Corporate Governance and Risk Management in Malaysia

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INDIVIDUAL ASSIGNMENT:

CORPORATE GOVERNANCE AND RISK MANAGEMENT

IN MALAYSIA

LECTURER:

DR. AHMAD HUSNI BIN HAMZAH

BBA RISK MANAGEMENT & TAKAFUL

SEM II 2018/19

BY:

FITROTUL HASANAH BINTI AIDIR (BMCL16043428)

INTRODUCTION

Organization for Economic Co-operation and Development (OECD) defines corporate governance as “the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stakeholders. The corporate governance also spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance” (OECD, 1999).

        Securities Commission (SC) describes corporate governance as “the process and structure used to direct and manage the business and affairs of the company with a view to enhancing business prosperity and corporate accountability with the ultimate objective of realizing long term shareholder value while taking account the interests of other stakeholders” (Securities Commission, 2000).

        Based on the above definitions given both by OECD and SC, it is clear that corporate governance associates with how company is being managed and monitored through commitment of various parties whether direct or indirectly by adapting transparency and accountability practices to achieve company’s inspiration. To prevent corporate failures, companies need to re-adjust their business procedures and strategies by enhancing corporate governance practices. By improving governance practice, the firm would minimize the exposure to various risks surrounding them such as operational risk and financial risk.

        The main objective of this discussion are concept and roles of board of directors (BOD) in the establishment of risk management committee (RMC) for Malaysian’s public listed companies (PLCs). BOD is an integral part of every business organization. They have a role for the future direction of the organization and company. In Malaysia, the regulators frequently ask for the BODs to have the strong position and role in corporate activities. They have another job portfolio that relating to the risk management.

        The establishment of RMC is one of the company initiatives in risk management practices. The formation of RMC is still voluntary in most countries in the world including Malaysia. In Malaysia, based on the Malaysian Code on Corporate Governance 2007 and 2012 clearly stated the role and responsibility of the BODs toward the risk management activities. The code highlighted for the BODs to have a system which effectively monitor and manage risks. This is an indicator of the importance of risk management and the oversight function of the BODs.

DISCUSSION

The risk management practice in Malaysia is heavily driven by MCCG and Bursa Malaysia Listing Requirements. The Code has been revised for a number of times started with the MCCG 2000, MCCG 2007, MCCG 2012 and the latest is MCCG 2017. The stock exchange has incorporated many parts of Code in listing requirements of Bursa Malaysia. Apart from these initiatives, Bursa Malaysia has introduced the Guidelines for Risk Management and Internal Control to assist directors in preparing appropriate disclosure on risk management and internal control company’s annual report.

        By looking at the three versions of Code of corporate governance, there are major changes or improvement in the risk management practices in Malaysia. The first version of the Code focuses on the role of Board in managing the risk. Meanwhile the second version (i.e. MCCG 2007) looks on the role of internal audit to monitor and manage the risk. As for MCCG 2012, the Code recommend for the companies to establish a clear framework on risk management. In MCCG 2017, it is expected the company to establish the separate board committee to handle risk management affairs of the company.

        MCCG 2017 has emphasized on the need of having strong internal control and risk management functions. According to the Code, risk management should concentrate on identifying business threat and opportunities meanwhile the internal control function should capitalize the business opportunities available to enhance company’s performance. This enable the company to make sound business decision and incorporating the level of risk that they willing to accept and execute necessary action to achieve business objectives. In particular, there is one section which specifically designed for risk management aspect. The section which falls under principles of good governance is known as effective audit and risk management. Under “Principle B: Effective Audit and Risk Management”, there are three Practices that companies are supposed to implement which are:

Practice 9.1: The board should establish an effective risk management and internal control framework.

Practice 9.2: The board should disclose the features of its risk management and internal control framework, and the adequacy and effectiveness of this framework.

        While the BOD is fully responsible for risk management activities of the companies, under paragraph 9.3, the Code suggest the Board to establish Risk Management Committee (RMC) which consist of independence directors, to oversee the company’s risk management framework and policies. Prior study found that factors such as nonexecutive directors, separation role of Chief Executive Officer (CEO) and chairman might lead to establishment of RMC. By doing so the committee is able to effectively monitor the risk management framework of the company and its related policies. The existence of this committee might lessen the workload of existing audit committee.