Group 5 N4AM2256D ADM659 CASE Study Question 5 PDF

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FACULTY OF ADMINISTRATIVE SCIENCE AND POLICY STUDIESBACHELOR OF CORPORATE ADMINISTRATION (AM225)CORPORATE GOVERNANCE AND ETHICS (ADM659)WRITTEN REPORTCASE STUDY QUESTION 5PREPARED BY:NAME IDJULIESAFARINA BINTI MOHD JANJANG 2018261542KHAIRUL AIN BALQIS BINTI MOHD SHARIFF 2020963499MATHESSA MATHEWS 20...

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FACULTY OF ADMINISTRATIVE SCIENCE AND POLICY STUDIES BACHELOR OF CORPORATE ADMINISTRATION (AM225) CORPORATE GOVERNANCE AND ETHICS (ADM659) WRITTEN REPORT CASE STUDY QUESTION 5

PREPARED BY: NAME

ID

JULIESAFARINA BINTI MOHD JANJANG

2018261542

KHAIRUL AIN BALQIS BINTI MOHD SHARIFF

2020963499

MATHESSA MATHEWS

2019593863

NOR MANISHA BINTI CHE KHALID

2019456018

NUR ARISYA NATASYA BINTI AB RAHMAN

2019643298

PREPARED FOR: MADAM FARIHAH BINTI HASSAN

CLASS: N4AM2256D / GROUP 5

SUBMISSION DATE: 01ST DICEMBER 2021

Table of Contents Question ................................................................................................................................................. 3 Introduction (Summary of the case study) ......................................................................................... 4 Discussion .............................................................................................................................................. 5 a) Explain to the board of directors FOUR (4) functions of a remuneration committee under the MCCG 2021. (10 marks)

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b) Put forward any THREE (3) arguments against Encik Ali’s opinions regarding the importance of an independent director on the board of directors in the company. (15 marks) ............................................................................................................................................................ 8 Conclusion ........................................................................................................................................... 10 References:........................................................................................................................................... 11

Question Muaz Transportation Bhd is planning to be listed on the main market of Bursa Malaysia. As a part of the preparations for the listing, the directors are seeking to understand certain key recommendations in the Malaysian Code of Corporate Governance 2021 (MCCG) and the Bursa Malaysia Listing Requirements. One of the directors raises the issue relating to the requirement to ensure that at least 2 directors or 1/3 of the board of directors of a listed issuer, whichever is the higher, are independent directors. However, the current composition of the board is mostly non-independent non-executive directors. In addition to that, one of the directors, Encik Ali, believes that the existence of independent directors will not assist the company at all since they are outsiders with little information and no connection with the company at all.

On top of that, regarding the board salary, it is usually determined by the

board members themselves. They just realised that the remuneration committee is one of the recommended committees by the MCCG to be established., but the role and the importance of this committee is still unclear to them. As the company secretary of Muaz Transportation Bhd, you are required to:

a)

Explain to the board of directors FOUR (4) functions of a remuneration committee

under the MCCG 2021.

b)

(10 marks)

Put forward any THREE (3) arguments against Encik Ali’s opinions regarding the

importance of an independent director on the board of directors in the company. (15 Marks)

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Introduction (Summary of the case study) Muaz Transportation Bhd intends to list on the main market of Bursa Malaysia. The directors are studying the Malaysian Code of Corporate Governance 2021 (MCCG) and the Bursa Malaysia Listing Requirements as part of the listing preparations. One of the directors suggests that at least two directors, or one-third of the board of directors of a publicly traded company, be independent. The board is currently comprised primarily of non-independent non-executive directors. Furthermore, Encik Ali, one of the directors, believes that having independent directors will not benefit the company because they are strangers with little knowledge and no connection to the company. Furthermore, board salaries are typically determined by the board members themselves. The remuneration committee is one of the MCCG's recommended committees, but they are unclear about its role and significance. Thus, a Company Secretary to Muaz Transportation have made an explanation to the board of directors regarding four (4) functions of a remuneration committee under the MCCG 2021 and a three (3) arguments against Encik Ali’s opinions regarding the importance of an independent director on the board of directors in the company.

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Discussion a) Explain to the board of directors FOUR (4) functions of a remuneration committee under the MCCG 2021. (10 marks) The Malaysian Code on Corporate Governance (MCCG), which was implemented in 2000, has been an important tool for corporate governance reform and has favourably influenced corporate governance practises. The MCCG incorporates global concepts and widely recognised corporate governance practises that go above and beyond what is required by statute, regulation, or Bursa Malaysia. The MCCG allows for a more constructive and adaptable response to raising corporate governance standards. It recognises that some parts of corporate governance require statutory regulation, while others benefit from self-regulation supplemented by market regulation. The MCCG was evaluated and revised in 2007, 2012, 2017, and 2021 to guarantee its relevance and alignment with globally recognised best practises and standards. The MCCG 2021 update introduces best practises and guidance to improve board policies and processes, including those related to director selection, nomination, and appointment; strengthen board oversight and the incorporation of sustainability considerations into company strategy and operations; and encourage the adoption of best practises, particularly those found to have relatively lower levels of adoption, as highlighted in the SC's Corporate Governing Guidelines. The Remuneration Committee was established in accordance with the Malaysian Code on Corporate Governance to make recommendations to the Board of Directors ("Board") on the remuneration of the Board of Directors and Senior Management in all forms, with the component parts of remuneration structured to link rewards to corporate and individual performance. The board of directors must be aware of four functions of a remuneration committee under the MCCG 2021 in order to perform a remuneration committee. The first one is to determine and regularly review the framework, board policy and specific term for the remuneration and terms and conditions of employment of the chairman and executive director. The remuneration committee is responsible for recommending to the board the remuneration packages of executive directors, and sometimes other top management including their salary, fees, pension agreements, options to acquire shares in the company and other benefits. Further, they need to be sufficient to attract the necessary top executives, to provide an incentive to higher than average performance, to reward success, and to retain the vital executives’ commitment to the organisation. The problem is to reconcile the interests of 5

the directors with those of the shareholders both in the short and the long term. In the other hand, the focus on board-level remuneration has generated a market for remuneration consultants to assist remunerations committees.

Secondly, implement policies and procedures on remuneration including reviewing and recommending matters relating to the remuneration of board and senior management. The board has a Remuneration Committee to implement its remuneration policies and procedures including reviewing and recommending matters relating to the remuneration of board and senior management. As proposed in The Greenbury Report (1995) that outlined a code of conduct which has been integrated in the UK Combined Code, the remuneration committee needs to establish a structured and transparent framework for formulating policy on executive director remuneration (Tricker, 2015). The challenge is to provide adequate incentive to recruit and retain top management in a competitive market for talent, rewarding achievement, but avoiding excesses and appearing rewarding failure (Tricker, 2015). As an example of Japan Land's Remuneration Policy, Japan Land's board of directors was compensated through basic director's fees, committee fees, attendance fees, and share options. The director's fee policy was based on a sliding scale of fees that included basic retainer fees as director and additional fees for attendance and service on specialised committees. Executive directors were not paid director fees, but instead received a combination of salary, allowances, bonuses, and stock options. The proposed director's fee for 2009 was S$279,686, covering a 14-month period. The proposed fee in 2010 was S$304,074 (Teen, 2013). In 2000, the company approved and implemented the 2000 Japan Land Limited Share Option Scheme ("2000 scheme"). Employees of the Group, as well as executive and nonexecutive directors of the company, were granted stock options under this scheme. If the directors receiving options are controlling shareholders or associates of the company, the general meeting of shareholders must approve them (Teen, 2013).

Next, recommend and monitor the level and structure of the remuneration of senior managers. Fair remuneration is critical to attract, retain and motivate directors and senior management. The remuneration package should take into account the complexity of the company’s business and the individual’s responsibilities. In addition, the remuneration should also be aligned with the business strategy and long-term objectives of the company. A remuneration committee should have a charter or terms of reference that clearly defines its job and gives it all the authority it needs to carry out that role. Review and recommend to the board 6

on the total individual remuneration package for executive directors and senior management personnel, including, where appropriate, bonuses and incentive payments within the terms of the agreed remuneration policy and based on individual performance, is one of the suggested responsibility areas that can be considered when outlining the terms of reference of a remuneration committee. Lastly is to ensure that the executive directors and the management are fairly rewarded for their individual contribution to the overall performance of the company. As an example, a New York Stock Exchange-listed company garnered international attention a few years ago when its chairman received a US$100 million "severance" payment. The "severance" clause in his contract referred to him relinquishing his position as CEO (he remained board chairman). The amount of the award raises obvious questions about the criteria taken into account in formulating his remuneration package. It also emphasises the importance of the remuneration committee being more mindful of such components (such as severance pay) in director and senior management contracts (Corporate Governance Guide, Pull-out I, Guidance on Board Leadership and Effectiveness). Thus, establishing a Committee to assist the board in developing and administering a fair and transparent procedure for setting policy on remuneration of directors and senior management is important because this would ensure that remuneration packages are determined on the basis of the directors’ and senior management’s merit, qualification and competence, while having regard to the company’s operating results, individual performance and comparable market statistics. To summarise, it is critical for the board of directors to be familiar with the functions of a remuneration committee in order to perform a remuneration committee and to understand the remuneration committee's objective, as the committee members exercise objectivity and are not conflicted in determining remuneration. It is also essential for the board to guarantee that the committee is made up of board members who will not gain directly from their decisions (i.e. persons involved must refrain from discussing their own salary) and who will consider the interests of shareholders and other stakeholders. Moreover, the Remuneration Committee have a lot of function that will help the Board of director to ease and smoothen the decision-making process. By having the Remuneration Committee, the executive director, key management and other member of the company will be fairly rewarded accordingly, based on the contribution towards the company.

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b) Put forward any THREE (3) arguments against Encik Ali’s opinions regarding the importance of an independent director on the board of directors in the company. (15 marks) Based on the Bursa Malaysia Practice Note, it defines that the independent director is an individual that is independent of management and free from any business or relationship that will affect them in exercising the independent judgement or the ability to act in the best interest of the interest of the applicant. The Remuneration Committee must include at least three members who are all independent. The Remuneration Committee members will elect a Chairman from among themselves. The Remuneration Committee will convene as and when it is required. Subject to any laws, guidelines, or rules imposed by Bursa Malaysia Securities Berhad and/or any other applicable authorities, the quorum for any meetings shall be two (2) Non-Executive Directors (Teo Guan Lee Corporation Bhd., 2021). Firstly, the importance of an independent director on the board of director in the company is to help the board by providing the company with effective leadership. Independent director is concerned with the depth of information an independent director has about a company. This is because they aren't involved in the day-to-day operations of the firm, independent directors can't make judgments that will help the company operate better. Independent directors, on the other hand, aren't necessarily as up to speed on the company's difficulties as the executives. In addition, his role differs from others in the organisation, according to this argument. Further, Independent directors add value to the firm by keeping an eye on the executive team's work, overseeing their performance, and protecting the company's long-term interests. It's true that they don't know as much about how companies work as a manager does, but this cannot be used as an argument against them, since their job is different. When faced with a major choice, it is the independent directors' responsibility to thoroughly research all of the possible outcomes and effects across the whole organisation. Even though independent directors who are not employed by the company and do not have any type of professional relationship with the company, except the directorship, these are directors that appointed for their personal and professional qualities who can perform their functions without being conditioned by relationship with the company, its significant shareholders or its managers. Next, the importance of having an independent director into the company is that they can contribute their independent point of views to the board’s deliberation. The argument 8

stated by Ali on the independent director is not important as the have limited knowledge about the company, its importance to have them shows otherwise. As independent directors are outsider that will not involve directly to the company, they are selected based on their skills and expertise. Thus, it indicates that the independent directors are familiar in the field that they are selected by. Not only that, the view that are given out by the independent director have the least possibility of having the internal influence, which in the other word, every opinion that is delivered is not biased to any parties. The independent opinion can assist the evaluation of the decision-making process to work effectively and efficiently. For example, in the case of Deloitte, the evaluation board that consists of the independent director amended some of the constitution of the company such as the requirement of reappointing the independent director based on their performance in the evaluation report. This shows that, every independent director that is selected are required to play they roles during the period of appointment.

Lastly, independent directors play a vital role in ensuring the continuing effectiveness of the executive directors and manager. According to (Mohamad Hafiz Rosli, Aza Azlina Md Kassim, & FazilahTamsir, 2019), the author stated that independent’s director occurs to minimize potential conflict that could arise as they are putting the procedures and structures in its place. Not only that, by having the independence director the board effectiveness is not questionable as they do not have any significant interests and relationship in the company and they are expected to express their honest and professional opinions effectively. This object the argument of independent director not assisting the company due to little knowledge and connection in the company. Furthermore, the independent director is selected based on the qualified skills and knowledge. Therefore, they might be helpful in assisting the executive director in the field they are excel in. Also, it can prevent any information overlooked during the process of decision making by giving their point of view without any prejudice. Effectiveness is very important as it can help the company to reduce unnecessary cost, time and resources to achieve the desired goals. In conclusion, independent director will not involve in the company day to day activities however it assists the company by contributing their knowledge, skill and ability to the company. Therefore, having the independent director will not giving any harm to the company but it gives the company a new insight during decision making process.

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Conclusion The Malaysian Code on Corporate Governance (MCCG) is aiming to line out principle and best practices on structure and procedures to achieve the optimum governance framework for the listed companies. Although MCCG is a voluntary act to be practices by the company, it gives a lot of benefit for the practitioner such as strengthen board composition, support effective audit, maintain integrity and many more. Thus, for the company achieving the optimum effectiveness, MCCG is the practices to be considered to apply to the management of the company and it can also enhance understanding of the director to internalize the corporate governance of the company.

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References: Administrator. (n.d.). Terms of reference- remuneration committee. Welcome to Teo Guan Lee Corporation Bhd. Retrieved November 25, 2021, from https://www.tglcorp.com.my/index.php?option=com_content&view=article&id=356&I temid=86. Cheah, F. S., & Lee, L. S. (2009). Corporate governance in Malaysia: Principles and practice. August Pub. Mak, Y. T. (2013). Corporate governance case studies. CPA Australia. (n.d.). (rep.). Corporate Governance Guide, Pull-out I, Guidance on Board Leadership and Effectiveness. Rosli, M. H., Kassim, A. A. M., & Tamsir, F. (2019). Corporate Governance Principles and Practices in Malaysia (1st ed.). Oxford Fajar Sdn. Bhd. Securities Commission Malaysia. (2021). Malaysian Code on Corporate Governance. Tricker, B. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press.

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