Understanding Corporate

Governance III

The Key Players

AMAL HAYATI ISHAK
0 ACIS 2021

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The Key Players in CG 1

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Board of
Shareholders Directors (BOD)

Senior
Management
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…The Senior Management

► The Senior Management are the executives involve in the day-to-day business -
hold responsibilities including;
► Report to the BOD the status of business operation
► Follow and implement strategic plans of the BOD
► Operate within annual plans and budget set by the BOD
► Maintain efficient management and organisation structure
► Manage the risk for any decision taken by the organisation
► Ensure a sound internal control system to provide the organisation with accurate
reports
► Ensure availability and functioning of reporting channels for any potential
misconduct

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…The Board of Directors 3

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► BOD takes full responsibility for the monitoring/ oversight of
the corporation’s business. They are responsible to;
► Monitor and assess senior management (executives) performance
including the selection, evaluation, replacement and compensation
► Assess the conduct of business to ensure it is properly run by the
senior management
► Review and approve financial corporate plans proposed by the
senior management
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…The Board of Directors

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Two fiduciary duties of the BOD;
► Duty of care to the corporation – they would exercise the same manner in managing the
corporation’s asset as they would for their personal assets. So the BOD’s decision should be
supported with sufficient evidence and information.
► Duty of loyalty to the corporation – they would act in the best interest for the corporation
as they would act for their own interests. So the BOD are prohibited from putting their
personal interest ahead of the corporation’s interest
► **Violations of the fiduciary duties will be subjected to penalty e.g petition for dismissal, class action suits
(sued in a group) or legal injunction
► **Business judgment rule – this rule limits the liability of BOD from any penalty as long as they acted in good
faith. This means as long as BOD is under reasonable impression , they have not commit any violation in their
duties.
BOD’s structure 5

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► No one-board profile fits every corporation.
► No specific size but it should be aligned not too small (lacks expertise or
manpower to run business productively) not too big (waste resources and
diminish individual productivity; but can be subdivided into subcommittees)
► The board’s structure will be established abiding to the;
► the corporation’s rules and regulation
► the local legal environment (e.g listing requirements of Bursa etc)
► Changes to the board structure is needed to accommodate new developments
e.g merger and acquisition.
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…BOD’s structure
► BOD structure comprises of;
► 1. Chairperson – responsible to lead activities of BOD. In some corporation, the Chairperson is the
CEO i.e CEO duality (advisable to appoint different persons).
► 2. CEO- the leader of the executives.
► 3. Executive directors – Members of the board who are also involved in the operation of the
company.
► The risks -The independence of the BOD can be threatened when there are many executives in the board.
This may lead to conflict of interest in important board’s decision e.g executive evaluation and board’s
compensation. Other risks peer evaluation may not be possible for lower executive to evaluate their
superior (Executive directors)
► The advantages- Executive directors have a handful of information regarding business operation,
relationship and line communication with other executives in the business line. First hand information for
non executive directors.

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…BOD’s structure

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► 4. Independent outside directors
► An effective BOD must contain members from within the company and from outside in balance – so
to ensure the BOD remains independent and decide in the best interest of the corporation
► They have the access to information to check and review independently
► Any prohibitions may hinder the effectiveness of their function
► Sometimes the independent directors sit for several organisations due to their expertise and
experience but may cause ‘busy board members’; their attention to each corporation may be
limited and less effective
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…BOD’s structure

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► 5. Additional committees in the BOD
► The BOD is divided into smaller committees to facilitate monitoring activities
► Suitable especially for large BOD
► Allow the directors to contribute within their specific expertise e.g
► Audit Committee, - follows the rules of auditing, prepares statement accordinglyetc
► Compensation Committee, - evaluate, approve, review compensation practices, to approve their duty
of care as the compensation need to be disclosed legally
► Nominating Committee – for recruitment or BOD selection
► Governance Committee – establish governance practices
► Ethics Committee – watchdog over the board members and executives whether they are exercising
their fiduciary duties or not
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…BOD’s structure

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► Compensation of the BOD
► Director’s salary
► Determined by the compensation committee
► Lofty salaries should be justified for a quality member
► Stocks
► Compensating with shares may encourage directors to act in the best interests of the
shareholders
► Restricted stock
► Restricted stock has limited trade provisions to prevent insider trading or stock related
scandals
► Bonuses
► Liability insurance – against any risks in corporate activities
► **or a combination of the above
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► https://youtu.be/JDai-cVmq_w
 The Shareholders 11
► The shareholders are the absolute owners of corporations
► They have several specific rights;
► 1. The rights of shareholders to receive information;
► Shareholders expect to receive accurate and representative information of the
corporation’s policies and its financial situation.
► Normally distributed via AGM and reports released annually or quarterly
► Shareholders must be assured they receive all information relevant to issues arised
for the current release of report – any material change should be particularly
informed
► E.g the Sarbenes-Oxley Act requires material change to be informed officially
including changes in company control, acquisition or disposition of significant assets,
bankruptcy, accounting changes, director resignation, code of ethics modification,
entry into agreement not in the ordinary course of business, termination of
agreement.

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…the shareholders
2. The right of shareholders to vote
• Shareholders vote in the board members
election. Prior to that the BOD will submit
potential candidates who had been
previously nominated and screened by the
BOD. The shareholder also can nominate
their candidates
• Shareholders have the right to vote on the
proposals proposed by the other shareholders
• However, there are certain corporations offer
stock without voting rights – they merely
offer financial incentives
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3. The right to submit proposals
• Proposal to help the direction of the
corporation
• The proposal should consider
• The minimum company’s stock owned by
the proposing shareholder (e.g at least 1%
in hold at least for a year
• Number of proposal, wordings etc may
also be controlled according to company’s
policy.
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► 4. Right to take action against wrongdoings
► E.g The removal of board members
►
…the If shareholders believe BOD are not behaving in favour
of their fiduciary duties they can;

shareholders ►

►
Petition for dismissal of the member
Enact a suit
► Legal injunction according to the misbehaviour.
► Sometimes shareholders face the issue of director
entrenchment where board members can’t be removed
due to the corporation’s policy (e.g automatically
reelected after a term. The issue can be solved by;
► Establish limited terms
► Eliminate automatic reelection

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► 5. Shareholders meeting

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► Shareholders meeting is a platform to
execute their rights and make decisions
► For matters under the purview of
….the shareholders e.g
shareholders ► Selection of board members
► Voting rights – based on “one share, one vote
principle” – this is a common rule/ standard in
CG law suggesting each person who invests
money in a company has one vote per share
they own, equally with other shareholders.
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► https://youtu.be/wtMORWO5h9Y
 ► Based on the Bursa Malaysia Listing Requirements,
explain the requirements related to;
► Directors
Discussion ► Nominating Committee
► Audit Committee & Auditors
► CG Disclosure, Internal Audit & Specific requirements
► Based on your opinion, list 3 requirements and justify.

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