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Published: Fri, 02 Feb 2018
What is corporate governance?
Corporate governance is a phrase that refers generally to the regulations, practices, or by law which companies are functioned, controlled, and regulated (Cheung SYL, 2004). Furthermore, corporate governance is an internal classification that consists of law enforcement, procedure, community, and makes sure the desires of shareholders and other stakeholders are fulfilled (Baysinger B, 1985). This willpower will be skillful achieved by leading and controlling in running procedures using excellent business performances’, neutrality, accountability and reliability (Conyon M, 1994). Moreover, successful corporate governance relies on external marketplace dedication and legislation, a strong board of directors who look after course of action and development of the corporation (Conyon M L. D., 1994).
1.2 The Importance of corporate governance
Corporate governance is a key ingredient in pleasing to the eye of investor’s assurance, encourage competitiveness, and eventually improving economic development (Haniffa RM, 2002). Brilliant corporate governance helps out to avoid corporate fraud, possible civil and criminal accountability of the organization and scandals (Johnson S, 2000). In addition, good corporate governance reflection will boost the reputation of the business and this will be more eye-catching to investors, suppliers, customers, and providers of nonprofit companies. It is intends to shield shareholder’s privileges, develop disclosure and transparency (La Porta R, 2000).
A company is an artificial person created by law. Function of a company in a legal sense is to hold assets and carry on a business or other activity, as an entity separate from the members who are the investors and manager in that business or activity (Koh, 2006). The companies follow Companies Act 1965 which have change to Companies (Amendment) Act 2007 as their guide in operating the business (Latif, 2008).
2.1 Companies Act 1965
Companies Act 1965 came into force on April 15 1965 (Weir, 1967). The purpose of the act is to merge as well as make changes the law pertaining to companies in Malaysia (Weir, 1967). In view of the chronological connection with Australia and United Kingdom, the judicial pronouncements on the understanding of their respective company’s legislation are highly persuasive in interpreting the equivalent Malaysian provisions (Weir, 1967). Furthermore, the function can be seen as an enabling function and regulatory function. Since the Malaysian Companies Act 1965 came into force, it has been amended in excess of 30 times (Koh, 2006). The Companies Act 1965 is a quantity of legislation that contains 374 sections which are divided into 12 parts with nine supplementary schedules (Koh, 2006).
2.1.1 Scandal case
The fall down of multi-billion corporate organizations such an Enron Corporation and Bear Stearns Incorporated stunned the business world (Agrawal, 2007).It verified a collection of inconsistency among the top management and the corporation’s shareholders (Agrawal, 2007). The disagreement in the above cases is frequently trigger as a consequence of a director’s or a top management’s breach of the fiduciary duties to the company (Koh, 2006).
In Malaysia, the case that makes the nation shocked is Asparta Sdn Bhd v Bank Bumiputra Malaysia Bhd  (Koh, 2006) which shows that fraud happens in the company. In this case, Bumiputra Malaysia Finance Ltd (BMF) sued Lorrain Esme Osman (Lorrain) for the full amount figure of M$27,625,853.06 which they have describe that Lorrain have made secret profit it with no awareness and agreement form them.
At those times, Lorrain was a director of Bank Bumiputra Malaysia Bhd (BBMB) and he was the chairman of BMF also. then they court get to know that Lorrain want to fly off from Malaysia so the court restrain Lorrain from moving his assets out of authority, and also for an order of finding of disclose the value for Lorrain, location of each and every one of his assets and nature. Then they get to know that Lorrain’s assets are in 32 banks and 104 other companies separately from Aspatra Sdn Bhd is where his shares in custody in.
The court takes this action because they want to prevent Lorrain from taking out his asset out from this country so that’s why the court froze the asset and the court doesn’t want Lorrain to fly off from this country. Furthermore, the court gets to know that Lorrain has secretly transferred the profit to a company call Aspatra which was the other reason why the court want to freeze Lorrain’s assets.
However, Lorrain argue that he is not the culprit but the company is the culprit where the money is with the company and not with him which he say that this is separate legal personality where the member’s and the management are separate from the company. Lorrain use Salomon v Salomon case  and s 16(5) of the Companies Act 1965  to argue about separate legal personality. Conversely, this is satisfactory for the court to lift the corporate veil for the intention of formative to see the culprit who transfers all the money to Aspatra Sdn Bhd. In the instantaneous case, the corporate veil having been appropriately lifted and Lorrain having been uncovered that he is the one been transferring all the money to Aspatra Sdn Bhd so the Supreme Court judged that Lorrain and Aspatra Sdn Bhd is liable for this case.
2.2 Companies (Amendment) Act 2007
The Companies (Amendment) Act 2007 passed by Parliament on May 23 2007 which bring significant changes in the corporate governance (Latif, 2008). The act came into action on August 15 2007 (Latif, 2008).The purpose of amendment is to enhance the corporate governance and its aim is to enhance the corporate governance in Malaysia flourishes and investor confident about companies in Malaysia (Beasley, 2008). The spread of the Companies (Amendment) Act 2007, as a most important effort at updating the Company Act 1965, is a decisive moment in the Company Law progress (Latif, 2008). There are 23 amendments of Companies (Amendment) Act 2007 seek then the Companies Act 1965 (Beasley, 2008).
The differences between Companies (Amendment) Act 2007 and Companies Act 1965 are amendment of sections are s.11A, s. 69I, s. 131, s. 132  , s. 132C, s. 132E  , s. 132F, s. 134, s. 145, s. 145A  , s. 174  , s. 174A, and s 217 (Latif, 2008). The deletions of sections are s. 132A, s. 132B, s. 132G, and s. 135 (Latif, 2008). The new sections are s.11B, s.11C, s.131A  and 131B  , 167A  , 172A  , 181A  , 181B  , 181C  , 181D  , 181E  , 368A  and 368B  (Latif, 2008). The differences cases between Companies Act 1965 and Companies (AMENDMENT) Act 2007 is where even though courts have not at all failed to state that directors are obliged to duties, however, the court didn’t specifically and tell what the duties are (Lipton M, 2008). The older cases such as Re City Equitable Fire Insurance Co  appeared that enforce only an easygoing duty upon directors, where later on cases such as Re D’Jan of London Ltd  have point out that their sense of duty are extra strict (Lipton M, 2008).
2.2.1 Scandal case
In 2007, there was a case called Malaysia’s Enron scandal, which is the publicly traded Transmile Group Bhd (Agrawal, 2007), the chairman was ex- MCA President and Cabinet Minister Ling Liong Sik, who was caught having overstated the company’s revenue by RM530 million. the account show s that the profit was Rm207 million in 2006 where the losses are RM126 million, and a net profit of 120 million in 2005 where the losses of RM77 million, which effect the government postal company Pos Malaysia & Services Holdings Bhd where its earnings for the financial year 2006 might be affected by the account overstatement, since the postal group owned 15.3 percent of Transmile share. The problem started when Transmile unsuccessful to put forward their audited account before the deadline which is on 30 April. Followed by, the external auditors had declined to sign the declaration stating that the accounts showed an accurate and precise outlook of the condition of interaction of the firm. This shows that something serious have happen.
In 2008, it was exposed that Rafidah Aziz (Agrawal, 2007), who had work as trade and industry minister for 18 years, where she had been peddling selling permits for duty such as free car sales and purportedly keeping the money in her pocket. There are two companies which didn’t even have showrooms where one of the companies belonged to Rafidah’s niece’s husband’s who gets the scores of permits.
2.3 Good corporate governance
Companies with healthier corporate governance have good health in operating presentation than those companies with deprived corporate governance which was simultaneous with the observation that better governed firms may have additional resourceful operations, consequential in far above the ground expected returns (Jensen, 1992). Cadbury is a good example of corporate governance where they follow all the rules and regulation (DeFond, 1992).
3.0 Principles of Corporate Governance
3.1 Directors and Officers (Koh, 2006)
In section 4 of the Companies Act 1965 (CA) defines director as “any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act and an alternate or substitute director” (Koh, 2006). This means that director is a person who can take decision for the company. All listed company should be lead by an effectual board that should control and direct the company. The board should consist of a stability of executive directors and non-executive directors which take account of independent non-executives with the purpose of no individual or minor group of individuals can control the board’s judgment. The board should be detailed about information of the company and enable it to fulfill its duties. Additionally, there should be an official and crystal clear course of action for the appointment of new directors to the board. Then, all directors should be compulsory to submit themselves for re-election at customary times and at least every three years.
The fiduciary duty of a director is to act bona fide in the interest of a company. Act on bona fide in the interest of a company means to act with good faith for the advantage of the company. A director who is on a duty to make sure that whichever act he carry out is with a vision to enhancing the significance of the company either by enhancing profits, plummeting costs or even optimistic advertising of the company. In the case of Re Hdyrodam (Corby) Ltd (1994) , Millett J, defining a de facto director is one who has not been formally appointed as such and therefore is not a de jure director but has nevertheless acted as a director in so far as he has openly undertaken a directorial role in the conduct of the company’s affair.
Directors also owe fiduciary duties to the company to act in good faith in the company’s interest but not to the individual shareholders such as in the case Percival v Wright  , exercise due care and skill in the discharge of their duties, and avoid conflict between their duties and their private interests, among other things. This can be seen in the case of The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin Syed Mohamed & Anor  , the judge found that there was a clear breach of fiduciary duties. The judge here applied three tests to determine whether a director could be held liable for breach of fiduciary duty by obtaining personal profit which in equity belong to the company. Furthermore, the director is put in trust but he is not the trustee of the company.
Moreover, the directors who misappropriate company funds have no defense. They cannot assert that since there was no intention to case wrongful loss to company or that they did not consider the company to be another person and therefore there was no misappropriation. In the case of Tan Sri Hian Tsin v PP  and Chong Lee Swee v PP  , it held that misusing company funds for a director own benefit constituted a criminal breach of trust.
In addition, the directors cannot misuse of confidential information. This can be seen in the case of Electro Cad Australian Pty Ltd & Ors v Metagi RCS Sdn Bhd & Ors  , the judge stated what amounts to confidential information where “Confidential information is generally information which is the object of an obligation of confidence and is used to cover all information of a confidential nature. These include trade secrets, literary and artistic secrets, personal services and public and government secrets (Koh, 2006).
3.2 Meetings and Proceedings
Pursuant to the Companies Act a shareholders’ meeting may be assemble by two or more members who investment in the company’s issued share capital which should not less than one-tenth, and the directors of the company should not failed to organize a meeting without a good validation, where they have the right to requested to do so (RB, 2000).
Companies should set up an official and crystal clear procedure for building up policy on executive salary and for setting up the remuneration packages of individual directors (Koh, 2006). The company’s annual report should include facts of the payment of each director (Koh, 2006). Intensity of wages should be adequate to catch the attention of the directors and keep hold of the directors desirable to run the company fruitfully (RB, 2000).
The executive directors wages should be planned between the connection of rewards to corporate and the person’s performance, however, non-executive directors wages replicate the level of responsibilities undertaken by the particular non-executive concerned and the experience that person have (Koh, 2006).
3.3 Accountabilities and Audits
In the financial reporting, the board should present an understandable and balanced review of the company’s situation and forecast (Abbott LJ, 2003). The board should uphold a sound system of internal control to the company’s assets and safeguard shareholders’ investment (Abbott LJ, 2003). The board should set up official and crystal clear measures for uphold a proper relationship with the company’s auditors (Koh, 2006). The Companies Act obliges the directors to make sure that profit and loss account and the balance sheet present fair and accurate analysis of the company’s financial dealings and its profits and losses for the accounting periods (Koh, 2006).
Company law that legalizes the corporate performance of its players has been in continuation in this nation over a century ago and it has since progress enormously into a legal skeleton which has come off fine before until now (McGuire JB, 1988). There are companies that been a good corporate governance example for this country. On the other hand, the citizen’s are more interested in corporate scandals rather than good corporate governance news. What is more, the confirmation of the outburst of corporate scandals which give us an idea about the flexibility of corporate guiding principle which means the access for taking advantage of the regulations has previously been open (McGuire JB, 1988). In an instance the world can move up and down as a result of corporate scandals, where the governments are required to take part beyond their critical sense of duty in put a stop to these scandals so that it won’t reoccur. Furthermore, the government has to grant a great deal of strict guidelines at the same time, they have to assurance that the enforcement is strictly keeping an eye on the corporation’s (McGuire JB, 1988). The presence of laws can be underprivileged, if it does not putting into practice, it will definitely illustrated that the law will be fruitless. The up to date situations indicated that enforcements merely take place after an up-to-the-minute scandal is exposed. The conscientiousness at this moment is exclusively on the shoulders of the government to make sure effectual corporate governance is look after all the way through the country, for as far as businesses are alarmed, despite the fact that numerous like to disagree with it, the main concern is to take full advantage of the profit with ethical regulations taking a back seat (McGuire JB, 1988).
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