Already a regional leader in corporate governance best practices, at the end of April Malaysia’s Securities Commission (SC) released an update to its Code of Corporate Governance (the MCCG). While it came without much fanfare the new MCCG includes significant changes that investors and public companies should be aware of, tightening diversity and independence requirements, and putting the onus of sustainability risk and clear ESG goals on board leadership and senior management.

The theme of sustainability runs throughout the new edition. As the SC notes:

“Effective board leadership and oversight also require the integration of sustainability considerations in corporate strategy, governance and decision-making, as sustainability and its underlying environmental, social as well as governance (ESG) issues become increasingly material to the ability of companies to create durable and sustainable value and maintain confidence of their stakeholders. For companies to be resilient, boards need to take a much more holistic view of the business coupled with proactive and effective measures to anticipate and address material ESG risks and opportunities.”

Material changes under the revised MCCG include:

Gender Diversity

The new MCCG builds upon the prior iteration of the Code, released in 2017, which required the boards of Large Companies (those in the FTSE Bursa Malaysia Top 100, or with a market cap of at least RM 2 billion) to include at least 30% female directors. Under the updated MCCG, the 30% gender diversity requirement is extended to all companies, not just Large Companies.

Director Tenure

The 2017 Code introduced a new approach to board tenure for independent directors. In particular, after nine years of cumulative service on a board, a director’s continued independence became subject to an annual shareholder vote. Moreover, after twelve years of cumulative service that annual vote was held on a two-tier basis, requiring the approval of both large shareholders and non-large shareholders, voting separately. The updated MCCG brings forward the two-tier vote system by three years, preventing large holders from rubber stamping the continued independence of long-serving directors who may have ties to the company or affiliated entities, and promoting minority shareholder rights.

Committee Independence

Under the revised Code, board chairs are prohibited from serving on board committees in any capacity. The SC notes that the service of board chairs on committees may “impair the objectivity of the [chair] and the board when deliberating on the observations and recommendations put forth by the board committees”.

Virtual General Meetings

The revised Code also addresses the holding of virtual and/or hybrid general meetings, which started during the COVID-19 pandemic. The MCCG encourages the practice, provided that technology ensures voting in absentia and continued shareholder participation, with opportunities for shareholders to ask questions and all asked questions being made visible to all meeting participants. Further, companies would need to ensure proper data protection.

Other Notable Changes

In addition to the major changes above, other corporate governance amendments to the MCCG include a 3-year cooling off period for directors who have served as a company’s audit partner, and considerations around how directors were sourced and the nature of their affiliations with existing directors.

Regional Perspective

Corporate governance does not reside in a vacuum — the Asia Corporate Governance Association’s biannual publication, CG Watch, provides valuable context regarding the strength (and weakness) of supporting institutions, such as government, regulators, and civil society. Nonetheless, in terms of governance requirements the updated MCCG strengthens what was already a robust set of best practices, and makes Malaysia the outright leader across the Asia Pacific region in promoting female representation among listed companies via code or regulation.

Currently, India, Pakistan are the only other Asia-Pacific markets with specific board gender diversity requirements, with South Korea set to join this small group in 2022. Australia has taken a less prescriptive approach, maintaining board gender diversity recommendations, particularly for S&P/ASX 300 companies. For other markets, there is generally a broad consideration of gender as being part of the larger consideration of board diversity. This is case for Japan, Singapore, Thailand, while Hong Kong is looking to increase the role of gender diversity as per a recently-released consultation paper.

It’s also worth noting that the voting process on board tenure has served as a regional model. Singapore is implementing a similar structure from January 2022, and Hong Kong is considering a similar approach under its current governance consultation.

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