The following is an excerpt from the interview with Tan Sri Zarinah Anwar, Chairman of Institute of Corporate Directors Malaysia (ICDM):
The Edge: Tan Sri, you were chairman of the SC for six years before you retired in March 2012, so you’re in a good position to speak. You’ve seen the momentum of corporate governance (CG) build up. How different are the duties/responsibilities of a director today compared with, say, 10 years ago? How do you see these evolving, especially with many companies getting into digitisation and complex, innovative technologies?
Tan Sri Zarinah Anwar: There’s a lot more scrutiny on companies and boards today. Shareholders are increasingly holding boards accountable for performance. And they have not hesitated to take action where they feel the board’s CG practices have not been up to standard. I’m very glad to see in our market, rising investor activism. We’ve seen our institutional investors making their voices heard on issues such as executive pay and gender diversity.
An overriding concern in CG surveys in 2018 is the quality and composition of boards. Investors want to see boards add value by ensuring that the diverse skills of board members are aligned with the business strategy. They want subject matter experts on the board; members who appreciate disruptions to business, understand the challenges and oversee what changes are needed to ensure sustainability.
When it comes to board composition, gender diversity is a major governance issue that investors are concerned with. There are various studies that link gender diversity at board and leadership levels to better financial performance, higher average return on equity, improved CG.
In fact the World Bank’s Malaysia office in conjunction with the 30% Club recently conducted a study on women on board of companies listed on Bursa Malaysia and found that the profit rate is significantly correlated with the presence of female board members.
It’s not surprising therefore that institutional investors have shown their displeasure with companies that have ignored gender diversity.
Last year, State Street - the world’s third largest asset manager - voted against the re-election of directors in about 400 companies for failure to address the issue of gender diversity.
At home, the Employees Provident Fund recently voted against male nominees to the board of two companies with all-male boards. So, indeed, many new issues to occupy the board’s attention and for boards, therefore, to ensure that they are fully competent to deal with them.
The unusually high remuneration of certain directors has been in the news of late. In a small market like Malaysia’s, where it is already difficult to find good and qualified directors, especially independent ones, how do companies strike a balance between paying adequate compensation to directors and taking into consideration the increasingly tough responsibilities they shoulder?
There’s a need to draw a distinction between fees and allowances paid to non-executive directors and the remuneration of a CEO and other senior executives who may be executive members of the board. For non-executive directors, the position is quite clear. The Companies Act and Bursa Listing Requirements require directors’ fees and benefits to be approved by shareholders at the AGM.
The recent spotlight on directors’ compensation focused on CEO’s pay, which is an issue that’s a challenge not just in Malaysia but also other markets. In the US, the UK, Netherlands and Australia, shareholders have been flexing their muscles on executive pay.
The Malaysian Code on Corporate Governance (MCCG) provides for transparency of board and senior management pay by requiring disclosure of the amounts paid.
The MCCG also stresses the need for companies to disclose how board and senior management renumeration is determined, so stakeholders have an idea of whether it is aligned with the business strategy and long-term objectives of the company.
This is really key — the need to ensure that both the short-term financial returns and long-term goals and objectives of the company are delivered. It is important, therefore, to have a balance between short-term and long-term incentives in formulating a compensation package for CEOs and top executives to ensure delivery of both short-term profits and long-term value creation.
The remuneration committee typically takes expert advice on pay benchmarks against peer companies to ensure the company is not underpaying or overpaying against the market, but the actual payout must be performance-based — both individual and company performance.
Target setting is a critical part of the pay-setting process, so companies are not paying for underperformance.
With all the disclosures made, shareholders should be able to make informed judgements on remuneration and to voice their views and objections if they feel the remuneration is not justified.
There is also a view that increasingly onerous rules on directors add to costs and distract them from their growth focus. Please comment.
Rules and codes of governance are benchmarked against global standards and best practices. What is enforced in Malaysia is, therefore, no more onerous than what exists elsewhere. It is important to note that standards of conduct and governance are required precisely to ensure an environment that is conducive for long-term sustainable growth.
Look at all the governance failures that have occurred — at home and abroad. Companies have collapsed, leading to huge losses for not just shareholders but also other stakeholders. The impact on the economy has been debilitating. These mega failures were not the result of an economic downturn but because of failure of governance and ethics. Clearly, we have a challenge in terms of effecting a change in the mindset of company directors and senior management.
For those who perceive the increased disclosures and responsibilities as merely adding costs to business, the task can appear burdensome. But there are also those who appreciate that a modern corporation is subject to high levels of public scrutiny and see these disclosures and accountability as tools for enhancing shareholder value and for building a brand premium for their companies as quality investment. That is a crucial choice for the leadership of a company to make.
Who provides the training and does the board effectiveness evaluation at ICDM? Do you hire external parties?
Yes, most faculty members are independent third parties. But members of ICDM board are also experienced speakers and they may be invited to lead specific sessions in a particular programme depending on their area of expertise. Some of our board members are also experienced in board effectiveness evaluation and may join our external consultants in a board evaluation exercise.
Is ICDM a for-profit body?
We’re not, but we do charge fees for our services and our membership to ensure that we have enough to sustain ourselves so we can continue to serve our members.