Professional Ethics

____________________________________________________________PROFESSIONAL ETHICS ϱϬ memorandum from the CEO, asking her to give the easier and ‘high commission work’ to his brother, Zubaidi. Noraini is uncertain what she should do. Questions: 1. Discuss Noraini’s dilemma in the above case. 2. Explain the conflict of interest in the above case. If you were in Noraini’s place what actions would you take to avoid future conflict of interest and how would you deal with favouritism at the workplace? 3. Briefly discuss related fundamental principles that are related to the above case.

____________________________________________________________PROFESSIONAL ETHICS ϱϭ TOPIC 4 ETHICAL CONFLICTS & DILEMMAS Learning Outcomes Ath the end of topic, students able to: x Define ethical conflicts x Discuss situations where ethical conflicts and whistle-blower can arise x Explain Threats to ethical behaviour x Discuss Ethical dilemmas in workplace x Elaborate Safeguards against ethical threats and dilemmas

____________________________________________________________PROFESSIONAL ETHICS ϱϮ 4.1 Define ethical conflicts Given the vast array of human relationships within the realm of business, it can be inferred that professional accountants will inevitably encounter ethical difficulties and conflicts of interest. Conflicts of interest may arise due to a multitude of circumstances. The accountant may be obligated to: x adopt a personal stance on a particular issue, such as when the accountant maintains a familial or personal connection with the client. x provide guidance to a business that operates in a competitive landscape alongside an established client, and offer assistance to two clients who are directly competing with each other. When faced with the task of assessing many ethical requirements that appear to be irreconcilable, accountants encounter ethical challenges and conflicts. For instance: x the ethical dilemma faced by an accountant arises from the conflict between their allegiance to their manager and their professional obligations. This conflict is evident when a manager requests the accountant to withhold information that could have adverse effects on the financial records of the organisation. x The individual may perceive the policies of their employer as lacking ethical standards and may encounter difficulties in aligning their personal values with those upheld by the firm. x The individual in question might find themselves in a situation where they are offering guidance to a client with whom they have a longstanding relationship, which also extends to a personal friendship. However, they come to realise that a member of the client's family is engaging in dishonest behaviour, so creating a conflict between the personal link of friendship and the professional duty to offer impartial and truthful counsel. When faced with ethical dilemmas, the individual responsible for making decisions must consider the factual aspects of the situation as well as the ethical principles that are implicated.

____________________________________________________________PROFESSIONAL ETHICS ϱϯ 4.2 Discuss Situations Ethical Conflicts and Whistle-Blower Can Arise Conflict of Interest Three categories of conflicts of interest exist: 1. Actual conflict of interest It occurs when there is a genuine conflict between the accountants' interests and other interests that influence an individual's actions or decisions. 2. Possibility of a conflict of interest It occurs when a person has interests or responsibilities that may conflict with those of the consumer. 3. Considered conflict of interest When it occurs, it appears that others may perceive a person to be susceptible to influence due to a conflict of interest. Whistleblower The term "whistleblower" refers to an individual who exposes alleged illegal or dishonest activity, behavior or unlawful action within an organization. The alleged offence or claimed wrongdoing can be: x a breach of a law, regulation, or standard; • The presence of a direct threat to the public interest, instances of fraud, and violations of health and safety regulations; • Deception of corruption. Whistle-blowers have the option of making their claims internally or outside. Ethical Dilemmas The topic of ethical dilemmas is a subject of great significance and interest in the field of ethics. Ethical dilemmas refer to A scenario arises wherein an individual is confronted with the challenge of making a challenging decision between two potential courses of conduct, both of which involve a violation of moral principles.

____________________________________________________________PROFESSIONAL ETHICS ϱϰ 4.3 Threats to Ethical Behavior Threats can emerge from a diverse range of interactions and events. The presence of a threat, whether originating from a relationship or circumstance, has the potential to undermine the commitment of a professional accountant to uphold the essential values. Alternatively, such a threat may be subjectively regarded as compromising the accountant's adherence to these standards. A given scenario or interpersonal connection has the potential to give rise to numerous sources of risk, and a single risk can impact the adherence to multiple core values. 5 Threats to ethical behavior 1. Self-interest threat One potential hazard that individuals may face is the self-interest threat. The potential for a financial or other interest to unduly impact the judgements or conduct of a professional accountant, so posing a danger or threat. Example: o Financial Interest The concept of financial interest refers to an individual or entity's stake or involvement in a financial matter. It encompasses the potential for financial gain or loss that may arise from a vested financial stake in a client whose worth may be influenced by the execution of professional services. o Recurring Client Potential loss of a recurring client. The concept of a recurring client refers to a customer who engages in repeated transactions or interactions with a certain business or service provider. o Loan The concept of a loan refers to the act of lending money or resources to an individual or entity with the expectation that it would be. A loan provided to or received from a client of an assurance firm, or any of its directors or officers, in which the loan's value may be influenced by the quality of professional services rendered. o Potential Employment Potential employment opportunity with the customer.

____________________________________________________________PROFESSIONAL ETHICS ϱϱ 2. Self-review threat The concept of self-review threat refers to a situation when an individual's ability to objectively evaluate their own work or performance is compromised. The potential risk or threat that a professional accountant may encounter is the failure to sufficiently evaluate the results of a previous decision or task carried out by either the accountant or another individual within the accountant's firm or employing organisation. This evaluation forms the basis for the accountant's judgement in providing the current service. Example: o Identify Error A significant error oversight discovered during re-evaluation. o Report Financial System This report aims to provide an analysis of the functioning of financial systems, drawing on firsthand experience in both their design and execution. o Member & Officer for Client A member of an engagement team for assurance services who currently holds or formerly held a position as a director or officer inside the client organisation. o Influence by Team An individual who is currently or formerly employed by the client and holds a position that allows them to exert direct and substantial influence over the subject matter of the engagement. 3. Advocacy threat The potential risk or hazard that a professional accountant may face is the possibility of advocating for a client's or employer's viewpoint in a manner that compromises their objectivity. Example: o The act of encouraging the purchase of shares in a public interest entity that is a customer of the auditor. o Representing a client engaged in an assurance engagement in the process of resolving conflicts with third parties.

____________________________________________________________PROFESSIONAL ETHICS ϱϲ 4. Familiarity threat There is a growing concern regarding the potential consequences of a long-term or intimate relationship between a professional accountant and a client or employer. It is feared that such a relationship may lead to an excessive display of empathy for the interests of the customer or employer, or an unwarranted acceptance of their work. Example: x The association with the director of the family A scenario occurs when a member of the engagement team has a familial connection, whether it be near or immediate, with a director or officer of the client organisation. x The Significance of Familial Connections with Influential Individuals A member of the engagement team who possesses a familial relationship, either close or immediate, with an employee of the client organisation who holds the ability to exercise substantial and direct influence over the subject matter of the engagement. x The individual who previously held the position of principal now serves as a director or officer inside the organisation. The individual in question is a former principal of the company who currently holds a position as a director, officer, or employee of the client. This individual possesses the authority and capacity to have direct or significant influence over the subject matter of the engagement. x Accepting Presents Engaging in the acceptance of gifts or the receipt of preferential treatment or privileges, unless the monetary worth of such offerings is clearly insignificant.

____________________________________________________________PROFESSIONAL ETHICS ϱϳ 5. Intimidation threat The risk that a professional accountant will be persuaded from acting objectively due to actual or perceived pressures, such as attempts to exert undue influence over the professional accountant. Example: x Resignation Threat The potential risks of termination or substitution in connection with a client relationship. x Litigation Danger Having been threatened with legal action x Forced to cut employment The professional accountant is encountering excessive pressure to limit the extent of their job in order to decrease costs.. 4.4 Ethical Dilemmas in Workplace x Professionals within the accounting field carry a substantial responsibility towards the general public. Accountants play a crucial role in disseminating company information to the public, facilitating informed investment decisions pertaining to retirement planning, school funding, and substantial acquisitions like real estate properties. x In order to in still trust in the information provided, it is imperative that accountants possess a level of expertise and adhere to ethical standards that engender confidence. In order to mitigate fraudulent acts and foster public confidence, the accounting profession necessitates adherence to ethical principles. x During the operational cycle of any corporate organisation, it becomes necessary to engage the services of a competent accountant for the purpose of information provision. Accounting professionals are consistently driven to modify financial outcomes and often rationalise their behaviour by labelling it as "creative accounting." x Creative accounting refers to the utilisation of questionable accounting methods with the intention of enhancing financial outcomes. Accountants have the potential to inaccurately record revenues and expenses, or even neglect to include certain expenses altogether. The

____________________________________________________________PROFESSIONAL ETHICS ϱϴ prevalence of aggressive accounting practises might be attributed to unethical behaviour. x One prevalent illustration of an ethical quandary arises when superiors direct a subordinate employee to inaccurately document a transaction. As an illustration, a company entity that concludes service agreements with consumers has a fiscal year-end of December 31. x Contracts are commonly executed on the first day of December and have a duration of one year. In accordance with accounting principles, the company is obligated to recognise the revenue from the contract alone in the month of December. x The residual income is documented in the financial statements of the subsequent fiscal year. Nevertheless, the management provides instructions to an employee to record the complete contractual sum in the month of December with the intention of augmenting revenues for the current fiscal year. x In light of the augmented revenue, the management team is eligible to obtain a bonus, while the subordinate will be acknowledged during an upcoming performance evaluation. x Unfortunately, dilemmas regarding ethics like the one presented are common. MIA has defined relevant safeguards against ethical dilemmas and any threats to the independence of its members in order to discourage creative accounting and disregard for ethical behaviour. 4.5 Safeguards Against Ethical Threats and Dilemmas x When accountants encounter an ethical dilemma, they must know what to do. How should they assure their compliance with the ethical code's fundamental principles and deal with the threat if their compliance is threatened? Professional accounting organisations could adopt either a rules-based or principles-based approach. 1. A rules-based approach entails the identification of every conceivable ethical difficulty or dilemma that may emerge in an accountant's professional practise, along with the specification of the required actions that the accountant must undertake in each particular case.

____________________________________________________________PROFESSIONAL ETHICS ϱϵ 2. A principles-based approach specifies the principles that should be applied when attempting to resolve an ethical problem, provides some general guidelines, and leaves it to the accountant's discretion to apply the principles sensibly in each specific circumstance. x Depending on the work assignment or engagement, various safeguards may be necessary to prevent ethical hazards. Therefore, it is in the public interest for accountants to follow a conceptual framework rather than a set of strict principles. Nature of ethical safeguards x When confronted with potential hazards or risks that may compromise adherence to core ethical values, it is imperative for the accountant to assess and analyse the available countermeasures. The presence of current protective measures may effectively mitigate the potential occurrence of a risk or diminish it to a level that is deemed acceptable. x If the current precautions are deemed inadequate, it is recommended that the accountant implement additional measures to mitigate or substantially diminish the associated risk. x There are two distinct classifications that can be attributed to ethical safeguards. 1. One of the ways in which external protections are implemented is through the establishment of legislation, regulation, or by the accounting profession. 2. The implementation of internal safeguards within the workplace. Safeguards created by legislation regulation or the accountancy profession The subsequent instances illustrate external safeguards that have been established through legislative measures, regulatory frameworks, or professional standards: x The professional organisation mandates that individuals meet specific criteria in terms of education, training, and job experience in order to qualify for membership. x The primary objective of implementing continued professional development (CPD) standards for certified individuals is to guarantee the maintenance of a suitable level of proficiency.

____________________________________________________________PROFESSIONAL ETHICS ϲϬ x The adoption and enforcement of corporate governance norms and legislations, including those related to auditing, financial reporting, and internal control, should be carried out. x Professional standards encompass many guidelines and regulations that govern the practises of professionals in specific fields. These standards are particularly relevant in areas such as financial reporting and auditing, where adherence to established protocols is crucial. The protocols pertaining to the surveillance and enforcement measures. x External examination conducted by a duly authorised third party. Safeguards in the working environment Numerous measures can be employed within the organisational setting to ensure safety and security. The safeguards that are relevant and applicable to the entire organisation or company: x These encompass the code of ethics of a firm or organisation, as well as the ethical leadership demonstrated by senior management. x an effective internal control system characterised by strong internal controls x The implementation of suitable policies and procedures for the purpose of monitoring the quality of client work. x The implementation of policies that restrict the firm's dependence on fee income derived from a solitary client.. Specific safeguards for a particular piece of work consist of: x One measure to consider is the prevention of persons from engaging in work environments where their adherence to fundamental principles may be compromised, particularly in cases involving conflicts of interest or conflicts of familiarity. x In the context of audit firms, the practise of periodically rotating the audit partner assigned to a client business's audit engagement serves as a means to ensure the establishment and maintenance of effective internal controls. This rotation policy aims to prevent the same audit partner from being responsible for auditing the same client company beyond a defined maximum duration.

____________________________________________________________PROFESSIONAL ETHICS ϲϭ x Employing an additional accountant to assess the performance of a fellow accountant. x This entails engaging in deliberations pertaining to ethical concerns with key decision-makers within the company's governance structure, including the audit committee, senior non-executive director, and board of directors. Example of Safeguard THREATS SAFEGUARDS Self Interest Financial Interest Situation where an accountant or close family member has financial interest in the employing company Example: Accountant being paid a bonus based on the financial statement result which he is preparing Remuneration being determined by other members of management Disclosure of relevant interest to those charged with governance of the company Consultation with superiors or professional bodies Self-Review Preparing Accounting Records and Financial Statements Situation where an audit firm is preparing clients’ Accounting Records and Financial Statements and subsequently provide the audit service Separation of staff who involved in preparing financial statements and who involved in audit For client from public listed companies, audit firm is prohibited from preparing accounting records and financial statement for the company Advocacy Long last Client Situation where an accountant promotes a position or opinion to the point that subsequent objectivity is impaired Example: • Comment in public on future events in particular circumstances • Promoting shares of public listed client Prohibited from engaging in these event

____________________________________________________________PROFESSIONAL ETHICS ϲϮ Familiarity Long last Client Situation where an accountant (auditor) having a client for an extended period of time Rotating Audit Partner every 5 years for client from public listed companies (others 7 years) Rotate audit team member 2-3 years Regular independent internal or external reviews of the engagement Intimidation Conflict between Requirements of Employer and Fundamental of Principles Situation where an accountant having conflict whether to follow employer’s order or fundamental principles stipulated by professional bodies. Example: Acting contrary to laws or regulation or against professional standards Consultation with superiors or professional bodies The employer provides a formal dispute resolution process Legal advice

____________________________________________________________PROFESSIONAL ETHICS ϲϯ EXERCISES 1. Define ethical conflicts 2. Who is a whistle-blower? 3. List and explain five (5) threats to ethical behavior. For each threats, suggest relevant safeguards that can be applied.

____________________________________________________________PROFESSIONAL ETHICS ϲϰ TOPIC 5 CORPORATE GOVERNANCE & CORPORATE SOCIAL RESPONSIBILITY Learning Outcomes At the end of topic, students able to: x CORPORATE GOVERNANCE o Definition corporate governance o Explain concept of corporate governance o Explain importance of corporate governance in organizations o Discuss on developments in corporate governance o Discuss on the best practice in effective corporate governance o Explain on reporting of corporate governance x CORPORATE SOCIAL RESPONSIBILITY o Define corporate social responsibility o Explain importance of corporate social responsibility in organizations o Explain on reporting of corporate social responsibility

____________________________________________________________PROFESSIONAL ETHICS ϲϱ 5.1 Definition Corporate Governance ‘Corporate Governance is the system by which companies are directed and controlled’. The Cadbury Report 1992 Corporate governance refers to the established standards, customs, and protocols that govern and oversee the operations of a corporation. The process involves aligning the interests of various stakeholders inside a firm, including shareholders, top-level executives, customers, suppliers, financiers, governmental entities, and the local community. According to the scholarly work of Abdullah and Valentine (2009), corporate governance may be conceptualized as a comprehensive framework encompassing many procedures and structures that are employed to effectively manage and guide an organization. In their interactions with the public, clients, prospective clients, employers, employees, and professional colleagues, individuals demonstrate ethical conduct, expertise, thoroughness, and courtesy. . ‘Corporate Governance describes all the influences affecting the institutional processes including those for appointing the controllers and/or regulators involved in the production and sale of goods and services.’ Turnbull, 1997 ‘Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.'. The OECD Organisation for Economic Co-operation and Development Malaysian Code on Corporate Governance 2000 defined corporate governance as “the process and structure used to direct and manage the business and affairs of a company towards enhancing business property and corporate accountability with the ultimate objective of realizing long-term shareholder value, whilst taking into account the interests of other stakeholders”.

____________________________________________________________PROFESSIONAL ETHICS ϲϲ 5.2 Theories Concept of Corporate Governance x Corporate governance refers to the amalgamation of regulations, procedures, and legal frameworks that oversee the functioning, supervision, and management of businesses. This study examines the impact of both internal and external influences on the interests of many stakeholders inside a firm, encompassing shareholders, consumers, suppliers, government regulators, and management. x The concept of corporate governance is contextualised within the framework of business ethics. Business ethics refers to the ethical principles and values that are applied within the realm of organisations, specifically pertaining to the moral character, virtuous qualities, and conduct of persons in the context of their professional endeavours. x Effective corporate conduct practises are encompassed under codes of ethics, which take into account the established set of values within the same system or code for the overall good of the corporation. Corporate governance can be defined as the mechanism by which firms are guided and overseen (Cadbury, 1992), and is typically represented through codes of good governance. x The predominant form of business registration is observed in the small company sector, wherein a collective of individuals or family members combine their resources to form a corporate organisation. x The company is efficiently handled by its proprietors. The ownership arrangement in question is commonly referred to as the "owner-manager" firm. As corporations undergo expansion, its proprietors necessitate substantial resources from capital markets, such as the issue of stocks and bonds, in order to finance the expansion. x Once a corporation transitions into a publicly listed entity, the level of power wielded by its owners and founders becomes diminished. In the context of private firms, it is common for owners to actively participate in the administration of day-to-day operations. In the context of publicly listed enterprises, the proprietor entrusts the responsibility of overseeing day-to-day operational activities to a group of skilled managers.

____________________________________________________________PROFESSIONAL ETHICS ϲϳ There are 7 key concept in corporate governance; x Fairness A fair, impartial, and balanced approach to dealing with stakeholders and shareholders. The capacity to reach a fair decision in a given ethical situation. x Transparency Open and transparent disclosures (no hiding information from shareholders). Utilising accounting systems and standards that promote this transparency. x Independence Free from conflict of interest or influences. x Honesty Sincerity and accuracy in financial reporting, as rather than manipulating stakeholders or corporations, demonstrate a high moral standard. x Responsibility A corporation's capacity to monitor accountability is facilitated by clearly defined roles and responsibilities. x Accountability Accountability for all actions and decisions resulting from the corporation's acceptance of responsibility. Private Company Structure Public Corporation Structure Owner Manager Shareholder Board of Directors Management

____________________________________________________________PROFESSIONAL ETHICS ϲϴ x Reputation A company's reputation is influenced by its moral qualities. 5.2.1 Theories of Corporate Governance There are three distinct perspectives regarding the "ownership" and "management" of businesses: i. Agency Theory ii. Stewardship Theory iii. Stakeholders Theory Agency Theory x In 1776, Adam Smith made a notable observation on the agency dilemma, wherein he noted that individuals entrusted with managing the finances of others often fail to exhibit the same level of diligence and responsibility as the actual owners. In the year 1932, Berle and Means brought attention to the distinct division between ownership and control within a corporation. They emphasised the resulting outcomes, such as investment diversification and a low concentration of ownership, as well as the conflicting interests among directors, managers, and proprietary investors. x The agency theory of corporate governance was initially introduced by Alchian and Demsetz (1972) and further developed by Jensen and Meckling (1976). According to Jensen and Meckling (1976), an agency relationship can be defined as a contractual arrangement wherein one or more individuals (referred to as principals) select another individual (known as the agent) to carry out a service on their behalf, while also granting the agent decisionmaking authority. x The principal delegated decision-making authority to the agent to facilitate the completion of tasks. Furthermore, the principal has the belief that the agent will consistently exhibit behaviour and conduct that aligns with their own best interests, all the while carrying out their responsibilities with utmost diligence. x The theory posits that the agent's actions may not consistently align with the principal's best interests, owing to the presence of information asymmetry. The

____________________________________________________________PROFESSIONAL ETHICS ϲϵ principal has the ability to mitigate the divergence of interests by offering the agent suitable incentives and incurring agency fees. x This theory offers valuable understanding of corporate governance, particularly on the conflicts that arise between external investors and management, as well as the expropriation of minority shareholders by controlling shareholders (Eisenhard, 1989). x The fundamental contributions of agency theory to the study and reform of corporate governance encompass the notions of risk, uncertainty of results, incentives, and information systems. The field of research pertaining to the application of agency theory to corporate governance matters is seeing growth due to its frequent pursuit of elucidating real-world phenomena. x This hypothesis finds support in the concept of agency costs, which posits that individuals in positions of authority within a firm, such as directors or managers, may be inclined to prioritise their personal interests over the best interests of the organisation. Consequently, their decision-making and management practises may be influenced by this self-interest. The agency theory has been widely employed in the field of corporate governance studies (Tricker, 2009). x According to agency relationship theory, the ties between shareholders (principals) and controllers (agents) are characterised as contractual partnerships. Directors serve as the managerial overseers of a publicly traded company. The amalgamated entity is no longer under the direct management or entire control of the shareholders of the respective entities. They relinquish or transfer the majority of authority to their designated board of directors.

____________________________________________________________PROFESSIONAL ETHICS ϳϬ x A board of directors consists of a collective of experienced and qualified directors who have authority over corporate resources, make critical decisions on behalf of shareholders, and so act as representatives of the shareholders' interests within the corporation. x The board of directors appoints a group of senior managers to supervise the day-to-day activities of the organisation. Managers have a pivotal role in making critical operational choices pertaining to the distribution of resources within a business. x Shareholders have an expectation that the board of directors would diligently oversee the actions of the senior management team in order to ensure their adherence to the established objectives and achievement of predetermined targets. x In return, the board of directors and senior management team are provided with a substantial remuneration package and incentives, aimed at motivating them to fulfil their tasks and obligations effectively, ultimately maximising the interests of shareholders. The diagram below depicts the relationship between board and shareholders. x In the practical realm of public corporations, it is not routinely observed that controllers or directors make persistent efforts to attain the objective of maximising the wealth of shareholders. Company Shareholders The shareholders (principal) delegate power and authority to the board of directors (agent) Board of directors Management Board of directors delegate power to the management

____________________________________________________________PROFESSIONAL ETHICS ϳϭ x Controllers or directors have extensive knowledge of the day-to-day operations of corporations, and by nature, they put their own interests first. x In order to optimise their personal self-interest, they exhibit egoistic behaviour as a result of the knowledge they acquire by controlling corporate resources. x Such scenarios arise when shareholders' and controllers' objectives conflict, and the controllers fail to make the appropriate choices in order to achieve the shareholders' objectives and allocate resources in their best interest. x This situation is referred to as a principal-agent or agency problem. Conflict of Interest x A conflict of interest arises when an agent pursues his or her own personal interests when making economic decisions, while disregarding the consequences for shareholders. Shareholders expect the controllers to maximize their wealth in order for them to experience good returns on their investments, including a high dividend yield and the long-term survival of public corporations on the market. x However, not all controllers have the same objective of maximising shareholder wealth. When appointing agents within the corporation, the administrators may have varying purposes or agendas. This misalignment of interests between shareholders and managers contributes to the central problem of corporate governance in publicly traded companies. x In the given scenario, it is seen that agents exhibit a tendency to prioritise their personal interests over the interests of the principal. The agent's pursuit of self-interest drives them to allocate the corporation's resources into endeavours that hinder the goal of maximising shareholder profit. x The personal objectives of agents encompass remunerating themselves with elevated incentives irrespective of the company's accomplishment, availing paid vacations, procuring expensive club memberships, getting a corporate aircraft, and upholding a lavish office space. The aforementioned benefits are financed by the firm, resulting in a decrease in shareholder wealth.

____________________________________________________________PROFESSIONAL ETHICS ϳϮ Information Asymmetry x Due to information asymmetry, the shareholders (principal) cannot effectively monitor the controller (agent). Agents regularly engage in daily operations within the firm and possess comprehensive understanding of all business transactions and matters. Consequently, agents or managers possess a greater level of information regarding the company compared to the principals and shareholders. x Managers, when provided with enhanced information accessibility, tend to make judgements that primarily serve their own interests. x However, shareholders have limited information because they rely significantly on the information provided by the managers to provide relevant information about the company through annual reports or the firm's website. Agency Theory Assumption x The agency theory posits that individuals participating in the market exhibit rational behavior. This implies that economic decisions are made by managers, shareholders, creditors, analysts, governments, and other market actors by the use of logical reasoning. x Therefore, agency theory assumes that managers engage in opportunistic behavior (such as earnings management, fraud, and accounting controversies) that may increase the agency cost of a company. Agency Cost x The conflict of interests between managers and shareholders warrants the exertion of control by shareholders over managers and directors. The purpose of exercising control is to align shareholder and manager interests. x In order to monitor the efficacy of managers and the activities they conduct, shareholders must incur time-consuming and costly agency costs. Due to the information asymmetry, it is difficult for shareholders to determine whether managers and directors are acting in a manner consistent with shareholder interests. x To reduce agency problems, shareholders implement a costly step-by-step control mechanism in terms of money spent, resources consumed, and even time expended. The costs of an agency can be divided into three categories:

____________________________________________________________PROFESSIONAL ETHICS ϳϯ 1. Monitoring cost: the cost incurred by shareholders to monitor the actions of the manager. The expenses include fees for external auditors, incentive programmes, and compensation programmes. 2. Bonding cost: The manager is responsible for bonding expenses, which are incurred to provide shareholders with assurance that their interests will be protected. For instance, quarterly financial report preparation costs. A quarterly report will provide the principal with information on the most recent performance update for the company. Managers may be questioned by the principal and held accountable for their actions. 3. Residual cost: 3. Residual costs refer to expenses that arise due to a discrepancy between the choices made by an agent and the decisions that would optimise the overall welfare of the shareholders. For example, expenses incurred as a result of earnings management, fraud, or accounting scandals. Stewardship Theory x It is generally recognized that 'stewards' of these stakeholders and their interests should protect and promote the rights of shareholders and other stakeholders associated with the company. Argenti and Campbell (both 1997). x The management of the organisation is perceived as custodians of its assets, responsible for their utilisation and allocation in alignment with the organization's overarching plan. In a formal context, it is within the purview of shareholders to exercise their voting rights during the Annual General Meeting (AGM) in order to potentially remove manager. x The stewardship theory posits that there exists a fundamental absence of conflicting interests between owners and administrators. It aims to establish an organisational framework that facilitates cooperation in order to enhance operational efficiency. x This theoretical perspective posits that managers are successful stewards of the organisation, prioritising the interests of the company's owners (referred to as principals). It assumes that professional managers are competent and capable of effectively managing resources.

____________________________________________________________PROFESSIONAL ETHICS ϳϰ x According to the stewardship theory, managers are appointed with the responsibility of efficiently managing the operations of the organization, and the evaluation of a manager's effectiveness and achievements is based on their level of contentment with the firm's performance. The fundamental goal of the manager is to optimize the value of the firm, rather than prioritizing their personal self-interest. x The stewardship hypothesis posits that managers operate with sincerity and integrity in order to enhance shareholder wealth. Managers engage in corporate operations with integrity in order to safeguard their reputations and ensure the stability of their future professional prospects. x Stewards, according to the stewardship theory, are the board of directors and managers who safeguard the shareholders' interests, make good decisions on their behalf, and generate a high profit for the shareholders. Their mission is to create company operational strategies and maintain a successful organization in accordance with the desires of the shareholders. Directors and administrators are fully committed to the company's path to success and sustainability. Board of Directors Shareholder Managers Corporate Governance Structure: Stewardship

____________________________________________________________PROFESSIONAL ETHICS ϳϱ Stakeholder Theory x According to Freeman (1984), he is recognised as the pioneer of this theory, which posits that the advancement of an organisation necessitates considering the concerns of various stakeholder groups (such as employees, clients, suppliers, and creditors) while remaining consistent with the ethical principles upon which the organisation is established. x According to Mansell (2013), the application of the social contract concept to organisations challenges the fundamental assumptions of the market economy, as posited by stakeholder theory. x Stakeholders encompass a diverse range of entities, including shareholders, creditors, managers, employees, consumers, suppliers, local communities, and the general public (Hill and Jones, 1992). x According to Freeman (1984), stakeholders refer to any collective or individual entity that possesses the ability to exert influence on, or be influenced by, the attainment of an organization's objectives. x The stakeholder approach posits that all individuals involved in the generation of value own the entitlement to partake in the value generated throughout the progression of the value chain. x This perspective posits that corporate governance is oriented towards the safeguarding and administration of remuneration for all stakeholders, while considering their respective opportunity costs. x The company's choices and actions consider the interests of all participants and stakeholders, as well as their involvement in corporate governance. x The firm can be understood as a network of contractual agreements involving several stakeholders, including as owners, creditors, employees, administrators, clients, suppliers, authorities, and others. Alternatively, it can be viewed as a collaborative game played by these stakeholders (Aoki, 1991).

____________________________________________________________PROFESSIONAL ETHICS ϳϲ 5.3 Importance of Corporate Governance in Organizations Every organizations requires management and governance. The primary focus of management pertains to the operational aspects of a firm, while corporate governance is primarily concerned with ensuring the proper execution of management practices. Corporate governance involves the delicate task of managing the competing interests of various stakeholders inside a firm, such as shareholders, management, consumers, suppliers, financiers, the government, and the community. The value of corporate governance lies in: x The establishment and implementation of robust and efficient corporate governance practices contribute to the cultivation of an organizational atmosphere characterized by ethical conduct, hence leading to enhanced operational outcomes and the long-term viability of the business as a whole. x The primary objective of this initiative is to enhance the level of responsibility exhibited by both individuals and teams within an organization, with the ultimate aim of proactively mitigating potential errors. x Efficiency in processes is achieved by the consistent and repetitive execution of tasks. x The repeatability and consistency of a process enable errors to be easily identified and addressed in a timely manner.

____________________________________________________________PROFESSIONAL ETHICS ϳϳ x Cost Reduction - By streamlining duties, firms can effectively minimize wasteful practices such as scrap, rework, and other costly inefficiencies. x Enhanced Operational Efficiency - The occurrence of frequent disruptions resulting from inconsistent procedures is eradicated by the establishment of clear operation standards categorized as either 'conform' or 'non-conform'. x Compliance refers to the adherence to corporate governance principles, which fosters an environment that facilitates the successful introduction of a product into the market, ensuring that it aligns with its intended specifications and operates effectively. 5.4 Developments of Corporate Governance 5.4.1 Historical Development of Corporate Governance in United Kingdom Source: https://www.frc.org.uk/directors/corporate-governance-andstewardship/history-of-the-uk-corporate-governance-code 1992 Cadbury Report The establishment of the Committee on the Financial Aspects of Corporate Governance took place in May 1991, as a collaborative effort between the Financial Reporting Council, the Stock Exchange, and the accounting profession. This initiative was prompted by persistent concerns surrounding financial reporting and accountability standards, particularly in light of the BCCI and Maxwell cases..

____________________________________________________________PROFESSIONAL ETHICS ϳϴ The report that followed, published in 1992, is commonly referred to as the Cadbury Report, named for Sir Adrian Cadbury, the chairman of the Committee. This study established a robust framework of corporate governance principles, which were subsequently integrated into the Listing Rules of the London Stock Exchange (LSE). Additionally, it introduced the notion of 'comply or explain'. It made the following fundamental suggestions: i. The Board of Directors - The Board should consist of both executive and nonexecutive directors who can provide a broader perspective on the company's operations. The Code recommends that directors seek independent professional counsel and participate in seminars, courses, and training programmes designed to enhance their skills and knowledge. i. The Chairman – Code suggests that the board members appoint a senior nonexecutive director as the deputy chairman, to whom they should address any concerns regarding the positions. ii. Non-executive directors – The code suggests that audit committees comprised of non-executive directors be a minimum requirement for every board. A significant majority of non-executive directors should be independent in the sense that they have no business or other relationships that could compromise their independent judgement and decision-making. iii. Establishment of committee – The code suggests that each board form nomination, compensation, and audit committees. All director compensation must be disclosed. The Code recommends that audit firms be rotated in order to prevent an overly familiar relationship between management and auditor. iv. Audit – The Code suggests that the board should maintain a professional and objective relationship with the auditors. The auditor should report on the company's ability to continue as a continuing concern. v. Shareholders – The Code recommends that companies engage in more frequent dialogue and communication with shareholders through the annual report and the annual general meeting (AGM) so that shareholders can exercise their voting rights and exchange opinions regarding the operation strategy of the company. 1995 Greenbury Report Regarding the formation of remuneration committees, the Greenbury Report issued a Code of Best Practise. It was established to investigate directors' compensation

____________________________________________________________PROFESSIONAL ETHICS ϳϵ packages and related disclosures in annual reports. The report recommends that the annual report include the complete details of each director's remuneration package, including their names, basic salary, benefits in kind, annual awards, and long-term incentive schemes. The report highlights the following recommendations: x Directors' compensation should be sufficient to attract, retain, and motivate them to serve the company without being excessive. x The committee should reconsider the director's compensation, especially in light of his subpar performance and dismissal. x To align the interests of directors and shareholders, performance-based components of remuneration should be implemented. x Options on shares should not be granted at a discount. 1998 Hampel Report x The Hampel Report was released subsequent to the Greenbury Report by a span of three years, with the primary objective of endorsing and reinforcing the recommendations proposed by preceding regulations. The 1998 Hampel Report places significant emphasis on the ideas of director efficacy and pay. x The Hampel Committee conducted a comprehensive evaluation of the suggestions put forth by the Cadbury and Greenbury Committees. Hampel introduced a unified corporate governance code, leading to the establishment of the Combined Code, which was designed to be universally applicable to all firms listed in the United Kingdom. x The report encompasses a dual set of recommendations, designed specifically for both the firm and institutional investors. The compliance or explanation principle is advocated for by directors. The text underscores the significance of upholding efficient internal controls that span all facets of the company's activities. It further highlights the need to conduct regular reviews of the control systems, at least on an annual basis, and to communicate their effectiveness to shareholders. The Hampel Report provides the following suggestions: x Directors: Directors are obligated to fulfil their duties in a manner that demonstrates good faith, diligence, and expertise, all while prioritising the best interests of the company. Furthermore, it is imperative for the chairman to guarantee that all directors receive comprehensive briefings regarding matters that occur throughout board meetings. It is recommended that the directors get

____________________________________________________________PROFESSIONAL ETHICS ϴϬ supplementary training in order to augment their current understanding of the relevant new policies and regulations. x Remuneration of Directors: The pay committee is responsible for formulating a strategy to assess and oversee the remuneration packages of directors, with the objective of ensuring their alignment with the interests of shareholders. The composition of the committee should exclusively of directors who are nonexecutive and independent. The remuneration package encompasses yearly bonuses, stock option schemes, and long-term incentive schemes. x Shareholder: The presence of the chairman of the remuneration, audit, and nominating committees is essential during the annual general meeting to address any inquiries raised by shareholders. In order to ensure the success of the Annual General Meeting (AGM), it is imperative for the Hampel Committee to actively promote and endorse heightened shareholder engagement. It is imperative that, no less than twenty working days preceding the Annual General Meeting (AGM), each shareholder be duly notified of the forthcoming meeting and provided with any pertinent documentation. x Accountability and Audit: The Hampel Committee proposes that auditors should thoroughly scrutinise both financial and non-financial data included in the annual report, and then communicate any inconsistencies to the board of directors in a confidential manner. The responsibility for establishing and maintaining an effective internal control system, overseeing financial management, ensuring compliance with legal and regulatory requirements, managing risks, and conducting enterprise risk assessments lies with the board of directors and management. 1999 Turnbull Committee Report 1999 saw the publication of the Turnbull Report, which outlined recommended practises for internal control and risk management for UK-listed companies. The report consists of five sections: i. Introduction – The report emphasises the significance of internal control and risk management to safeguard the investments of shareholders and company assets. Management, government processes, and daily operations should all incorporate effective internal control. ii. Maintenance of an effective internal control system – Members should discuss the potential risks the company might be facing, how far the risk impact to the business and cost to control the risks.

____________________________________________________________PROFESSIONAL ETHICS ϴϭ iii. Review of the effectiveness of internal control – The board should review management's reports on the efficacy of internal control on a regular basis. iv. Board’s statement on internal control – The annual report should include details on internal control and risk management. In addition, the board should elucidate the adopted practises to identify, evaluate, and manage the company's risks. v. Assessing the Efficiency of the Organization's Risk and Control Process – The report provides a list of potential queries for the board to consider during its meeting with management. 2003 Higgs Review/Smith Report The Higgs Independent Review conducted an analysis of the role and effectiveness of non-executive directors. The publishing of the Smith Report followed the occurrence of the Arthur Andersen scandal and the Enron scandal. The study focused on the concept of auditor independence and furnished audit committees with comprehensive guidance. 2005 Revised Turnbull Guidance The Financial Reporting Council of the United Kingdom's 2005 Turnbull report on internal control concluded that risk management information disclosure could be improved. The revised directive stated: It is imperative for the board of directors to evaluate the extent to which the internal control statement in the annual report provides an enhanced avenue for effective communication. The evaluation of a company's risk management and internal control by investors is deemed crucial in their investment decision-making process. In conjunction with the Business Review, which has replaced the Operating and Financial Review, the internal control statement provides the board with the means to facilitate shareholders' comprehension of the company's risk and control matters. Additionally, it enables the board to elucidate the company's approach to maintaining a system of internal controls to tackle these matters, as well as to outline the board's assessment of the efficacy of said system.

____________________________________________________________PROFESSIONAL ETHICS ϴϮ 2010 The UK Corporate Governance Code The Combined Code has been revised and transformed into the UK Corporate Governance Code. The Financial Reporting Council (FRC) issued the most recent version of the UK Corporate Governance Code in June 2010, following the financial crisis that peaked in 2008-2009. This prompted a pervasive re-evaluation, both locally and internationally, of the governance systems that could have mitigated the problem. Sir David Walker was appointed in the United Kingdom to conduct a comprehensive assessment of the corporate governance practises in banks and other financial institutions. In response, the Financial Reporting Council (FRC) expedited the review of the code to enable a simultaneous evaluation of corporate governance in other publicly traded companies. The FRC drew two principal conclusions from its review. x The essence as well as the letter of the Code needed to be adhered to with a great deal more care. x The interaction between the boards of listed companies and their shareholders could and should be improved to increase the impact of shareholders on monitoring the code. Due to this rationale, the FRC has assumed the duty of developing a stewardship code that will furnish investors with information pertaining to optimal practises. Nevertheless, the Financial Reporting Council (FRC) agreed that the underlying principles of the old Combined Code were robust and suitable for their intended objectives. 2012 The Boardroom Diversity In observance of the 20th anniversary of the Corporate Governance Code, which implemented the "comply or explain" methodology for promoting optimal practises in corporate board organisation and shareholder interactions, the FRC released a compilation of scholarly writings. 2014 Risk and Viability The 2014 UK Corporate Governance Code mandates that an assessment of principal risks and a statement of longer-term viability be reported annually to shareholders.

____________________________________________________________PROFESSIONAL ETHICS ϴϯ 2016 Audit Review The revisions made to the Guidance on Audit Committees pertain to the operations and disclosure practises of audit committees. It is necessary for members of the audit committee to possess industry-specific experience that is relevant to the company's sector. The elimination of the obligation for the external audit to undergo a bidding process every ten years, as well as the elimination of mandatory tendering and audit firm rotation requirements, has taken place. According to the Code, organisations are obligated to provide transparency in the audit committee report regarding the assessment of the external auditor's effectiveness, the process employed for selecting or reappointing the external auditor, and the duration of the existing audit firm's tenure. Furthermore, notable modifications were made to auditing standards, which encompassed the mandate for "enhanced audit reporting" by publicly traded corporations and public interest organisations. The inclusion of an extended description of critical audit risks and the corresponding response strategies in the enhanced audit reports would result in a significant expansion of the reports' scope, necessitating auditors to comply with this requirement. Additionally, their report would designate the extent to which their audit was considered proficient in identifying anomalies and instances of fraudulent activity. Additional disclosures outlined in the report encompass the duration of the auditor's tenure, previous reappointments and renewals, a statement affirming the auditor's independence, and verification that no illegal services were provided. 2017 UK Corporate Governance Code The Financial Reporting Council (FRC) has declared its intention to undertake an assessment of the United Kingdom Corporate Governance Code. Subsequently, it plans to initiate a consultation process regarding the suggested modifications, which will occur at a later date in the year. These changes will be informed by the outcomes of the review as well as the government's reaction to its Green Paper. The publication of the government's response to the Corporate Governance Review occurred in August 2017. The FRC expressed its appreciation for the government's response in a press release. The corporate governance framework in the United Kingdom is expected to undergo adaptations in response to evolving requirements. On December 5, 2017, the Financial Reporting Council (FRC) released its recommended amendments to the United Kingdom Corporate Governance Code.

____________________________________________________________PROFESSIONAL ETHICS ϴϰ 2018UK Corporate Governance Code The FRC has released a new code of corporate governance in the United Kingdom, which it calls "A Code Fit for the Future." The release date of the modified code was July 16, 2018. According to the FRC, the new Code "places the relationship between companies, shareholders, and stakeholders at the centre of the UK's longterm, sustainable growth." For fiscal years commencing on or after January 1, 2019, the Code applies to all public-listed companies. The code's fundamental principles are divided into five categories. x Section A: Leadership x Section B: Effectiveness x Section C: Accountability x Section D: Remuneration x Section E: Relations with Shareholders 5.4.1 Historical Development of Corporate Governance in United States (US) Sarbanes Oxley Act 2002 In 2002, in response to a number of corporate governance scandals and the collapse of major corporations such as Enron and WorldCom, the United States Congress passed the Sarbanes-Oxley Act, which introduced reforms in the various areas of corporate management and listing requirements for the New York Stock Exchange (NYSE). Numerous nations have incorporated portions of this law into their own applicable regulations or codes. SOX is a rules-based governance framework. It is extremely detailed and carries full legal force. The Act was passed to mandate the presence of independent directors on audit committees. The SOX Act's purpose is to protect investors by enhancing the accuracy and dependability of corporate disclosures made subject to the securities laws, among other things. The regulations of the Sarbanes-Oxley Act are based on three principles: integrity, accuracy, and accountability, in order to foster investor confidence. This Act stipulated the following: x It placed a significant amount of responsibility on the CEO and CFO for the authenticity and completeness of the annual report. x It strengthened the external auditor's independence. x Audit committee membership by independent directors. Independent directors are those who have no direct or indirect relationship with the company.

____________________________________________________________PROFESSIONAL ETHICS ϴϱ x The new regulations require corporations to form nomination, compensation, and audit committees. These committees must be composed solely of independent directors. x It established the Public Company Accounting Oversight Board, a new regulatory body for auditors of US-listed companies. 5.4.2 Development of Corporate Governance in Malaysia Period Before Asian Financial Crisis 1997/1998 Malaysia's corporate governance began with the Companies Act of 1897, followed by the Companies Act of 1965. The Companies Act of 1965, which is administered by the Companies Commission of Malaysia (SSM), governs corporate structures, reporting requirements, disclosure, and director responsibilities. Moreover, the Kuala Lumpur Stock Exchange (KLSE) Listing Requirement applies to all publicly traded companies in Malaysia. The establishment of the Securities Commission Malaysia (SC) in accordance with the Securities Commission Act 1993 promotes a thriving securities market and maintains investor confidence in Malaysia. The efficacy of boards is still uncertain. Even companies listed in Malaysia have more non-executive directors. Before the crisis, the positions of chairman and chief executive director were held by distinct individuals. Period After Asian Financial Crisis 1997/1998 After the economic crisis and business failures of 1997 and 1998, which stunted the development of the Malaysian economy, corporate governance is being given serious consideration in the country. Investor confidence in the Malaysian market has been severely impacted by the crisis, and the only way to restore investor confidence is to reinforce corporate governance in Malaysia. In January of 2000, KLSE released the Revised Listing Requirements, which include greater transparency in company monitoring and enhanced protection of shareholder interests. The April 2004 conversion of KLSE to Bursa Malaysia Berhad was intended to strengthen Bursa Malaysia Berhad's international standing. The Securities Commission also plays a vital role in governing capital market development and sustaining investor confidence, particularly after the financial crisis. In 1998, the Malaysian government and private sector collaborated to establish the High Level of Finance Committee through the Ministry of Finance on Corporate Governance in order to establish a framework for corporate governance in Malaysia. The Committee subsequently established the Malaysian Institute of Corporate Governance (MICG) as a non-profit organisation limited by guarantee to increase the

____________________________________________________________PROFESSIONAL ETHICS ϴϲ awareness and practises of sound corporate governance in Malaysia, particularly for publicly listed companies. Prior to and during the financial crisis, the committee determined that the quality of corporate governance in Malaysia was inadequate and that it was necessary to enhance it. The companies required guidance to improve their corporate governance, which should be on par with the international standard. The most significant outcome of the Committee is the establishment of the Malaysian Code on Corporate Governance (MCCG) in 2000. The Committee concentrated on the recommendation to strengthen the statutory and regulatory framework for corporate governance and the best mechanisms for corporate governance. A variety of corporate governance reforms in Malaysia have been strengthened over time. Poor corporate governance, particularly in the private sector, is believed to have been the primary contributor to Malaysia's economic difficulties in 1997. The lack of independent directors, the absence of independent auditors, the absence of transparency, financial disclosure, and accountability, as well as allegations of cronyism, are among the many factors that have contributed to the fragility of corporate governance practises. In addition, the significant authority and participation of significant shareholders in company management in Malaysia has given them the opportunity to act in their own self-interest, resulting in corporate misconduct. This circumstance led to the collapse of several major Malaysian corporations, including Renong, Malaysian Resources Corporation Berhad, and Lion Group.. MCCG Introduced in 2000, the Malaysian Code on Corporate Governance (MCCG) has been a significant instrument for corporate governance reform and has positively influenced the corporate governance practises of companies. The MCCG embodies broad principles and internationally recognised practises of corporate governance that exceed the minimum requirements established by statute, regulation, or Bursa Malaysia Berhad (the Malaysian stock exchange). The code parallels the Combined Code on Corporate Governance (UK), which is based on the UK's experience outlined in the Hampel Report (1998) and Cadbury Report (1993). The Malaysian corporate governance framework is a comprehensive approach primarily motivated by the protection of shareholder interests. It seeks to promote transparency in corporate management. The MCCG 2000 placed significant emphasis on the board's role in governance by establishing best practises for enhancing board functions and board structures and procedures. MCCG 2000 is divided into four sections: principles and board practises of good corporate

____________________________________________________________PROFESSIONAL ETHICS ϴϳ governance, best practises, the role of institutional shareholders, and explanatory notes. The Securities Commission has amended the code in 2007, 2012, 2017, and 2021. The MCCG was reviewed in 2007 and 2012 to ensure its continued relevance and alignment with internationally acknowledged best practises and standards. Key MCCG 2007 amendments were intended to strengthen the board's role and audit committees' functions, ensuring that they carry out their responsibilities effectively and efficiently. In 2011, the Securities Commission unveiled a five-year Corporate Governance Blueprint (the Blueprint), which includes measures to improve the quality of corporate governance in Malaysia and to promote a culture of sound corporate governance in Malaysia among publicly listed companies. The framework highlights six areas of corporate governance: shareholder rights, institutional investor roles, boards, disclosure and transparency, gatekeepers, and public and private enforcement. Following this, the Malaysian Code on Corporate Governance 2012 (MCCG 2012), which supersedes the Revised MCCG 2007, will be issued. MCCG 2012 centred on clarifying the board's role in providing leadership, bolstering the board's independence, and enhancing the board's efficacy by strengthening its composition. Publicly traded companies with corporate disclosure policies were also encouraged to make public commitments to respect shareholders' rights. In April 2017, the MCCG 2017 was revised to adopt a new strategy for promoting increased internalisation of corporate governance culture in public-listed and non-publicly listed companies, such as small and medium enterprises, stateowned enterprises, and licenced intermediaries. It is a collection of best practises designed to strengthen corporate culture based on accountability, transparency, and sustainability. The enhancement to MCCG 2017 was pertinent in accordance with global standards, which incorporate the contributions and opinions of local and international shareholders, changes in market structure, and lessons learned from corporate governance failures. The 2021 revision of the MCCG introduces best practises and recommendations for: x Improve board policies and processes, including those related to director selection, nomination, and appointment; x strengthen board oversight and facilitate the incorporation of sustainability considerations into the strategy and operations of companies; and x encourage the adoption of best practises, particularly those with relatively low adoption rates, as emphasised in the SC's Corporate Governance Monitor report.

____________________________________________________________PROFESSIONAL ETHICS ϴϴ Bursa Malaysia Berhad's ("Bursa") Corporate Governance Guide ("Guide") aims to enhance the application and implementation of corporate governance practises by providing listed issuers with practical guidance. It is also anticipated that the guide will foster an appreciation among listed issuers for the drivers of good corporate governance. The guide was created to reflect the MCCG's "CARE" (comprehend, apply, and report) concept as well as the new ways of thinking. The purpose of the guide is to provide insights into best practises of corporate governance, including how such practises can be applied and actualized in substance as opposed to form, in order to assist businesses in creating sustainable value. Under the Bursa Malaysia Securities Berhad Listing Requirements, there is also the CG disclosure framework. The various government initiatives (i.e., the Malaysian Anti-Corruption Commission (MACC) (Amendments) Act 2018, the Guidelines on Adequate Procedures 2018, and the National Anti-Corruption Plan (NACP) 2019–2023) communicate that strong corporate governance is essential for the long-term viability of the Malaysian economy. Section 17A of the 2019 MACC Act, which went into effect on June 1, 2020, concentrates on the new provisions for corporate liability. Following are the summary changes made by the Securities Commission in each revision: MCCG 2007 x The MCCG 2007 modifies the composition of the nomination committee, the director's evaluation, the meeting procedure, and the audit committee. x Specified the eligibility requirements for director appointments and the function of the nominating committee. x Specified the criteria for appointment as a member of the audit committee, the audit committee's composition, the frequency of its meetings, and the need for continuous training. x Public Listed Companies are required to establish an internal audit department.

____________________________________________________________PROFESSIONAL ETHICS ϴϵ MCCG 2012 x Provide eight principles and 26 specific recommendations to increase the efficacy of the board. x Principle 1: Clearly define the roles and responsibilities of the board. The board should establish distinct functions, roles, and procedures for carrying out their responsibilities. In addition to formalising ethical standards through a code of conduct, the board should ensure compliance. x Principle 2: Enhance the membership of the nomination and compensation committees. The board should establish nomination and compensation committees consisting solely of independent non-executive directors with a majority of independent members. The nomination committee will establish recruitment and annual evaluation criteria for the director. To devise remuneration policies and procedures to attract and retain directors. x Principle 3: Strengthening directors' independence Putting a cap on the tenure of independent board members at nine years. Chairman and CEO should be held by separate individuals, and the chairman should be a non-executive board member.

____________________________________________________________PROFESSIONAL ETHICS ϵϬ MCCG 2012 (continued) x Principle 4: Promote director commitment. Board members should have access to continuing education opportunities. x Principle 5: Maintain the audit committee's integrity in financial reporting. The audit committee must ensure that the financial statements adhere to all applicable financial reporting standards. The audit committee should have policies and procedures in place to evaluate the qualifications and independence of external auditors. x Principle 6: Recognise and manage risks. The board should establish a solid framework for risk management. The board should create an internal audit function that directly reports to the audit committee. x Principle 7: Ensure quality and timeliness of disclosure The board should ensure that the company has appropriate corporate disclosure policies and procedures, including the use of information technology (IT) to disclose the information. x Principle 8: Strengthen the company's relationship with its shareholders. The board ought to promote survey voting. The board should encourage shareholders' participation at annual general meetings through effective communication and engagement. MCCG 2017 x Establish 36 practices to support three principles: board leadership and effectiveness, effective audit and risk management, integrity in corporate reporting, and meaningful stakeholder relationships. x Adopted the proportionality approach in order to distinguish large companies from others by implementing best practises. x introduced the CARE approach, outlined the desired outcomes for each best practise, and provided companies with guidance on how to implement the practices. x Introduced 'Step-Up' practises to assist companies in strengthening their corporate governance practices further.

____________________________________________________________PROFESSIONAL ETHICS ϵϭ The MCCG is founded on three fundamental principles of effective corporate governance: x Principle A: Board Leadership and Effectiveness o Board Responsibilities - In every organisation, there exists a governing board that assumes the responsibility of leading the firm and is jointly held accountable for the attainment of the company's objectives and goals. The board of directors is responsible for formulating the strategic objectives of the organisation, ascertaining the availability of essential resources to accomplish these objectives, and assessing the performance of the management team. The roles of Chairman and Chief Executive Officer (CEO) are fulfilled by separate individuals. It is recommended that the board chairman refrain from assuming membership on the audit committee, nomination committee, or pay committee͘ o Board Composition - The governance of any company is entrusted to a board, which assumes the responsibility of leading the firm and is collectively held accountable for the attainment of the company's objectives and goals. The board of directors is responsible for defining the strategic objectives of the organisation, ensuring the availability of essential resources to accomplish these objectives, and assessing the performance of the management team. o Remuneration - The salary of directors and senior management is determined based on the company's objective of attracting and retaining suitable talent to effectively pursue the company's long-term objectives. The development of compensation policies and the subsequent decisionmaking process adhere to a clear and impartial methodology. x Principle B: Effective Audit and Risk Management o Audit Committee - The Audit Committee should consist solely of directors who are independent. The Audit Committee is fully informed about all relevant matters pertaining to audits and financial statements, and takes appropriate action to address them. The coordination of the connection between internal and external auditors is evident. o Risk Management & Internal Control Structure - The responsibility for the risk management and internal control systems of the company lies with the board of directors. The organisation should implement suitable

____________________________________________________________PROFESSIONAL ETHICS ϵϮ internal control procedures and actively seek confirmation that these mechanisms are functioning efficiently. The board is responsible for ensuring that the internal control system effectively controls risks and is effectively incorporated into the organisational culture of the company. The establishment of a Risk Management Committee by the board, consisting primarily of independent directors, is intended to oversee the company's risk management structure and policies. x Principle C: Integrity in Corporate Reporting and Meaningful relationship with Stakeholders o Engagement with Stakeholders - There is continuous communication between the organisation and its stakeholders to facilitate a mutual understanding of each party's objectives and expectations. Stakeholders are able to make informed decisions regarding the company's business, governance, environmental, and social responsibility policies. Communication with stakeholders is possible through a variety of channels, including: • establishing an investor relations function; conducting engagement forums; • arranging investor, analyst, and media briefings; and • utilising electronic means (websites, social media, mobile apps, etc.).. o Conduct of General Meeting - General meetings are essential platforms for directors and senior management to engage shareholders in order to facilitate a greater understanding of the business, governance, and performance of the company. The shareholders must receive notice of the annual general meeting at least 28 days prior to the meeting. General meetings enable and support shareholders in exercising their ownership rights and expressing their views to the board and senior management on any areas of concerns. Shareholders should exercise their rights to ask questions, provide views and vote at general meetings. The company should also leverage technology to facilitate greater shareholder’s participation.

____________________________________________________________PROFESSIONAL ETHICS ϵϯ Key features of the MCCG: One of the key features of MCCG is The Comprehend, Apply and Report approach – CARE: CARE x CARE advocates for firms to analyse the cognitive processes associated with the implementation of effective corporate governance and to offer a comprehensive and justifiable account of their implementation efforts. x CARE aims to enhance the level of trust between corporations and their stakeholders by advocating for the provision of equitable and substantial information, upon which stakeholders can depend to effectively engage with the company. Moreover, it cultivates a climate of transparency and reciprocal regard that yields advantages for both the institution and its constituents. x CARE aims to enhance awareness and promote the adoption of optimal corporate governance principles, while also facilitating evaluations and fostering dialogues pertaining to corporate governance. In aggregate, these results will enhance the prevailing corporate governance culture norm in the market. The Comprehend, Apply and Report approach – CARE The shift from comply or explain to apply or explain an alternative. Identify exemplary practices which support companies in moving towards greater excellence – Step Ups. Guidance to assist companies in applying the Practices. Greater focus and clarity on the Intended Outcomes for each Practice.

____________________________________________________________PROFESSIONAL ETHICS ϵϰ Source: Bursa Malaysia Sustainability Reporting Guide 5.4.3 Regulatory Framework of Corporate Governance in Malaysia Key Players in Corporate Governance Regulatory Framework Minority Shareholder Watchdog Group (MSWG) Finance Committee on Corporate Governance Securities Commission Malaysia Companies Commission of Malaysia Bursa Malaysia Securities Berhad Malaysian Institute of Corporate Governance (MICG)

____________________________________________________________PROFESSIONAL ETHICS ϵϱ Malaysian Institute of Corporate Governance x In March 1998, following a financial crisis, the Malaysian Institute of Corporate Governance (MICG) was established in response to a recommendation by the High Level Finance Committee on Corporate Governance. x MICG is responsible for promoting awareness and practises of good corporate governance in Malaysia, and is committed to facilitating business and corporate development in the country via the finest corporate governance practises. x Eleven major objectives of the MICG: o To be the preferred and most trusted organisation for advancing corporate governance best practises. o Through dialogues, forums, conferences, and seminars, to become a well-known organisation in the field of corporate governance. o To develop relationships with the primary corporate governance reference and research group and to network with them. o To provide consultative, technical, and support services for the implementation of corporate governance best practises. o To work with multiple stakeholders. o To collaborate with regulatory bodies including SC, SSM, and Bursa Malaysia. o To execute corporate governance ratings as an independent body, particularly for publicly traded companies. o To be able to provide input that is impartial, just, and honest in order to improve the performance of publicly traded companies. o To promote corporate governance initiatives in Malaysia. o To conduct advanced research on corporate governance issues with Malaysian and international organisations. o To encourage corporations to adopt investor values with a longer-term perspective in order to contribute to a stable economic system for the benefit of society. Minority Shareholders Watchdog Group (MSWG) x MSWG was founded in 2000 as an independent corporate governance research organisation. x The primary objective of MSWG in Malaysia is to safeguard the interests of minority shareholders of public companies in Malaysia, as MSWG urges

____________________________________________________________PROFESSIONAL ETHICS ϵϲ shareholders to be treated equally and promotes transparency in the company's operations and administration. x MSWG's primary responsibilities in Malaysia are: o To implement proxy voting systems, it will allow minority shareholders to continue to have voting rights at the company's annual general meeting. o To act on behalf of minority shareholders to raise any issues and concerns related to the company's management or other matters that need to be brought up at the general meeting. Securities Commission Malaysia (SC) x The Securities Commission Malaysia (SC) was constituted under the Securities Commission Act 1993 on March 1, 1933. x SC believes roles that perform by key players of the corporate governance ecosystem will make successful corporate governments environment as an efforts show by regulators and market. x Corporate Governance ecosystem constitutes roles of directors, roles of gatekeepers, roles of shareholders and roles of industry association: o All directors must implement their own best practices for corporate governance that promote accountability, transparency, and integrity; and therefore, continuous programme for the directors is very important. o The gatekeepers which referring to external auditor represent as a sole independent party to review the transactions and books of the company. Their independent opinions on the statements are required which will enforce integrity and corporate governance. o Shareholders have to play their role to ensure that board and management of the companies are using resources effectively and efficiently for the interest of companies and shareholders. Practices of good corporate governance will be used as a benchmark whenever new shareholders are selecting companies for investment.

____________________________________________________________PROFESSIONAL ETHICS ϵϳ o The industry association in Malaysia plays an essential function in improving the components of the corporate governance framework, they provide services to their members ranging from education, surveys, and venues for sharing of opinions and best practices. Companies Commission of Malaysia (SSM) x Under a 2002 Act of Parliament, the SSM, a statutory authority that regulates company and business affairs in Malaysia, was established. x The functions of SSM as a prominent authority in the evolution of corporate governance are as follows.: o To ensure the provisions of the SSM Act and laws are administered, imposed. o To serve as an agent of the government and supply service in administering, collecting and imposing payments for regulatory matters concerning operations, companies and business. o To encourage and motivate proper manner among directors, secretaries so as to ensure that every company is conducted for excellent corporate governance. o To improve and promote availability of company information to made available to the public. Companies Act 2016 x In 2003, SSM conducted a review of the Companies Act of 1965 in an effort to streamline the incorporation process and reduce business costs. x The companies Act 2016, which came into effect on January 31, 2017, serves as the replacement for the Companies Act 1965. It applies to all firms and corporations operating in Malaysia and is widely regarded as the principal legislation governing corporate governance in the country. x The user's text does not contain any information to be rewritten in an academic manner. The Companies Act of 2016 governs a range of matters pertaining to the duties and obligations of directors, conflicts of interest among directors, and the indemnification of directors. The statement above aims to strengthen the prevailing common law norms that require directors to exercise their authority for a valid purpose, in a sincere manner, and in the organization's best interests. x As per the provisions outlined in the Companies Act of 2016, it is incumbent upon directors to furnish written notification to the company with respect to

____________________________________________________________PROFESSIONAL ETHICS ϵϴ specific items. These encompass the act of revealing specific information pertaining to their ownership of shares in the organisation, any alterations made to their share ownership, their participation in transactions associated with the organisation, and any current or potential instances of conflicting interests. x Important alterations to the 2016 Companies Act pertaining to corporate governance are as follows: o One member can incorporate a company, in which case that member can also serve as the sole director, unless the minimum number of directors for a publicly traded company remains at two. o It is optional to adopt a Memorandum of Association and Articles of Association. o No longer must a company disclose its authorised capital. A company is required to notify its issued share capital and paid-in share capital of the adjustments resulting from the return of allotments. o As of January 31, 2017, private companies are no longer required to convene their annual general meeting, which can now be conducted via circular resolutions. o The chairman of the member's meeting shall provide reasonable opportunities for members to query, discuss, comment on, and make recommendations for the company's management. o Dividends are only permitted if they pass the solvency test and can only be distributed from profits to shareholders. Bursa Malaysia Securities Berhad x Bursa Malaysia, formerly known as the Kuala Lumpur Stock Exchange or KLSE, was renamed Bursa Malaysia Berhad on April 14, 2004 in order to strengthen its competitive position and adapt to global trends by becoming more customer- and market-focused. x Bursa Malaysia is governed by regulatory principles to ensure that high standards of business conduct are maintained, investors' interests are safeguarded, and effective and efficient regulations are in place.

____________________________________________________________PROFESSIONAL ETHICS ϵϵ x Corporations that are listed on Bursa Malaysia are obligated to adhere to the listing standards and rules set forth by Bursa Malaysia, in addition to the Companies Act 2016. x As per the stipulations outlined in the Listing Requirements, it is mandatory for boards of public listed corporations to establish a nominating committee as well as an audit committee. Furthermore, it is required that a minimum of onethird of the boards of listed corporations be comprised of independent directors. x Listed corporations are obligated to ensure the inclusion of a narrative account of their corporate governance practises, specifically in relation to the Malaysian Code on Corporate Governance (MCCG), inside their annual report. 5.4.4 Features on poor Corporate Governance x Five common ethical issues of corporate governance Financial Manipulation o Directors who manage the company's information may manipulate the finances for their own purposes. o Invalid financial information disclosed by directors could mislead shareholders. o The Enron, Worldcom, Transmile, and Xerox Corporation scandals brought attention to the consequences of financial fraud. o Furthermore, the auditor's professional independence was compromised as they assisted the accounting administration of the client company, in addition to violating their obligations. Director's negligence Poor communic ation of informatio n Excessive business risk-taking and lack of risk control Inflated director's remunerati on FInancial Manipulati on