ACT 4193 CURRENT ISSUES IN ACCOUNTING AND AUDITING

1. ACT 4193 CURRENT ISSUES IN ACCOUNTING AND AUDITING Topic 4: Corporate Governance Practices in Malaysia

2. GROUP 2 MEMBERS: 114691 NG CHUAN HOCK 115073 SONG SOH CHING 115175 JANICE CHOOI WAI LENG 115347 SUSAN WONG 116402 UNITHA SUKUR

3. Issues to discuss: Section 1 - Introduction Section 2 - Asian Financial Crisis 1997/1998 Section 3 - Corporate Governance Practices before Financial Crisis Section 4 - Corporate Governance Reform Undertaken by Authorities Section 5 - Minority Shareholders Watchdog Group Section 6 - Conclusion

4. Introduction • Federation of Malaya declared independence in 1957 • Article 153 provided special rights for the Malays - address the imbalance between the Chinese and Malays - however, the Bumiputra share of the economy did not increase • Friction between the Malay and Chinese has bring to the incident of 13 May, 1969 • Government formed NOC - implementation of the NEP • NEP has resulted in the emergence of key corporate figures that had significant control over big Malaysian corporations

5. Asian Financial Crisis 1997/1998 • Partly contributed by poor corporate governance practices • A period of economic unrest that started in July 1997 • Pre-crisis, Malaysia had a large current account deficit of 5% of GDP • In July, the Malaysian ringgit was "attacked" by speculators - led to rating downgrades - general sell off on the stock and currency markets

6. Asian Financial Crisis 1997/1998 (cont) • By end 1997, - ratings had fallen from investment grade to junk - KLSE had fallfrom above 1,200 to below 600 - ringgit lost its value, falling from above RM2.50 to under RM3.80 to the dollar • In 1998, - first recession for many years - GDP plunged 6.2% - ringgit plunged below 4.7 - KLSE fell below 270 points

7. Corporate Governance Practices before Financial Crisis • Corporate governance: - manner in which a corporation is directed, and laws and customs affecting that direction - its structure specifies the relations, and the distribution of rights and responsibilities - main concern is to ensure the firm’s directors and managers act in the interests of the firm and its shareholders • Poor corporate governance practices before the financial crisis came to be seen as a problem

8. Corporate Governance Practices before Financial Crisis (cont) • Five aspects: - Ownership concentration - Political nepotism, cronyism and corruption - Weak legal framework for protection of shareholders and creditors - Lack of transparency and inadequate information disclosure - Ineffective audit and risk management

9. Corporate Governance Practices before Financial Crisis (cont) Ownership concentration • has given family-based owners and their affiliated companies’ excessive power to pursue their own interests • reduced the effectiveness of shareholder protection • industry and business are dominated by a few groups • banks have failed to act as external disciplining agents

10. Corporate Governance Practices before Financial Crisis (cont) Political nepotism, cronyism and corruption • corporate arrangements between the government and economic elite are blamed • two forms of political favouritisms: - official status - informal ties • implementation of NEP and privatization had opened the door to greater political involvement

11. Corporate Governance Practices before Financial Crisis (cont) Weak legal framework for protection of shareholders and creditors • weak corporate governance results in management misconduct will then leads to recession • shareholder rights were often neglected in practice because of the excessive power enjoyed by controlling shareholders • ineffectiveness in implementing and enforcing regulations often raises uncertainty for investors

12. Corporate Governance Practices before Financial Crisis (cont) Lack of transparency and inadequate information disclosure • inability of investors and creditors to determine sound financial institutions and corporations due to the lack of transparency resulted in: - investors reluctant to hold shares - creditors reluctant to rollover maturing short-term debts • director of NEACstated that the financial crisis in Malaysia was a ‘crisis of confidence’

13. Corporate Governance Practices before Financial Crisis (cont) Ineffective audit and risk management • Why external auditors failed: - companies choose to remain solid - opaqueness of business causes auditing to be an unattractive activity and complex in nature - business transactions are relationship-based • Weak risk management: - Asian corporate managers favour in leverage policies

14. Corporate Governance Reform Undertaken by Authorities • Corporate governance reform exercise in Malaysia was announced by the Minister of Finance in March 1998 - establishment of a high level Finance Committee (FC) - FC was established to provide a report on measures for corporate governance improvement • FC was asked to: - undertake a review of the legal and regulatory infrastructure to evaluate its effectiveness - develop a Malaysian Code of Best Practices in Corporate Governance

15. Corporate Governance Reform Undertaken by Authorities (cont) Two phases of the reform process: • Stabilization - Danaharta - Danamodal • Reform - Merger of financial institutions - Corporate sector restructuring

16. Corporate Governance Reform Undertaken by Authorities (cont) Danaharta • asset management company • to remove NPLs from the balance sheets of financial institutions at fair market value and to maximize their recovery value • establishing a transparent and fair method of disposing of the assets

17. Corporate Governance Reform Undertaken by Authorities (cont) Danamodal • recapitalize financial institutions • capital injection was accompanied by - absorption of losses by shareholders through reduced shareholding in the institutions - change in the composition of the boards of directors - change in the management • appointed representatives in the recapitalized institutions to ensure they have been managed prudently and efficiently

18. Corporate Governance Reform Undertaken by Authorities (cont) Merger of Financial Institutions • to merge 58 financial institutions into 6 groups • will prepare the domestic banks for the financial services under the WTO • Central Bank will facilitate and smoothen the merge • guidelines on pricing and major aspects of the merger exercise will be issued

19. Corporate Governance Reform Undertaken by Authorities (cont) Corporate sector restructuring • CDRC will take responsibility • seeks to assist the companies to restructure without government support • progress is slow • banks reluctant to settle without full repayment • disagreement from one creditor will jeopardize the whole process

20. Minority Shareholders Watchdog Group (MSWG) • Minority shareholders: - often unaware when the companies they invest in are being mismanaged - do not take action because they do not know their rights - unfamiliar with their rights and options for recourse or the appropriate channels to air their objection • There has always been a protection mechanism in Malaysia available to minority shareholders

21. Minority Shareholders Watchdog Group (MSWG) (cont) Malaysia’s Minority Shareholder Watchdog Group (MSWG) • incorporated on 2 July 2001 • set up with the aim of promoting shareholder activism among the minority shareholders • non-profit public company • founded by five large institutional investors namely the EPF, Permodalan Nasional Bhd, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji and SOCSO

22. Minority Shareholders Watchdog Group (MSWG) (cont) • Objectives of MSWG: - Provide a forum for minority shareholders to share their experiences - Be a think-tank and a resource centre for minority shareholders - Encourage shareholder activism - Initiate collective shareholder activism - Influence the decision making processes of PLCs - Take direct action against directors of PLCs when warranted - Ensure good corporate governance is practiced

23. Minority Shareholders Watchdog Group (MSWG) (cont) • Role of MSWG: - awaken minority shareholders for their rights and responsibilities • seek to protect minority shareholders from being oppressed by PLCs

24. Minority Shareholders Watchdog Group (MSWG) (cont) Measure of Minority Shareholders Protection: • have the right to take action through the laws and regulations in appropriate circumstances • have the right to attend, appoint proxies, speak up and vote at general meetings • receive information as statutorily provided in the various registers • requisition and convene general meetings

25. Conclusion • Legal, institutional and regulatory frameworks have undergone reforms • It is being further improved to institute a sound and effective corporate governance structure to protect investors • Malaysia has been in the forefront introducing many regional firsts in terms of rules and regulations

26. Conclusion (cont) • MSWG has been set up with the aim of promoting shareholder activism among the minority shareholders • Good corporate governance will motivate shareowners & inspires their confidence to provide continuing support • Mr. Danish Crawford should invest in Malaysia capital market

27. ~THANK YOU~