BKAI3043 RISK MANAGEMENT AND

CORPORATE GOVERNANCE

TOPIC 7 : CODE OF CORPORATE GOVERNANCE AND BEST PRACTICES

GROUP A

NUR HAZIQAH BT ABD HAMID 195496 AMALINA SURAYA BT NASRI 195572 NOOR AZIMAH BT MAT ISA 195720 ROBIATUL ADAWIYAH BT TAKAI JUDIN 195747 JUNIZA BT SHAFIE 195772 HOE LENG SEE 195830 TEH HUI CHEN 195951 KOAY BEE CHENG 196449

MALAYSIAN CODE ON

CORPORATE GOVERNANCE

2012

(MCCG2012)

&

TENAGA NASIONAL BERHAD

(TNB)

Overlapping authority of the regulatory institutions governing the securities market

Weak protection of minority shareholders

Lacking of punishment for directors if breaches of duty in MCCG

Weakness of MCCG 2007

Consists 8 Principle & 26 recommendation

All companies are encouraged to adopt MCCG 2012

MCCG 2012 is effective immediately

Extent report compliance with financial year ending 31 December 2012

Malaysian Code on Corporate Governance 2012 ( MCCG 2012 )

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ESTABLISH CLEAR ROLES AND RESPONSIBILITIES

The responsibilities of the

board, which should be set out

in a board charter, include

management oversight, setting

strategic direction premised on

sustainability and promoting

ethical conduct in business

dealings

Principle 1

1.1 The board should establish clear functions reserved for the board and those delegated to management

1.2 The board should establish clear roles and responsibilities in discharging its fiduciary and leadership functions

1.3 The board should formalise ethical standards through a code of conduct and ensure its compliance.

1.4 The board should ensure that the company’s strategies promote sustainability

1.5 The board should have procedures to allow its members access to information and advice

1.6 The board should ensure it is supported by a suitably qualified and competent company secretary

1.7 The board should formalise, periodically review and make public its board charter

Division between the board and management committees established by the board

Processes and procedures for convening board meetings

MCCG 2012 2007 Code

Principle 1

Establish clear roles and

responsibilities

1.1 The board should establish clear functions reserved for the board and those delegated to management

Part 2 : AA XVI Relationship of the board to management

The board, together with the chief executive officer, should develop position descriptions for the board and for the chief executive officer, involving definition of the limits to management’s responsibilities In addition, the board should approve or develop, with the chief executive officer, the corporate objectives for which the chief executive officer is responsible to meet

MCCG 2012 2007 Code

1.2 The board should establish clear roles and responsibilities in discharging its fiduciary and leadership functions

Part 1 : A I The board Every listed company should be headed by an effective board which should lead and control the company. Part 2 : AA I Principal responsibilities of the board The board should explicitly assume the following six specific responsibilities, which facilitate the discharge of the board’s stewardship responsibilities: • Reviewing and adopting a strategic plan for the company • Overseeing the conduct of the company’s business to evaluate whether the business is being properly managed • Identifying principal risks and ensuring the implementation of appropriate systems to manage these risks

MCCG 2012 2007 Code

• Succession planning, including appointing, training, fixing the compensation of and where appropriate, replacing senior management • Developing and implementing an investor relations programme or shareholder communications policy for the company • Reviewing the adequacy and the integrity of the company’s internal control systems and management information systems, including systems for compliance with applicable laws, regulations, rules, directives and guidelines.

1.3 The board should formalise ethical standards through a code of conduct and ensure its compliance

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1.4 The board should ensure that the company’s strategies promote sustainability

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MCCG 2012 2007 Code

1.5 The board should have procedures to allow its members access to information and advice

Part I : A III Supply of information The board should be supplied in a timely fashion with information in a form and of a quality appropriate to enable it to discharge its duties Part 2 : AA XIX Access to information Directors should have access to all information within a company whether as a full board or in their individual capacity, in furtherance of their duties Part 2 : AA XX Access to Advice There should be an agreed procedure for directors, whether as a full board or in their individual capacity, in furtherance of their duties, to take independent professional advice at the company’s expense, if necessary

MCCG 2012 2007 Code

1.6 The board should ensure it is supported by a suitably qualified and competent company secretary

Part 2 : AA XXI All directors should have access to the advice and services of the company secretary Part 2 : XXII Directors should appoint as secretary, someone who is capable of carrying out the duties to which the post entails, and his removal should be a matter for the board as a whole. The board should recognise that the chairman is entitled to the strong and positive support of the company secretary in ensuring the effective functioning of the board

1.7 The board should formalise, periodically review and make public its board charter

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STRENGTHEN COMPOSITION

The board should have

transparent policies and

procedures that will assist

in the selection of board

members. The board

should comprise members

who bring value to board

deliberations.

Principle 2

Recommendation 2.1 -exclusively non-executive(6/6) -majority independence(3/6)

Recommendation

2.1

The board should establish a Nominating Committee which should comprise exclusively of non-executive

directors, a majority of whom must be independent.

Recommendation

2.2

The Nominating Committee should develop, maintain and review the criteria to be used in the recruitment process and annual assessment of directors.

Recommendation

2.3

The board should establish formal and transparent remuneration policies and procedures to attract and retain directors.

Who set the non executive directors and executive directors remuneration?

MCCG 2012 2007 Code

Principle 2

Strengthen composition

2.1 The board should establish a Nominating Committee which should comprise exclusively of non-executive directors, a majority of whom must be independent

Part I : A IV Appointments to the Board There should be a formal and transparent procedure for the appointment of new directors to the board Part 2 : AA VIII Appointments to the board The board of every company should appoint a committee of directors composed exclusively of non-executive directors, a majority of whom are independent, with the responsibility for proposing new nominees to the board and for assessing directors on an ongoing basis. The actual decision as to who should be nominated should be the responsibility of the full board after considering the recommendations of such a committee. The nominating committee should:-

MCCG 2012 2007 Code • recommend to the board, candidates for all directorships to be filled by the shareholders or the board. In making its recommendations, the nominating committee should consider the candidates’ – skills, knowledge, expertise and experience – professionalism – integrity – in the case of candidates for the position of independent non-executive directors, the nominating committee should also evaluate the candidates’ ability to discharge such responsibilities/functions as expected from independent non-executive directors

• consider, in making its recommendations, candidates for directorships proposed by the chief executive officer and, within the bounds of practicability, by any other senior executive or any director or shareholder • recommend to the board, directors to fill the seats on board committees

The revised Code provides greater clarity on the aspects which a nominating committee should consider when recommending candidates for directorships

MCCG 2012 2007 Code

2.2 The Nominating Committee should develop, maintain and review the criteria to be used in the recruitment process and annual assessment of directors

Part 2 : AA IX The board, through the nominating committee, should annually review its required mix of skills and experience and other qualities, including core competencies which nonexecutive directors should bring to the board. This should be disclosed in the annual report Part 2 : AA X The board should implement a process, to be carried out by the nominating committee annually, for assessing the effectiveness of the board as a whole, the committees of the board, and for assessing the contribution of each individual director, including independent non-executive directors, as well as the chief executive officer. All assessments and evaluations carried out by the nominating committee in the discharge of all its Functions should be properly documented

MCCG 2012 2007 Code Part 2 : AA XIII Directors’ training As an integral element of the process of appointing new directors, each company should provide an orientation and education programme for new recruits to the board

2.3 The board should establish formal and transparent remuneration policies and procedures to attract and retain directors

Part 1 : B I The level and make-up of Remuneration Levels of remuneration should be sufficient to attract and retain the directors needed to run the company successfully. The component parts of remuneration should be structured so as to link rewards to corporate and individual performance, in the case of executive directors. In the case of non-executive directors, the level of remuneration should reflect the experience and level of responsibilities undertaken by the particular non-executive concerned

MCCG 2012 2007 Code Part 1 : B II Procedure Companies should establish a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors Part 1 : B III Disclosure The company’s annual report should contain details of the remuneration of each director Part 2 : AA XXIV Remuneration Committees Boards should appoint remuneration committees, consisting wholly or mainly of nonexecutive directors, to recommend to the board the remuneration of the executive directors in all its forms, drawing from outside advice as necessary. Executive directors should play no part in decisions on their own remuneration. Membership of the remuneration committee should appear in the directors’ report. The determination of remuneration packages of non-executive directors, including nonexecutive chairmen, should be a matter for the board as a whole. The individuals concerned should abstain from discussing their own remuneration

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REINFORCE INDEPENDENCE

The board should have

policies and procedure to

ensure effectiveness and

independent directors.

Principle 3

Recommendation 3.1 Board Should Undertake An Assessment of Its Independent Directors Annually

Recommendation 3.2 The tenure of an independent director should not exceed a cumulative term of nine years. Upon completion of the nine years, an independent director may continue to serve on the board subject to the director’s re-designation as a non-independent director

Recommendation 3.3 The board must justify and seek shareholders’ approval in the event it retains as an independent director, a person who has served in that capacity for more than nine years

Recommendation 3.4 The positions of chairman and CEO should be held by different individuals, and the chairman must be a non-executive member of the board

Recommendation 3.5 The board must comprise a majority of independent directors where the chairman of the board is not an independent director

MCCG 2012 2007 Code

Principle 3 Reinforce

Independence

3.1 The board should undertake an

assessment of its independent directors annually

-

3.2 The tenure of an independent

director should not exceed a cumulative term of nine years. Upon completion of the nine years, the independent director may continue to serve on the board subject to the director’s re- designation as a non-independent director

-

3.3 The board must justify and seek

shareholders’ approval in the event it retains as an independent director, a person who has served in that capacity for more than nine years

-

MCCG 2012 2007 Code

3.4 The positions of chairman and CEO should be held by different individuals, and the chairman must be a non-executive member of the board

Part 2 : AA II Chairman and Chief Executive Officer There should be a clearly accepted division of responsibilities at the head of the company which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the roles are combined there should be a strong independent element on the board. A decision to combine the roles of chairman and chief executive officer should be publicly explained.

3.5 The board must comprise a majority of independent directors where the chairman of the board is not an independent Director

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FOSTER COMMITMENT

Director should devote

sufficient time to carry

out their responsibilities,

regularly update their

knowledge and enhance

their skills.

Principle 4

UPHOLD INTEGRITY IN FINANCIAL REPORTING

The board should ensure

financial statements are a

reliable source of

information.

Principle 5

MCCG 2012 2007 Code

Principle 5

Uphold

integrity in financial reporting

5.1 The Audit Committee should ensure financial statements comply with applicable financial reporting standards

Part 2 : BB II The duties of the audit committee should include the following: (i) To consider the appointment of the external auditor, the audit fee and any question of resignation or dismissal (ii) To discuss with the external auditor before the audit commences, the nature and scope of the audit, and ensure co- ordination where more than one audit firm is involved; (iii) To review the quarterly and year-end financial statements of the board, focusing particularly on– • any change in accounting policies and practices • significant adjustments arising from the audit • the going concern assumption • compliance with accounting standards and other legal requirements (iv) To discuss problems and reservations arising from the interim and final audits, and any matter the auditor may wish to discuss (in the absence of management where necessary)

5.2 The Audit Committee should have policies and procedures to assess the suitability and independence of external

auditors

MCCG 2012 2007 Code (v) To review the external auditor’s management letter and management’s response (vi) To do the following, in relation to the internal

audit function– • review the adequacy of the scope , functions and

resources of the internal audit function, and that it has the necessary authority to carry out its work

• review the internal audit programme and results of the internal audit process and, where necessary,

• ensure that appropriate actions are taken on the recommendations of the internal audit function

• review any appraisal or assessment of the performance of members of the internal audit function

• approve any appointment or termination of senior staff members of the internal audit function

• take cognisance of resignations of internal audit staff members and provide the resigning staff member an opportunity to submit his reasons for resigning

(vii) To consider any related-party transactions that may arise within the company or group (viii) To consider the major findings of internal investigations and management’s response (ix) To consider other topics as defined by the board.

RECOGNISE AND MANAGE RISKS

The board should

establish a sound risk

management framework

and internal controls

system

Principle 6

Recommendation 6.1 The board should establish a sound framework to manage risks

Recommendation 6.2 The board should establish an internal audit function which reports directly to the Audit Committee

MCCG 2012 2007 Code

Principle 6 Recognise and manage risks

6.1 The board should

establish a sound framework to manage risks

Part I : D II Internal control The board should maintain a sound system of internal control to safeguard shareholders’ Investment and the company’s assets Part 2 : BB VII The board should establish an internal audit function and identify a head of internal audit who reports directly to the audit committee. The head of internal audit will be responsible for the regular review and/or appraisal of the effectiveness of the risk management, internal control, and governance processes within the company

Part 2 : BB VIII The internal audit function should be independent of the activities they audit and should be performed with impartiality, proficiency and due professional care. The board or the audit committee should determine the remit of the internal audit function

6.2 The board should establish an internal audit function which reports directly to the Audit Committee

The revised Code recognises the importance of the internal audit function by requiring all companies to have an internal audit function. In order to preserve the independence of the internal audit function, the head of internal audit should report directly to the audit

committee.

ENSURE TIMELY AND HIGH QUALITY DISCLOSURE

Companies should establish

corporate disclosure policies

and procedures to ensure

comprehensive, accurate

and timely disclosures.

Principle 7

The board should ensure that corporate disclosure policies and procedure.

The board should encourage the company to leverage on information technology for

effective dissemination of information.

STRENGTHEN RELATIONSHIP BETWEEN COMPANY AND SHAREHOLDERS

The board should

facilitate the exercise of

ownership rights by

shareholders

Principle 8

The board should take reasonable

steps to encourage shareholder

participation at general meetings

The board should encourage poll

voting

The board should promote effective

communication and proactive

engagements with shareholders

http://www.tnb.com.my/investors-media/circulars-notice-to-shareholders.html

TNB Annual Report 2011 (page 2)

TNB Annual Report 2011 (page 331)

TNB Annual Report 2011 (page 165)

http://www.tnb.com.my/investors-media/request-for-meeting.html

MCCG 2012 2007 Code

Principle 8

Strengthen relationship

between company and shareholders

8.1 The board should take reasonable steps to encourage shareholder participation at general Meetings

Part 3 : I Shareholder voting Institutional shareholders have a responsibility to make considered use of their votes

8.2 The board should encourage poll voting

–

8.3 The board should promote effective

communication and proactive engagements with shareholders

Part I : C I Dialogue between companies and investors Companies and institutional shareholders should each be ready, where practicable, to enter into a dialogue based on the mutual understanding of objectives

MCCG 2012 2007 Code

Part 2 : CC I The relationship between the board and shareholders The boards should maintain an effective communications policy that enables both the board and management to communicate effectively with its shareholders, stakeholders and the public. This policy must effectively interpret the operations of the company to the shareholders and must accommodate feedback from shareholders, which should be factored into the company’s business decisions Part 3 : II Dialogue between companies and investors Institutional investors should encourage direct contact with companies, including constructive communication with both senior management and board members about performance, corporate governance, and other matters affecting shareholders’ interest

BEST PRACTICES OF

CORPORATE

GOVERNANCE IN

MALAYSIA, UK & USA

The UK Corporate Governance Code

UK incorporated companies listed on the UK Stock Exchange 5 Principle

Section A: Leadership Section B: Effectiveness Section C: Accountability Section D: Remuneration Section E: Relations with shareholders

United Kingdom

Business Roundtable (BRT)

An association of chief executive officers of leading U.S. companies with over $6 trillion in annual revenues and more than 14 million employees. 4 Sections

Duty of the board of directors Responsibility of management Responsibility of the board Responsibility of the corporation

United Stated of America

Nomination Committee

Audit Committee

Directors

REQUIREMENTS MALAYSIA UNITED KINGDOM UNITED STATE

1. INDEPENDENCE OF DIRECTOR

Principle 3 mention that the board should have policies and procedures to ensure effectiveness of independent directors.

Combination of executive and non-executive directors (and, in particular, independent non-executive directors)

A substantial majority of the board's directors should be independent

2. THE ROLE OF CHAIRMAN AND CHIEF EXECUTIVE

Rec 3.4 -positions of chairman and CEO should be held by different individuals -the chairman must be a non-executive member of the board

should not be exercised by the same individual

combining the positions of CEO and chairman

3. ELECTION OF DIRECTORS

Rec 3.2 -The tenure of an independent director should not exceed a cumulative term of nine years.

Non-executive directors who have served longer than nine years should be subject to annual re-election

The lead director should be appointed by the independent members of the board and should serve for a period of at least one year.

1. Independence of directors

2. The role of chairman and chief executive

3. Election of directors

3. Election of directors

REQUIREMENTS MALAYSIA UNITED KINGDOM UNITED STATE

AUDIT COMMITTEE MCCG 2007 (Part 2 BB I) at least three members majority of whom are independent All members of the audit committee should be non-executive directors. Financially literate and at least one should be a member of an accounting association or body

UK CG2012 (C.3.1) At least 3 members Independent non-executive directors At least one member of the audit committee has recent and relevant financial experience

US BRT CG2012 at least three members, who should all be independent directors consist of three to five members At least one member of the audit committee should be an audit committee financial expert

ANNUAL REPORT & ACCOUNTS HSBC HOLDINGS PLC (page 232-233)

REQUIREMENTS MALAYSIA UNITED KINGDOM UNITED STATE

NOMINATION COMMITTEE

MCCG 2012 exclusively of non-executive directors majority of whom must be independent.

UK CG2012 (B.2.1 , B.2.2 , B.2.4) Majority of independent non-executive directors A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments. evaluate the balance of skills, experience, independence and knowledge on the board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.

US BRT CG2012 The corporate governance committee (often combined with or referred to as a nominating committee) should have at least three members should be composed solely of independent directors

Independent Directors Non independent

Do not comply with requirement in US BRT CG2012 which state that the member of Nominating and Governance Committee should independent.

Duties of Nominating and Governance Committee

Enhancement of marketability of

goods and services

Improved leadership

Demonstration of transparency

and social accountability

Stimulation of performance

Improved access to capital markets

BUSINESS STRATEGY Why Need good Corporate Governance?

Reduction of risk

PAST YEAR QUESTION

Semester 1 (2008/2009)

Answers

Unitary (Anglo- Saxon approach) Dual (Two-Tier structure)

The governing body is comprised of a

single board

The governing body is comprised of

two separate boards; supervisory

board and management board

Executive and non-executive directors

operate in one board

Executive and non-executive directors

operate in separate boards

The committees of the board is

mandatory or recommended

The committees of the board is

recommended

Two differences between a Unitary (Anglo- Saxon approach) and a Dual

(Two-Tier structure) Board are:

Answer

Unitary(Anglo-Saxon approach) Dual (Two-Tier structure)

Advantages:

Quick in making decision

Direct contact between e executives and non-

executives that enables sound monitoring

and counselling

Efficient information flow and non-

executives’ access to corporate data

Reduction in possible fraud as wider

involvement of NED in management

Advantages:

Clear separation between operations and

management

Balancing the power of Chief Executive

Officer (CEO) and board Chairman

Higher objectivity and independence,

particularly in the process of management

evaluation, compensation policy

no personal connections enable sound

monitoring and counselling

Disadvantages:

Powerful position of Chief Executive Officer

(CEO) who holds Chairman function

Dependence on CEO policy, lack of

objectivity

Risk of building a coalition

between CEO and outside directors

(evaluation of board work, resisting to

takeovers)

Disadvantages:

Higher costs of board functioning

Poor information flow and non-executives’

access to corporate data

lack of direct contact between executives

and non-executives

Risk of dominating the board by majority

shareholder

The advantages and disadvantages for each approach are:

d) How many time audit committee need to meet with External auditor without BOD. Why?

The committee should meet with the external auditors without executive board members present at least twice a year. This encourages a greater exchange of free and honest views and opinions between both parties without the intervention of executive director or other parties that have the interest towards the entities. It shows that independency between audit committee and executive director. So they can conduct their duty respectively. To avoid External Auditor involved in non-audit services

e) There have been a number of high profile corporate failures despite the fact that the financial statement is being annually audited and the company seems to have good corporate governance. This is because of i. Auditor conflicts of interest - Auditing firms, the primary financial "watchdogs" for investors, were self- regulated. They also performed significant non-audit or consulting work for the companies they audited.

ii. Boardroom failures - Board members who either did not exercise their responsibilities

or did not have the expertise to understand the complexities of the businesses. In many cases, Audit Committee members were not truly independent of management.