Updated standards for financial institutions
Consultation Papers on Corporate Governance and Shareholders Suitability
In March, the Malaysian Central Bank (Bank Negara Malaysia) published two papers for public consultation: one on corporate governance and the other on shareholder suitability. Both are applicable to licensed financial institutions.
The Consultation Paper on Corporate Governance is intended to help institutions adopt sound corporate governance practices in line with long-term value creation and a corporate culture based on ethical, prudent and professional behaviour at all levels of the organisation.
Thus, institutions must adopt the minimum standards presented in the paper and operate effectively, in accordance with their size, the nature of their business, the complexity of their activities, their structure and their systemic importance.
The paper includes the following blocks, analysed here in schematic form:
1. Board of Directors
- The board must have a charter regulating its roles, responsibilities and business requiring its approval.
- It will be responsible for promoting the institution’s sustainable growth, taking into account the short and the long-term outlook in its decision-making.
- In general, its duties will be: to approve the risk-appetite framework and strategy plan; supervise the appointment, performance, remuneration and succession planning of the institution’s CEO; supervise the activity of the institution and the different control mechanisms; promote a robust corporate governance culture, and ethical, prudent professional behaviour; supervise and approve financial plans; promote suitable communications between the institution and the regulator regarding matters that could affect the institution’s reputation.
- The chairman of the board will be responsible for its correct performance.
- Board members must devote sufficient time to the fulfillment of their duties and attend at least 75% of the board meetings.
- The minimum quorum for meetings is half the board members.
- Meetings must be minuted, clearly reflecting the resolutions adopted and policies approved, as well as any dissenting voice.
- Board members may receive input from external advisors on specific matters.
Appointment and severance of directors
- The institution must establish a procedure for the appointment, re-election and severance of directors.
- Incompatibilities. Directors may not:
- Be actively involved in politics;
- Have commitments that could hinder them from carrying out their duties in an effective manner;
- Be or have been members of the external financial audit firm appointed to audit the institution’s financial statements until at least two years after: (i) having left the firm, or (ii) the firm having provided such audit services.
- The board must establish and regularly review the succession plans for directors, to promote the renewal of this governance body and cover vacancies.
- The institution must request authorisation from the Malaysian Central Bank for the appointment of its directors. It must also request its approval to appoint, re-elect or dismiss independent directors.
- The board will be of sufficient size to promote the active participation of its members. It must specify the criteria and skills necessary to be a director and review these regularly.
- The chairman of the board may not be executive or have held the position of CEO in the institution during the preceding 5 years.
- The board must comprise of one executive director, at most, and a majority of independent directors.
- Except under exceptional circumstances, the maximum term of office for independent directors will be nine years.
- The board must constitute the following support committees: appointments, remuneration; risks; audit.
- The appointments and the remuneration committees may be constituted jointly.
- Each committee must comprise a minimum of 3 directors, with a majority of independent directors. Its chair must be an independent director.
- With the exception of the appointments committee, support committees may not have any executive members.
Assessment and training
- The activity of the board and its committees, and of their individual members, must be assessed every year.
- The board must dedicate the resources required for the directors to receive periodic training sessions.
Conflicts of interest
- The board must establish a written policy to manage potential conflicts of interest with respect to directors. This must include: circumstances that could generate a conflict of interest; procedures to report on these; persons or bodies responsible for managing them; and the consequences of any breach of this policy.
2. Senior management
Appointment and incompatibilities
- The appointment of the CEO will require approval from the Central Bank of Malaysia.
- The CEO may not be a member of the senior management or any significant shareholder in the institution.
- The institution will formulate a clear, transparent succession plan for all members of the senior management, and should review it every year.
- The performance of each member of the senior management will be assessed every year.
Information on corporate governance
- The institution must report on its corporate governance practices and procedures, as described in Appendix 4.
- The information will be published in a simple, clear and disciplined manner:
- It will be given to the directors before the General Meeting is held;
- It will be published on the Institution’s website;
- Listed companies will publish it in their mandatory annual reports.
The paper contains a chapter on institutions’ responsibility to provide effective supervision of their subsidiaries.
In addition, there will be a transition period for institutions to implement the standards contained in the paper, most specifically with respect to the number and classification of the directors on their boards.
Finally, it incorporates the following appendices:
- Appendix 1: Responsibilities of the board support committees
- Appendix 2: List of guidelines and circulars replaced by the paper
- Appendix 3: Procedure for appointment of directors and senior managers
- Appendix 4: Publication of information on corporate governance
Meanwhile, the Consultation Paper on Shareholders Suitability, which substitutes an earlier version published in October 2014 is also applicable to licenced financial institutions. It establishes requirements with which shareholders of these institutions must comply:
- Maintain honesty, integrity and reputation. Shareholders may not act in any manner that prejudices or could prejudice their repute or that of the institution.
- Exercise of influence.
- Shareholders must act in line with standards of good governance in exercising their rights.
- Significant shareholders in the institution may not exercise their position of influence in such a manner that it could prejudice the institution’s security and solvency.
- Financial security. Shareholders must have adequate control of their financial risks and maintain a sound financial position, such that this can serve as an additional source of funding in the event of the institution requiring further capital.