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CORPORATE GOVERNANCE

Definition: Corporate Governance is a process and


structure used to direct and manage business and affairs of
the company towards enhancing business prosperity and
corporate accountability with the ultimate objective of
realizing long term shareholder value and at the same time
taking into account the interest of other stakeholders.

The High Level Finance Committee Report on


Corporate Governance
Other definition:

Corporate governance is the corporate framework or


structure that an entity applies to direct and manage its
business and affairs. Corporate governance to ensure that
those managing the entity properly utilise their time, talents
and available resources
in kamaruzzaman
the best interest of owner.
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CORPORATE GOVERNANCE
Further explanation:

Corporate Governance refers to the structure and


processes by which organisations are directed, controlled,
managed and held to account. It involves establishing a
control structure which consists of policies, procedures,
rules and regulations: and process comprising mechanisms
and systems to facilitate decision making.

The objective of corporate governance is to realizing long


term shareholder value and at the same time taking into
account the interest of other stakeholders.

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THE PRINCIPLE PLAYERS IN CORPORATE


GOVERNANCE
BOARD OF DIRECTORS
AUDIT COMMITTEE

REGULATORS

(Laws, regulations,
standards)
SHAREHOLDERS
STAKEHOLDERS

MANAGEMENT

EXTERNAL AUDITOR

INTERNAL AUDIT

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THE PRINCIPLE PLAYERS IN CORPORATE


GOVERNANCE
Function of each Players

BOD provides leadership and direction to management

Management accountable to the BoD

Internal and external auditors monitor performance and


outcomes

Board accountable to regulators for conformance with laws


and to shareholders/stakeholders for profit and corporate
results.

Shareholders have responsibility to make considered use of


their votes

Ultimately the players should ensure the company is able to


have the right balance between conformance and
performance.
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DEVELOPMENT OF CORPORATE
GOVERNANCE IN MALAYSIA

Begun in 1992, after publication of the Cadbury Report in 1992. The


Cadbury Report and its Code of Best Practice issued in December 1992
by the Committee of Financial Reporting Council, the London Stock
Exchange.

The formation of Cadbury Report because of two reasons:

Anglo-American companies were lagging behind their global competitiveness (due to


defective functioning in corporate governance)
Significant corporate failure arising from fraud such Maxwell and B.C.C.I. scandals
(UK scandals).

Due to that, the requirement for Board Audit Committee comprising


independent directors enforced immediately to the Malaysian
subsidiaries of British multinational. From there, auditors starts to
advise their clients to have audit committee and then corporate
governance became fashionable in Malaysia. In 1994, Government
stepped in and legislates the requirement of an audit committee in the
Listing Requirement.
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DEVELOPMENT OF CG IN MALAYSIA

Continuous effort was put in place by the Malaysians to raised


the standard of corporate governance and we can see from the
changes to its listing regulations and the establishment of new
agencies, such as:

Revamped KLSE Listing Requirements in January 2001, to


enhance corporate governance and transparency, enhance
efficient capital market activities, strengthen investor
protection and promote investor confidence.

Research Institute of Investment Analyst Malaysia (RIIAM)


being established and being appointed to conduct the
mandatory continuous training for the directors of Public
Listed Companies, as required under KLSE listing
requirements.
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DEVELOPMENT OF CORPORATE
GOVERNANCE IN MALAYSIA

Malaysian Institute of Corporate Governance being


establish in 1998 with several objectives such as to
promote awareness of corporate governance, to collect
and circulate corporate information and data pertaining
corporate governance (Code on Corporate Governance).

Minority Shareholders Watchdog Group (Badan


Pengawas Pemegang Saham Minoriti Berhad) was
incorporated on 30 August 2000, a non-profit making
company limited by guarantee, under MoF. Purpose to
overseen management behaviour and enhancing board
independence to ensure fairness treatment to all
shareholders.
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CONCEPT IN CORPORATE GOVERNANCE

Transparency: Financial and non-financial information


should be easily available
Independence: Procedures and structures of company
should be put in place to minimize conflict of interest
Accountability: Decision makers should be accountable on
what they do.
Responsibility: Directors should be liable for their
performance to stakeholder.
Fairness: All shareholders should received equal
consideration regardless of the size of their holdings.
Social responsibility: A well-managed company should be
aware of and respond to issues of social concern.

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BURSA MALAYSIAS REQUIREMENT ON


CORPORATE GOVERNANCE: Example of CG
On the DIRECTORS

Composition of the BOD: 1/3 or nearest to 1/3 must be


independent directors.

Rights of Directors: Directors in discharge his duties should


have rights to obtain full and unrestricted access to any
information of the company, getting assistance of company
secretary and hiring consultant.

Vacation of office: The office of the director become vacant if


the director becomes of unsound mind, bankrupt and absent
of more 50% BoD meeting (within a year).

Restriction of directorship: Limit directorship: 25, i.e. 10 in


listed company and 15 in other companies.

Directors training: Directors should undergo continuous


training.
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BURSA MALAYSIAS REQUIREMENT ON


CORPORATE GOVERNANCE: Example of CG
On the Audit Committee

All listed companies must establish an audit committee. The


composition of committee, function, role, duties will be
discussed later.
On the External Auditors

Appointment of external auditors: Must appoint a suitable


firm, i.e. they must have experience and resources

Removal of external auditors: a copy of a representation


made by the auditors need also be forwarded to Bursa
Malaysia.

Review of statements: External auditor should also review the


statement made by the board on internal control.

Right to request for meeting: The auditor has a right to ask


for meeting with audit committee to bring any matter which
the auditor believe should be brought to the attention of the
Directors or shareholders.
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EFFECTIVE GOVERNANCE: PRINCIPLES AND


BEST PRACTICES FOR BOD

Good governance depends on effective inter-relationship


between Board and management. Effective Board is a
board which able to establish good leadership, stewardship
and control.

LEADERSHIP

Effective Board will enhance the competitiveness of the


company and shareholders confident. Effective board also
will assure that the organization is trustworthy, honest and
incorruptible. Board also should demonstrate their concern
on social responsible, not just focusing on profits.
Transparent, loyal, care and diligence among important
attitude and principle recognised globally for good
corporate governance.
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EFFECTIVE GOVERNANCE: PRINCIPLES AND


BEST PRACTICES FOR BOD
STEWARDSHIP

Boards as stewards (person of responsible/care off) of the


company assets have a moral and statutory obligation to work
with management to add value to those assets by contributing
in various ways:
Strategic planning: strategic planning develops by
management and monitors by board on the achievement.

Risk management: Board must ensure that key risk area of


the business are identified, analysed and managed.

Human resources management: An organization must have


a highest standard of selecting, compensating and
monitoring performance of key personnel and senior
management as they are the key persons the BoD trust and
assists BOD in discharged their duties.

Communication policy: communication line internal and


external must be clear so as to effectively convey
information and accommodate feedback.
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EFFECTIVE GOVERNANCE: PRINCIPLES AND


BEST PRACTICES FOR BOD
STEWARDSHIP

Internal control assurance: The board should review the


adequacy and integrity of the companys accounting and
financial reporting system and internal control systems and
other systems of the company and to ensure the systems
are compliance with current laws and regulations.

CONTROL

The third component of principles and best practice for BOD


is monitoring. The company can have the best systems,
procedures and technology in place but if they do not well
monitor and control, the business is bound to fail. Continuous
monitoring will also provide assurance of things that are
going right and identify matters which need to be put right.
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GOOD CG REQUIREMENTS RELATING TO


DIRECTORS RESPONSIBILITIES

The DIRECTORS must act in the best interest of the company, care
and diligence in their function and in dealing with statutory duties.
Must act honestly and avoid conflict of interest. He must act according
to M&A, Companies Act, Securities Industries Act and comply to the
Listing Requirement.
Specifically, the directors responsibilities are:Set corporate objectives, review and approve and guide corporate
strategies and business plan, budgets and to monitor the
implementation;
To oversee the management of company business and to ensure
corporate performance;
To oversee human resources management, staff selection and
compensation, etc;
To develop and implement investor relations programs to
effectively communicate with the shareholders, other stakeholders
and the public;
To review the adequacy and integrity of the systems employed by
the company. i.e. accounting system, financial reporting systems,
internal control etc;
To select CEO; and
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To prescribe the transactions
that require board approval.

AUDIT COMMITTEE
Introduction

Audit Committees is required on:


All listed companies and those seeking listing on Bursa
Malaysia
All Federal Statutory Bodies
Banks and Financial Institutions
Audit Committee is to assist BOD in discharging their duties
relating to company/entity management and internal control,
accounting policies and financial reporting and a line of
communication between the board and the auditors
Why an audit committee is needed: Major frauds, strong
criticism of the quality of executive management and the
effectiveness of board supervision, and financial institutions
have to made necessary action for strengthening accountability
and corporate governance so as to provide greater protection
for shareholders and the investing and depositing public.
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Reporting Level of Audit Committee


Board of Directors

Audit Committee

Company Secretary

Managing Director

Department

Department

Department

Department

Extracted from prospectus Tijari Resources Bhd


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Reporting Level of Audit Committee


Board of Directors

Company
Secretary

Audit Committee

Internal Audit

External
Auditors

control assessment
Review process

Risk
management
Committee
Risk identification
and assessment

Reporting

Risk mitigation
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AUDIT COMMITTEE
Role of an audit committee
To oversee the financial reporting and governance processes so as to:
1.
Assist directors in discharging their statutory duties and
responsibilities: The directors liable on preparing companys
financial statements and audit committee minimize the
involvement of BOD.
2.
Monitor company activities: Ability to access the accounting
records and indirectly monitor the company activities
3.
Increase public confidence in the credibility and objectivity of
financial reporting. The financial statement is free from bias.
4.
Support the audit function: Audit committee becomes closely
with the whole audit process and it will strengthens the
auditors independence.
5.
Monitor disclosure requirements
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AUDIT COMMITTEE
Role of an audit committee
To oversee the financial reporting and governance processes so as to:
6.
Satisfy the board that adequate attention is being given to risk
management. Organization should have prevention and response
mechanisms in place to help them keep risk at acceptable level. Audit
committee should determine the systematic methods employed to
evaluated business risks.
7.
Satisfy the Board that internal control exist and are effective. An
internal control system is an integral part of the management process
and the committee should ensure that the control framework in place is
adequate to provide assurance on: Accomplishment of establish objectives
The economical and efficient use of resources
Safeguarding of resources
The reliability and integrity of information
Compliance with policies, plans, procedures, laws
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AUDIT COMMITTEE
Composition Members of Audit Committee Members
1.
2.
3.
4.

5.

The committee shall be among Directors of Company and shall


be appointed by the board.
Should consist of not less than 3 members with a majority of
non-executive directors (independent directors)
Audit committee to be chaired by an independent nonexecutive Director.
A member shall not have any family relationship with the
executive director of the company or related companies or any
relationship that would interfere the independent judgment.
At least one member of the audit committee must be a
member of MIA or if not a member of MIA, he or she must
have at least 3 years working experience and
i.
Have passes the examination specified in Part I of
the 1st Schedule of Accountant Act, 1967 or
ii. He must be a member of one of the association
specified in Part II of 1st Schedule of Accountant Act,
1967.
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AUDIT COMMITTEE
Drawbacks of an audit committee
Some of problems are:
1.
Interference in executive decision on operational matters which
will tend to undermine the authority of the board. There may be
conflict of mistrust and misunderstanding among the committee,
management, internal auditors and the external auditors. How to
overcome/prevent: Audit committee should have clear terms and
responsibilities and communication between all parties should be
made on timely basis on professional manner.
2.
Audit committees have no teeth: Audit committee are just
window dressing to comply Bursa Malaysia Listing
Requirement. How to overcome/prevent: Audit committee must
be and be seen to be independent, with authority given to back
up their responsibilities. BOD must give their full support to the
committee including financial and administrative resources to
carry out their duties.
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AUDIT COMMITTEE
Drawbacks of an audit committee
Some of problems are:
3. The full board is distanced from financial matters and the
external auditor. This happen when BOD has discharged
his duty to audit committee BUT they still has full
responsibilities on the financial matters of the company.
How to overcome/prevent: the BOD must require oral and
written report on all activities of the committee and may
even call the auditors to attend the meetings.
4. Legal Liability of Audit Committee members: Audit
committee does not relieve the BOD of its responsibility
for the financial reporting process. However, audit
committee members may increase their exposure to
possible additional liability because the extra
responsibilities entrusted to them.
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AUDITORS ROLE
IN CORPORATE GOVERNANCE
1.

2.

3.
4.
5.
6.

Assist in establish good internal control and risk


management policies
Provide assurance of integrity and reliability of the internal
control and risk management system of clients.
Measure to detect misstatement
Ensure awareness on and uses relevant measures to
detectmisstatement in financial statement
Ensure independent in performing the audit
Ensure perform audit quality
Adhere to auditing standards
Reduce expectation gap through communication, education
and professional development.

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TYPES OF DIRECTORS (Additional Notes)

Independent Director
Independent Directors are normally non executive and
considered outsider and appointed to sit on BOD of a
company.
The Malaysia Institute of Corporate Governance (MICG)
defined an Independent Directors as one who has the
knowledge, integrity and vision combined with personality,
skill and experience to fulfill his role effectively.
There should be sufficient number of independent director
on the Board to create a suitable balance of power.
Duty of Independent Directors:

Help identify the right strategy that will improve shareholders value
Balance up Board structure, give independent view and judgment in the
Board decision making process.
As a watchdog particularly to minority shareholders and monitor board
process.

Appointed for a specific term and subject to retirement by


rotation and re-election
They may appoint an alternate/substitute director
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