Corporate Governance Checklist for Malaysian Stocks
The short answer
Corporate governance is how a company’s board and management are directed and held to account. For Malaysian investors, the reference point is the Malaysian Code on Corporate Governance (MCCG), which goes beyond what statute and Bursa Malaysia require [1]. A short checklist covers board independence, related-party dealings, auditor changes and director shareholdings, each of which is disclosed in public documents.
What is the MCCG?
The MCCG is the Securities Commission’s code of corporate governance practices for listed companies. It was introduced in 2000 and reflects globally accepted principles and practices that are above and beyond the minimum required by statute, regulation or Bursa Malaysia [1].
It has been reviewed in 2007, 2012, 2017 and 2021 [1]. The 2021 update introduced best practices on board policies and processes, including director selection, nomination and appointment, and on board oversight and the integration of sustainability into strategy [1]. Listed companies explain how they applied the code in Corporate Governance Reports, which the Securities Commission uses to track adoption [1].
The reports, not the code alone, are what you read. A practice that is not adopted but is explained sensibly is different from silence.
How do I check board independence?
Check who the independent directors are, how long they have served, and how the board’s composition compares with its size and risks. The MCCG (text as at 28 April 2021) says an independent director’s tenure should not exceed nine years, after which the director may continue as a non-independent director [2]. A board that wants to keep an independent director beyond nine years should justify it and seek annual shareholder approval through a two-tier voting process [2].
The same code says the chairman of the board should not be a member of the audit, nomination or remuneration committees, and that the board should comprise at least 30% women directors [2]. Under the Bursa Malaysia Listing Requirements, a listed issuer must have at least one woman director [1].
A practical checklist:
- How many directors are independent, and what are their tenures?
- Who chairs the board, and is the chair independent of management?
- Does the audit committee consist of independent directors with financial experience?
- Do executive directors sit on committees that decide their own pay?
- Does the annual report explain any practice the company did not adopt?
What are related party transactions and why do they matter?
A related-party transaction is a business transaction between two parties who had a connection before the deal. An example is a dominant shareholder who causes one company to trade with another at advantageous prices [3]. They matter because the terms may not be the ones independent parties would agree.
Not every related-party deal is a problem. Many are routine supply or service arrangements within a group. The test is transparency and fairness: are the terms disclosed, are they at market prices, and did independent directors review them?
The Companies Act 2016 also requires a director who is interested in a contract or proposed contract with the company to declare the nature of that interest at a board meeting as soon as practicable [4]. A director cannot, without the consent or ratification of a general meeting, use the company’s property, information, position or opportunities to gain a benefit [4].
Ask of any related-party disclosure in the annual report notes:
- Who is the related party and how are they connected?
- How large is the amount compared with revenue or costs?
- Are there outstanding balances, and are they secured?
- Is the transaction recurrent, and who approved it?
Hypothetical illustration: if Company A buys most of its raw material from a firm owned by its chairman, the figure may be fair, but it deserves the same scrutiny you would give any single supplier on which the business depends.
What can an auditor resignation signal?
An auditor resignation can signal a disagreement or concern, but it can also be routine. The right response is to read the reasons the company gives, not to assume either.
The Companies Act 2016 sets procedures that make resignations visible [4]. An auditor who resigns gives written notice to the company, and the term ends after 21 days or a date specified in the notice [4]. The company must send a copy to the Registrar within seven days of receiving the notice [4]. For a public company, the auditor may attach a statement of the circumstances and may require the directors to convene a general meeting to explain them [4]. Directors must hold that meeting within 28 days of receiving the requisition [4].
When you see a change of auditor, ask:
- Did the auditor resign, or did the term simply end?
- Was a statement of circumstances filed?
- Has the new auditor been appointed promptly?
- Do the following results show any modified opinion, or restatements?
A modified opinion in the auditor’s report adds weight to those questions.
Where are director share dealings disclosed?
Directors must notify the company in writing of the particulars of their shares and other interests, and any change to them, so that the company can keep its statutory register [4]. Substantial shareholders, who hold at least five per cent of voting shares, must notify the company within three days of a change [4].
In practice, investors follow these through company filings and the Company Announcements section of Bursa Malaysia, and through the shareholdings tables in the annual report. Look at the trend and the context over several filings instead of one transaction. A director might sell shares for personal reasons, or might buy as part of a long-term plan; neither is evidence by itself.
How do I put the checklist to work?
Where each answer sits:
| Checklist item | Where to look |
|---|---|
| Board independence | Annual report, governance overview |
| Related parties | Notes to the accounts |
| Auditor changes | Company Announcements, annual report |
| Director and large holder dealings | Company Announcements, shareholdings tables |
Use the checklist as a routine, not a score. Apply it once for each company on your watchlist, record the answers, and revisit them when the annual report or a significant announcement arrives. Note any red flags in your quarterly report review notes, and fold governance questions into your wider risk management process. Groups that study stocks together can use the same checklist; see Finworld’s page for investor groups.
This article does not rate any named company’s governance. It gives you the questions and the documents where the answers sit.
Frequently asked questions
What does MCCG stand for?
It stands for the Malaysian Code on Corporate Governance, published by the Securities Commission [1].
How long can an independent director serve under the MCCG 2021?
The code sets a nine-year tenure limit for independent directors, after which a director may continue as a non-independent director [2].
Is a related-party transaction always a red flag?
No. It is a transaction between connected parties [3], so the question is whether it is disclosed, fairly priced and independently reviewed.
Does an auditor resignation mean fraud?
No. It may be routine or it may signal a problem. The Companies Act 2016 lets a resigning auditor of a public company explain the circumstances to members [4], so read that explanation.
Sources
- Securities Commission Malaysia — Malaysian Code on Corporate Governance, its reviews, Corporate Governance Reports and the one-woman-director Listing Requirements note
- Securities Commission Malaysia — Malaysian Code on Corporate Governance (as at 28 April 2021): independent director tenure, chairman and committees, women directors (practices 1.4, 5.3 and 5.9)
- Wikipedia — definition and example of a related-party transaction
- Companies Commission of Malaysia (SSM) — Companies Act 2016 (Act 777) updated text as at 1 August 2022: sections 137 to 139 on substantial shareholders, 218 to 221 on directors’ duties and disclosure, and 281 to 283 on auditor resignation
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