On April 28, 2021, the Securities Commission Malaysia (SCM) updated the Malaysian Code on Corporate Governance (MCCG) to strengthen the corporate governance culture of Malaysia’s listed companies. According to SCM, in this first update since 2017, the MCCG “focuses on the role of the board and senior management in addressing sustainability risks and opportunities of the company”, among other topics. The SCM notes:
“The MCCG 2021 also addresses the urgent need for companies to manage [ESG] risks and opportunities, with the introduction of new best practices that emphasise the need for collective action by boards and senior management. The global commitment and acceleration of efforts to transition towards a net zero economy has resulted in demand for greater action on the part of corporates. The SC[M]’s review of sustainability statements by large listed companies found that some have begun to address climate-related risks but more can and needs to be done.”
In this Blog Post, we provide additional background on the MCCG and highlight ESG-related aspects of the 2021 update, as well as recent, similar efforts to highlight the connection between ESG management and good corporate governance in other Asian jurisdictions.
The MCCG was introduced in 2000 and has since been reviewed in 2007, 2012, 2017 and 2021. It sets out globally accepted corporate governance practices above and beyond the minimum required by statute, regulation or as prescribed by Bursa Malaysia. The MCCG does, however, apply to listed companies in Malaysia on an “apply or explain an alternative” basis (rather than a more common “comply or explain” basis, in which companies can either comply with a requirement or explain why they do not).
On the MCCG’s “apply or explain an alternative” basis, if the board of a listed company determines that it is unable to implement any of the corporate governance practices contained in the MCCG, it should apply a suitable alternative practice to meet the relevant “Intended Outcome”. Large companies are also expected to disclose the measures they have taken, or intend to take, to enable them to adopt the MCCG practices and the timeframe required. Private companies are encouraged to adopt the practices set out in the MCCG,
The 2021 Update
The 2021 update of the MCCG introduces best practices and guidance to:
- strengthen board oversight and the integration of sustainability considerations in the strategy and operations of companies;
- improve board policies and processes, including those related to director selection and diversity, nomination and appointment; and
- encourage the adoption of the best practices, particularly those found to have relatively lower levels of adoption, as highlighted in the SCM’s Corporate Governance Monitor report.
ESG and Corporate Governance
At a high level, the 2021 update to the MCCG clarifies the link between ESG and corporate governance as follows:
“Effective board leadership and oversight also require the integration of sustainability considerations in corporate strategy, governance and decision-making, as sustainability and its underlying [ESG] issues become increasingly material to the ability of companies to create durable and sustainable value and maintain confidence of their stakeholders. For companies to be resilient, boards need to take a much more holistic view of the business coupled with proactive and effective measures to anticipate and address material ESG risks and opportunities.
Companies with a well-articulated long-term strategy, and a clear plan on sustainability including supporting the global transition to a net-zero economy, will distinguish themselves by building the confidence of their stakeholders, for example, consumers, investors, policymakers and regulators. However, boards and companies that are not prepared may see their businesses suffer, as these same stakeholders lose confidence in the ability of the company to adapt to shifts and changes in the global landscape.”
New Sustainability Practices
The updated MCCG includes a new “Intended Outcome” for companies to address sustainability risks and opportunities in an integrated and strategic manner to support long-term strategy and success. Specific board practices intended to achieve this outcome include:
- Accounting for sustainability considerations in the development and implementation of company strategies, business plans, major plans of action and risk management;
- Ensuring sustainability strategies, priorities and targets, as well as performance against those targets, are communicated to internal and external stakeholders;
- Staying abreast of, and understanding, sustainability issues relevant to the company and its business, including climate-related risks and opportunities; and
- Including the management of sustainability risks and opportunities in the performance evaluations of the board and senior management.
Companies are particularly encouraged to “Step Up” and appoint a designated person within management to provide dedicated focus to manage sustainability strategically, including the integration of sustainability considerations in the operations of the company.
SCM is also tackling diversity in the updated MCCG with new board practices that would have listed companies include at least 30% women directors and disclose policies on gender diversity.
The MCCG provides further guidance for companies implementing these new practices to note, including:
- Many institutional investors consider the integration of ESG factors in their investment decision-making process as part of their fiduciary responsibility, including by using shareholder votes to hold boards and senior management accountable for the management and oversight of sustainability;
- Stakeholder expectations are heightening across various sustainability issues such as health and safety, climate action, data governance and privacy ;
- Boards should have sufficient understanding and knowledge of sustainability issues relevant to the company and its business, which can be measured by their ability to tackle questions and deliberate on sustainability issues; and
- Boards should identify their professional development needs on sustainability and ensure these are addressed, including by considering whether a change in their composition or skills matrix is required to strengthen board leadership and oversight of these issues.
Similar Approaches in Asia
The approach to promoting and improving upon ESG and sustainability practices through corporate governance initiatives appears to be taking hold in Asia. Earlier this month, regulators in both Hong Kong and Japan each proposed amendments to corporate governance codes that address ESG issues.
In Hong Kong, the Stock Exchange of Hong Kong Limited proposed amendments to its Corporate Governance Code and Listing Rules that would clarify the link between ESG and good corporate governance, including by specifically including ESG risks in its existing risk management framework. Meanwhile, proposed amendments to Japan’s Corporate Governance Code would require companies to develop a basic policy and disclose initiatives on sustainability and enhance climate-related disclosures.
Both proposals, like the updated MCCG, also address gender diversity and encourage the inclusion of more women in senior management and on corporate boards.