Policy Dialogue Policy Dialogue

on on

Corporate Governance Corporate Governance

Regulatory EnforcementRegulatory Enforcement ::

The Malaysian ExperienceThe Malaysian Experience

Presented ByPresented By::

Siow Kim Lun, Director Siow Kim Lun, Director Market Supervision Market Supervision DivisionDivisionSecurities CommissionSecurities CommissionMALAYSIAMALAYSIACaveat : The views expressed by the presenter reflect his personal views and

need not necessarily represent the official views of the Securities Commission

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AgendaAgendaAgendaAgenda

1.Accountabilit1.Accountability of Regulatorsy of Regulators 1.Accountabilit1.Accountability of Regulatorsy of Regulators

2. 2. Division of Division of responsibilities responsibilities

between the between the Securities Securities

Commission Commission (SC), Stock (SC), Stock

Exchange and Exchange and SROsSROs

2. 2. Division of Division of responsibilities responsibilities

between the between the Securities Securities

Commission Commission (SC), Stock (SC), Stock

Exchange and Exchange and SROsSROs

3. Developing 3. Developing effective effective

sanctions and sanctions and incentivesincentives

3. Developing 3. Developing effective effective

sanctions and sanctions and incentivesincentives

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Accountability of RegulatorsAccountability of Regulators

Introduction :

• The Asian economic crisis of 1997 – 1998 and financial scandals like Enron and WorldCom have reinforced the importance of good corporate governance

• Today, corporate governance is a key factor in investment decisions

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Accountability of RegulatorsAccountability of Regulators

To Whom is SC Accountable?To Whom is SC Accountable?

• Parliament Parliament – SC, as a statutory body, – SC, as a statutory body, discharges duties and carries out mandate discharges duties and carries out mandate endorsed by Parliamentendorsed by Parliament

• Other Stakeholders Other Stakeholders – investors’ protection – investors’ protection is SC’s paramount concern; SC ensures proper is SC’s paramount concern; SC ensures proper market conduct and that market operates market conduct and that market operates efficiently; SC carries out effective efficiently; SC carries out effective enforcement of securities laws and rulesenforcement of securities laws and rules

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Accountability of RegulatorsAccountability of Regulators

What are the Regulators seeking to promote ?

• Disclosure & Financial Disclosure & Financial transparencytransparency – timely, accurate and – timely, accurate and reliable disclosure on companies’ financial positionsreliable disclosure on companies’ financial positions

• Disclosure & Financial Disclosure & Financial transparencytransparency – timely, accurate and – timely, accurate and reliable disclosure on companies’ financial positionsreliable disclosure on companies’ financial positions

• Proper Market Conduct andProper Market Conduct and BusinessBusiness integrity integrity • Proper Market Conduct andProper Market Conduct and BusinessBusiness integrity integrity

• Accountability and responsibilityAccountability and responsibility to protect investors’ to protect investors’ interestinterest through effective enforcement of securities through effective enforcement of securities laws and ruleslaws and rules

• Accountability and responsibilityAccountability and responsibility to protect investors’ to protect investors’ interestinterest through effective enforcement of securities through effective enforcement of securities laws and ruleslaws and rules

• Investor Investor confidenceconfidence • Investor Investor confidenceconfidence

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Accountability of RegulatorsAccountability of Regulators

Implementation of Key Corporate GovernanceImplementation of Key Corporate GovernanceInitiatives in MalaysiaInitiatives in Malaysia

1.1. Listing RequirementsListing Requirements – sets out corporate governance rules – sets out corporate governance rules that must be complied with by public listed companies that must be complied with by public listed companies (PLCs) and their directors (PLCs) and their directors

2.2. Malaysian Code on Corporate GovernanceMalaysian Code on Corporate Governance - introduced in - introduced in year 2000, which sets the tone for the directors of PLCs to year 2000, which sets the tone for the directors of PLCs to inculcate good corporate governance practices for their inculcate good corporate governance practices for their organisations organisations

3.3. DBR DBR – SC has moved from a merit-based regulation to a – SC has moved from a merit-based regulation to a disclosure based system of regulation. DBR accords great disclosure based system of regulation. DBR accords great flexibility for issuers to raise capital but it imposes high flexibility for issuers to raise capital but it imposes high standards of due diligence and disclosure standards of due diligence and disclosure

4.4. Duties of auditors of listed corporationDuties of auditors of listed corporation (section 99E SIA) –to (section 99E SIA) –to report breaches of laws and Rules report breaches of laws and Rules

5.5. Financial reporting frameworkFinancial reporting framework - accounting standards - accounting standards issued by Malaysian Accounting Standard Boards come with issued by Malaysian Accounting Standard Boards come with legal backing with enforcement powers given to authorities legal backing with enforcement powers given to authorities such as Securities Commission, Central Bank of Malaysia such as Securities Commission, Central Bank of Malaysia and Companies Commission of Malaysia . and Companies Commission of Malaysia .

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Accountability of RegulatorsAccountability of Regulators

6.

create awareness among minority shareholders of create awareness among minority shareholders of their rightstheir rights

act on behalf of minority shareholders to deter act on behalf of minority shareholders to deter abuses of majority shareholders who control the abuses of majority shareholders who control the decision making process of a PLC decision making process of a PLC

6.

create awareness among minority shareholders of create awareness among minority shareholders of their rightstheir rights

act on behalf of minority shareholders to deter act on behalf of minority shareholders to deter abuses of majority shareholders who control the abuses of majority shareholders who control the decision making process of a PLC decision making process of a PLC

Shareholder activism – the Minority Shareholder WatchdogShareholder activism – the Minority Shareholder WatchdogGroup was established in August 2000 with the aim to: Group was established in August 2000 with the aim to:

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Division of Responsibilities between SC, Stock Division of Responsibilities between SC, Stock Exchange & SROsExchange & SROs

Delineation of Functions to Achieve Greater Delineation of Functions to Achieve Greater Efficiency in the Enforcement of Securities Efficiency in the Enforcement of Securities Laws and Regulations in Malaysia Laws and Regulations in Malaysia

• Role of SC (Regulator)Role of SC (Regulator) - enforcement agency with - enforcement agency with powers to investigate and take administrative, civil or powers to investigate and take administrative, civil or criminal actions. It also has an equally important role criminal actions. It also has an equally important role to develop the Malaysian capital market. to develop the Malaysian capital market.

• Role of the Stock Exchange Role of the Stock Exchange – enforce compliance of – enforce compliance of the Listing Requirements and Business Rules. Has the Listing Requirements and Business Rules. Has power to suspend, de-list, issue caution / reprimand & power to suspend, de-list, issue caution / reprimand & impose fines. impose fines.

• Role of SROs in MalaysiaRole of SROs in Malaysia – more empowerment to the – more empowerment to the industry associations such as the Association of Stock industry associations such as the Association of Stock broking Companies Malaysia (ASCM) and Federation broking Companies Malaysia (ASCM) and Federation of Malaysian Unit Trust Managers (FMUTM), whose of Malaysian Unit Trust Managers (FMUTM), whose role is to regulate conduct of their members (e.g. role is to regulate conduct of their members (e.g. brokers, dealer representatives, and sales agents of brokers, dealer representatives, and sales agents of unit trust funds).unit trust funds).

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Division of Responsibilities between SC, Stock Division of Responsibilities between SC, Stock Exchange & SROsExchange & SROs

Types of Enforcement Actions Taken Types of Enforcement Actions Taken by by

the SC : 1993-2003the SC : 1993-2003

Compound (36%)

(53 cases involving 40 individuals & 30 companies)

Warning letters (15%)

(22 cases involving 29 individuals & 9 companies)

Criminal charge(49%)

(71 cases involving 97 individuals & 7 companies)

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Division of Responsibilities between SC, Stock Division of Responsibilities between SC, Stock Exchange & SROsExchange & SROs

Corporate Governance(36%)

(26 cases involving 38 individuals & 2 companies)

Fraud (7%)(5 cases involving 13

individuals & 1 company)

Futures industryFutures industryOffences (13%)Offences (13%)

(9 cases involving 16 individuals & 2 companies)(9 cases involving 16 individuals & 2 companies)

E.g.: – Providing false or

misleading information on proposals, dealings in securities or affairs of company

– Fraud involving directors or management.

– Mis-utilisation of funds raised

– Breach of condition of SC’s approval

– Trading offences involving directors or management.

Short selling & licensing related

Offences (44%)(31 cases involving

30 individuals & 2 companies)

Types of Offences Prosecuted by the SC : 1993 - 2003

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Developing Effective Incentives Developing Effective Incentives and Sanctionsand Sanctions

Incentives Incentives •Protection for whistle blowing – Section 99F of the SIA offers protection to those who report breaches of securities laws, rules or any matter affecting PLC’s financial position•Green lane scheme – faster approval for corporate proposals and less stringent conditions of approvals for companies with good record on corporate governance•Recognition – through annual rewards given to PLCs with exemplary governance practices and those which practice good disclosure standards

Sanctions•Enforcement actions – against those who breach securities laws and listing requirements•Merit /Demerit scheme –SC will conduct thorough investigations on PLCs with poor governance practices and thus resulting in slower approvals for corporate proposals

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Summary of key corporate governance reforms in Malaysia

Listing Requirements :

strengthen rules on related party

transactions (July)

New Malaysian Code on Takeovers and Mergers

(January)

Listing requirements mandate quarterly reporting (August)

Guidelines on Issue/Offer of Securities

facilitate equity participation by

independent directors (December)

Amendments to securities and

company law to harmonise the

regulatory regime for prospectuses (July)

Major revamp of KLSE Listing

Requirements – new chapter 15 on

corporate governance (January)

Amendments to securities laws to inter alia introduce

provisions governing whistle blowing and

enhance enforcement/ redress

mechanisms for breaches of

securities laws (January)

Rules &Regulations

Malaysian Code on Corporate

Governance (March)

MAICSA best practice guidance of company secretaries

(November)

Best Practices

Minority Shareholder Watchdog Group formed (August)

Director’s Mandatory Accreditation Programme

commences (April)

Director’s Continuing Education

Programme commences

(July)

SC licenses Minority

Shareholder Watchdog Group as an investment

advisor and receives grant of

RM250,000 (March-April)

Taskforce on Internal Controls issues a

guidance for directors on

statement of internal controls (February)

Institute of Internal Auditors issues

guidelines on the internal audit

function (July)

20031998 1999 2000 2001 2002 2004

SC introduces merit-demerit incentives in

Guidelines on Issue/Offer of

Securities (April)

Malaysian Institute of Corporate

Governance formed (March)

Institutional reforms

Best practices for Best practices for good corporate good corporate

disclosures disclosures (expected this year)(expected this year)

Thank You