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CORPORATE LAw REFORM AND SOME 'RULE OF LAW
ISSUES IN MALAYSIA
0
JaninePascoe*
Malaysia has recently embarked on a comprehensive corporate law reform

program ("CLRP") which promises to reinforce progress made in implementing
corporate governance measures for its listed sector. Changing the law to provide
for a sound legal and regulatory corporateframework, although overdue, will not
be enough in itself to prevent future corporate collapses or misconduct or instill a
culture of transparencyand good governance. So far as Malaysiais concerned, an
important aspect of corporate law reform is not merely the overhaul of particular
provisions, but the issue of acceptance of the "rule of law" coupled with effective
enforcement. This paper examines the issue of corporate law reform in Malaysia
in the context of weaknesses in the "rule of law" which are evident in terms of
public governance.
Background
In 1965 the present Companies Act was introduced in Malaysia. The Act
has its origin in the Australian Uniform Companies Act 1961, itself based
on the Companies Act 1948 (UK). As transplanted company law, the
principles of separate legal identity and limited liability, affirmed in the
landmark case of Salomon v Salomon & Co Ltd [1897] AC 22, are part of
the accepted law in Malaysia. While there have been several amendments
to the Act since its inception, they have mainly been of a minor and piece-
meal nature. Unlike other common law jurisdictions such as Australia,
New Zealand and the United Kingdom, until recently there has been no
comprehensive review of core provisions relating to company formation,
share capital, duties of directors or winding up. The slow progress towards
statutory reform in Malaysia is not atypical: it accords with the findings of
researchers looking at the transplant effect on the evolution of corporate
law in developing countries.
B.A., LL.B. (Hons) PhD, Senior Lecturer, Corporations and Workplace Law Research Group, De-
partment of Business Law and Taxation, Monash University, Australia.
Visiting Corporate Law Scholar, Monash University Malaysia Campus, 2008.
Contact: janine.pascoe@buseco.monash.edu.au
1 Katharina Pistor et al, "Evolution of Corporate law and the Transplant Effect: Lessons from Six
Countries" (2003) (18) (1) The World Bank Observer89.
770 Janine Pascoe (2008) HKLJ
In December 2003 Malaysia embarked on a comprehensive corporate law

reform program ("CLRP"), which promised to reinforce corporate governance
("CG") measures in its listed sector. A Corporate Law Reform Committee
was set up with the task of reviewing the Companies Act. This followed
calls a decade ago for statutory reform of such matters as directors' duties,
shareholder rights, insolvency regimes, enforcement, remedies and regulatory
overlap. The Committee has produced 12 consultation papers to date. It has
recommended sweeping changes to core provisions. Its recommendations re-
lating to the duties of directors and officers have now been incorporated into
the Acte and other significant recommendations seem likely to follow. Never-
theless, in comparison with corporate governance reforms in the listed sector,
in place since 2001, it is obvious that statutory reform has been overdue.
The Asian financial crisis and corporate governance (CG) reforms
While the Companies Act is likely to undergo a thorough overhaul as a

result of the law reform program, the major challenge will be in actually
implementing and enforcing the new statutory regime. Many of these
challenges were highlighted at the time of the Asian financial crisis of the
late 1990s and centre on weaknesses in public governance. In Malaysia,
the crisis involved corporate collapses and scandals, although not on as
massive a scale as some other developing Asian countries. In various ways
the crisis exposed and highlighted weaknesses in "rule of law" in Malaysia
and also precipitated conduct involving political and corporate leaders
which was incompatible with that concept. In some instances, now un-
covered by the extensive economic literature on corporate wrongdoing
and political cronyism, corporate misdeeds involving companies con-
trolled by preferred political cronies went unremedied and were followed
by government bailouts.
Malaysian scholars have recognised that reforming the legal and regulatory
infrastructure is not sufficient to ensure a strong, healthy corporate sector. They
point to weak public governance and lack of effective and predictable enforce-
ment as issues which need to be addressed: " ... as part of a holistic effort to
2 "High Level Finance Committee, Report on Corporate Governance", February 1999. Available at:
http://www.sc.com.my/eng/html/resources/inhouse/cgreport.pdf (visited 20 February 2008).
Companies (Amendment) Act 2007 (M'sia).
See eg Edmund Gomez and Kwame Sundaram Jomo, Malaysia's PoliticalEconomy: Politics, Patronage
and Profits, (New York, Cambridge University Press, 1999); William Case, "Malaysia: New Re-
forms, Old Continuities, Tense Ambiguities" (2005) (4) Journalof Development Studies 284.
Vol 38 Part 3 Corporate Law Reform and Some 'Rule of Law' Issues in Malaysia 771
strengthen the accountability of government and its regulators and the

independence of the judiciary."5
The CLRP's core objective is to create a legal and regulatory structure
that will facilitate business.' Its ambitious reform agenda promises to usher
in a fundamentally different corporate framework with enhanced account-
ability and transparency and a more effective regime of remedies and
penalties. It closely follows models adopted in other common law jurisdic-
tions, yet Malaysia faces a number of obstacles in giving full effect to these
reform measures. Some of these obstacles stem from "rule of law" issues,
discussed below, which may impede the path to genuine law reform.
The fallout from the Asian financial crisis of the late 1990s was the main
impetus for the rapid uptake of corporate governance reforms in Malaysia,
with concerns sparked by the need to restore the confidence of foreign in-
vestors. The government, mindful of community resentment of the business
elites who had in the past benefited from government protection and bail-
outs, announced its commitment towards more regularised and transparent
procedures in the corporate sector. There were open calls for better regula-
tion of Malay business elites:
"The efforts to create a new class of bumiputera [indigenous] business leader

have fallen short of our expectation [though] not because it is the wrong strat-
egy. What did go wrong - and it is more evident that there has been a lack of
controls paced on these icons of success - is in the management and gover-
nance of the companies they lead."
Thus, when it was time for a stock take of possible causes of the crisis, gov-
ernment and regulators tended to highlight corporate governance weakness.
They pointed out that many boards and audit committees did not act as
effective oversight mechanisms; that a culture of full and timely disclosure
was not well-entrenched; and that compliance and enforcement mecha-
nisms were not well developed.! The immediate response was to implement
comprehensive reforms, including the establishment of a High Level Fi-
nance Committee in 1998 followed by the release of the Capital Market
See Thillainathan, Kandiah and Nathan, "Corporate Governance and Finance in Malaysia"
published under the auspices of the OECD Development Centre. Available at: http://www.oecd.
org/dataoecd/9/18/2444141.pdf
See CLRC Terms of Reference, available at: http://www.ssm.com.my/clrc/termofreff.html (visited 20
February 2008).
Defence Minister Najib Raza, quoted in the Star, 24 October 2002, p 22.
Zarinah Anwar, Deputy Chief Executive and Kar Mei Tang, Economic Analyst, Malaysian Securi-
ties Commission, "Building a Framework for Corporate Transparency" InternationalAccountant,
February 2003. Recovery plans for the corporate sector in East Asia from institutions such as the
IMF and the World Bank were also predicated upon the need to reform corporate governance:
World Bank (2000) East Asia: Recovery and Beyond. Washington D.C., USA.
Masterplan, the Code of Corporate Governance in 2001 and the revamp-

ing of the Bursa Malaysia 9 Listing Requirements in 2001. Comprehensive
reform of core company law rules was also contemplated by the Finance
Committee, but its progress has stalled.
Improvements in self-regulation have occurred since the crisis, largely as
a result of the speedy implementation of the Corporate Governance Code,
which applies to listed companies on a "Comply or Explain" basis."o In 2001
the Code's main recommendations were incorporated into Chapter 15 of
the Listing Requirements. Key measures now include:
* Strengthened rules for related party transactions;

* Rules relating to independence of the board and board committees;
* Enhancement of audit committees' roles and independence;
* Training and accreditation of directors;
* Requirement for statement on internal controls;
* Controls on companies with unsatisfactory financial performance;
and
* Restrictions on the number of directorships.
These initiatives followed the trend towards global convergence of corporate

governance best practices in emerging market companies. Awareness of CG
issues has been fostered by the establishment of bodies such as the Malaysian
Institute of Corporate Governance in 1999 and the Minority Shareholders'
Watchdog Group in 2000. The 2001 listing rule reforms built upon earlier
initiatives such as periodic disclosure of information, enhanced accounting
standards and audit committee requirements for listed companies. The virtues
of adopting good CG practices have been espoused by regulators" who have
focused on the country's improved rankings over recent years as a sign that
CG weaknesses exposed by the financial crisis have been redressed.
Corporate Governance initiatives not enough

There are concerns about whether Malaysia's good governance agenda rep-
resents a genuine reform program or a knee-jerk reaction to the financial
9 Formerlythe Kuala Lumpur Stock Exchange (prior to demutualisation).

10A revised version of the Code was issued in August 2007, strengthening, inter alia, audit com-
mittee requirements. Compliance with the Code of Corporate Governance is voluntary, but para
15.26(a) of the Listing Requirements requires listed companies to provide in their annual reports a
mandatory narrative statement on the extent of compliance with the principles set out in Part I of
the Code.
" See n 8 above.
crisis and the need to shore up foreign investment." For example, the 2007
survey" undertaken by brokerage house CLSA and the Asian Corporate
Governance Association ("ACGA") revealed that a number of common
problems still exist across the region, including poor quality of quarterly
reporting, the independence of audit committees and political influence on
regulatory action. Commenting on the 2007 findings, the ACGA noted
that after initial post-crisis improvements, Malaysia's CG scorecard has
slipped in recent times. It concluded" that its CG practices are unimpres-
sive and lack commitment to genuine governance. Although regulators are
well-staffed the ACGA pointed to political and other obstacles to sound
enforcement, with limited private enforcement.
Jamie Allen, Secretary General of the ACGA, notes that it is a "fantasy"
to suggest that global corporate governance standards are easily implemented
in Asia's developing economies, pointing to the usual impediments such as:
* Concentrated corporate ownership structures;

* Generally weak compliance culture;
* Directors and managers who are untrained from a CG perspective;
and
* Generally weak legal systems and controlled judiciary. 5
Research examining the links between the adoption of specified practices

and company performance is still in its infancy. It has yet to be deter-
mined whether improved "scorecards" represent improvements in form, 6
rather than substance. Although rankings on various surveys undertaken
by independent bodies show that there has been an improvement in CG
practices, in terms of the OECD principles, by Malaysian listed companies
there is other evidence pointing to a less positive picture. The withdrawal
of US$300 million from the Malaysian equity market in 2002 by the world's
12 Case, "Malaysia: New Reforms" see n 4 above, p 288, observes that there has been disillusionment
within Malaysian government circles about the ability of the various market reforms and good gov-
ernance measures to deliver desired economic outcomes, in particular a return to the pre crisis high
levels of foreign investment.
13 CLSA/ACGA: "CG Watch 2007-On a Wing and a Prayer", Available at https://www.clsa.com/
public/library/dflCLSAACGACGWatch2007_Extract.pdf(visited 13 April 2008). Of 10 Asian
countries surveyed in 2007, Malaysia was in 6h place, having slipped from 4th place in 2006.
14 "CG Watch 2007: Market rankings, trends and issues". Available at: http://www.acga-asia.orgl
content.cfm?SITECONTENTTYPEID=17 (visited 13 April 2008).
15 Jamie Allen, "Corporate Governance Reform in Asia: Fact Fiction and Fantasy", Presentation at
the Asian Institutional Roundtable, Hong Kong, 29 June 2006.
16 See David Larcker, Irem Tuna and Scott Richardson, "Does Corporate Governance Really Matter?"
9 June 2004. Available at: http://knowledge.wharton.upenn.edu/papers/1281.pdf(visited 20 February
2008). The authors question the value of much recent corporate governance research, questioning
whether positive corporate governance scorecards correlate with enhanced corporate performance
and managerial standards of conduct.
largest pension fund, the US Californian Public Employees' Retirement

Fund (CalPERS), which had approximately US$2 billion invested in
emerging markets, came after the fund had conducted a review of issues,
such as transparency and shareholder rights in the Asian region, which
found Malaysia, among others, to be lagging. There has been a progressive
decrease in foreign investment in Malaysia in the years since the crisis."
Furthermore, there has been a reliance on survey evidence, without much
qualitative research to back up claims that good CG practices have effectively
been put into place. Concerns about the value of a "box-ticking" approach
have been highlighted by a recent qualitative research project" into the ef-
fective uptake of CG reforms in the Malaysian listed sector. Although the
sample size was very small, thus precluding generalised conclusions, the study
points to the problematical nature of earlier positive conclusions about im-
provements in CG practices. The study was based on in-depth semi-structured
interviews with 19 directors and senior executives of listed companies. It
found that the adoption of CG practices was driven not so much by the need
for long-term improvement, but by the need to be seen to tick the right boxes
to meet regulators' expectations that good scorecards were needed to improve
foreign investor confidence. The anecdotal evidence in the study pointed
to underlying unacceptable practices and abuses which still exist despite the
existence of formal structures to eradicate them. This divergence between
substance and form was particularly acute in relation to its findings of a lack
of director and auditor independence. The interviewees invariably noted that
this could be traced back to the nature of the family and concentrated owner-
ship structure in Malaysian companies, together with the dominance of major
shareholders. A further study by the same researcher, based on interviews with
10 representatives of corporate sector organisations, concluded that despite
some positive developments in corporate governance in the post crisis era:
" ... core elements of the previous system remain largely intact, in particular the
concentrated ownership structure, the non-separation of ownership and man-
agement ... and the political influences in the Malaysian corporate arena." 19
1 Asian Development Bank Outlook 2004, Oxford University Press Inc.

18 Pik Kun Liew, "The perceived roles of corporate governance reform in Malaysia: the views of
corporate practitioners" University of Essex, Working Paper 02-06, April 20006. Available at:
http://www.essex.ac.uk/AFM/research/workingpapers/WP06-02.doc (visited 20 February 2008). See
also the study by Stephen Cheung and Hasung Jang, "Scorecard on Corporate Governance in
East Asia", Centre for International Governance Innovation, Working Paper December, 2006.
Available at: http://www.cigionline.org (visited 20 February 2008). The study indicated a significant
gap in corporate governance rules and practices of nine Asian countries including Malaysia.
19 Pik Kun Liew, "Corporate Governance Reforms in Malaysia: the key leading players' perspectives"
(2007) 15 Corporate Governance: An InternationalReview 724.
These small studies raise concerns about the validity of quantitative re-
search data. More broadly based qualitative research is needed. Some
skepticism is needed to temper the belief that improved scorecards will
change the corporate culture, build better companies or correlate to in-
creased foreign investment. Foreign investment levels have still not
returned to pre-crisis levels, indicating perhaps that overseas markets
are skeptical of the reforms and that they may be looking for more clear
evidence of "rule of law" reforms in Malaysia.zo There is another serious
concern about the value of promoting the need to achieve high rankings on
CG scorecards which relates to compliance burdens imposed by CG regula-
tion. In Australia, which has a history of strong corporate regulation and
acknowledgement of the importance of sound principles of corporate gov-
ernance, a recent survey of the top 200 companies indicated that there are
general concerns about costs of compliance, doubts about whether gover-
nance guidelines enhance performance and 20 per cent of companies chose
to comply with recommendations, rather than explain a departure from any
of the recommendations, even though they believed their original prac-
tice was preferable." A recent UK report found similar doubts about the
tangible benefits of increased corporate regulation, with companies facing
increased costs in keeping up with the ever-increasing pace of regulation. 2
Another criticism, in terms of developing Asian markets, is that the
CG reforms are premised on Western notions of good governance. In 2003
the OECD White Paper on Corporate Governance2 3 referred to a number
of features of the Asian business landscape pertinent to the process of le-
gal and regulatory change. In particular, the historical, cultural and social
traditions of country, as well as the interplay between the political and
legal systems are relevant in this context. These factors shape the way
companies operate in Malaysia and other Asian economies. For example,
ownership concentration, typically in the hands of family controlling share-
holders, creates agency problems in terms of the need for a special focus on
protecting minority shareholders from the abuse of the controllers.
The 1999 High Level Finance Committee set up in Malaysia in the wake
of the financial crisis, alluded to the problems associated with ownership
20 See Malaysia 'Bail Out'? Capital Controls, Restructuring and Recovery, K. S. Jomo, Wong Sook Ch-
ing, and Chin Kok Fay (eds), (Singapore University Press, 2005).
Chartered Secretaries Australia (CSA) Reporting against the ASX Corporate Governance Council
Guidelines, Survey, December 2006. Available at http://www.csaust.com (visited 14 July 2008).
22 ManagingRisk and Compliance: Challenges costs and future expectations, Ernst and Young (UK) 2006.
Available at http://www.ey.com/Globallassets.nsf/UK/Managing-risk/$file/Managing-risk.pdf(visited
14 July 2008).
2 OECD White Paper on Corporate Governance in Asia, released by the OECD Roundtable on
Corporate Governance, June 2003. Available at: http://www.oecd.org/dataoecd/4/l2/2956774.pdf
(visited 14 February 2008).
concentration but did not examine the issue in any depth. Transparency has
also been identified as a key feature of good corporate governance, with its
ultimate purpose being investor protection. However, Asia does not have
a tradition of strong disclosure in corporate dealings. In evaluating CG re-
forms in the Asian context, the OECD has cautioned against complacency
on the issue of director "independence". The Paper stated that:
"While the theory on independent non-executive approval may hold some

appeal, real-life experience in Asia reveals shortcomings not unlike those in
other regions. High ownership concentration among Asian listed companies
means that controlling shareholders usually select the entire board of directors.
In these and similar cases, non-executive directors can fail to demonstrate in
practice the independent judgment required to make their consent an effective
safeguard against abuse. In other cases, non-executive directors assume their
duties with an independent mindset but cease to maintain it over time as their
sympathies, or their interests become too closely aligned with insiders. Finally,
passive or acknowledgeable directors can fail to scrutinise transactions closely
enough to apply informed, independent judgment, even if their level of activity
may be sufficient to shield them from liability from negligence."24
Whether or not the financial crisis was precipitated by weaknesses in CG

rules and practices, it highlighted the need for a thorough revision of the
Companies Act, to reinforce the measures in the listed sector, give statu-
tory clarification to principles of good corporate conduct and provide for a
more effective and proactive enforcement regime. Official improvements in
Malaysia's CG rankings in recent times must be tempered by the fact that
while the scorecard for CG rules and regulations has improved, the score-
card on enforcement is still poor.
The need for statutory reform

Referring to Malaysia, a 2005 World Bank Report 26 highlighted the need
for implementation of rules which have the force of law and are applicable
to all companies. Specific areas which the Report targeted as in particular
need of statutory reform included the following:
* Regulation and disclosure of related party transactions.
24 2003 OECD White Paper on Corporate Governance in Asia, para

[124], p 27.
25 See eg ACGA and CLSA Asia-Pacific Markets, "CG Watch 2005: The Holy Grail". Malaysia
scored nine on a scale of 10 for having most rules and regulations for corporate governance, but
only 3.5 for enforcement.
26 Corporate Governance Country Assessment: Malaysia, June 2005, World Bank, 6-8.
Available at
http://www.worldbank.org/ifa/rosc-cg-malaysia.pdf.(visited 14 February 2008).
* Facilitating shareholders' ability to exercise voting rights, including

the introduction of cumulative voting.
* Improving the effectiveness of the annual general meeting and
shareholder communications.
* Strengthening the enforcement capability of statutory regulators.
* Strengthening members' rights and remedies, including the intro-
duction of a statutory derivative action.
The Corporate Law Reform Committee was set up in December 2003 under
the auspices of the Malaysian Companies Commission. Its terms of refer-
ence required it to determine what reforms needed to be implemented to
bring the Act into line with the needs of a modem economy dealing with
changes imposed by the globalisation of markets, new technology and other
developments. Specific topics on the reform agenda were delegated to five
Working Groups.27 The Committee has accessed cross-jurisdictional mate-
rial, with particular reference to wholesale company law reforms in the UK
and Australia. The reform program is an important initiative given that
Malaysia does not have an established tradition of transparent and consul-
tative law reform. Unlike previous ad hoc reform initiatives in Malaysia,
the CLRP consultation papers, recommendations and other relevant infor-
mation has been made publicly available through the program's website and
there has been wide public consultation.
Key recommendations of Malaysia's Corporate Law Reform Committee
The CLRP working groups have to date released 12 consultative documents

outlining detailed recommendations on their respective areas of review.
Key recommendations are summarised below. In 2007 the government
enacted amendments to the Companies Act,28 which incorporated some
of the committee's recommendations for strengthening the duties of
directors and officers29 and providing for a statutory derivative action and
statutory injunction. It is not clear why the Act was amended before
27 Company formation and alternative Business Structures, Capital

Raising & Maintenance rules,
Corporate Governance and Shareholders Rights, Corporate Securities & Insolvency and Sanctions
and Enforcement.
28 Companies (Amendment) Act 2007.
2 Working Group C, Consultative Document -Clarifying and Reformulating the Directors' Role and
Duties. Available at: http://www.ssm.com.my/clrc/cd5.html (visited 14 February 2008). For an over-
view of the new directors' duties provisions see Samsar Kamar bin Ab Latif , "The New Statutory
duties and liabilities of Directors under the recent Companies (Amendment) Act 2007" [2007] 5
MLJA 318.
'0 Section 181A.
the Committee had completed the consultation process before it has

handed down its Final Report, although a possible explanation is that the
government wished to strengthen key provisions relating to directors' and
officers' duties in the light of impending problems which might arise as a
result of possible fall-out from the United States "sub-prime" financial sector
crisis." The Explanatory Memorandum accompanying the amendments is
very brief and provides no background information or analysis of the new
provisions. Nevertheless, the amendments are a positive step, recognising
the inadequacy of previous provisions in terms of the modem day standards
expected of directors and in protecting shareholders. The new provisions
bring Malaysia's law into line with well established provisions in other
common law jurisdictions. The reform Committee acknowledged that the
former provisions did not adequately set out contemporary expectations in
terms of directors' standard of care and diligence. There are now provisions
in the Companies Act which stipulate an objective standard of care, skill
and diligence, 32 allow for proper delegation of duties" and provide for a
"business judgment rule". 4 The statutory provisions supplement and do not
replace or override the common law fiduciary duties.
The recommendation for the codification of directors' conflict of interest
rules is also a significant initiative that has long been regarded as necessary
in Malaysia. While the common law fiduciary rules dealing with abuses
of position and conflicts of interest are applicable in Malaysia, the Com-
panies Act amendments"6 tighten and clarify the definition of "director",
codify the common law rules prohibiting specific categories of directors'
conflicts of interest and clarify the position of nominee directors. Other
recommendations, also now enacted, include vetoes on self-interested di-
rector voting and replacing the requirement for directors to act "honestly"
with a directive that they act in the best interests of the company and for
31 Interview with senior official at the Malaysian Integrity Institute, April 10, 2008. (Transcript
on
record with the author).
31 Section 132 (lA).
1 Sections 132 (IF). Sections 132 (lC) and 132 (1D) clarify the circumstances where directors may
rely on information or advice provided by professionals or experts.
1 Section 132 (1B).
1 Section 132 (5).
31 Section 132 (2) codifies the common law rules against any conflict of interest such as misuse of
company property, position, information or opportunity. Self interested directors who are to re-
quired to disclose conflicts of interest by virtue of s 131 of the Companies Act are now prohibited
from voting or participating in any discussions with respect to transactions involving conflicts of
interest: s 131A. The new provisions require disclosure not only by directors, but by members of
directors' families, their partners and associates: s 122A. In addition, new s 131(7A) requires a
director to disclose the interest, if any, of any family member in a contract or proposed contract
entered into by the company.
proper purposes, 3 7 are also useful reforms. Providing statutory reinforcement

and clarification of core fiduciary rules, along with recommendations for
introducing civil penalties in cases involving no fraud or dishonesty, are
developments which are in line with other jurisdictions such as Australia
and the UK. The changes to the Act, as recommended by the CLRC follow
well ingrained principles in Anglo-American corporate law models. The
widened coverage of the directors' duties reforms 3 9 recognises the agency
problems which may arise in Malaysian companies as a result of the con-
centrated nature of ownership of Malaysian companies and the reality that
real control may be exercised by majority or controlling shareholders and
not necessarily with the formally appointed directors.
The CLRC recommended the overhaul of outmoded provisions on
regulation and disclosure of related party transactions which lack clarity,
have been ineffective in practice and in some instances contain significant
loopholes. The CLRC has also reviewed related party transactions involv-
ing substantial property transactions, loans to directors and disclosure
requirements recommending amendments and clarifications to existing
provisions.4 ' The Companies Act has now been amended to include these
41
reforms.
A number of measures to empower minority shareholders have been
recommended, to enhance their participation in meetings, strengthen their
voting rights and to curtail corporate abuses. The CLRC's document "On
engagement with Shareholders"" focuses on enhancing shareholders' rights
through improving communications with shareholders and the effectiveness
of the annual general meeting. The uncontroversial recommendations in-
clude, among others, increased notice requirements for meetings, flexibility
in the location of the AGM,c discretionary electronic voting, provision for
electronic service of notices of meetings and dispensing with AGMs in most
" Section 132 (1). The former requirement that directors act "honestly" was arguably based on sub-
jective factors, and thus required difficult questions regarding directors' motives and beliefs.
3 Working Group E, Consultative Document, On the Review of Criminal and Administrative Sanc-
tions. Available at: http://www.ssm.com.my/clrc/cd1l1.html (visited 14 February 2008).
* The definition of 'director' for the purposes of s 132 now includes the chief executive officer, the
chief operating officer, the chief financial controller or any other person primarily (emphasis added)
responsible for the operations or financial management of a company, by whatever name called.
40 Working Groups B and C, Review of Provisions Regarding Substantial Property Transactions,
Disclosure Obligations and Loans to Directors. Available at: http://www.ssm.com.my/clrc/cd9.pdf
(accessed 14 February 2008).
41 See new s 132E, inserted by the Companies (Amendment) Bill 2007.
42 Working Group A, On Engagement with Shareholders. Available at: http://www.ssm.com.my/clrc/
cd3.html (visited 14 February 2008).
43 Section 145A of the Act (inserted by the Companies (Amendment) Act 2007) provides that a
company shall hold a meeting of members within Malaysia and may hold a meeting at more than
one venue provided all members are given a reasonable opportunity to participate in the meeting.
This enables companies to utilise any technology in conducting shareholders' meetings.
cases for private companies. The Group did not address an area regarded as
crucial by corporate law reform bodies44 and commentators,45 namely that
of the introduction of cumulative voting for directors.
Proposals for the introduction of a statutory injunction, a statutory
derivative action,46 improved proxy voting rights and a broadening of the
remedy for oppression will hopefully assist in empowering all shareholders.
However, it is interesting that the scope of the new statutory derivative
action contained in s 181A(1) of the amended Companies Act differs in
several respects from that recommended by the CLRC which suggested
a model that predominantly mirrored the Australian legislation.4 1 Under
the Australian model there are detailed criteria for the application by a
shareholder to commence proceedings against the company. The court
may grant leave where the company does not intend to bring proceedings,
the applicant acts in good faith, the application is in the best interests of
the company and there is a serious question to be tried. Moreover, specific
statutory guidance is provided as to the circumstances relating to the "best
interests of the company". In Malaysia there are only two general criteria
for the court to grant leave under s 181A(1). These are that the applicant
is acting in good faith and that it is in the best interests of the company for
the court to grant leave. The CLRC also recommended that, similar to the
Australian model, the common law right to bring proceedings on behalf of
the company should be abolished. However, the new amendments expressly
preserve the common law right of action. It is not clear why the govern-
ment departed from the recommendations of the CLRC which were based
on a detailed examination of the jurisprudential basis of the derivative ac-
tion in other jurisdictions. The right to commence action under s 181A(1),
as presently provided, is couched in very general terms, with very little
guidance for the court to exercise its discretion in determining the merits of
the case. It remains to be seen how effective the provision turns out to be in
practical terms.
These proposals to enhance the rights of minority shareholders are par-
ticularly acute issues in the context of the potential for abuse of minority
shareholder rights in companies with concentrated shareholdings. Comple-
menting these reforms with effective enforcement capabilities, arguably one
4 High Level Finance Committee recommendation, see below n 54 at para [3.5.6].

4 See, eg R. Thillainathan, "Corporate governance and restructuring Malaysia", Paper prepared for
the joint World Bank/OECD Survey of Corporate Governance arrangements in a selected number
of Asian countries). Available at: http://www.oecd.org/dataoecd/7/24/1931380.pdf (visited 3 April
2008).
41 Section 181A of the Act (inserted by the Companies (Amendment) Act 2007) now allows for pro-
ceedings to be brought on behalf of the company.
4 Part 2E 1A CorporationsAct 2001 (Cth).
of the most difficult and sensitive items in the CLRC's Terms of Reference,
will be the subject of a later consultation paper.
In terms of share capital and capital maintenance rules, the CLRC has
focused on modernising and streamlining the rules regulating capital-raising
by companies. 4 Its proposals for abolishing the par value shares and for
the requirements for a company to be registered with an authorised-share
capital clause are both timely and uncontroversial. The recommendations
are in line with well established share capital reforms in other common law
jurisdictions.
There have been a number of proposals for improving the present regime
relating to insolvency and financially distressed companies. The consul-
tative document on reform and restatement of the liquidation scheme 49
proposes to strengthen the existing powers of liquidators and provide them
with greater recovery powers in respect of antecedent transactions. It en-
hances the rights of preferential and secured creditors and employees in a
company winding up. These refinements to the Companies Act insolvency
provisions are useful, but clearly fundamental structural reforms are overdue.
A predictable, efficient and transparent insolvency regime underpins the
system of financial and contractual relationships that facilitate economic
and trade development. Other common law jurisdictions, such as Australia
and New Zealand implemented comprehensive insolvency reforms, includ-
ing alternative rescue mechanisms, some time ago. Thus, the proposal" for
the introduction of alternative corporate rehabilitation schemes, namely
a Judicial Management System and Corporate Voluntary Arrangement
scheme, recognises of the inadequacy the present legal framework to
enable a company to restructure where there is a realistic chance for reha-
bilitation.
The CLRC's ambitious corporate reform agenda promises to usher in a
fundamentally different corporate framework with enhanced accountability
and transparency and a more effective regime of remedies and penalties.
It closely follows models adopted in other common law jurisdictions, yet
Malaysia faces a number of obstacles in giving full effect to these reform
measures. Those obstacles may stem from "rule of law" issues affecting pub-
lic governance generally which may impede the path to genuine corporate
law reform.
Working Group B, On Capital Maintenance Rules and Share capital: Streamlining provisions ap-
plicable to Shares. Available at: http://www.ssm.com.my/clrc/cd2.html (visited 3 April 2008).
Working Group D, Company Liquidation-Reforms and Restatement of the Law. Available at:
http://www.ssm.com.my/clrc/cd4.html (visited 3 April 2008).
50 Working Group D, Reviewing the Corporate Insolvency Regime. Available at: http://www.ssm.
com.my/clrc/cd10.htmI (visited 3 April 2008).
'Rule of law' issues and implications for corporate sector reform

Malaysia has not scored particularly well on recent World Bank "rule of
law" rankings, raising concerns about the quality of public governance.5 1
This begs the question "what is rule of law"? Writing over 100 years ago in
an age of classic liberal thought, Dicey formulated his version of the core at-
tributes of "rule of law". Dicey52 considered that the concept of "rule of law"
had three aspects: (1) the absence of arbitrary or wide discretionary govern-
mental power and the presence of regular law; (2) that all individuals are
equal before the law regardless of rank or social position; and (3) the rule of
law and the rights it protects are the traditions and customs of the ordinary
or common law, not a written constitution or bill of rights. Since Dicey ar-
ticulated his three-pronged concept of the rule of law, two distinct "rule of
law" strands have emerged expanding on his conception. Those adopting a
"formalist" approach focus on the procedural aspects of legal systems which
may act to prevent arbitrary government action. It requires laws that are
publicly promulgated, prospective, certain, consistent and capable of being
complied with. They do not consider the content or inherent morality of
the law. In the formalist tradition, Hayek asserted that rule of law:
" ... means that a government in all its actions is bound by rules fixed and an-
nounced beforehand - rules which make it possible to foresee with fair certainty
how the authority will use its coercive powers in given circumstances, and to
plan one's individual affairs on the basis of this knowledge." 53
Substantive theorists54 emphasise the value of human rights and have

crafted theories of rule of law which in addition to procedural aspects incor-
porate a moral and political conception of what is "good" law. This author
accepts that it is apposite to use the "substantive" approach as a benchmark
in relation to Malaysia, given that it adheres, albeit nominally, to demo-
cratic principles with a Constitution which purports to guarantee certain
important human rights. It seems, on this analysis, that there are some sys-
temic "rule of law" weaknesses affecting public governance in Malaysia. In
recent times these weaknesses have been comprehensively documented by
human rights groups, various NGOs and international observers.
51 World Bank, Governance Matters 2008. Available at: http://info.worldbank.org/governance/wgi2007/

5 sc chart.asp (visited 3 April 2008).
' A.C. Dicey, Introduction to the Study of the Constitution(10th edn 1961).
5 Friedrich Hayek, The Road to Serfdom, (Chicago, University of Chicago Press, 1994) p 80. See also
Joseph Raz, "The Rule of Law and its Virtue" in The Authority of Law: Essays on Law and Morality,
(Oxford, Oxford University Press, 1979) pp 210-219 who separates the attributes of rule of law
from democracy, human rights and equality.
* Ronald Dworkin, A Matter of Principle, (Harvard, Harvard University Press, 1985) pp 11-12.
The strength of the executive arm of government at the expense of the

diminishing powers of the legislature and the judiciary has been a feature of
the socio/political landscape in Malaysia since the coming to power of Dr
Mohammed Mahathir in 1981, under the auspices of the Barisan Nasional
(BN) coalition." The formal constitutional separation of powers, inherited
from the British, was eroded as emergency powers centralised in the Prime
Minister and cabinet. This led to the demise of ministerial accountability
to the legislature." Moreover, under constitutional amendments, there is
no judicial review of ministerial decisions. Before the 1980s, although con-
servative, the judiciary was seen as a defender of the "rule of law". Judicial
review powers were stripped from the judiciary following a string of rulings
against the Mahathir government in the late 1980s. Thus, its vital role in
pronouncing on the constitutionality and legality of government acts was
removed. Malaysia can now be regarded as a "quasi-democracy" retaining
some of the nominal and superficial features of an elected parliamentary
democracy, but with effective power concentrated in the government and ,
until the March 2008 elections, any notion of political pluralism effectively
quelled. Progressively, other participants and institutions including the he-
reditary rulers, the opposition parties, the judiciary and non-government
organisations have had their roles and powers emasculated."
The prevalence of corruption, particularly within the judiciary, acts as
an obstacle to equality before the law. Commentators have observed" that
in the vast majority of cases judges act independently and are untainted by
corruption. However, concerns centre on the high profile cases or politi-
cally sensitive cases that touch upon the interests of the executive. The
Malaysian Bar Council has recently recognised and protested59 the threats
posed to "rule of law" in the close links between senior members of the
5 The National Front (Barisan Nasional) is a coalition of 15 parties and has been in power since in-
dependence in 1957. All of the major BN parties are race based, with the UMNO the major party
in the coalition.
56 Ministers in Malaysia are not accountable to parliament but to the government, or more precisely
to their component party in the ruling coalition.

5 See eg "The Boa Constrictor; Silencing Human Rights Defenders", Joint Report on the Situation
of Human Rights Defenders in Malaysia by the Observatory for the Protection of Human Rights
Defenders and Suaram, March 2003. Available at: http://www.fidh.org/communiq/2003/myO104a.htm
(visited 26 April 2008). More recently see "Countries at the Crossroads 2007-a Survey of Demo-
cratic Governance, Country Report-Malaysia", Freedom House and Human Rights Commission of
Malaysia (Suhakam) Annual Report, 2007.
5 See Rainier Heufers, "The Politics of Democracy in Malaysia" ASIEN, (October 2002) 85.
59 A rally involving 2000 of its members in September 2007 was given scant attention in the local
media. See Michael Backman, "Truth and Justice are no Longer the Malaysian Way", The Age, 21
November 2007, 14. Members of the Malaysian Bar and human rights organisations called for a
Royal Commission to enquire into a video recording in 2002 between a senior lawyer and a senior
member of the judiciary which allegedly points to gross failures in the integrity of the process of
judicial appointments. Following an initial inquiry, a Royal Commission into the so-called 'Lingam
video tape' affair was set up. The Commission has now handed down its report.
legal fraternity and the government. As the Council has sought to high-
light, longstanding problematical practices concerning the promotion and
elevation of judges continue to pose a threat to "rule of law" in Malaysia.
The announcement by Prime Minister Abdullah Badawi in April 2008 of
the establishment of a Judicial Appointments Commission is a necessary
initiative in restoring confidence in the judiciary in the light of the find-
ings of the Royal Commission into the fixing of judicial appointments to
the Supreme Court. The Commission found"o that persons with high-level
political connections had a direct influence over judicial appointments.
While generally welcomed, the proposal for a Judicial Appointments Com-
mission has been regarded as not going far enough to bring about the deep
structural changes that are needed to ensure complete independence of the
Malaysian Judiciary. As the Human Rights NGO SUARAM has indicated,
more fundamental changes are required, including a return to the separa-
tion of powers doctrine.
"What is most notably missing from the Prime Minister's judicial reform
package is the crucial restoration of the doctrine of separation of powers - a
fundamental principle of a functioning democracy. The amendments to Article
121 of the Federal Constitution in 1988, which removed the inherent powers of
the court and subjected the same to federal legislations, have exposed the judi-
ciary to possible legislative abuses of powers and curtailed the independence of
the judiciary as a third pillar of the state." 61
Article 8 of Malaysia's Constitution provides that all persons are equal

before the law and entitled to the equal protection of the law. This sits un-
easily with the Bumiputra affirmative action policies applying to the Malay
population. Despite the constitutional guarantee of equality there are real
concerns about equal rights and access to the law for minority groups,62 the
6o Report of the Commission of Inquiry on the Video Clip Recording of a Person purported to be an Advocate
and SolicitorSpeaking on the Telephone on Matters regardingthe Appointment of Judges, May 2008. The
Report is available from the website of the independent internet newsagency Malaysiakini. (http://
www.malaysiakini.com/doc/lingam-tape report.pdf ).
The Report recommended criminal charges should be considered against those named in the
Report has having interfered with the judicial appointments process. The three other recommen-
dations by the Royal Commission are the setting up of a Judicial Appointments Commission for
superior court judges, establishing a Judicial Complaints Tribunal and amending Art 121 of the
Federal Constitution to remove the perception that the executive had control over the judiciary.
61 SUARAM (Suara Rakya Malaysia-Voice of the People), "Judicial Commission Welcomed, but
More Substantial Reforms Needed to Restore Public Confidence in the Judiciary" 16 May 2008.
Available at: http://www.suaram.net/index.php (visited 14 July 2008).
6' Thousands of Malaysian Indians took part in a rally in Kuala Lumpur on 25 November 2007 pro-
testing economic, religious and racial discrimination underlying long held grievances that they are
not equal citizens in the eyes of the law in Malaysia.
poor and the marginalised, including refugee and immigrant groups. Legal
aid and legal access programs need strengthening.
The erosion of accepted democratic and human rights has been well-
documented.63 It has been effected by ostensibly lawful means and justified
in the name of public order, national unity and "Asian values". A range of
laws on the statute books, 4 including emergency laws allowing prolonged
detention without trial inherited from the colonial era have been used, or
arguably misused, by the government to ensure its dominance. Over the
years this strategy, resulting in a concentration of power in the executive
arm of government and in the prime minister in particular, could effectively
be termed "rule by law" rather than "rule of law". Emergency provisions
such as the Internal Security Act 1960, which is quarantined from judicial
review and from compliance with constitutional guarantees, are used to
quell dissent and strengthen the hand of the government. The use of mega
defamation actions and contempt charges as well as other forms of econom-
ic coercion are tactics which have been used to silence critics, the press,
human rights activists and lawyers.
The corruption and political interference in the law enforcement process
which has generally undermined public confidence in public governance
also impacts upon the corporate sector.6 The increased role and influence
of the state in the corporate sector has evolved over time and is inextricably
linked with the shaping of a political environment which poses threats to
the "rule of law". The concentration of power in the executive arm of gov-
ernment has not enabled a law reform culture to be nurtured at either the
institutional or rule making level. As a Malaysian commentator observed:
"Improvements in corporate governance rules, without the corresponding im-

provements in institutional governance, will hardly be sufficient. Institutional
governance is here not limited to institutions having the control or wielding
influence over companies such as the Securities Commission, the Companies
Commission, and Bursa Malaysia, it extends to other public bodies such as the
Anti-Corruption Agency and the Attorney-General's Chambers. The indepen-
dence and transparency of these bodies has been questioned ... ,66
6 R.S. Milne and D.K. Mauzy, Malaysian Politics under Mahathir (New York, Routledge, 1999).
64 These laws include, inter alia, the Internal Security Act 1960, the Sedition Act 1948, the Printing
Presses and Publications Act 1984 and the Official Secrets Act 1972.
61 See, eg speech by Lee Chong San, Deputy President, Transparency International, "Corporate
Governance and Transparency" Malaysia, Kuala Lumpur, August 2005. Available at: http://www.
transparency.org.my/Presentations.
html.
66 See Mohammad Rizal Salim, "Legal Transplantation and Local Knowledge" (2006) 20 Australian
Journalof Corporate Law 55, 63.
Clearly, introducing codes of conduct and new legal rules is not enough.
The institutional framework" for dispute resolution, investigation and
enforcement in the corporate sector remains weak. It is characterised by
under-resourcing and lack of effective enforcement tools and sanctions.
Regulators may be subject to government interference in cases of corporate
transgressions involving high profile persons with government connec-
tions.68 The blurring of corporate and political power in Malaysia over the
years has resulted in weak regulatory structures in the corporate sector,
together with problems stemming from regulatory overlap. There has been
some strengthening in the powers of the Securities Commission stemming
from corporate governance reforms affecting listed companies, but on the
whole the system of corporate regulation is characterised by systemic weak-
nesses and inefficiencies. Arming regulators with sufficient independent
powers and adequate funding to effectively carry out their tasks free from
political interference is essential. This includes vesting them with powers
to apply for civil and criminal penalties6 9 and where necessary to com-
mence class actions in cases involving detriment to investors, consumers
or the public at large. According to Malaysian commentators, law reforms
involving institutional changes in the public and corporate sector are long
overdue.70
Accessing information remains a crucial problem for corporate regula-
tors despite the rhetoric of transparency. In countries with healthy "rule
of law" cultures, the financial press plays an important investigative role
as an adjunct to the formal role of the corporate regulators. effective pow-
ers to protect whistleblowers and provide sanctions against breaches of
whistleblower protection legislation are also well-developed. This is not
the case in Malaysia. 7 Human rights groups and others continue to high-
light transparency as a necessary ingredient of good corporate governance.
More needs to be done, for example, in ensuring that transparency is an
integral part of the procurement policies and practices of government-
linked corporations (GLCs). The restrictive regime of governmental
censorship also impacts upon the corporate sector with laws restricting
67 With powers dispersed between the Securities Commission, Bursa Malaysia and the Companies
Commission.
68 For a discussion of the failure of the post-Badawi reforms in eradicating corruption and political
patronage see Case, "Malaysia: New Reforms" (see n 4 above) and "The Boa Constrictor: Silenc-
ing Human Rights Defenders", (see n 57 above).
69 As recommended by the CLRC in its Consultative Document 'On the Review of Criminal, Civil
and Administrative sanctions in the Companies Act 1965.' Available at: http://www.ssm.com.my/
clrc/cd1l1.html (visited 14 February, 2008).
'o See Salim, "Legal Transplantation" (see n 66 above), p 55.
n While some protection for whistleblowers is found in the Companies Act and Capital Markets
and Services Act 2007, the coverage is limited and the provisions are not backed up by sufficient
enforcement and sanctions.
freedom of expression, such as the Official Secrets Act and the Printing
and Presses Act, also applying to companies. The ability of a vibrant and
active financial media to freely access and disseminate timely corporate
information is a feature of a healthy capital market. Although it is too
early to tell, it may well be that the internet has an important role in
breaking down the barriers to free speech and expression in Malaysia, par-
ticularly with the growth of online "blogs". By publishing online, bloggers
can overcome restrictive publishing and licensing laws. As one author
notes, laws restricting freedom of assembly are less effective in cyberspace,
enabling ideas, information, exposure of wrongdoing and criticism of gov-
ernment policy to be freely disseminated to large groups.n
Conclusion
The Malaysian corporate landscape changed in various positive ways in the

years since the financial crisis. Financial reporting and accounting standards
have improved in recent years, with the reporting practices of large listed
companies generally compliant with international best practices. There
have been improvements in the staffing and enforcement capabilities of
regulatory bodies. Regulatory and stock exchange websites have been set
up to provide access to laws and regulations, corporate announcements and
other useful information. The Malaysian government has been taking ac-
count of, and implementing, new international best practices on auditor
independence. Professional bodies are promoting the principles embodied
in the Code on Corporate Governance and providing related training,
while the Minority Shareholder Watchdog Group has an increasingly sig-
nificant voice for minority shareholders.
On the other hand some systemic problems persist. The quality of finan-
cial reporting among smaller companies is poor, while the standards of non-
financial reporting among all companies leaves a lot to be desired. Insider
trading laws are generally ineffective. There is virtually no voting by poll
at AGMs. There is little confidence in the market that independent direc-
tors are genuinely independent. While public enforcement efforts have
improved, regulators are not completely independent. Legal remedies for
shareholders are limited.
At the time of its establishment, it was anticipated that the CLRC
would submit its Final Report to the government by the end of 2006. De-
spite calls a decade ago for statutory reform the review process is still not
72 Hang Wu Tang, "Let a Hundred Flowers Bloom: Digital Speech in Malaysia" (2006) (1) Asian
Journalof Comparative Law 1.
complete and the Committee's Final Report is not in sight. It is, however,
encouraging that the government has acted on some of the important rec-
ommendations concerning the reform of directors' duties provisions in the
Companies Act and it seems likely that there will be further substantive
changes to the law in the books. The question of changes in the prac-
tices of corporate sector participants is more problematic as the discussion
of self-regulatory initiatives in this paper has indicated. The decision to
adopt an across the board approach, rather than undertaking an ongoing
and incremental approach to corporate law reform, similar to, for example,
Australia's Corporate Law Economic Reform Program (CLERP) may well
account for the CLRP's slow progress. The project has proved too large to
complete within the designated time frame. Its inordinately slow process
underscores contextual "rule of law" issues and resultant challenges faced by
law reformers in Malaysia.
The post-Mahathir era in Malaysia has not seen any significant break-
down in the barriers to effective rule of law. Since Mahathir's successor,
Abdullah Badawi, came to power in October 2003 some reforms have been
undertaken, including anti-corruption measures and Royal Commissions
into the activities of the police force and a case of alleged interference in
the judicial appointment process.13 Some cases of individual corruption and
cronyism have been addressed. The National Integrity Plan backed by the
Malaysian Integrity Institute was launched in April 2004, and a training
arm of the Anti-Corruption Agency established to promote best prac-
tices in combating corruption. However, on the whole it is perceived that
Badawi is moving on a very modest scale, and that structural problems are a
long way from being addressed." For example, the recommendations of the
police force Royal Commission supporting the freedom of assembly have
not been implemented and the Anti-Corruption Agency is still not suffi-
ciently independent from executive control." There is still evidence of the
old practices of cronyism and political patronage. As evidenced by recent
Transparency International data, the endemic problem of corruption, a ma-
jor threat to "rule of law", appears to be worsening." According to Param
Cumaraswamy, President of Transparency International Malaysia, there has
been much rhetoric but little concrete action in addressing "rule of law"
issues. He pointed to the need, inter alia, for:
" The so called "Lingam tape affair". See Royal Commission Report, see n 60 above.
1 Fernandez and Selvam, "The Malaysian Government's Anti-Corruption Drive" Transparency
International (Malaysia) Newsletter, April 2006.
' Transparency International Malaysia has called for the ACA to be removed from the control of
the Prime Minister's department and be directly responsible to the legislature and courts. See
Lee Cheong San, "Anti-Corruption Strategies of Transparency International Malaysia", 31
March 2005.
71 See the Transparency International 2007 Corruption Perception
Index.
" ... an enforceable code of conduct for all leaders in public administration ...
the establishment of an office of an independent ombudsman to monitor and
enforce the code; the need to make the office of the anti-corruption agency
independent of the executive; to release the media of government control
including political party control; to enact freedom of information legislation
and a whistleblowers protection legislation; to review the Official Secrets At to
make it less restrictive for greater transparency in public administration."77
The well-regarded NGO Freedom House78 also notes that after the Badawi
government won a landslide in the March 2004 elections its drive against
corrupt practices began to wane, with anti corruption measures now ef-
fectively stalled. Attempts to mandate disclosure of politicians' business
interests, corporate connections and value of investments have generally
proved ineffective. 79 Freedom of expression, freedom of assembly and the
right to freedom of information remain severely curtailed."
The existence of "rule of law" barriers is rarely acknowledged at the for-
mal level. For example, it is not acknowledged in the Strategic Framework
document released by the CLRC, a government appointed body. Given the
availability of empirical evidence supporting a link between rule of law and
economic development it is to be hoped that that "rule of law" initiatives,
of which the CLRP represents a genuine first-stage or 'commercial rule of
law' initiative, are implemented. As Claessens observes:
"The literature shows that good corporate governance generally pays - for
firms, for markets, and for countries. It is associated with a lower cost of capital,
higher returns on equity, greater efficiency, and more favourable treatment of all
stakeholders, although the direction of causality is not always clear."8 1
Research is needed, in due course, to evaluate the impact and effectiveness

of measures introduced under the CLRP. It will be particularly useful to see
whether there is an improvement in the resourcing and enforcement capa-
bilities of the various regulators.
n Speech by Dato Param Cumaraswamy, President Transparency International, Institute Integrity

Malaysia and Fredreich Neumann Foundation, Kuala Lumpur, Nov 24, 2005.
An independent non-governmental organisation that supports the expansion of freedom in the
world.
' See "Countries at the Crossroads 2007, A Survey of Democratic Governance, Country Report-
Malaysia", Freedom House; Human Rights Commission of Malaysia (Suhakam) Annual Report,
2007.
s0 In terms of press freedom Reporters Sans Frontiers ranked Malaysia 124th of 169 countries in 2007.
See Reporters Without Borders, World Press Freedom Index 2007 at: http://www.rsf.org/article.
php3?idIarticle=24025(Visited 14 July 2008).
81 Stijn Claessens, "Corporate Governance and Development" (2006) (21) (1) World Bank Research
Observer 91.
The author's recent fieldwork82 in Malaysia, involving discussions with

various corporate sector stakeholders, points to continued concerns about
the drawn out process of the CLRP and the ability of regulators to enforce
breaches of the new Companies Act directors' duties provisions without
fear or favour. There are ongoing concerns about possible interference in
prosecutorial discretion in cases of corporate transgressions involving high
profile figures with government connections. There is however, some opti-
mism about a more open political climate in Malaysia since the March 2008
elections, and a greater willingness in recent times to talk openly about
matters of integrity and ethics in the corporate sector. The proposal to set
up a Judicial Appointments Commission has generally been welcomed."
The Badawi government has also announced" that the Anti-Corruption
Agency (ACA) would be turned into an independent commission outside
the control of the prime minister's office. Renamed the Commission on
Anti-Corruption, the new corruption body will issue an annual report on
graft and implement new policies to protect whistleblowers and witnesses.
From interviews with corporate sector participants and also on the basis of
anecdotal evidence there is optimism that genuine changes are occurring,
albeit slowly, in terms of corporate ethics and a greater willingness to accept
higher standards of governance and accountability, at least so far as leading
companies are concerned.
It is now a time of some political instability in Malaysia, particularly
since the announcement of a leadership transition agreement," signal-
ing the impending retirement (in mid 2010) of Prime Minister Abdullah
Badawi whose position has been increasingly undermined both by the
recently empowered opposition parties and from disaffected elements of
the BN coalition. Former Prime Minister Mahathir's relentless criticism of
the Badawi government continually draws attention from the mainstream
media. Reinvigorated opposition parties, including the party led by former
Deputy Prime Minister Anwar Ibrahim, are putting pressure on the govern-
ment to address issues of public governance, particularly those related to
82 In particular, the Minority Shareholders' Watchdog Group indicated that legal changes requiring
greater accountability and transparency need to be accompanied by a change in corporate mindset
in Malaysia that might be difficult to achieve in the short term. (Interview with CEO of Minority
Shareholder Watchdog Group, 4 April 2008. Transcript on record with the author).
For the first time since independence, the BN coalition lost its two-thirds majority in the National
Parliament.
The Star, 10 April 2008.
85 21 April 2008.
86 "Handover Pact", The Star Online, 14 June 2008.
Former Deputy Prime Minister Anwar Ibrahim's multi-racial People's Justice Party won the high-
est number of seats on the opposition benches in Parliament. Together with the pro-Chinese
Democratic Action Party and the Islamist Pan Malaysian Islamic Party or PAS, the opposition
commands 82 seats, just 30 seats short of capturing government.
transparency and corruption. Whether this pressure will be sustained in

light of recent allegations of impropriety made against Anwar remains to be
seen.

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Malaysia has recently embarked on a comprehensive corporate law reform

In December 2003 Malaysia embarked on a comprehensive corporate law

The Asian financial crisis and corporate governance (CG) reforms

While the Companies Act is likely to undergo a thorough overhaul as a

strengthen the accountability of government and its regulators and the

"The efforts to create a new class of bumiputera [indigenous] business leader

Masterplan, the Code of Corporate Governance in 2001 and the revamp-

* Strengthened rules for related party transactions;

These initiatives followed the trend towards global convergence of corporate

Corporate Governance initiatives not enough

9 Formerlythe Kuala Lumpur Stock Exchange (prior to demutualisation).

* Concentrated corporate ownership structures;

Research examining the links between the adoption of specified practices

largest pension fund, the US Californian Public Employees' Retirement

1 Asian Development Bank Outlook 2004, Oxford University Press Inc.

"While the theory on independent non-executive approval may hold some

Whether or not the financial crisis was precipitated by weaknesses in CG

The need for statutory reform

* Regulation and disclosure of related party transactions.

24 2003 OECD White Paper on Corporate Governance in Asia, para

* Facilitating shareholders' ability to exercise voting rights, including

Key recommendations of Malaysia's Corporate Law Reform Committee

The CLRP working groups have to date released 12 consultative documents

27 Company formation and alternative Business Structures, Capital

the Committee had completed the consultation process before it has

proper purposes, 3 7 are also useful reforms. Providing statutory reinforcement

4 High Level Finance Committee recommendation, see below n 54 at para [3.5.6].

'Rule of law' issues and implications for corporate sector reform

Substantive theorists54 emphasise the value of human rights and have

51 World Bank, Governance Matters 2008. Available at: http://info.worldbank.org/governance/wgi2007/

The strength of the executive arm of government at the expense of the

to their component party in the ruling coalition.

Article 8 of Malaysia's Constitution provides that all persons are equal

"Improvements in corporate governance rules, without the corresponding im-

The Malaysian corporate landscape changed in various positive ways in the

Research is needed, in due course, to evaluate the impact and effectiveness

n Speech by Dato Param Cumaraswamy, President Transparency International, Institute Integrity

The author's recent fieldwork82 in Malaysia, involving discussions with

transparency and corruption. Whether this pressure will be sustained in

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