EBOOK Professional Ethics

51 4.3 Threats to Ethical Behavior Threats may be created by a broad range of relationships and circumstances. When a relationship or circumstance creates a threat, such a threat could compromise, or could be perceived to compromise, a professional accountant’s compliance with the fundamental principles. A circumstance or relationship may create more than one threat, and a threat may affect compliance with more than one fundamental principle. 5 Threats to ethical behavior 1. Self-interest threat the threat that a financial or other interest will inappropriately influence the professional accountant’s judgment or behavior Example: o Financial Interest A financial interest in a client where the performance of professional services may affect the value of that interest o Recurring Client Concern about the possibility of losing a recurring client o Loan A loan to or from an assurance client or any of its directors or officers where the performance of professional services may affect the value of that loan. o Potential Employment Potential Employment with client 2. Self-review threat the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed by the professional accountant, or by another individual within the professional accountant’s firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service Example: o Discover Error The discovery of a significant error during a re-evaluation o Report Financial System

52 Reporting on the operation of financial systems after being involved in their design or implementation o Member & Officer for Client A member of the engagement team for an assurance client being, or having recently been, a director or officer of that client. o Influence by Team A member of the engagement team being, or having recently been, employed by the client in a position to exert direct and significant influence over the subject matter of the engagement 3. Advocacy threat the threat that a professional accountant will promote a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised; Example: o Promoting shares in a public interest entity when that entity is an audit client. o Acting as an advocate on behalf of an assurance client in resolving disputes with third parties 4. Familiarity threat the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work; Example: • Family Relationship with Director A member of the engagement team having a close or immediate family relationship with a director or officer of the client. • Family Relationship with Influenced person A member of the engagement team having a close or immediate family relationship with an employee of the client who is in a position to exert direct and significant influence over the subject matter of the engagement • Former Principal is client’s Director/Officer

53 A former principal of the firm being a director or officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement. • Accepting Gifts Accepting gifts or preferential treatment, unless the value is clearly insignificant 5. Intimidation threat the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant Example: • Dismissal Threat Being threatened with dismissal or replacement in relation to a client engagement • Litigation Threat Being threatened with litigation • Pushed to Reduce work Being pressured to reduce inappropriately the extent of work performed in order to reduce fees. 4.4 Ethical Dilemmas in Workplace • Individuals in the accounting profession have a considerable responsibility to the general public. Accountants provide information about companies that allow the public to make investment decisions for retirement, a child’s education and major purchases such as a home. • For the public to rely on the information provided, there must be a level of confidence in the knowledge and behaviour of accountants. Ethical behaviour is necessary in the accounting profession to prevent fraudulent activities and to gain public trust. • Every business entity has an accounting professional provide information at some point in the organization’s operation cycle. Accounting professionals are

54 always being tempted to alter financial results and often rationalize the behaviour by calling it creative accounting. • Creative accounting is the process of employing questionable accounting methods to boost results. An accountant may record revenues and expenses in an incorrect manner or omit expenses altogether. Repeated incidences of aggressive accounting are a result of the lack of ethical behaviour. • A common example of an ethical dilemma involves management instructing a subordinate employee to record a transaction in an incorrect manner. For instance, a company with a Dec. 31 year-end calendar year, signs contracts with consumers to perform services. The contracts are usually signed Dec. 1 and are a year in length. Accounting principles require the company to record the revenue for the contract for one month only, the month of December. • The remainder of the revenue is recognized on next year’s financial statements. However, management instructs an employee to record the entire amount of the contract in December to boost revenues for the current year end. Management receives a bonus for the boosted revenue and the subordinate receives recognition in an upcoming performance review. • Unfortunately, ethical dilemmas, such as the example provided, are common. To help curb the desire to practice creative accounting and ignore ethical behaviour, MIA has outline relevant safeguard against ethical dilemma or any threats to its member independence. 4.5 Safeguards Against Ethical Threats and Dilemmas When accountants are faced with an ethical conflict they need to know what to do. If there is a threat to their compliance with the fundamental principles of the ethical code, how should they ensure their compliance and deal with the threat? There are two possible approaches that the professional accountancy bodies could take, a rulesbased approach and a principles-based approach. 1. A rules-based approach is to identify each possible ethical problem or ethical dilemma that could arise in the work of an accountant, and specify what the accountant must do in each situation. 2. A principles-based approach is to specify the principles that should be applied when trying to resolve an ethical problem, offer some general guidelines, but leave it to the judgement of the accountant to apply the principles sensibly in each particular situation.

55 Ethical threats need different safeguards may exist depending on the work assignment or engagement. It is in the public interest, therefore, to have a conceptual framework for the accountants to follow, rather than a set of strict rules. Nature of ethical safeguards When there are threats to compliance with the fundamental ethical principles, the accountant should assess the safeguards against the threat. There might already be safeguards in place that eliminate the possibility that the risk will ever materialise, or that reduce the risk to an acceptable level. If the safeguards that exist are not sufficient, the accountant should try to introduce new safeguards to eliminate or reduce the risk to an insignificant level. Ethical safeguards can be grouped into two broad categories: 1. Safeguards created externally, by legislation, regulation or the accountancy profession 2. Safeguards established within the work environment. Safeguards created by legislation regulation or the accountancy profession Safeguards that are created externally, by legislation, regulation or the profession, include the following. • The requirements for individuals to have education and training and work experience, as a pre-condition for membership of the professional body. • The continuing professional development (CPD) requirements for qualified members, to ensure that they maintain a suitable level of competence. • Corporate governance regulations, particularly those relating to auditing, financial reporting and internal control. • Professional standards, such as financial reporting standards and auditing standards. Monitoring procedures and disciplinary procedures. • External review by a legally-empowered third party. Safeguards in the work environment A variety of safeguards can be applied within the work environment. These can be categorised into: • Safeguards that apply across the entire firm or company: these include

56 o a code of ethics for the company or firm and suitable ethical leadership from senior management o a sound system of internal control, with strong internal controls o the application of appropriate policies and procedures for monitoring the quality of work done for clients o Policies that limit the reliance of the firm on the fee income from a single client. • Safeguards that are specific to a particular item of work: These include o keeping individuals away from work where there might be a threat to their compliance with the fundamental principles (for example where a conflict of interests or a conflict of familiarity might exist) o in the case of audit firms, rotating the audit partner so that the same audit partner is not responsible for the audit of the same client company for more than a specified maximum number of years o the application of strong internal controls o using another accountant to review the work that has been done by a colleague o Discussing ethical issues with those people in the company who are responsible for governance issues, such as the audit committee, senior non-executive director, or 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

57 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 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

58 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.

59 TOPIC 5 CORPORATE GOVERNANCE & CORPORATE SOCIAL RESPONSIBILITY Learning Outcomes At the end of topic, students able to: • 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 • 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

60 5.1 Definition Corporate Governance ‘Corporate Governance is the system by which companies are directed and controlled’. The Cadbury Report 1992 Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. It essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Haslinda Abdullah and Benedict Valentine 2009 defined corporate governance as a set of processes and structures for controlling and directing an organization Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, as well to colleagues in profession. ‘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”. 5.2 Theories Concept of Corporate Governance Corporate governance is the combination of rules, processes or laws by which businesses are operated, regulated or controlled. The term encompasses the internal and external factors that affect the interests of a company's stakeholders, including shareholders, customers, suppliers, government regulators and management

61 The concept of corporate governance is framed within business ethics. Business ethics is the ethics applied to the organizational field, which refers to human quality, the excellence of people and their actions, within the framework of their work in them. Good business conduct practices are embodied in codes of ethics, which contemplate the set of values that are established in the same system or code in order to benefit the company as a whole. Thus, corporate governance framed within the area of business ethics is defined as the system by which companies are directed and controlled, Cadbury (1992) and embodied in the so-called codes of good governance. Most companies registered as small companies, where a group of people or family members contribute their funds together to form a business entity. The owners are effectively the managers of the company. This form of ownership control is called as the ‘owner-manager’ firm. As companies inspire to expand their business, the owners need substantial capital to support the expansion through capital markets in issuing shares and bonds. Once companies enter as a public listed company, in any times its is no longer fully controlled by the owners or founders. In private companies, the owners are directly involved in management of day-to-day operations. While in public-listed companies, the owners delegate the management of day-to-day operations to a group of professional managers. Private Company Structure Public Corporation Structure Owner Manager Shareholder Board of Directors Management

62 There are 7 key concept in corporate governance; • Fairness Even handed, unbiased, balanced method of dealing with stakeholders and shareholders. The ability to reach an equitable judgement in a given ethical situation • Transparency Open and clear disclosures (no concealment of information to shareholders). Using accounting systems and standards that facilitate this openness • Independence Free from conflict of interest or influences. • Honesty Honesty and truth in financial reporting, not misleading to stakeholders and corporation, show strong morality • Responsibility Clearly defined roles and responsibilities provides a corporation with the ability to track for responsibility. • Accountability Development and maintenance of risk management & control procedures Corporation being answerable for all actions & decision made as a result of acceptance of responsibility • Reputation Moral virtues effect the good name of a corporation. 5.2.1 Theories of Corporate Governance There are three different views associated with the “ownership” and “management” of organizations: i. Agency Theory ii. Stewardship Theory iii. Stakeholders Theory

63 Agency Theory In 1776, Adam Smith exposed the agency problem, noting that managers of other people's money do not take the same care as the owner himself. Later in 1932, Berle and Means highlighted the existing separation between ownership and control of the company and its consequences (diversification of investment, low concentration of ownership), as well as the divergent interests between directors, managers and proprietary investors. The agency theory of corporate governance was put forward by Alchian and Demsetz (1972) and Jensen and Meckling (1976). Jensen and Meckling (1976) define an agency relationship as “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent”. The principal delegates some decision-making authority to the agent to enable said agent to perform the assigned tasks. The principal also trust that the agent will always act in the best interest of the principal and perform their duties diligently. The theory assumes that both the principal and the agent are utility maximizers with different interests, and that because of information asymmetry the agent will not always act in the best interests of the principal. The principal can limit the divergence of interest by establishing appropriate incentives for the agent and by incurring costs termed agency costs. This theory offers insight to explain the phenomena of corporate governance, particularly the agency-principle problems of conflicts between external investors and managers and the expropriation of minority shareholders by controlling shareholders (Eisenhard, 1989). The main contributions of agency theory to thinking about and reforming corporate governance are the ideas of risk, uncertainty of results, incentives and information systems. The study of conjectures that applies agency theory to corporate

64 governance issues continues to grow, because it frequently tries to explain real events that occur in the world. The approach that supports this theory is associated with the so-called agency costs: the “agents”, directors or managers of the companies, may be tempted to act for their own benefit and make management decisions driven by their own interests. In any case, the agency theory has been the most applied in corporate governance research (Tricker, 2009). In Agency relationship theory, relationship exist in the contractual relationship between shareholders (principal) and controllers (agents). The controllers are the directors of the public corporation. The shareholders who own the companies do not manage or have full control over the enlarged entity anymore. They effectively surrender or delegate most power to their appointed board of directors. A board of directors consists of group professional and knowledgeable directors in which they control corporate resources and make crucial decisions on behalf of the shareholders therefore represent shareholder’s interest in the corporation. The board of directors then appoint a team of senior managers to manage daily operations of the corporation. Managers decide key operational decisions pertaining to the allocation of corporate resources. Shareholders expect that directors will closely monitor behaviour of senior management team in ensuring they act in track and meet the objective that have been decided. In return, the directors and senior management team enjoy good remuneration package and incentive to motivate them in complete their job and task hence maximize shareholder’s interest. Below illustration show the relationship between the shareholders and the board. 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

65 In real world situation of public corporations, the controllers or directors do not consistently strive to ensure the achievement of the shareholder wealth maximization objective. Controllers or directors have built deep information about daily operations of corporations, and in nature they prioritize their own self-interest. Due to knowledge they gain by controlling corporate resources, they display egoistic behaviour to maximize their self-interest. These situations exist when conflict of goals arise between shareholders and controllers, where controllers do not make necessary decision that achieve goals of the shareholder and not allocate resources in the best interest of the shareholders. This situation is known as principal-agent problem or agency problem. Conflict of Interest • Conflict of interest occurs when an agent acts to fulfil their own personal interest when making economic decisions while ignoring the implications for shareholders. Shareholders expect the controllers to maximize their wealth so that they can enjoy the good returns on their investments including expect high return in term of dividend, long-term of survival public corporation in the market. • Controllers, however do not necessary share same objective to maximize shareholders wealth. The controllers may have different motive or agenda when they appoint as agent in the corporation. This misalignment of interest between the shareholders and controllers, which contribute as key problem of corporate governance in public corporations. • In this instance, agent tend to prioritizes their own self-interests rather than the interest of the principal. Self-interest motivate the agent to divert the corporation’s resources to activities that are detrimental to the objective of maximizing shareholders’ wealth. • Example of agent personal agenda include paying higher bonuses to themselves regardless of company performance, enjoying paid holidays, buying expensive club memberships, acquiring a corporate jet and having a luxurious office. The corporation pays for these perks, which lead to the reduction in shareholder wealth. Information Asymmetry • The shareholders (principal) are unable to effectively monitor the controller (agent) due to information asymmetry. Agent work in the firm every day and are knowledgeable about all business transactions and affairs, thus, agent or managers

66 surely have more information about the firms rather than the principals or shareholders. • With more information in their hands, managers, therefore, tend to make decision that benefited themselves. • Nevertheless, the information hold by the shareholders is limited because they hugely depend on the information supplied by the managers to furnish the relevant important information about the company through the annual reports or the firm websites. Agency Theory Assumption • Agency theory assumes that people in the market are rational. Which means, managers, shareholders, creditors, analysts, governments and all other market players think rationally in making economic decisions. • Therefore, agency theory assume that managers tend to be involved in opportunistic behavior (such as earnings management, fraud and accounting scandal) that potentially increases a firm’s agency cost. Agency Cost • The divergence of interest between the managers and shareholders leads to the need for shareholder to take steps to exercise control over the managers and directors. The purpose of exercise control is to align the interest of the shareholders and managers. • Shareholders need incur agency cost which is time-consuming and expensive in order to monitor the performance of managers and activities managers do. Because of the information asymmetry it is not an easy task for shareholders to determine whether managers and directors are performed in a right path that are align with the interest of shareholder. • Hence, shareholders take a step of place control mechanism that are costly in terms of the money spent, resources consumed and even time-consuming to reduce agency problem. Agency costs can be divided into 3 main categories: i. Monitoring cost– Cost that incurred by the shareholders in monitoring the manager’s action. The costs include external auditor’s fees, incentive schemes and compensation schemes. ii. Bonding cost – Cost incurred to give assurance to the shareholders that their interests are safeguarded, and these costs are under manager’s responsibility. For instance, costs incurred in preparing quarterly financial reports. Principal will get information regarding the latest

67 update of the company’s performance through quarterly report. Principal may question to managers and managers accountable on their actions. iii. Residual cost – incurred due to divergence between the agent’s decision and those decisions that would maximize welfare of the shareholders. For instance, costs incurred due to earnings management, fraud, accounting scandal. Stewardship Theory Generally, it is accepted that the rights of shareholders and other stakeholders connected with the company should be protected and promoted by ‘stewards’ of these stakeholders and their interests, Argenti (1997) and Campbell (1997). This views the management of the organization as the “stewards” of its assets, charged with their employment and deployment in ways consistent with the overall strategy of the organization. Technically, the shareholders have the right to dismiss stewards via a vote at the AGM (Annual General Meeting). Stewardship theory strongly believe that there is no conflict of interest between the owners and the managers and that it seeks to find an organizational structure that allows coordination to achieve greater efficiency. This theory considers managers as good servants of the organization, act in the best interest of the owners (principals) and assumes that professional managers of any company do a good job and will act as effective managers of its resources. Stewardship theory articulates that managers are hired for handling the firm’s operations in a well manner and a manager’s achievement and success is measured

68 by satisfaction he gets from the performance of the firm. The manager’s primary objective is to maximize the firm value rather than their self-serving objectives. Stewardship theory, assume that managers work with good faith and honesty in order to increase the wealth of shareholders. The managers behave in honest way in operating the business in order to protect their reputation and to secure their future career. Under stewardship theory, stewards refer to board of directors and managers who protects the interests of the shareholders, make good decisions on behalf of the shareholders and make high profit for the shareholders. Their objective is to create company operational strategies and maintain a successful organization as the shareholder’s desire. Directors and managers place a full commitment for the path of companies sustain and success. Stakeholder Theory The basis of this theory is attributed to Edward Freeman (1984), and he postulates that the organization must be developed taking into account the interests of the interest groups (employees, clients, suppliers and creditors) without contradicting the ethical principles on which the organization is based. Capitalism, which is criticized by Mansell (2013) who argues that stakeholder theory undermines the principles on which the market economy is based by applying the concept of social contract to the organization. The legitimate claim on the signature is established through the existence of an exchange relationship. Stakeholders include shareholders, creditors, managers, employees, customers, suppliers, local communities, and the general public (Hill and Jones, 1992). Stakeholders are any group or individual that can affect or be affected by the achievement of the company's objectives (Freeman, 1984). The stakeholder approach considers that all participants in the creation of value have the right to participate in the value that is added in the development of the value Board of Directors Shareholder Managers Corporate Governance Structure: Stewardship

69 chain. This approach implies that corporate governance is oriented to safeguard and manage that the remuneration of all participants occurs, taking into account their opportunity cost. The interests of all participants and stakeholders in the company who are affected by the decisions and actions that occur in it, as well as their participation in corporate governance, are considered. The company is a nexus of contracts between the different stakeholdersshareholders, but also with creditors, employees, administrators, clients, suppliers, authorities, others, or an agreement according to which the company constitutes a cooperative game between the different stakeholders (Aoki, 1991). In the stakeholder approach, corporate governance is affected by the relationships between the agents that intervene in the corporate governance system. As the OECD (2004) points out, these relationships are subject, in part, to laws and regulations, but also to voluntary adaptation and, more importantly, to market forces. 5.3 Importance of Corporate Governance in Organizations All companies need managing and governing. If management is about running the business, then corporate governance is about seeing that it is run properly. Corporate governance essentially involves balancing the interests of many stakeholders of a company, such as shareholders, the management, customers, suppliers, financiers, the government and the community. The importance of corporate governance is; • Strong and effective corporate governance helps to cultivate a company culture of integrity, leading to positive performance and a sustainable business overall.

70 • Essentially, it exists to increase the accountability of all individuals and teams within a company, working to avoid mistakes before they can even occur. • Efficient Processes – due to the repeatability and consistency of tasks performed. • Visibility of Errors – this repeatability and consistently helps to quickly identify the nonconformities in processes. • Reduced Costs – when tasks are streamlined, companies can eliminate the waste from scrap, rework, and any other costly inefficiencies. • Smoother–Running Operations – regular disruptions from inconsistent processes are eliminated, as operation specifics become either ‘conform’ or ‘non-conform’. • Compliance – a culture that supports corporate governance allows for its product to reach the market while meeting its intended specifications and working correctly. 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 Committee on the Financial Aspects of Corporate Governance was set up in May 1991 by the Financial Reporting Council, the Stock Exchange and the accountancy profession in response to continuing concern about standards of financial reporting and accountability, particularly in light of the BCCI and Maxwell cases.

71 Its subsequent report (published in 1992), which became known as the Cadbury Report after Sir Adrian Cadbury who Chaired the Committee, developed a set of principles of good corporate governance which were incorporated into the London Stocks Exchange (LSE)’s Listing Rules. It also introduced the principle of ‘comply or explain’. It made the following basic recommendations: i. The Board of Directors – the Board should consist of executive directors who run the company and non-executive directors who can bring broader views to the company’s operations. Code recommends that directors need to have an independent professional advice, attend any workshop, courses, or training to enhance their skills and knowledge. ii. The Chairman – Code recommends the board members should appoint a senior non-executive director as the deputy chairman, as a person to whom they should address any concerns about the positions. iii. Non-executive directors – Code recommends there should be a minimum each board should have an audit committee composed of non-executive directors. Majority of the non-executive directors should be independent in terms of free from any business or other relationship that could interfere their independent judgement and decision. iv. Establishment of committee – Code recommends each board needs to establish the nomination, remuneration and audit committees. All directors’ emoluments need to be disclosed. The Code recommend rotation of audit firms should be implemented to avoid any relationship between management and auditor become too comfortable. v. Audit – Code recommends that the board needs to ensure that a professional and objective relationship is maintained with the auditors. The auditor should report the company’s capability in running its operation as going concern. vi. Shareholders – Code recommends that the companies should have more frequent dialogue and communication with the shareholder via annual report and Annual General Meeting (AGM) so that shareholder able to exercise their voting rights and exchange views concerning strategy of company’s operation. 1995 Greenbury Report The Greenbury Report issued a Code of Best Practice on establishing remuneration committees. It was formed to look into the directors’ remuneration packages and disclosure about it in the annual reports. The report recommends that the full details of all elements in the remuneration package of each individual director by names,

72 basic salary, benefits in kind, annual bonuses, and long-term incentive schemes need to be disclosed in the annual report. The report highlights few recommendations as follows: i. Directors pay should not be excessive, but sufficient to attract, retain and motivate them to serve the company. ii. The committee should reconsider the compensation payment particularly when it comes to director’s poor performance and termination. iii. The performance-related elements of remuneration should be created to align the interest between directors and shareholders. iv. Share options should not be issued at a discount. 1998 Hampel Report Three years after the issuance of the Greenbury Report, the Hampel Report was published in order to support the recommendations of previous codes. Thedirector’s effectiveness and remuneration are among the principles being emphasized by the Hampel Report (1998). The Hampel Committee reviewed the recommendations made by the Cadbury and Greenbury Committees. Hampel recommended a single code of corporate governance, and this led to the Combined Code which applied to all UK listed companies. It has two sets of recommendations: one for the company and other for the institutional investors. It promotes the principle of comply or explain for the directors. It laid emphasis on maintenance of good internal controls, covering all aspects of company's’ operations, reviewing the controls systems at least annually and informing shareholders about its efficacy. The Hampel Report makes the following recommendations: i. Directors – Directors should act in good faith in the interest of the company and exercise care and skill. Besides, Chairman needs to ensure that all directors are properly briefed on issues arising at board meetings. The directors should receive further training relating to the relevant new policies, regulations in order to boost their current knowledge. The Code emphasizes that nonexecutive directors should contribute to the development of the company’s strategy. Additionally, recruitment of new directors must come from diversity of background including qualifications and various experience. ii. Director’s Remuneration – Remuneration committee supposed to develop a policy with purpose to judge and monitor the remuneration packages of directors in order to ensure that they are aligned with shareholder’s interest. The committee should made up wholly independent non-executive directors. Annual bonuses, share option schemes and long term incentive plans are of the remuneration scheme.

73 iii. Shareholder – The chairman of the three committees (remuneration, audit and nomination committee) should attend the Annual General Meeting to be available to answer questioned by shareholder at the AGM. Hampel Committee support greater shareholder’s participation in order to have an effective AGM. Notice of the AGM and any related document should be distributed to every shareholder at least 20 working priors days of AGM. iv. Accountability and Audit – the Hampel Committee suggest that the auditors should review both financial and non-financial information in the annual report and to report any inconsistencies resulting from the audit to the directors privately. The directors and management are accounted for an effective internal control system, therefore to maintain and control financial management, compliance of laws and regulations, risk management, and business risk assessment. 1999 Turnbull Committee Report The Turnbull Report was published in 1999 in which set out best practice on internal control and risk management for UK listed companies. The report is divided into five sections: i. Introduction – the report highlights the significance of internal control and risk management in order to protect the shareholder’s investment and company asset. An effective internal control should be embedded in the management, government process and for daily operation. ii. Maintenance of a sound 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. iii. Review of the effectiveness of internal control – Board should regularly review report from the management on effectiveness of internal control. iv. Board’s statement on internal control – Annual report should disclose information on internal control and risk management process. Besides, board should clarify the adopted practices in order to identify, evaluate and manage the risks faced by the company. v. Apendix on assessing the effectiveness of the company’s risk and control process – the report provides a list of questions that the board may consider during the board discussion with the management.

74 2003 Higgs Review/Smith Report The Higgs Independent Review considered the role and effectiveness of non-executive directors The Smith Report was published in the wake of the collapse of Arthur Andersen and the Enron scandal. The report concerned auditor independence, and provided guidance for audit committees. 2005 Revised Turnbull Guidance The review by the Financial Reporting Council in 2005 of the UK Turnbull report on internal control concluded that disclosure on risk management information could improve. The revised guidance said: Boards should review whether they can make more of the communication opportunity of the internal control statement in the annual report. Investors consider the board’s attitude towards risk management and internal control to be an important factor when making investment decisions about a company. Taken together with the Operating and Financial Review (superseded by the Business Review), the internal control statement provides an opportunity for the board to help shareholders understand the risk and control issues facing the company, and to explain how the company maintains a framework of internal controls to address these issues and how the board has reviewed the effectiveness of that framework. 2010 The UK Corporate Governance Code The Combined Code was revised and renamed the UK Corporate Governance Code. The latest edition of the UK Corporate Governance Code was issued in June 2010 by the Financial Reporting Council (FRC) following the financial crisis which came to a head in 2008-2009. This triggered a widespread reappraisal, locally and internationally of the governance systems which might have alleviated it. In the UK, Sir David Walker was asked to review the governance of Banks and other financial institutions, and the FRC decided to bring forward the code review so that corporate governance in other listed companies could be assessed at the same time. Two principal conclusions were drawn by the FRC from its review. • First, that much more attention needed to be paid to following the spirit of the Code as well as its letter. • Secondly, that the impact of shareholders in monitoring the Code could and should be enhanced by better interaction between the boards of listed companies and their shareholders.

75 To this end, the FRC has assumed responsibility for a stewardship code that will provide guidance on good practice for investors. However, overall, the FRC agreed that the fundamental principles of the previous Combined Code were sound and 'fit for purpose' 2012 The Boardroom Diversity The FRC published a collection of essays to mark the 20th anniversary of the Corporate Governance Code, which had introduced the UK’s "comply or explain" approach to best practice in the organisation of the corporate boardroom and in relations with shareholders. 2014 Risk and Viability 2014 UK Corporate Governance Code requires the assessment of principal risks and longer term viability statement to be reported to shareholders annually. 2016 Audit Review Changes to the Guidance on Audit Committees and cover audit committee activities and reporting. Requirement for audit committee members to have competence relevant to the sector in which the company operates. The provision relating to the need to tender the external audit every 10 years has been removed, and requirements for mandatory tendering and audit firm rotation. The Code requires companies to disclose in the audit committee report how the committee has assessed the effectiveness of the external auditor, the approach taken to the external auditor’s appointment or reappointment and the length of tenure of the current audit firm. There were also some key changes to auditing standards, including the requirement for ‘enhanced audit reporting’ for all listed companies and public interest entities. The contents of the enhanced audit reports would be substantially more, as auditors would be required to include an expansion of the description of key audit risks and how they responded to those risks. Their report would also include a description of how their audit was considered capable of detecting irregularities and fraud. Other disclosures in the report include the tenure of the auditor, previous reappointments and renewals of appointment, and a declaration of the auditor’s independence, and a confirmation that no prohibited services were provided.

76 2017 UK Corporate Governance Code FRC announced that they would be reviewing the UK Corporate Governance Code and will commence a consultation on its proposals later in the year, based on the outcome of the review and the Government’s response to its Green Paper. The government response to the Corporate Governance Review was published in August 2017. The FRC welcomed the Government's response in a press release Corporate Governance will evolve to meet the changing needs of the UK. On 5 December 2017 the FRC published its proposals for a revised UK Corporate Governance Code. 2018 UK Corporate Governance Code The FRC has released a new Corporate Governance Code in the UK, which it describes as 'A Code Fit for the Future'. The new Code was released on 16 July 2018. According to the FRC, the new Code 'puts the relationship between companies, shareholders and stakeholders at the heart of long-term sustainable growth in the UK economy'. The Code applies to all premium-listed companies for the financial years beginning on or after 1 January 2019. The Main Principles of the Code are divided into five areas • Section A: Leadership • Section B: Effectiveness • Section C: Accountability • Section D: Remuneration • Section E: Relations with Shareholders 5.4.1 Historical Development of Corporate Governance in United States (US) Sarbanes Oxley Act 2002 In 2002, following a number of corporate governance scandals and collapse of big companies such as Enron and WorldCom has caused the US Congress passing the Sarbanes-Oxley Act in 2002 which introduced reforms in the various areas of corporate management as well as listing requirements for New York Stocks Exchange (NYSE). Many countries have incorporated segments of this law into their own relevant regulations or codes. SOX is a rules-based approach to governance. It is extremely detailed and carries the full force of the law. The Act was introduced to require inclusion of independent directors in the audit committee.

77 The purpose of SOX Act is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. To help establish investor trust, the regulations of the Sarbanes-Oxley Act are based on three principles; Integrity, Accuracy and accountability. This Act provided for the following: • It placed considerable responsibility on CEO and CFO in relation to accuracy and completeness of the company’s annual report. • It strengthened the independence of external auditor. • Inclusion of independent directors in the audit committee. The independent directors means who do not have any relationship directly or indirectly with the company. • New rules require the companies to establish the nomination, remuneration and audit committees. These committees should entirely consist of the independent directors. • It set up a new regulatory body, called Public Company Accounting Oversight Board, for auditors of US listed firms. 5.4.2 Development of Corporate Governance in Malaysia Period Before Asian Financial Crisis 1997/1998 The governance of corporation in Malaysia started with the Companies Enactment in 1897 and followed by the Companies Act 1965. The Companies Act 1965 which is regulated by Companies Commission of Malaysia (SSM) covers issues and matters concerning corporate structures, reporting requirements, and disclosure as well responsibilities of directors. Additionally, all public listed companies in Malaysia also regulated under Kuala Lumpur Stock Exchange (KLSE) Listing Requirement. Establishment of Securities Commission Malaysia (SC) under Securities Commission Act 1993 further promotes a healthy securities market and maintained investor’s confidence in Malaysia. The effectiveness of boards remains questionable even Malaysian listed companies are found to have more non-executive directors different individuals hold the positions of chairman and chief executive directors before the crisis.

78 Period Before Asian Financial Crisis 1997/1998 Corporate governance in Malaysia is seriously considered after the economic crisis and business failures in 1997/1998, in which has affected the growth of the Malaysian economic. The impact of the crisis has severely affected investor’s confidence in Malaysian market and the only way to gain the investor’s confidence is through strengthen corporate governance in Malaysia. KLSE released the Revamped Listing Requirements in January 2000 that includes the transparency in monitoring the company, strengthen the protection of shareholders’ interest. Conversion of KLSE to Bursa Malaysia Berhad in April 2004 was purpose to enhance Bursa Malaysia Berhad’s position internationally. The Securities Commission is also plays crucial role in regulating capital market development and maintaining investor’s confidence especially after the crisis. High Level of Finance Committee through Ministry of Finance on Corporate Governance was established via partnership effort between Malaysian Government and private sector in 1998 for creation a framework for corporate governance in Malaysia. Then, the Committee established Malaysian Institute of Corporate Governance (MICG) as a non-profit organization limited by guarantee to increase awareness and practices of good corporate governance in Malaysia, mainly for public listed companies. The committee found that the corporate governance quality in Malaysia prior to and during the financial crisis was lacking and there was a need to improve it where the companies needed guidance in raising their corporate governance quality, which should be par and same level with the international level. The establishment of the Malaysian Code on Corporate Governance (MCCG) in 2000 is the most significant outcome of the Committee that focus on the recommendation to strengthen the statutory and regulatory framework for corporate governance and best mechanism towards corporate governance. Malaysia has a range of corporate governance reforms that have been strengthened over the years. It is believed that the primary contributing factor to 1997’s economic problem in Malaysia was due to poor corporate governance especially in private sector. The absence of independent directors, lack of independent auditors, lack of transparency, financial disclosure, accountability, allegations of cronyism are amongst the much-talked factors that contributed to fragility of corporate governance practices. In addition, significance dominance and participation of major shareholders in company management in Malaysia have provided them the opportunities to act in their own interests, leading to corporate misbehavior. This situation led to fall of several large companies in Malaysia, example: Renong, Malaysian Resources Corporation Berhad, Lion Group.

79 MCCG The Malaysian Code on Corporate Governance (MCCG) introduced in 2000 has been a significant tool for corporate governance reform, and has influenced corporate governance practices of companies positively. The MCCG reflects global principles and internationally recognised practices of corporate governance which are above and beyond the minimum required by statute, regulations or those prescribed by Bursa Malaysia Berhad (the stock exchange of Malaysia). The code is similar in nature to the Combined Code on Corporate Governance (UK) which draws from the UK’s experience set out in the Hampel Report (1998) and Cadbury Report (1993). The Malaysian corporate governance framework is broadbased approach (driven mainly by concern for shareholders’ interest. It aims to encourage transparency management of a company. The MCCG 2000 placed great emphasis on the governance role of the board by setting the best practices for improving roles of the board and also board structures and procedures. MCCG 2000 is divided into four parts: principles and board practices of good corporate governance, best practices, role of institutional shareholders on corporate governance, and the explanatory notes. The Securities Commission has revised and amend the code in 2007, 2012, 2017 and 2021. The MCCG was reviewed in 2007 and 2012 to ensure that it remains relevant and is aligned with globally recognised best practices and standards. Key amendments to MCCG 2007 were to strengthen the role of board and functions of audit committees, ensuring they discharge their responsibilities effectively and efficiently. Securities Commission introduced a five-year Corporate Governance Blueprint (the Blueprint) in 2011, which includes action to increase quality of corporate governance in Malaysia and to promote culture of practice good corporate governance in Malaysia among public listed companies. There are six corporate governance areas that are highlighted in the Blueprint, named shareholders rights, the roles of institutional investors, boards, disclosure and transparency, gatekeepers, and public and private enforcement. This is followed by the issuance of the Malaysian Code on Corporate Governance 2012 (MCCG 2012) that supersedes the Revised MCCG 2007. MCCG 2012 focused on clarifying he role of the board in providing the leadership, reinforcing the independence of the board and enhancing board effectiveness through strengthening its composition. Establishment policies of corporate disclosure in public listed companies was also encouraged to make public commitment in respecting shareholder’s rights. In April 2017, the MCCG 2017 was updated to take on a new approach to promote greater internalisation of corporate governance culture in public listed and non-public listed companies including small and medium enterprise, state-owned

80 enterprise, and licensed intermediaries. It consists of a set of best practices to strengthen corporate culture anchored on accountability, transparency, and sustainability. The improvement on MCCG 2017 was relevant in line with global standards where take into the accounts the contributions and views from local and international shareholders, changes in market structure and lessons from corporate governance failures. The 2021 update of the MCCG introduces best practices and guidance to– • improve board policies and processes including those related to director selection, nomination and appointment; • strengthen board oversight and the integration of sustainability • considerations in the strategy and operations of companies; and • encourage the adoption of the best practices, particularly those found to have relatively lower levels of adoption, as highlighted in the SC’s Corporate Governance Monitor report. The Corporate Governance Guide (“Guide”) by Bursa Malaysia Berhad (“Bursa”) seeks to enrich the application and actualisation of corporate governance practices by providing practical guidance to listed issuers. It is also hoped that the Guide will cultivate listed issuers’ appreciation on the drivers of sound corporate governance. The Guide was developed to reflect the new modes of thinking as well as the “CARE” (i.e. C – Comprehend; A – Apply and Re – Report) concept that underpins the MCCG. Premised on the objective of bringing about cultural and behavioural change, the Guide serves to provide insights into best practices of corporate governance, including how such practices can be applied and actualised in substance rather than in form, so as to help businesses in building sustainable value. There is also the CG disclosure framework under Bursa Malaysia Securities Berhad Listing Requirements. The various Government initiatives (i.e. the Malaysian Anti- Corruption Commission (MACC) (Amendments) Act 2018, Guidelines on Adequate Procedures 2018 and the National Anti-Corruption Plan (NACP) 2019 -2023), deliver key messages that strong corporate governance is fundamental for the sustainability of the Malaysian economy. Section 17A of the MACC Act 2019, came into force on 1 June 2020, focuses on the new corporate liability provisions.

81 Following are the summary changes made by the Securities Commission in each revision: MCCG 2007 • MCCG 2007 revises the appointment of nomination committee, director’s assessment, meeting procedure, and audit composition. • Specified the eligibility criteria for appointment of directors and the role of the nominating committee. • Specified the eligibility criteria for appointment as an audit committee member, the composition of audit committee, the frequency of meeting, and the need for continuous training. • Mandatory establishment of an internal audit department in Public Listed companies. • The head of internal audit should report directly to the audit committee. • Compulsary to appoint only non-executive directors in audit committee MCCG 2012 • Set out eight principles and 26 specific recommendations to enhance board’s effectiveness. • Principle 1: Establish clear board’s roles and responsibilities – Board should develop clear functions, roles, procedures in discharging their duties. Board should also formalize ethical standards through a code of conduct and ensure it compliance. • Principle 2: Strengthen the composition of nomination and remuneration committees – Board should form nomination and remuneration committees that comprises exclusively non-executive director and majority is independent. Nomination committee to develop criteria for director’s recruitment process and annual assessment. Remuneration committee to develop remuneration policies and procedure to attract and retain directors. • Principle 3: Reinforcement of director’s independence – Limiting the tenure of independent directors to only nine years. The position of chairman and chief executive officer should be held by different individuals, and the chairman should be a non-executive member of the board.

82 MCCG 2012 (continued) • Principle 4: Foster the commitment of directors – Board should ensure members have access to continuing education programmes. • Principle 5: Uphold the audit committee integrity in financial reporting – Audit committee should ensure the financial statements comply with applicable financial reporting standards. Audit committee should have policies and procedure to assess the suitability and independence of external auditors. • Principles 6: Recognition and management of risks – Board should establish a good framework to manage risks. Board should establish an internal audit function which reports directly to the audit committee. • Principle 7: Ensure timely and quality disclosure – Board should ensure the company has appropriate corporate disclosure policies and procedure including leverage on Information Technology (IT) for reveal the information. • Principle 8: Strengthen the relationship between the company and shareholders – The board should encourage poll voting. Board should promote effective communication an effective engagement with shareholders to encourage their participation at Annual general Meetings. MCCG 2017 • Set out 36 practices to support three principles, namely Board Leadership and Effectiveness, Effective Audit and Risk Management, Integrity in Corporate Reporting and Meaningful relationship with Stakeholders. • Adopted the proportionality approach to differentiate large companies from others in applying certain best practices. • Introduced CARE Approach • Specified intended outcomes for each best practice and provided guidance to assist companies in applying the practices. • Introduced ‘Step-Up’ practices to support companies in moving towards further strengthening their corporate governance practices. • Required at least half of the board to be independent directors. For large companies, more than 50% of board members must be independent.

83 The MCCG is based on three key principles of good corporate governance, which are– • Principle A: Board Leadership and Effectiveness o Board Responsibilities - Every company is headed by a board, which assumes responsibility for the company’s leadership and is collectively responsible for meeting the objectives and goals of the company. The board should set the company’s strategic aims, ensure that the necessary resources are in place for the company to meet its objectives and review management performance. The positions of Chairman and Chief Executive Officer (CEO) are held by different individuals. The Chairman of the board should not be a member of the Audit Committee, Nomination Committee or Remuneration Committee. o Board Composition - Board composition influences the ability of the board to fulfil its oversight responsibilities. The board has a policy which limits the tenure of its independent directors to nine years without further extension. An effective board should include the right group of people, with an appropriate mix of skills, knowledge, experience and independent elements that fit the company’s objectives and strategic goals. o Remuneration - The level and composition of remuneration of directors and senior management take into account the company’s desire to attract and retain the right talent in the board and senior management to drive the company’s long-term objectives. Remuneration policies and decisions are made through a transparent and independent process. • Principle B: Effective Audit and Risk Management o Audit Committee - The Audit Committee should comprise solely of independent directors. the Audit Committee is fully informed about significant matters related to the company’s audit and its financial statements and addresses these matters. There is co-ordination between internal and external auditors. o Risk Management & Internal Control Framework - The board of directors is responsible for the company’s risk management and internal control systems. It should set appropriate policies on internal control and seek assurance that the systems are functioning effectively. The

84 board must also ensure that the system of internal control manages risks and forms part of its corporate culture. The board establishes a Risk Management Committee, which comprises a majority of independent directors, to oversee the company’s risk management framework and policies. • Principle C: Integrity in Corporate Reporting and Meaningful relationship with Stakeholders o Engagement with Stakeholders - There is continuous communication between the company and stakeholders to facilitate mutual understanding of each other’s objectives and expectations. Stakeholders are able to make informed decisions with respect to the business of the company, its policies on governance, the environment and social responsibility. Communication with stakeholders can be achieved through various means, including– • establishing an investor relations function; • conducting engagement forums; • organising investor, analyst and media briefings; and • use of electronic means (website, social media, mobile applications etc). o Conduct of General Meeting - General meetings are important platforms for directors and senior management to engage shareholders to facilitate greater understanding of the company’s business, governance and performance. Notice for an Annual General Meeting should be given to the shareholders 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.

85 Key features of the MCCG: One of the key features of MCCG is The Comprehend, Apply and Report approach – CARE: CARE • CARE encourages companies to clearly identify the thought processes involved in practising good corporate governance, including providing fair and meaningful explanation of how the company has applied the practices. • CARE aims to reinforce mutual trust between companies and their stakeholders by promoting fair and meaningful disclosures that will be relied upon by stakeholders to have effective engagements with the company. It also promotes a culture of openness and mutual respect that benefits both the company and its stakeholders. • CARE will help generate greater interest in corporate governance best practices, facilitate assessments and stimulate conversations on corporate governance. Collectively, these outcomes will raise the standard of corporate governance culture of the market overall. 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.

86 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)

87 Malaysian Institute of Corporate Governance • Malaysian Institute of Corporate Governance (MICG) was established due to recommendation by High level Finance Committee on Corporate Governance in March 1998 after financial crisis. • MICG’s responsibility is to raise the awareness and practices of good corporate governance in Malaysia, dedicated to facilitate businesses and corporate development in the country through best practice of corporate governance. • MICG’s eleven main objectives: o to be a preferred and trusted organization for improvement of best practice corporate governance. o To be a renowned organization for corporate governance matters through dialogues and forum, conference, and seminar. o To create relationship and networking with the primary corporate governance references and research group. o To be an empowered facilitator and body for consultative, technical and support services on execute corporate governance best practice. o To collaborate with various stakeholders. o To work together with regulators such as SC, SSM, and Bursa Malaysia. o To function as an independent body to perform Corporate Governance Ratings particularly for public listed companies. o To have the ability to be independent, just, and truthful in providing input to increase performance of public listed companies. o To promote the efforts focusing on corporate governance in Malaysia. o To conduct advance research with organization within and outside Malaysia on issue relating corporate governance. o To motivate companies to commit with longer-erm investor values, to contribute a sound economic system for the benefit of society. Minority Shareholders Watchdog Group (MSWG) • MSWG was established in 2000 as an independent research body on corporate governance issues. • Main objective of MSWG in Malaysia is to ensure that interest of minority shareholders of public companies in Malaysia are safeguarded, as MSWG urge shareholders to be treated equally and encourage transparency in operation of management of the company.

88 • Main roles of MSWG in Malaysia: o To enforce voting systems referred to as proxy voting system. It will permit the right of minority shareholders to still have voting rights in the company’s Annual General Meeting. o To act on behalf of the minority shareholders to raise any issues and concerns related to company’s management or other issues that need to be raised in the general meeting. Securities Commission Malaysia (SC) • Securities Commission Malaysia (SC) was established on 1 March 1933 under the Securities Commission Act 1993. • 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. • 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. 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.

89 Companies Commission of Malaysia (SSM) • SSM is a statutory body that regulates company and business affairs in Malaysia was established in 2002 under an Act of Parliament. • Following are functions of SSM as a prominent authority for the development of corporate governance: 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 • In 2003, SSM reviewed the Companies Act 1965 with the purpose to simplify the process and procedures of company’s incorporation and to reduce business cost. • The CA 2016, which came into force on 31 January 2017 (repealing the Companies Act 1965) applies to all companies and corporations in Malaysia, and can be said to be the primary statute on corporate governance in Malaysia. • The CA 2016 governs, among others, directors’ duties and liabilities, conflicts of interest involving directors and indemnification of directors. It further codifies the common law rules requiring directors to exercise their powers for a proper purpose, in good faith and in the best interest of the company. • The CA 2016 requires directors to disclose by notice in writing to the company: o particulars of his or her shareholding in the company, and changes to such shareholding; o interest in transactions involving the company; and o conflicts or potential conflicts of interest.

90 • Major changes in Companies Act 2016 relating to corporate governance issues are: o A company can be incorporated by one member in which the single member may also be the only director of the company, unless for public listed company, the minimum number of directors still remains at two directors. o The adoption of Memorandum of Association and Articles of Association is optional. o A company is no longer required to state its authorized capital. Through the return of allotments, a company is required to inform its issued share capital and paid-up capital and the related changes. o Effective from 31 January 2017, the private companies is no longer required to hold their annual general meeting which it can be made over circular resolutions. o The member’s meeting chairman shall allow reasonable opportunities for members to question, discuss, comment on and make recommendations for the management of the company. o Dividends are only allowed if they meet the solvency test and can only be distributed to shareholders out of profits. Bursa Malaysia Securities Berhad • Bursa Malaysia, formerly known as Kuala Lumpur stock exchange or KLSE was renamed Bursa Malaysia Berhad on 14 April 2004 to enhance competitive position and to respond global trends by making themselves more customer-driven and market-oriented. • Bursa Malaysia is guided by regulatory principles to ensure high standards of business conduct are maintained, to confirm that investors interest is protected and efficient and effective regulations is in place. • Corporations listed on Bursa Malaysia are required to comply with listing requirements and rules prescribed by Bursa Malaysia (Listing Requirements), in addition to the CA 2016. • The Listing Requirements provide that boards of listed companies must establish both a nominating committee and an audit committee. Additionally, at least onethird of boards of listed companies must comprise independent directors.

91 • Listed companies must also ensure that their board of directors provide a narrative statement of their corporate governance practices with reference to the MCCG in their annual report. 5.4.4 Features on poor Corporate Governance • Five common ethical issues of corporate governance Financial Manipulation o Directors who control the information about the company might manipulate financial to serve their own agenda. o Directors report inaccurate financial information that could mislead the shareholders. o Corporate scandals such as Enron, Worldcom, Transmile, and Xerox Corporation highlighted effect of financial manipulation. o The auditor also compromised their duties by not having professional independence through helping the management of the client company to ‘adjust’ figures of their accounts. Inflated director’s remuneration o Directors are highly to abuse their powers and reward themselves excessively when they are given free rein to decide their own remuneration. o Shareholders object to offer remuneration package that do not reward directors based on clear performance measures. o The cases of Royal Dutch Shell, AIG Group, HIH Insurance and Enron clearly demonstrate how top executives paid huge bonuses to themselves despite poor performance. Excessive business risk-taking and lack of risk control o Directors undertake high risky projects to serve their own agenda for gaining prestige and power, hence at the same time exposing the assets of shareholders to unnecessary risk. 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

92 o Directors is responsible to establish risk management and internal control systems for safeguard shareholder’s assets and investments. Poor communication of information o Board of directors might not release or communicate corporate information to shareholders in timely and accurate manner, where shareholders rely on that information to make decisions. o The board should have a clear communication policy to provide communication channels for develop good interaction with shareholders. 5.5 Best practice in effective Corporate Governance Best practices incorporate many different aspects of board work. They entail taking a critical look at the qualities and characteristics of board directors, who they are as people, and the way they approach governing an organization. Governance can incorporate many different practices. Specifically, some of the primary best practices include building a competent board, aligning strategies with goals, being accountable, having a high level of ethics and integrity, defining roles and responsibilities, and managing risk effectively. Good corporate governance practices instil in companies the required vision, processes and structures that ensure long-term sustainability. It is also critical to support good corporate citizenship, which is a commitment to ethical behaviour in business strategy, operations and culture. In today’s globalised and interconnected world, investors, creditors and other stakeholders are increasingly recognising that environmental, social and governance considerations are integral to the company’s performance and long-term sustainability. Boards should therefore understand and incorporate these dimensions into their core decision-making processes to ensure that companies operate successfully and sustain growth. The board should understand that the key principles of corporate governance such as effective controls, corporate culture grounded on ethical behaviour and transparency, can reduce risk, corruption and mismanagement. Board of Directors The company should have an effective board (with a balance of skills, experience, independence and knowledge) that meets regularly. It is important to have positive relationships between the company, its shareholders and its stakeholders. Chairman and Chief Executive Officer (CEO)

93 The positions of the Chairman (person responsible for leadership and board effectiveness) and the CEO (the person in charge of running the company) should be separated. This is to ensure that no one individual has too much power within the company. The Chairman should be independent on appointment. 2 Types of Directors • Executive directors Those who are involved in the day-to-day execution of management • Non-executive directors (NED) o Those who primarily only attend board meetings o NED should provide a balancing influence and play a key role in reducing conflicts of interest between management and shareholders. o Role of NED-Strategy ▪ setting direction ▪ Performance – should scrutinize the performance of management in meetings goals and objectives. ▪ Risk – should ensure that risk management is robust. o Composition of NED ▪ At least half of the board should comprise independent NEDs. ▪ A smaller company should have at least 2 independent NEDs. ▪ One of the NEDs should be appointed the ‘senior independent director’. o NEDs should as far as possible be ‘independent’ and must not: ▪ have been an employee of the company in the last 5 years ▪ had material business interest in the co for the last 3 years either directly or indirectly ▪ participate in the company’s share options, performance-related pay scheme or pension schemes ▪ have close family ties with company directors or senior employees ▪ serve as a NED for more than 9 years with the same company ▪ hold cross directorship (i.e. two or more directors sit on the board of the same third party company) or have significant links with other directors through involvement in other organizations. Functions of Directors • MCCG has outlined six recommendations on functions of directors toward good corporate governance: ➢ Reviewing and adopting a strategic plan for the company

94 ➢ Overseeing the conduct of the company business so as to evaluate whether the business is being properly managed. ➢ Identifying principal risks and to ensure that the imolementation of risk management system is appropriate. ➢ Succession planning, including appointing, training, fixing the compensation of senior management. ➢ Developing and implementing shareholder communication policy for the company. ➢ Reviewing the adequacy and integrity of the company internal control systems and management information systems including regulations and guidelines. Remuneration Committee Director’s remuneration should be set via a “remuneration committee”. The committee must consist of: • Independent NED (≥ 3 for listed companies and ≥ 2 for smaller companies) • The Chairman can be a member but cannot chair the committee. • The chair must have been a committee member for at least 12 months. There should be clear reporting on remuneration and how it helps the organization to achieve its strategy and long-term success and its alignment to workforce remuneration. Due to directors being paid large salaries for a number of years (and being seen as major corporate abuse) The Greenbury committee in the UK set out principles to demonstrate what a good remuneration policy should look like: • Directors remuneration should be set by independent members of the board • Bonuses, increments or others relate to measurable performance or enhance share value • Full transparency of director’s remuneration The committee also has to consider: • The different levels of management/directorship • The ability for managers to leave • Individual performance • Overall organizational performance

95 Audit Committee An audit committee of independent non-executive directors (at least 3 listed companies and at least 2 for smaller listed companies) who are responsible for monitoring and reviewing the company’s financial controls and the integrity of the financial statement. They should liaise with external audit, supervise internal audit, and review the annual accounts and internal control. The role of audit committee is very significant due to their responsibilities for supervising and offering an overall review. They should have close interest in the work of the internal audit. They also review the effectiveness of risk management and internal controls at least annually and report to shareholders covering all material controls The benefits of an effective audit committee, • Improve the quality of financial reporting, by reviewing the financial statements • Reduce opportunity for fraud by creating a climate of discipline and control • Enable the non-executive to play a positive role by giving an independent judgment • Help the finance director, by providing the forum to raise concern in situations that otherwise may be difficult • Strengthen the position of the external auditor but providing a channel of communication and forum for issue of concern • Provide a framework within which the external auditor can assert their independence in the event of a dispute • Strengthen the position of the internal auditor • Increase public confidence and credibility in the financial statements Responsibilities of an Audit Committee, • Review the work and effectiveness of the internal audit function • Monitor the external auditor’s independence and objectivity • Short-list external audit firms when a change is needed. Nomination Committee A nomination committee should be in place for appointing board members and making recommendations to the board. It should consist of a majority of nonexecutive directors. This is to provide some independence from the current board members and to ensure that all appointments are based on merit and suitability and that the composition of the board is balanced. A nomination committee should be responsible for finding suitable applicants to fill board vacancies and recommending them to the board for approval.

96 Public Oversight Board The public is a legitimate stakeholder; thus it has the right to know how a particular company is being governed. One can also mention that the public has the right to be involved in the governance process of companies. The most obvious means of public oversight of corporate governance is via the publication of Annual Reports and Accounts. Companies should also discuss their plans with their representatives of various stakeholder groups including journalists and local politicians. 5.6 Reporting of Corporate Governance Malaysia’s corporate governance framework is contained in several pieces of legislation and guidelines. Applicable laws and guidelines include: 1. the Financial Services Act 2013 (FSA 2013); 2. the Malaysian Code on Corporate Governance (MCCG); 3. Bank Negara Malaysia’s (The Central Bank of Malaysia) (BNM) Guidelines on Corporate Governance; 4. Bursa Malaysia’s Main Market, Ace Market and Leap Market Listing Requirements; and 5. the Code of Ethics for Company Directors issued by the Companies Commission of Malaysia (CCM). Financial Services Act 2013 Financial institutions in Malaysia are required to comply with the corporate governance framework and internal controls pursuant to the Financial Services Act 2013 (FSA 2013). Under the FSA 2013, the prior written approval of BNM is required before a person may be appointed as a chairman, director or chief executive officer (CEO) of a financial institution. Additionally, BNM is empowered under the FSA to stipulate fit and proper criteria applicable to financial institutions. BNM has also issued Guidelines on Corporate Governance that apply to financial institutions

97 Malaysian Code on Corporate Governance The MCCG applies to listed companies, but non-listed entities, including state owned enterprises, small and medium enterprises and licensed intermediaries are encouraged to adopt the practices in the MCCG to enhance their accountability, transparency and sustainability. BNM’s Guidelines on Corporate Governance BNM’s Guidelines on Corporate Governance apply to financial institutions and prescribe, among others, key responsibilities of the board and senior management, requirements on minimum quorum and attendance at board meetings, and matters relating to composition of the board. Significantly, the guidelines provide that: • the board must have a majority of independent directors at all times; • the board must establish a written policy to address directors’ actual and potential conflicts of interest; and • written approval of BNM must be obtained before a financial institution removes an independent director (save where such removal is as a result of a disqualification under the FSA) or before an independent director resigns. Code of Ethics for Company Directors The Code of Ethics for Company Directors (Code of Ethics) was issued by the CCM to establish a standard of competence for corporate accountability in respect of directors of companies in Malaysia, which includes standards of professionalism and trustworthiness with a view of upholding good corporate integrity. Among others, the Code of Ethics recommends that: • directors should disclose immediately all contractual interests, direct or indirect, with the company; • directors should not divert any business ventures being pursued by the company, or make use of confidential information obtained by reason of their office for their own advantage; and • directors should at all times act with utmost good faith in any transaction involving the company and discharge their duties in a responsible manner.

98 5.7 Define Corporate Social Responsibility (CSR) The idea of Corporate Social Responsibility (CSR) has been a topic of discussion since the 1950s. However, it wasn’t until much later that people started understanding its meaning, significance and impact. Corporate Social Responsibility (CSR) is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. Sometimes known as sustainability, sustainable development or corporate responsibility. CSR is also defined as a company’s obligation to all of its stakeholders across all of its activities with the aim of achieving sustainable development in the economic, social and environmental dimensions. Stakeholders can include employees, customers, suppliers, community organisations, the environment, subsidiaries and affiliates, local neighbourhoods, the planet, investors and shareholders. In Malaysia, Bursa Malaysia launched a CSR framework for public listed companies in 2006. Bursa Malaysia defined CSR as ‘open and transparent business practices that are based on ethical values and respect for the community, employees, the environment, shareholders, stakeholders to deliver sustainable value to society at large’ (Bursa Malaysia, 2006). •Investment or donations in capital, time, products, services, knowledge. •to create positive impact on local communities. Community •Activities to maintain high standard of recruitment, Workplace development and retention of employees. •Initiatives to conserve the ecosystems and biodiversity •to manage the effect of a firm's operations on the environment Environment •Activities to encourage potential investors and existing shareholders, vendors, customers •to maintain a sustainable manner across the value chain Marketplace

99 Pyramid of Corporate Social Responsibility Source: https://thecsrjournal.in/understanding-the-four-levels-of-csr CSR, in the form that we see today, became popular after it was defined by Archie Carroll’s “Pyramid of Corporate Social Responsibility” in 1991. Its simplicity, yet ability to describe the idea of CSR with four areas, has made the pyramid one of the most accepted corporate theories of CSR since. Carroll’s pyramid suggests that corporate has to fulfil responsibility at four levels: • Economic responsibility – required companies to be profitable so that shareholders can earn a reasonable rate of return for their investment and employees can be gainfully employed to support their lives. • Legal responsibility – requires companies to obey all laws and adhere to regulations that are relevant to business operations.

100 • Ethical responsibility – requires companies to do what is right, fair and justice in its dealings with all stakeholders. Companies have to act in the manner consistent with expectations of societal mores and ethical norms. • Philanthropic responsibility – companies is expected for being a good corporate citizen in the market industry. Emphasizes on contribution of monetary and non-monetary to citizens in order to promote the community’s well-being. The traditional view of CSR has been a focus on philanthropy, largely influenced by the Pyramid of CSR, which places economic responsibility (to be profitable and create jobs for the community) as the foundation and philanthropic activity (to contribute to the welfare of humans and spreading of goodwill) at the peak. The most commonly published topics relating to CSR in Malaysia: • donations to community groups and charitable • funding scholarship programs and activities • supporting national pride/ government sponsored programs • Employees serve as volunteers • Promotes ethical practices at workplace • Provides safe working environment • Commitments to prevent pollution • Respond quickly to customer complaints • Sponsor skills training for local youths • Offers safe and good quality products • Provides healthcare to poorest people Professional accountants also have a crucial role in minimising environmental damage and putting social responsibility at the heart of strategy. They're in a unique position to make real, impactful change and be at the centre of sustainable development, including driving climate action in the organisations they lead and work for.