Corporate Governance_MCCG 2017 Principle A - Board Composition

Corporate Governance_MCCG 2017 Principle A - Board Composition

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  Malaysian Code ofCorporate Governance 2017 (MCCG 2017) - Principle A: Board Leadership and Effectiveness Board Composition Dayana Mastura Baharudin
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  Board Composition • Boardcomposition influences the ability of the board to fulfil its oversight responsibilities. • An effective board should include the right group of people, with an appropriate mix of skills, knowledge, experience and independent elements that fit the company’s objectives and strategic goals. • The right board composition will ensure sufficient diversity and independence to avert ‘groupthink’ or ‘blind spots’ in the decision-making process. • It also enables the board to be better equipped to respond to challenges that may arise and deliver value.
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  Intended Outcome • 4.0Board decisions are made objectively in the best interests of the company taking into account diverse perspectives and insights.
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  Practice: 50% Independent Boardof Directors • 4.1 At least half of the board comprises independent directors. For Large Companies, the board comprises a majority independent directors. • 4.2 The tenure of an independent director does not exceed a cumulative term limit of nine years. Upon completion of the nine years, an independent director may continue to serve on the board as a non-independent director. • If the board intends to retain an independent director beyond nine years, it should justify and seek annual shareholders’ approval. If the board continues to retain the independent director after the twelfth year, the board should seek annual shareholders’ approval through a two-tier voting process.
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  Step-Up • 4.3 Theboard has a policy which limits the tenure of its independent directors to nine years.
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  Appointment of An IndependentDirector • 4.4 Appointment of board and senior management are based on objective criteria, merit and with due regard for diversity in skills, experience, age, cultural background and gender. • 4.5 The board discloses in its annual report the company’s policies on gender diversity, its targets and measures to meet those targets. For Large Companies, the board must have at least 30% women directors.
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  Appointment of An Independent Director •4.6 In identifying candidates for appointment of directors, the board does not solely rely on recommendations from existing board members, management or major shareholders. The board utilises independent sources to identify suitably qualified candidates. • 4.7 The Nominating Committee is chaired by an Independent Director or the Senior Independent Director.
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  Guidance : BoardComposition • 4.1 Board composition should support objective and independent deliberation, review and decision-making. A board comprising a majority of Independent Directors allows for more effective oversight of management. • 4.2 In considering independence, it is necessary to focus not only on whether a director’s background and current activities qualify him or her as independent but also whether the director can act independently of management. • Stakeholders are increasingly concerned about the potential negative impact that directors’ long tenure may have on their independence. The long tenures of independent directors and familiarity may erode the board’s objectivity. Due to long or close relationship with board and management, an Independent
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  Guidance : BoardComposition • Director may be too sympathetic to their interests or too accepting of their work. There could also be occasions where an Independent Director may become a ‘dependent’ director due to prolonged insular recruitment processes and attractive remuneration packages and material benefits. • Large Companies are not encouraged to retain an independent director for a period of more than 12 years. • To justify retaining an Independent Director beyond the cumulative term limit of nine years, the board should undertake a rigorous review to determine whether the ‘independence’ of the director has been impaired. Findings from the review should be disclosed to the shareholders for them to make an informed decision.
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  Two-tier Voting Process
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  Guidance 4.4: Diverse Board •4.4 A diverse board can offer greater depth and breadth compared to non- diverse boards. As such, director candidates should be sourced from a diverse pool. • Diversity at senior management level will also provide constructive debates, which lead to better decisions. It enables the discussion of the same ideas in differing ways and equips the company to face challenges in an ever-changing environment. • In pursuing its gender diversity agenda, each company should take steps to ensure that women candidates are sought in its recruitment exercise for board and senior management positions.
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  Guidance 4.5: 30%Women Board of Directors • 4.5 While large companies are required to have 30% women directors, other boards should also work towards achieving this target. Women’s participation in decision-making positions should not be focused on board positions alone but also be broadened to include women in senior management, as the same benefits apply. Diversity, when extended to senior management, will also serve as a talent pipeline for board candidacy.
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  Guidance 4.6 • 4.6The board should use a variety of approaches and sources to ensure that it is able to identify the most suitable candidates. This may include sourcing from a directors’ registry and open advertisements or the use of independent search firms. • The company should disclose in its annual report how candidates for non- executive director positions were sourced including whether such candidates were recommended by the existing board members, management or major shareholders. • If the selection of candidates was solely based on recommendations made by existing board members, management or major shareholders, the Nominating Committee should explain why other sources were not used.
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  Guidance 4.7 • 4.7As chair of the Nominating Committee, the Independent Director or a Senior Independent Director shall– • lead the succession planning and appointment of board members, including the future Chairman and CEO; and • lead the annual review of board effectiveness, ensuring that the performance of each individual director is independently assessed.
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  Intended Outcome • 5.0Stakeholders are able to form an opinion on the overall effectiveness of the board and individual directors.
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  Practice • 5.1 Theboard should undertake a formal and objective annual evaluation to determine the effectiveness of the board, its committees and each individual director. The board should disclose how the assessment was carried out and its outcome. • For Large Companies, the board engages independent3 experts periodically to facilitate objective and candid board evaluations.
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  Guidance 5.1 • 5.1An objective and well-managed board evaluation process can lead to substantial improvement in board effectiveness, bringing significant benefits to the company. There are many ways in which board evaluations can be carried out such as through self-assessment, peer review or facilitated by the Company Secretary. Given that every board is different and their needs, roles, priorities and capacities vary depending on the company’s size and stage in its life cycle, a box-ticking approach to evaluation is ineffective and unacceptable.
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  Guidance 5.1 • Aboard evaluation which is periodically facilitated by a professional, experienced and independent party will lend greater objectivity to the assessment by providing an unbiased perspective on a director’s performance and his ability to contribute effectively to the board. When an independent third party is used to carry out board evaluation, the Board should disclose the identity of the third party.
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  Guidance 5.1 • Theannual assessment on individual directors should include an evaluation of their: • Will and ability to critically challenge and ask the right questions; • Character and integrity in dealing with potential conflict of interest • situations; • Commitment to serve the company, due diligence and integrity; and • Confidence to stand up for a point of view.
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  Guidance 5.1 • Indisclosing the evaluation carried out on effectiveness of the board, its committees and individual directors, the Nominating Committee of Large Companies should disclose the following information in its Annual Report: • How the evaluation was conducted, the criteria used such as the assessment of fit and properness, contribution and performance, calibre and personality of directors4; • Whether an independent expert was engaged, or was it internally facilitated; • Key strengths and/or weaknesses that were identified from the evaluation; and • Steps or enhancements proposed to be undertaken to mitigate or address the weaknesses identified.