensure that there is a balance of power and authority.
• The Board of Directors consists of six (6) members comprising three (3) Non-Executive Directors (including the Chairman) and three (3) Executive Directors. As it is required.
• The Code says that the company should have majority of independent directors out of Non-executive directors. There are 2 independent directors.
• Mr. Tay Hua Sin have attended 75% of meeting. The required level in this company is not less than 50%.
• All Directors are supplied with accurate information on a timely basis to enable them to effectively discharge their duties. This includes the provision of a full set of board papers which accompanies the agenda for each of its meetings. Directors are also given access to all information within the Group and may seek the advice and services of the Company Secretary or independent professional advice at the Company’s expense, where deemed necessary, in furtherance of their duties.

 

 

 

QUESTION 3

 

Effective corporate governance: importance of introduction of system, cost of its creation, demand from the companies

The companies observing high standards of corporate governance, as a rule, get broader access to the capital in comparison with the corporations operated in the inadequate image, and surpass the last in long-term prospect. Securities market on which rigid requirements to a corporate management system act and promote decrease in investment risks. As a rule, such markets attract more investors, ready to provide the capital at reasonable price, and are much more effective, bringing together owners of the capitals and the businessmen feeling need for external financial resources.

Effectively operated companies make more significant contribution to national economy and society development as a whole. They are steadier from the financial point of view, provide creation of bigger cost for shareholders, workers, local communities and the countries as a whole. Therefore they differ from inefficiently operated companies,  which bankruptcies become the reason of reduction of workplaces, losses of pension assignments and even can undermine trust to stock markets.

 

Simplification of access to the market of the capitals

Practice of corporate governance is a factor, capable to define success or failure of the companies at penetration into the market of the capitals. Investors perceive effectively operated companies as friendly confidences inspiring more that they are capable to provide to shareholders acceptable level of profitability of investments.

 

New requirements to registration of the actions, accepted at many stock exchanges of the world, cause need of observance by the companies of more and more strict standards of corporate governance. Among investors the tendency to include practice of corporate governance in the list of the key criteria applied in the course of adoption of investment decisions is obviously observed. Than level of corporate governance, high probability subjects is higher that assets are used in interests of shareholders, instead of plundered by managers.

 

Capital depreciation

The companies which observe appropriate standards of corporate governance, can achieve reduction of cost of the external financial resources used by them in the activity and, therefore, of depreciation of the capital as a whole. This regularity is especially characteristic for such countries as Malaysia in which the legal system is in process of formation, and legal agencies not always render the effective help to investors in case of violation of their rights. The joint stock companies, managed to reach even small improvements in corporate governance, can get in the opinion of investors very essential advantages in comparison with other joint stock companies operating in the same countries and branches.

Benefits to Shareholders

Good corporate governance initiatives can assist the board of control and the management to act on objectives that are in the best interest of both the company and the shareholders. The shareholders also have greater security on the investments they have made because of the transparency and access to investment details. The shareholders are better informed on all important decisions of management, such as the sale of assets and amendments to articles. (http://www.ehow.com/list_6058186_benefits-corporate-governance_.html)

Disadvantages

The international experience of corporate practice on the example of numerous corporate crises is shown by the following. The company with weak corporate governance is serious threat to interests of investors, and all society and the state, as a whole. The most strong example is Enron company which became live confirmation to that. Crash of this giant of the American industry happened in few days. There was it only thanks to a set of mistakes, abuses and fraud in activity of heads and directors of this company. Losses of nothing suspecting shareholders made about 60 billion US dollars; about 5,6 thousand workers remained without work. All this was very strongly reflected in contractors of the company. And it only one of loud episodes of consequences of badly realized corporate governance in the history of corporate scandals on the international scene.

Consequences of poorly developed corporate management system can be expressed not only in bankruptcy of the company as it became already popular topic. Bankruptcy is only one of extreme manifestations. Badly built or constructed without the sufficient accounting of specifics corporate management system is good opportunity for raider capture of the company, it is also an extreme unattractiveness of the company for investors; it is also fine opportunities for unfair managers and claims from shareholders to the company.

Misleading Financial Statements

There are many ways to present factually accurate information on a financial statement in a manner that is misleading to investors -- by, for example, selling property from a parent company to a subsidiary to maximize parent company revenues. It is also possible to present factually incorrect information that is difficult to detect by establishing complex networks of subsidiaries and cross-shareholdings. (http://info.legalzoom.com/disadvantages-corporate-governance-20070.html)

Costs of Regulation

The abuse of corporate governance has triggered the enactment of a large body of state and federal laws designed to prevent such abuses from recurring. Compliance with these laws can be burdensome and expensive for corporations. For example, the Securities and Exchange Act of 1933 requires companies seeking to list on a stock exchange to make such extensive disclosures to potential investors that compliance can cost hundreds of thousands of dollars. More recently, the Sarbanes-Oxley Act of 2002 requires corporations to establish extensive systems of internal controls to ensure that their financial statements are both factually accurate and non-misleading. (http://info.legalzoom.com/disadvantages-corporate-governance-20070.html)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

1. A.C. Fernando, 2006, Corporate Governance: Principles, Policies and Practices, Dorling Kindersley, page 10)
2. http://www.ehow.com/list_6058186_benefits-corporate-governance_.html
3. http://info.legalzoom.com/disadvantages-corporate-governance-20070.html
4. http://info.legalzoom.com/disadvantages-corporate-governance-20070.html