Corporate Governance

BBBD 3014
Lecture 8
Directors: Committees
▶ Nomination & remuneration committees
▶ Audit committee
Nominating Committee
The key tasks of the nominating committee is to
ensure that the company recruits, retains, trains
and develops the best available executive and
non executive directors and manages board
renewal and succession effectively.
Nominating committee: main
duties
▶ Regularly review structure, size & composition of the
Board;
▶ Identify candidates to fill in vacancies –
‘head-hunting’;
▶ KIV leadership needs;
▶ Recommendations about succession planning
Nominating Committee
▶ Paragraph 2.20A of the Listing Requirements mandates a
listed issuer to ensure each of its directors, chief executive
and chief financial officer has the character, experience,
integrity, competence and time to effectively discharge
their respective roles.
▶ Paragraph 15.08A of the Listing Requirements mandates a
listed issuer to establish a nominating committee, with
written terms of reference, and to provide a disclosure
statement in its annual report on the activities of the
nominating committee in the discharge of its duties for the
financial year.
Composition & Size
▶ Paragraph 15.08A (1) of the Listing Requirements
mandates the nominating committee, established by
the board, to comprise exclusively of non-executive
directors, a majority of whom must be independent.
▶ MCCG 2017 - Nominating Committee is chaired by an
Independent Director or the Senior Independent
Director
Nominating Committee
▶ Paragraph 15.08A (2) of the Listing Requirements
provide written terms of reference to be developed
outlining the nominating committee’s duties and
authority, including its structure and processes, in
particular the criteria on selection and assessment of
directors.
Nominating Committee: Meetings
▶ Nominating committees should meet at a minimum two
times a year, to carry out the activities as enshrined in its
terms of reference, or more frequently when the need
arises.
▶ The nominating committee should be provided with
sufficient resources to undertake its duties
▶ The meetings of the nominating committee should be
transparent, with all proceedings recorded and actions
documented.
▶ The nominating committee may also find it useful to invite
the CEO and relevant employees, such as the head of
human resource, to attend meetings, especially when
matters such as succession planning
Remuneration committee
▶ Composition & Size:
◦ Principle A, Guidance 6.2 MCCG 2017:
◦ The Committee should only consist of non-executive directors and
a majority of them must be Independent Directors, drawing advice
from experts, if necessary. Directors who are shareholders should
abstain from voting at general meetings to approve their fees.
Similarly, Executive Directors should not be involved in deciding
their own remuneration.
▶ Meetings: Whilst the Code does not specify the frequency
of meetings to be conducted annually, it is obvious that the
committee needs to meet at least once a year to discharge
its responsibilities as spelt out in its terms of reference.
Remuneration framework
▶ A remuneration framework should be designed in such a way that it supports
the strategies and long-term vision of the company as well as provides
adequate motivational incentive for directors to pursue the long term growth
and success of the company.
▶ The company should ensure that its remuneration framework is robust and
effective enough in the following areas:
(a) attracting and retaining key personnel of requisite quality that increases productivity
and profitability in the long run;
(b) motivating and creating incentives for directors and key management personnel to
perform at their best; and
(c) focusing attention on the achievement of desired goals and objectives
Note: companies should focus on identifying what its current remuneration
strategy is, what its overall business strategy entails and whether the
remuneration strategy in its present form supports the business strategy
Remuneration framework

Note: The concept of ‘pay for performance’ and the

satisfaction of conditions based on the company’s
financial performance to achieve short-term incentives
(“STIs”) and long-term incentives (“LTIs”) is now
reasonably well entrenched
Remuneration: Executive Director
▶ Remuneration packages for executive directors (and of
members of senior management or any other individual, as
defined by the Board) should involve a balance between fixed
and performance-linked (variable) elements.
▶ The executive remuneration should be set at a competitive level
for similar roles within comparable markets to recruit and retain
high quality executive directors and executives. Individual pay
levels should reflect the performance of the director, skills and
experience as well as responsibility undertaken.
▶ Paragraph 7.23 of the Listing Requirements states that salaries
payable to executive directors may not include a commission on
or a percentage of turnover
Remuneration: Non-Executive Director
▶ A review of the fees for non-executive directors should take into
account fee levels and trends for similar positions in the market and
time commitment required from the director (estimated number of
days per year). Such review should take into consideration any
additional responsibilities undertaken such as a director acting as
board chairman, chairman of a board committee or as the senior
independent director.
▶ Non-executive directors are normally remunerated by way of fees (in
the form of cash and by a fixed sum) that are approved by
shareholders on an annual basis. Paragraph 7.23 of the Listing
Requirements also stipulate that fees payable to non-executive
directors shall not be based on a commission or percentage of profits
or turnover.
Remuneration: Chief Executive Officer
(CEO)
▶ The remuneration of the CEO (where the CEO is not a
director of the company) and senior management should
also be recommended by the remuneration committee.
▶ In determining their remuneration the committee should
ensure that the rewards are in line with the following key
objectives:
(a) the offer is sufficient to attract and retain the best candidate in
the short term;
(b) the incentives offered are appropriate to motivate the CEO and
senior management to perform at their maximum on a continuous
basis; and
(c) the CEO’s and senior management’s remuneration are aligned with
shareholder value whilst creating an effective “golden handcuff” in
the long term.
Disclosure of Remuneration
▶ Appendix 9C (Part A) of the Listing Requirements
provides for the disclosure of directors’ remuneration
in the company’s annual report.
▶ Principle A, Guidance 7.1 MCCG 2017: The detailed
disclosure allows shareholders to make an informed
decision when voting on the approval of directors’
remuneration and to consider the appropriate
remuneration package taking into account the
responsibilities of the directors.
Audit Committee
The board is required by law to ensure that the financial
statements of the company present a true and fair view of the
state of affairs of the company and that they are prepared in
accordance with applicable approved accounting standards.
The audit committee must review and report the company’s
financial statements to the board for the board’s assessment
and approval. However, note that the board may delegate, but
not abdicate, its responsibility to the audit committee.
 Audit Committee: Duties
Every audit committee should assume four fundamental
responsibilities
(a) overseeing financial reporting;
(b) assessing the risks and control environment;
(c) evaluating the internal and external audit process;
and
(d) reviewing conflict of interest situations and related
party transactions.
Composition & Size
▶ Para 15.09 of the Listing Requirements mandates listed issuer
to appoint an audit committee comprising no fewer than three
members. At least one member of the audit committee must
fulfil the financial expertise requisite of the Listing
requirements.
▶ The audit committee should comprise non-executive directors
with a majority being independent. Independence is the
cornerstone of its effectiveness. Paragraph 15.10 of the Listing
Requirements also prescribes that the chairman of the audit
committee must be an independent director.
▶ MCCG 2017: The Audit Committee should comprise solely of
Independent Directors. The Chairman of the Audit Committee is
not the Chairman of the board
Audit Committee: Overall qualification

▶ MCCG 2017: Collectively, the Audit Committee should

possess a wide range of necessary skills to discharge
its duties. All members should be financially literate
and are able to understand matters under the purview
of the Audit Committee including the financial
reporting process.
 Audit Committee: individual
qualifications
The personal qualities considered by the nominating committee as provided by Bursa
Malaysia include:
(a) the ability to act independently and be pro-active in advising the board of any
concerns;
(b) the ability to ask relevant questions, evaluate the responses and continue to probe for
information until completely satisfied with the feedback provided;
(c) an ability and desire to constantly engage in self development programmes;
(d) ability to appreciate the company’s values and a determination to uphold these values
coupled with a thoughtful approach to the ethical issues that may be faced;
(e) a professional approach to duties, including an appropriate commitment of time and
effort;
(f) the courage to take and stand by tough decisions and high ethical standards; and
(g) encouragement of openness and transparency which is demonstrated by the ability to
accept mistakes and not ascribe blame.
Role of Chairman & Secretary of Audit
Committee
▶ Paragraph 15.10 of the Listing Requirements mandates
the appointment of an independent chairman. A strong and
independent chairman demonstrating depth of skills and
capabilities is a key element for a successful committee,
and so his selection should be undertaken with due care
and consideration
▶ Generally, the company secretary is the audit committee
secretary.
▶ Paragraphs 15.11 and 15.12 of the Listing Requirements set
out the need for written terms of reference (or a charter)
and minimum functions of the audit committee.
Rights of an Audit Committee
In order to empower the audit committee to carry out its work unhindered,
paragraph 15.17 of the Listing Requirements provides the rights of the audit
committee which include, amongst others:
▶ having authority to investigate any matter within its terms of reference;
▶ having full and unrestricted access to any information pertaining to the
company, including access to resources;
▶ having direct communication channels with the external and internal
auditors;
▶ authority to obtain independent professional advice; and
▶ being able to convene meetings with the external auditors or internal
auditors or both, excluding the attendance of other directors and
employees of the company, whenever deemed necessary.
Role of Chairman & Secretary of Audit
Committee
▶ Paragraph 15.10 of the Listing Requirements mandates
the appointment of an independent chairman. A strong and
independent chairman demonstrating depth of skills and
capabilities is a key element for a successful committee,
and so his selection should be undertaken with due care
and consideration
▶ Generally, the company secretary is the audit committee
secretary.
▶ Paragraphs 15.11 and 15.12 of the Listing Requirements set
out the need for written terms of reference (or a charter)
and minimum functions of the audit committee.
Rights of an Audit Committee
In order to empower the audit committee to carry out its work unhindered,
paragraph 15.17 of the Listing Requirements provides the rights of the audit
committee which include, amongst others:
▶ having authority to investigate any matter within its terms of reference;
▶ having full and unrestricted access to any information pertaining to the
company, including access to resources;
▶ having direct communication channels with the external and internal
auditors;
▶ authority to obtain independent professional advice; and
▶ being able to convene meetings with the external auditors or internal
auditors or both, excluding the attendance of other directors and
employees of the company, whenever deemed necessary.
Audit committee: Evaluation

▶ Paragraph 15.20 of the Listing Requirements states that the board of

directors of a listed issuer must review the term of office and performance
of the audit committee and each of its members at least once every three
years. This is to assess whether the audit committee and its members have
carried out their duties in accordance with their terms of reference.
▶ A formal evaluation of the performance of all committee members should
be undertaken by the nominating committee.
Audit committee: Evaluation

▶ Assessment of the audit committee’s effectiveness helps to ensure the

committee members’ expectations are continuously met.
▶ Upon completion of the evaluation, the board should deliberate the
outcome to undertake appropriate remedial actions (if any), for example
relevant training / education to be recommended for the committee
members, etc., to effectively discharge their responsibilities.
Audit committee: Continuing Education
▶ Audit committee members must educate themselves appropriately
through ongoing training, augmented by inputs from management and
external auditors on the recent developments in financial reporting.
▶ The CEO and the company secretary should update the audit
committee of changes in substantial shareholding that result in
changes of persons connected and related parties and the way the
company operates, including changes in key customers, suppliers and
parties to major contracts.
▶ Equipped with this knowledge, the audit committee should probe
management on how new accounting standards have an effect on the
financial reporting of the company and how significant transactions
are accounted for and disclosed in the company’s financial statements
and announcements.