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Controlling Shareholders: Issues and Challenges for Shareholders’ Empowerment in Directors’ Remuneration in Corporate Malaysia

Published online by Cambridge University Press:  29 May 2015

Shanthy Rachagan  and
Aiman Nariman Mohd Sulaiman
Aiman Nariman Mohd Sulaiman
Affiliation:
Department of Civil Law, International Islamic University Malaysia, Kuala Lumpur, Wilayah Persekutuan, Malaysia, E-mail: aimann@iium.edu.my
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Abstract

Current reform concerning directors’ remuneration relies on improving legal rules and self-regulation to minimise expropriation of minority shareholders. These have prominently focussed on empowering shareholders. Nonetheless, it is unclear as to the extent these reform proposals are compatible within the concentrated shareholding structure. Some of the reforms taking place in developed countries are suited for dispersed shareholding structure and thus transplanting them to emerging economies with concentrated shareholders may be ineffective. Malaysia poses an interesting case study, especially to countries with similar ownership structure as the concentrated shareholding structure raises different agency problems. The issue of protection of minority shareholder rights and the prevention of abuse of the controlling power by paying excessive remuneration to the executives is therefore a subject of due consideration in Malaysia and countries with similar shareholding structures. This article recommends that Malaysia and other emerging countries look into encouraging limited shareholder empowerment in tandem with laws.

Keywords

corporate governanceagency problemsshareholder empowerment
Type
Articles
Information
Asian Journal of Comparative Law , Volume 9: Special Issue: Socio-Legal Research on Southeast Asia: Themes, Directions, and Challenges , 1 January 2014 , pp. 267 - 294
Copyright
Copyright © Faculty of Law, National University of Singapore 2014

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50 Achieved through the introduction of the Enterprise and Regulatory Reform Bill 2012, Clause71.

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52 This differs from earlier government proposals which would have given shareholders a binding vote on a case by case basis on any exit payment which exceeds the equivalent of one year’s base salary.

53 The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth.).

54 Ibid.

55 L. Bebchuk, “Written Testimony Submitted Before the Committee on Financial Services United States House of Representatives Hearing on Empowering Shareholders on Executive Compensation” (2007). Written Testimony Submitted by Professor Lucian A. Bebchuk William J. Friedman & Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Corporate Governance Program Harvard Law School. Before the Committee on Financial Services United States House of Representatives Hearing on Empowering Shareholders on Executive Compensation, 8 March 2007. See online: <http://www.law.harvard.edu/faculty/bebchuk/pdfs/2007_HFSC.pdf> (last accessed 12 June 2013).

56 Section 951 of the Dodd-Frank Act amends the Securities Exchange Act of 1934 by adding s. 14A, which requires companies to conduct a separate shareholder advisory vote to approve the compensation of executives. Section 952 of the Act requires compensation committees to be composed exclusively of independent directors. Relevant factors the exchanges must consider include the source of compensation of the director and whether a director is affiliated with an issuer or a subsidiary or an affiliate of a subsidiary. Section 953 says companies must disclose the relationship between executive compensation actually paid and the financial performance of the issuer.

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58 Prudential Assurance Co Ltd v. Newman Industries Ltd (No 2) [1982] Ch 204, at 210.

59 The CEO of Genting Berhad is Tan Sri Lim Kok Thay who is the son of the founder Tan Sri Lim Goh Tong. The CEO of Berjaya Group is the founder Tan Sri Vincent Tan who holds 41.23% of the shares. Both of them sit in the remuneration committee.

60 Aznita Ahmad Pharmy & Dorothy Teoh, “NEDs Under the Spotlight” (22 February 2010), online: <http://www.theedgemalaysia.com/sports/161261-neds-under-the-spotlight.html> (last accessed 7 December 2011).

61 The MCCG was published in 2000 and was recently revised in 2007. The 2007 MCCG was superseded by the MCCG 2012.

62 Paragraph 15.25 of the Listing Requirements. Note that this “comply or explain” approach was specifically mentioned in MCCG 2000 and 2007 but that statement is no longer put in the MCCG 2012 although in the MCCG 2012, it is stated that: Listed companies are however required to report on their compliance with the MCCG 2012 in their annual reports.

63 This was also recommended by MCCG 2007.

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75 The company had initiated legal proceedings against the former directors but the case has been stayed pending the criminal action against the directors by SC, the Malaysian capital market regulator.

76 Ismail, Zaidi Isham, “GHope Fails in Bid to Sell Negara Prop” Business Times (22 November 2005) (Malaysia).Google Scholar The proposed merger was between Negara Properties and Island & Peninsular. The failure could be due to failure to address minority shareholders’ dissatisfaction. It was reported that the valuation of Negara Properties was not acceptable to minority shareholders of GHPB who were concerned that they have not been fairly treated. This was also in consideration of the recommendations made by two independent advisers, Malaysian International Merchant Bankers Bhd to the shareholders of Negara Properties and Public Merchant Bank Bhd to the minority shareholders of Golden Hope Plantations Bhd (GHPB) respectively: see Dalila Abu Bakar, “MSWG wants GHope to Reconsider VGO for Negara Properties” Asia Africa Intelligence Wire (18 March 2005), online: Asia Africa Intelligence Wire <http://www.accessmylibrary.com/coms2/summary_0286-19157782_ITM> (last accessed 1 April 2012). However, a merger between Island & Peninsular and Golden Hope Properties subsequent to this event obtained minority shareholders’ approval. At the early stages of the merger discussion over the same concern about pricing was also raised. Ahmad, Massita, “I&P Receives Shareholders’ Nod for Proposed Merger with GHope” Asia Africa Intelligence Wire (28 September 2004).Google Scholar

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78 This is a compulsory superannuation scheme for serving members (other than officers) in the Armed Forces who are required to contribute 10% of their monthly salary to LTAT with the government as employer contributing 15%. Participation by officers is voluntary at a contribution of a minimum of RM 25 with a maximum of RM 200 monthly: see online: <www.ltat.org.my> (last accessed 10 April 2012).

79 MSWG was established as part of the governance reform agenda in Malaysia. It is a public company limited by guarantee funded by five founding organisations: EPF; Armed Forces Fund Board; National Equity Corporation; Social Security Organization and Pilgrimage Board. The objectives of MSWG activities are to develop and disseminate the educational aspects of corporate governance, to influence the decision-making process in public-listed companies as the leader of the minority shareholder interests, and to monitor breach and non-compliance of corporate governance practices by listed companies.

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82 Other past scandals include the Renong/UEM scandal. Here, the deal involving United Engineers (M) Bhd’s (UEM) put-and-call option raised many unanswered questions. It can be traced to November 1997, when UEM purchased a 32.6% block in Renong Bhd, its parent company, from the market at RM3.24 per share. The total cost came to about RM2.34 billion. The deal sent the whole market fretting. From whom UEM purchased the shares is still not known. Hence, former Renong executive chairman Tan Sri Halim Saad, in an effort to appease UEM’s minority shareholders and the regulator, entered into a put-and-call option, giving an undertaking to buy back the shares from UEM at RM3.24, inclusive of the holding cost. The entire amount would come up to RM3.2 billion on 14 February 2001, when the option was due. When the put option expired, there was however no settlement. In fact, Halim resigned from the Renong/UEM group in October 2001. Khazanah Nasional Bhd took UEM private in 2001 and later cancelled the option. UEM’s chief executive then, Abdul Wahid Omar (now Datuk Seri), told reporters that the option was cancelled on 16 November 2001, because “UEM needs to retain control of Renong”. So Halim got off without paying a cent of what was then valued at RM3.2 billion. See Tee Lin Say, “Famous Past Scandals”, online: <http://www.thestar.com.my/story.aspx?file=%2f2010%2f7%2f3%2fbusiness%2f6579934> (last accessed 15 May 2012).

83 Sulaiman, Aiman Nariman Mohd, “Challenges of Public and/or Private Enforcement of the Corporate Governance Code” (2007) 6(1) Inter & Comparative Corporate Law Journal (ICCLJ) 17.Google Scholar

84 2011 EU Green Paper on Corporate Governance in Financial Institution COM (2011) 164, online: <http://ec.europa.eu/geninfo/query/index.do?swlang=en#queryText=2011+EU+Green+P aper+on+Corporate+Governance+in+Financial+Institution+COM+(2011)+164&tab=europa http://ec.europa.eu/geninfo/query/index.do?swlang=en#queryText=2011+EU+Green+ Paper+on+Corporate+Governance+in+Financial+Institution+COM+(2011)+164&tab=europa> (last accessed 5 November 2012) at 19.

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86 In the Credit Lyonnais Securities Asia (CLSA) produced corporate governance rankings for 495 firms across 25 emerging markets and 18 sectors. Further, the CSLA have done a survey on emerging markets and the results indicate that though Malaysia scored the highest amongst the 10 countries surveyed for the rules and regulations that it has implemented, the perception of its enforcement of the same has been very poor. See CLSA Emerging Markets, CG Watch: Corporate Governance in Asia (Hong Kong: Asian Corporate Governance Association, 2002 and 2003). This annual survey which was initiated in the year 2000 is written by Amar Gill the Head of Hong Kong Research to examine the practice of corporate governance across 10 East Asian countries namely Hong Kong, India, Indonesia, Malaysia, the People’s Republic of China, the Philippines, the Republic of Korea, Singapore, Taiwan and Thailand. The report “Fakin’ It – Board Games in Asia” which was released on 5 May 2003 represents the first collaborative effort between CLSA and the Asian Corporate Governance Association (see online: <www.acga-asia.org> (last accessed 5 June 2013)). Also, commenting on the overall analysis of companies done under the CLSA Report 2012, CLSA Head of Asia Research, Amar Gill said: “Asian corporations fare worst on the independence of boards. The composition of the audit committee is a genuine test that most companies fail. Few have an independent chairman, and not many have a majority of independent directors. The potential for conflict of interest is a major issue.” Singapore still remains on the top of the chart with good corporate governance followed by Hong Kong and China, Korea and Indonesia were named as countries where corporate governance is a major issue. See online: <https://www.clsa.com/index.php> (last accessed 5 June 2013).

87 See Pascoe, Janine, “Corporate Law Reform and Some ‘Rule of Law’ Issues in Malaysia” (2008) 38 Hong Kong L.J. 769 Google Scholar; see also OECD, “Corporate Governance in Malaysia: An Assessment” (Paper presented at the conference on Corporate Governance in Asia: A Comparative Perspective, Organised by OECD, Korea Development Institute, the Government of Japan and World Bank), online: <http://www.oecd.org/daf/corporateaffairs/corporategovernanceprinciples/1931420.pdf> (last accessed 5 June 2013).

88 Ariffin, Bany & Hook, Siong, Law, “Family Control Business and Capital Market Development in Asean” (2008) 6 Icfai Journal of Financial Economics 46–55.Google Scholar

89 See Isabelle Francis, “Hot Stock: E&O Rises After SC’s Legal Setback” (3 October 2012), online: <http://www.theedgemalaysia.com> (last accessed 15 August 2013).

90 The Securities Commission of Malaysia’s five-year Corporate Governance (CG) Blueprint was launched in July 2011. It provides an action plan to elevate the standards of CG in Malaysia by strengthening self and market discipline and promote good governance. The MCCG (2012) would supersede MCCG 2007 effective from 31 December 2012.

91 There have been several research conducted on directors’ remuneration in Malaysia. PriceWaterhouseCoopers has conducted a survey on board remuneration and practices in 2002, see supra note 64. Another survey was for 2004: PriceWaterhouseCoopers, “Board Remuneration & Practices in Relation to Board Effectiveness: An Update”, supra note 64. A 2009 research conducted by KPMG in Malaysia focused specifically on profiling non-executive directors’ and their pay: KPMG and Audit Committee Institute, “2009 Non-executive Directors: Profile, Practices and Pay” (2009). In 2010, PriceWaterhouseCoopers published their study on financial directors’ remuneration entitled “Performance Pays” comprising a finding of what is the current situation and also proposing a framework for setting remuneration in the financial sector.

92 Supra note 86.

93 Avi Licht, “Compensation Guidelines, Executive Compensation” (2013) online: <http://blogs.law.harvard.edu/corpgov/tag/avi-licht/> (last accessed 2 August 2013).