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Corporate governance in Malaysia has seen significant efforts to advance transparency, integrity and sustainability within companies. This article discusses three key areas of focus in the context of corporate governance:

• Conflict of interest requirements among listed companies;
• Balancing compliance process for shareholders¡¯ approval and business efficacy; and
• Measures to combat greenwashing.

These initiatives underscore Malaysia¡¯s commitment to fostering a robust governance framework that can instil investor confidence and ensure long-term business sustainability.

Conflict of interest

To enhance transparency and governance among listed companies, Malaysia¡¯s stock exchange ¨C the Bursa Malaysia ¨C has issued a Guidance on Conflict of Interest. The guidelines introduce stringent measures to mitigate potential conflicts that could compromise integrity or fairness in decision-making processes ? a significant concern in markets with a prevalence of overlapping interests among business sector individuals.

A key highlight of the guidelines is a requirement for listed companies to disclose not only actual matters of conflict but also potential conflicts involving directors, key senior management, legal representatives of listed corporations, management companies and/or trustee-managers of collective investment schemes.

The disclosure requirements cover both direct and indirect financial and non-financial interests. Examples of non-financial interests include favouritism, animosity, commitment and competing loyalties or duties ¨C all of which highlight the regulator¡¯s expectations for audit committees to rigorously review and monitor potential conflicts.

Another highlight of the exchange¡¯s expanded expectations on conflicts of interest encompasses monitoring potential conflicts that have not yet materialised but may arise due to existing relationships or circumstances.

One example provided by the bursa is of a director of a listed company who also has a family-owned business operating in a different state. The director could face a situation where their director¡¯s duty to act in the best interest of the listed entity conflicts with their personal interests, particularly if the listed entity intends to expand into the territory of the director¡¯s family business. The director would be obligated to disclose the nature and extent of these conflicts of interest.

Auditing to avoid. Audit committees of listed entities are responsible for ensuring comprehensive governance of conflicts of interest. This duty includes identifying, assessing, reporting and monitoring to resolve, eliminate or mitigate conflicts. Given these expectations, audit committees must undertake additional steps ¨C such as enhanced background searches ¨C and implement measures to monitor ongoing, persistent or potential conflict risks.

As this represents a new reporting requirement, it will be intriguing to observe how listed entities manage their disclosures to meet the minimum requirements, ensuring there are no material omissions while balancing the privacy rights of individuals involved in conflict of interest issues.

These requirements underscore the bursa’s commitment to reinforcing corporate integrity and investor confidence through enhanced governance practices. While the expanded scope of conflict of interest reporting may appear stringent, the intention is clear: to emphasise the importance of sound governance in the operation of listed entities, ensuring objectives are met impartially and effectively.

Balancing compliance and business

The Companies Act 2016 provides for a company¡¯s business and affairs to be managed by, or under the direction of, a board of directors. The board has all the necessary powers for this role, subject to modification, exception or limitations contained in the act or the company¡¯s constitution ¨C two avenues that grant power to shareholders. Among the main mechanisms for shareholder control can be a requirement for a board to obtain shareholder approvals or waivers for specific matters.

In connection with such a requirement, the Federal Court case of Dato¡¯ Azizan Abd Rahman & Ors v Concrete Parade Sdn Bhd & Ors and other appeals [2024] provides welcomed clarity on the compliance mechanism pivotal to the corporate governance landscape in Malaysia. The following supports the adoption of a practical approach to achieve balance between compliance and business efficacy, focusing on the true objective of the relevant requirements.

Shareholder approval. Section 223(1) of the act prohibits directors from entering into or effecting any arrangement or transaction for substantial acquisition or disposal, unless:

• The entering into the arrangement or transaction is made subject to the approval of the company by way of resolution; or
• The carrying into effect of the arrangement or transaction has been approved by the company by way of resolution.

In the above-mentioned federal court case, the minority shareholder submitted a ¡°tramline¡± approach, requiring two sets of shareholder approvals for the same transaction ¨C one during the execution of the agreement and another during the effecting stage of the transaction.

Giving a practical construction, the Federal Court highlighted that the true intent and purpose of section 223 was to ensure that shareholders are aware of and approve proposed corporate transactions that may materially affect a company; shareholders¡¯ approval need not be obtained twice. Directors have flexibility to put into writing conditional contracts which are subject to shareholder approval, provided that the approval is obtained at a later stage before effecting the transaction.

Express explanation/consent. In dealing with the pre-emptive rights conferred to shareholders by section 85(1) of the act, modified by the company constitution which subjected it to ¡°direction to the contrary by the company at general meeting¡±, the federal court held, against the imposition of conditions that unwarrantedly expand its intent and purpose, that the above-mentioned does not require explanation in the resolution or otherwise of the pre-emptive rights, or express statement consenting to the disapplication of pre-emptive rights from shareholders, who are expected to be aware of their rights with sufficient knowledge to approve or reject the relevant corporate exercise involving issuance of new shares.

Greenwashing

Greenwashing is the use of false or misleading claims or marketing to give an impression of a company¡¯s commitment to environmental protection and sustainability. This deception can range from overstating the environmental impact of products to selectively disclosing favourable data while ignoring harmful practices. The concern with greenwashing lies in its potential to mislead investors and consumers, thereby creating an uneven playing field where companies genuinely committed to sustainability are overshadowed by those merely paying lip service.

As of July 2024, there is no official regulation issued by the Securities Commission Malaysia, or the bursa, that explicitly addresses greenwashing. Nevertheless, the commission and the bursa have made significant strides in introducing elements of sustainability in corporate governance, indirectly addressing greenwashing.

Under the bursa¡¯s Main Market and ACE Market requirements, listed issuers are required to provide a sustainability statement in their annual reports. This necessitates a company making a narrative statement on the management of economic, environmental and social risks and opportunities.

To ensure the accuracy and transparency of these sustainability statements, the bursa¡¯s Sustainability Reporting Guide 2022 mandates the disclosure of 22 common sustainability indicators across 11 sustainability matters. Examples of sustainability matters include requiring listed issuers to disclose information on greenhouse gas emissions, energy consumption, water usage, waste management and employee health and safety. These disclosures must present both positive and negative aspects of company performance, thereby mitigating the risk of greenwashing.

Meanwhile, the securities commission has propagated environmental, social and governance (ESG) requirements through two main avenues. First, the Malaysian Code on Corporate Governance mandates asset managers incorporate ESG risks into their investment processes and active ownership practices. Second, the commission¡¯s Sustainable and Responsible Investment Guidelines require that sustainable and responsible investment funds adopt one or more sustainability strategies, such as the UN Global Compact Principles. These measures aim to promote sustainability among asset managers regarding their ESG claims.

Significant gaps remain in Malaysia¡¯s regulatory framework concerning greenwashing. One major gap is the lack of standardised sustainability indicators. Companies can comply with bursa requirements using different standards, such as the Global Reporting Initiative standards, Sustainability Accounting Standards Board standards, or Taskforce on Climate-related Financial Disclosures recommendations. This variability means that one company¡¯s sustainability indicators may not be comparable to those of another company that uses a different standard, complicating efforts to accurately assess the prevalence of greenwashing.

Another gap is the lack of accountability measures for failure to report accurate sustainability targets. While the bursa can take enforcement action against listed issuers for not providing sustainability statements, monitoring sustainability performance is often done sporadically and informally. This lack of rigorous oversight undermines the sustainability goals of the bursa and the securities commission.

ZAID IBRAHIM & CO (in association with KPMG Law)

Level 19, Menara Millennium,

Jalan Damanlela,

Pusat Bandar Damansara,

50490 Kuala Lumpur, Malaysia

Tel: +603 2087 9999

Fax: +603 2094 4888/4666

Email: info@ziclegal.com