2015 ANALYSIS OF CORPORATE GOVERNANCE DISCLOSURES IN ANNUAL REPORTS. Annual Reports December Page 0

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1 2015 ANALYSIS OF CORPORATE GOVERNANCE DISCLOSURES IN ANNUAL REPORTS Annual Reports December 2015 Page 0

2 Table of Contents EXECUTIVE SUMMARY... 2 PRINCIPLE 1: ESTABLISH CLEAR ROLES AND RESPONSIBILITIES PRINCIPLE 2: STRENGTHEN COMPOSITION PRINCIPLE 3: REINFORCE INDEPENDENCE PRINCIPLE 4: FOSTER COMMITMENT PRINCIPLE 5: UPHOLD INTEGRITY IN FINANCIAL REPORTING PRINCIPLE 6: RECOGNISE AND MANAGE RISKS CONCLUSION APPENDIX A Page 1

3 EXECUTIVE SUMMARY Pursuant to the Bursa Malaysia Listing Requirements ( LR ), listed issuers are required to prepare and publish in its Annual Report the following Governance Statements:- 1) LR a Corporate Governance Statement and in this Statement, to narrate how they have applied the Principles set out in the Malaysian Code on Corporate Governance 2012 ( MCCG ) to its particular circumstances having regard to the Recommendations under each Principle. Listed issuers must disclose any Recommendation to which the listed issuer has not followed and to provide reasons for not doing so and alternative adopted, if any; 2) LR an Audit Committee Report that contains among others, a summary of the terms of reference of the committee, a summary of the activities of the audit committee and internal audit function etc; This Review Bursa Malaysia undertook a review of 450 listed issuers annual reports. This review is the second exercise following the review of 300 listed issuers annual reports which were published in The purpose of the review of a total of 750 listed issuers annual reports is to assess the level and quality of disclosures made pursuant to the LR and MCCG, in particular, the Corporate Governance Statement, Audit Committee Report and Internal Control Statement in respect of the Principles and Recommendations under Principles 1 to 6 of the MCCG. 2 We have also assessed compliance by the listed issuers with the disclosure obligations under LR 15.06(1), 15.08, 15.08A, to 15.12, 15.21, 15.23, and Appendix 9C Part A Contents of Annual Report in their Corporate Governance Statement, Audit Committee Report and Internal Control Statement. 3) 15.26(b) an Internal Control Statement where in making the disclosures the listed issuers should be guided by the Statement on Risk Management and Internal Control: Guidelines for Directors of Listed issuers. 1 1 Practice Note 9, paragraph Principle 7 of the MCCG is assessed continuously through reviews of listed issuers corporate disclosures periodically e.g. whether listed issuers make immediate announcements of material information) and Principle 8 is currently under assessment. Page 2

4 Methodology (1) The Dashboard The methodology applied in this review is as follows:- 0 for no or incomplete disclosure 0.5 for generic or general disclosure; and 1 for adequate disclosure and/or disclosure that has complied with the requirements or best practice. We have provided in Appendix A, the areas that we reviewed in each listed issuer s annual report. The maximum total score a listed issuer could obtain is 72 points (which represents 100%). The breakdown of the total score for each Principle is reflected in Table 2 below. Further details on good disclosures can be found in the discussions of the respective principles in this Report. (2) Sample Size and Representation by Market Capitalisation The sample size of our review comprised the annual reports of 450 listed issuers from the Main and ACE Markets and were representative of corporations with large ( RM1 billion) ( Large Cap Issuers ), medium ( RM500 million RM1 billion) ( Medium Cap Issuers ) and small (<RM500 million) market capitalisation ( Small Cap Issuers ). This represents approximately 50% of our listed issuers. The review comprised annual reports with FYE 31 December 2013 to 30 September effect means that to-date, Bursa Malaysia has reviewed 750 listed issuers annual reports. We aim to cover all of our listed issuer s annual reports by The representation of listed issuers according to market capitalisation in 2015 is presented in Table 1 below: Market Capitalisation Large ( RM1 billion) Mid ( RM500 million - RM1 billion) Small (<RM500 million) Percentage Table 1 No. of companies 21% 91 12% 56 67% 303 (3) Scores and Reporting Indicators Generally, the criteria assessed covers the role of the board, board composition and independence, time commitment of the board, the role of the audit committee in upholding integrity of financial reporting and managing risks. The assessment criteria adopted this year remains the same as our review in 2014 except that certain criteria that have been included as part of the scores this year were not part of the scores in This is the second year that we have conducted our review of annual reports. The sample of 450 annual reports reviewed in 2015 are from a different sample group from 2014 which in Page 3

5 Table 2 below provides the breakdown of the points under each Principle. Principles Principle 1 Principle 2 Principle 3 Principle 4 Principle 5 Principle 6 Total Score Scores 17 points 13.5 points 7 points 5.5 points 17 points 12 points 72 points Table 2 Comparison between 2014 and 2015 results A direct comparison between the 2014 and 2015 scores is not meaningful or accurate as the listed issuers assessed are different in both years and we have varied the assessment criteria in 2015 as mentioned above. A comparison or an analysis of the improvements or the lack thereof will be more meaningful when the same batch of listed issuers are re-examined in future. [The rest of this page has been intentionally left blank] Page 4

6 Results by market capitalisation The dataset comprises a large number of listed issuers with small market capitalisation. The data in Diagram 1 reveals the following:- Large Cap Issuers received higher scores across all Principles. There is also a bigger gap between the Large Cap Issuers and other listed issuers (i.e. the Medium and Small Cap Issuers) in relation to Principles 1 and 6. This indicates that the disclosures of Large Cap Issuers are of higher quality than those of Medium and Small Cap Issuers. capitalisation in terms of compliance with the LR. The real difference lies in the quality of those disclosures made in relation to Principles 1 and 6. The Small Cap Issuers average scores by Principles are generally lower than those of Medium Cap and Large Cap Issuers. The exception is with reference to Principle 5 where, although lower than those of Large Cap Issuers, the Small Cap Issuers scored slightly better (0.7%) in 2015 than Medium Cap Issuers. Minimal differences in scores were noted among listed issuers by market capitalisation in relation to Principles 2 to 5. The indicators under those Principles took into account compliance with the LR. This shows that there is not much difference between listed issuers by market The average scores achieved by the Large Cap Issuers is 72% while the Medium and Small Cap Issuers achieved % and 62.18% respectively. 2015: Market Capitalisation Average Scores 86.7% 80.9% 79.1% 66.8% 60.7% 62.4% 64.7% 57.4% 52.8% 78.4% 74.8% 67.6% 66.6% 68.6% 61.9% 61.2% 57.1% 54.3% 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Principle 1 - Establish clear roles and responsibilities Principle 2 - Strengthen composition & LR15.08A Principle 3 - Reinforce Independence Principle 4 - Foster Commitment Diagram 2 Principle 5 - Uphold Integrity of Financial Reporting Principle 6 - Recognise and Manage Risks Small Market Cap Average 2015 Medium Market Cap Average 2015 Large Market Cap Average 2015 Diagram 1 0.0% Page 5

7 Scores achieved by listed issuers The highest score achieved by a listed issuer for disclosures in this review is 97.2% while the lowest score is 31.3%. Based on the review of 450 listed issuers, about 57% of listed issuers scored above 60% and 43% scored below 60%. Three listed issuers scored 90% and above. The breakdown in scores is depicted in Diagram : TOTAL SCORE PERCENTAGE DISTRIBUTION ACROSS 450 PLCS 49, 11% 11, 2% 3, 1% 15, 3% 90 to 100% 134, 30% 80% to 90% 70% to 80% 95, 21% 60% to 70% 50% to 60% 40% to 50% 30% to 40% 143, 32% Diagram 2 Page 6

8 Results of the Assessment Adherence to the LR Our finding is that there is strong adherence to the LR based on our review of the disclosures in the Corporate Governance Statement and the Audit Committee Report. All listed issuers reviewed have complied with the LR by issuing a Corporate Governance Statement 3, Audit Committee Report 4 and Internal Control Statement 5 in their annual report. All listed issuers have also narrated in their annual report how they have applied Principles 1 to 6 (which is the scope of this review) set out in the MCCG, albeit with varying levels of disclosure. We found that listed issuers generally had 1/3rd independent directors on their boards, 6 disclosed their attendance at meetings 7 and training 8, and that each of the directors did not hold more than 5 directorships. 9 Where nominating committee activities 10 were concerned, our review revealed that 98% of the listed issuers have disclosed establishing a nominating committee with a majority of independent directors. A majority of nominating committees have disclosed their terms of reference, which included selection and assessment of directors. Listed issuers for the most part disclosed that the nominating committee assessed the performance of the board, board committees and individual directors. Some listed issuers provided insight into the board nomination and selection process, explained the selection process by the nominating committee and the criteria used to select new directors All listed issuers reviewed have established an audit committee and provided a summary of its activities. Adherence to the LR on composition 11 and functions 12 of the audit committee ( AC ) was approximately 100%. All listed issuers had at least 3 members in the audit committee, all of whom were nonexecutive directors, the majority of whom were independent. The chairmen of the audit committees were without exception, independent directors. None of the listed issuers we reviewed had appointed alternate directors to the audit committee. There was 100% compliance with the LR in these areas. Our review of the audit committee reports showed that audit committees discharged their functions as required under the LR; such as oversight of the external auditors scope, audit plan and fees, reviewing the listed issuers quarterly and year-end financial statements, related party transactions and conflicts of interest. Almost all listed issuers also disclosed the internal audit fees and costs and whether internal audit was an in-house or outsourced function. 3 LR LR LR 15.26(b) 6 LR Appendix 9C 8 Appendix 9C 9 LR Appendix 9C(6A) 11 LR LR & Page 7

9 99% of listed issuers also disclosed that it was part of the terms of reference of the audit committee to review related party and conflict of interest transactions, discuss the external auditor s scope, audit plan and fees as well as discuss the auditor s report with the external auditor. Meaningful Disclosures that Provide Insight to the Governance Practices We noted that the quality of disclosures on board quality under Principles 1 to 4 of the MCCG varied. Our review showed that there were some high quality disclosures among listed issuers which demonstrated that they had embraced good corporate governance practices in their organization. We found that some listed issuers made disclosures in the Corporate Governance Statement which explained the governance framework that the listed issuers adhered to and provided clear explanations on how the chairman, senior independent director and CEO carried out their roles. Some listed issuers provided in-depth insight into how the board carried out its roles and responsibilities during the financial year Some disclosures even explained the process undertaken before and during board meetings and in certain instances disclosed adopting a rating process for board papers and presentations by management at board meetings and how the board provides constructive feedback to management. Whilst most listed issuers had disclosed that the board has in place procedures to obtain independent professional advice, many have not described the actual procedure and whether the board had consulted any professional advisers during the financial year. In respect of the nominating committee s responsibility on board, board committee and individual directors performance, although the criteria for such assessment was not always disclosed, there were some listed issuers who made commendable disclosures as they not only provided the criteria which included disclosures on the board mix of skills, but also an explanation of the board effectiveness, assessment and the areas for improvement. We also observed that 98% of the listed issuers reviewed, have established a remuneration committee, a committee that is recommended under the Commentary section of the MCCG. We commend listed issuers for adopting this best practice. We noted that listed issuers had disclosed that their independent directors were assessed annually. In respect of the independent directors that have served in the listed issuers board for 9 years or more, we noted that in most cases, justifications have been provided for retaining the director and shareholders approval have been sought to endorse the board s recommendation to retain the independent director. However, many justifications provided were not strong. In the area of the Audit Committee s oversight on external auditors under Principle 5, there was a lack of adequate disclosure of the processes in place to assess the suitability and independence of the auditors or how the listed issuer arrived at the conclusion that the auditor was independent or suited to conduct the audit during the financial year. Page 8

10 An area that requires much improvement pertains to Recommendation 5.2 of the MCCG as very few listed issuers disclosed any policy to assess the suitability and independence of their external auditors. The summary of the Audit Committee s and internal audit s activities were for the most part written in generic language. Disclosures on the internal audit activities fell short of providing insight into how internal audit performed its duties during the financial year and the areas that were audited. In most instances, disclosures were more about the general responsibilities of internal audit instead of activities or key focus areas of the audit during the financial year. In this review, we also found that listed issuers mentioned in the Internal Control Statement that they had a system of internal controls in place. 98% of listed issuers disclosed the main features of internal control in their organization. Listed issuers generally provided their board s opinion on the adequacy and effectiveness of the review of the risk management process during the financial year. Most listed issuers also disclosed as part of best practice that the board had received assurance from the CEO and CFO or equivalent. Furthermore, while the external auditor is required under the LR to review the Internal Control Statement, disclosure of such review is not mandated. Nevertheless, the majority of listed issuers made such disclosures as part of best practice. Our general observations during this review is that there is high compliance with the LR and adherence to best practices. The quality of disclosures could be further improved but there are some listed issuers who have issued outstanding disclosures and we commend them for such disclosures. We will provide each listed issuer reviewed with details of their individual scores, together with information on good disclosures and areas where their disclosures can be improved. Their individual report should be read together with this report in order to obtain a holistic understanding of the type and quality of disclosures that are expected of listed issuers. Listed issuers disclosed that there was a process in place to identify, evaluate and manage risks although they did not always describe such process. We also found some quality disclosures by listed issuers on significant risks faced during the financial year. Some listed issuers provided in-depth disclosures about the risk management framework in place, the types of risks faced during the financial year and how these were addressed Page 9

11 Principle 1: ESTABLISH CLEAR ROLES AND RESPONSIBILITIES Page 10

12 PRINCIPLE 1: ESTABLISH CLEAR ROLES AND RESPONSIBILITIES The disclosures under Principle 1 13 are about providing insight into how the board carried out its roles and responsibilities during the financial year. There is a difference between static information 14 which comprises terms of reference or the governance framework as well as the mission and vision of the listed issuer, and information on how the board performed its role during the financial year. Good disclosures under Principle 1 placed static information in the board charter while disclosures in the annual report focused on providing insight on how the board set the strategic direction of the listed issuer and carried out its role during the financial year. In many instances, information about the board s oversight of management and the CEO s responsibilities could be found in the listed issuer s board charter which was made publicly available on its website. Diagram 3 below shows that 209 listed issuers (c. 46.4%) reviewed have achieved a score of 60% and above for their disclosures under Principle 1. Furthermore, we noted that about 26% made meaningful disclosures, some of which were exemplary. The rest of the listed issuers which scored below 60% did not elaborate on how the board carried out its role during the financial year. We found generally that almost all listed issuers reviewed had disclosed clearly the roles and responsibilities of the board, but not all listed issuers provided much insight into how the board had discharged those responsibilities during the year. More than half of the listed issuers disclosed that the board has established a code of conduct and more than 40% provided a summary of their whistleblowing policy. Boards that have not established a code of conduct or a whistle blowing policy in their organisations should start formalizing this governance area. 13 Principle 1 The responsibilities of the board which should be set out in the board charter, include management oversight, setting strategic direction premised on sustainability and promoting ethical conduct in business dealings. 14 Static information refers to information that remains substantially unchanged from year to year. Page 11

13 Number of Companies Distribution of Scores for Principle 1 - Establish Clear Roles & Responsibilities % 30-39% 40%-49% 50-59% 60-69% 70-79% 80-89% % Range of Scores in Percentage (%) Diagram 3 The contents of the board charter varied as some listed issuers provided very brief information in the charter while others included their vision and mission statement in the board charter and provided details on the duties and responsibilities of the board, senior management and the company secretary. We noted that overall, there were less disclosures about static information such as the formal schedule of matters reserved for the board and the limits to management s responsibilities. Such information when disclosed, could be placed in the board charter. We found that almost all listed issuers made disclosures under Recommendation but the majority used generic language which amounted to repeating information in the Commentary to Recommendation 1.2 without further explanations. However there were some listed issuers that described the general roles and responsibilities of directors in the board charter and proceeded, in the annual reports, to explain in some detail how the directors carried out their roles and responsibilities during the financial year. 15 The board should establish clear roles and responsibilities in discharging its fiduciary and leadership functions. Page 12

14 We also noted that while most listed issuers mentioned that the board would oversee succession planning in the board and senior management, many listed issuers did not discuss this in depth. We recommend that all listed issuers focus on disclosing the steps taken to ensure succession planning as this is important to ensure continuity of the vision and mission of the organization. The majority of listed issuers had a Code of Conduct in place, but we recommend that listed issuers should also focus on establishing, implementing and disclosing their whistleblowing policy which is an essential part of sound internal controls. The majority of listed issuers disclosed that the directors had access to information and advice. We found that many listed issuers described these procedures briefly and stated that directors had the right to access information and advice but did not explain the process in place to exercise that right, particularly the right to obtain independent professional advice. We recommend that listed issuers also disclose the timeframe provided to circulate board papers so as to show whether the board receives the information in time to prepare adequately for board meetings. Some listed issuers disclosed that their board received board papers a minimum of 7 days before board meetings. Others had a shorter period to circulate board papers. Nevertheless these listed issuers adopted best practice by making such disclosures. We found some outstanding examples of disclosures which provided insight into how the board carried out its role during the financial year. It was clear that the listed issuer used the annual report to showcase its corporate governance achievements during the year to its shareholders and potential investors. Some disclosures were transparent and detailed enough for shareholders to know how the board had discharged its role during the financial year. MEANINGFUL DISCLOSURES INCLUDE: A summary of functions reserved for the board and functions for management; A description of fiduciary responsibilities including: How the strategic planning process was carried out; How the board ensures that the business is being effectively managed; The board s processes in place for succession planning, its authority and mandate; A summary of the shareholder communications policy and how the company communicated with shareholders during the financial year; Whistleblowing policy with appropriate communication and feedback channels A summary of the board s Code of Conduct Page 13

15 Key Findings 95% disclosed that there were procedures in place for the board to obtain timely information 88% disclosed their board charter publicly 93% disclosed the qualifications of their company secretary. 74% disclosed the role of the company secretary in their organization 42% provided a summary of their whistleblowing policy 53% disclosed that they had a Code of Conduct 81% disclosed that the board had oversight over succession planning 42% disclosed the limitations on management s authority 82% disclosed that their boards reviewed and adopted strategic plans & 10% of this group provided detailed explanations on how it was discharged 83% disclosed that the board oversaw the conduct of business and 12% of this group provided insight into how it was discharged. Page 14

16 Principle 2: STRENGTHEN COMPOSITION Page 15

17 PRINCIPLE 2: STRENGTHEN COMPOSITION Principle 2 16 pertains to the effectiveness of the board and maintaining board quality. Our review of disclosures under Principle 2 of the MCCG was coupled with a review of disclosures under LR 15.08A and Appendix 9C pertaining to the nominating committee and remuneration of directors. The disclosures under Principle 2 generally focused on the terms of reference of the nominating committee, board quality - whether there were clear policies on board quality which is a requirement in the LR pursuant to paragraph 2.20A, 17 and board diversity - whether boards were actually diverse and whether they had clear gender diversity policies. In addition, listed issuers were assessed on whether they disclosed clear processes and criteria in place for recruitment of new directors and whether they conducted performance assessments of the board, board committees and individual directors Diagram 4 shows that 252 listed issuers (c. 56.0%) reviewed have achieved a score of 60% and above for their disclosures. This shows that many listed issuers have made quality disclosures under Principle 2, although there is still room for improvement. We found that while 98% of the listed issuers reviewed have established a nominating committee comprising exclusively nonexecutive directors, the majority of whom are independent, the terms of reference of the nominating committee were not disclosed in the listed issuers board charter, website or annual report. Most listed issuers mentioned briefly that the nominating committee carries out the selection and appointment of new directors. 88% of listed issuers disclosed their policy on mix of skills on the board, and we found through the directors profiles in the annual report, that all boards were generally diverse in terms of their qualifications, age and skills set. However, we also noted that many listed issuers did not state whether character, experience, integrity, competence and time commitment 18 are also a consideration in determining the type of director that the board wants to work with. Where the board nomination and election process was concerned, listed issuers disclosed that the nominating committee had oversight over the board nomination and election process. Some listed issuers described the process in detail. Where a new director had been appointed, a few listed issuers described the process in some detail such as how they had contacted search firms to obtain a list of potential candidates, the specific criteria involved in searching for a new director and the nomination and election process. 16 The board should have transparent policies and procedures that will assist in the selection of board members. The board should comprise members who bring value to board deliberations. 17 LR 2.20A states that every listed corporation, management company or trustee-manager must ensure that each of its directors, chief executive or chief financial officer has the character, experience, integrity, competence and time to effectively discharge his role as a director, chief executive or chief financial officer, as the case may be, of the listed corporation, or the collective investment scheme. 18 LR 2.20A and 15.08A(3) Page 16

18 Number of Companies Distribution of Scores for Principle 2: Strengthen Composition % 30-39% 40%-49% 50-59% 60-69% 70-79% 80-89% % Range of Scores in Percentage (%) Diagram 4 We found that in most instances the disclosures on appointment of new directors used generic language and did not disclose the criteria for selection or the process involved such as how the candidate was sourced and the process of the appointment (including the recommendation and approval process). Disclosures on the number of candidates, how they were assessed and the final number proposed to the board for approval will go a long way to inform shareholders of the robustness of the listed issuer s board nomination process. About a third of listed issuers who had appointed new directors during the financial year, did not disclose the appointment(s) in the Corporate Governance Statement nor elaborate on the selection and process of appointment or the criteria used. Page 17

19 We noted that listed issuers disclosed that the nominating committee carried out performance evaluations but did not disclose clearly whether it was the board, board committees or individual directors who were evaluated during the financial year. Even when such disclosures were clear, the criteria for such evaluations were not disclosed. We do note, however, several instances of exemplary disclosures on this point. In these cases, readers were left with the impression that the process was thorough and conducted in a professional and transparent manner. Some listed issuers disclosed in a transparent manner, the criteria and processes involved in performance evaluations. We noted that a few listed issuers disclosed the type of performance evaluations carried out such as BEE (Board Effectiveness Evaluation) and made it clear that a thorough process had been undertaken. However they often did not disclose the criteria used in that evaluation. We recommend that they make the relevant disclosures. categorized remuneration into executive directors and non-executive directors in compliance with the LR and 84% disclosed the remuneration of directors in successive bands of RM50,000. Out of this, about 9% disclosed the remuneration of individual directors, which we commend. In this respect, we strongly recommend that listed issuers disclose the remuneration of individual directors in line with best practices. DIVERSITY A majority of the listed issuers did not disclose any board policy to appoint more women directors on boards but approximately 40% stated that they were aware of the Commentary to Recommendation 2.2 of the MCCG on gender diversity and would consider diversity in the future and/or when new board appointments came up. We strongly urge listed issuers to have clear targets and measures to appoint more women on boards. Some listed issuers even disclosed measures and targets to improve gender diversity. Listed issuers should clearly disclose that the board, board committees and individual directors have been evaluated during the financial year, the process undertaken and the criteria used in the evaluation. Disclosures showed that remuneration of directors was generally linked to the listed issuer s strategy and performance or long term objectives. Approximately 97% of listed issuers Page 18

20 MEANINGFUL DISCLOSURES INCLUDE: Description of the process of sourcing candidates Narrative of the selection criteria used when assessing candidates for new board appointments Narrative of the assessment criteria and process undertaken prior to recommending directors who will be seeking re-election at the Annual General Meeting Description of the tools or methodology adopted in assessments of boards, board committees and individual directors during the financial year. [The rest of this page has been intentionally left blank] Page 19

21 Key Findings 98% nominating committees comprised exclusively of non-executive directors, majority of whom were independent. 77% nominating committee s ToRs comprised selection and assessment of directors 88% established a policy on mix of skills in relation to board composition & 100% had mix of skills sets on their board. 40% stated that the board is cognizant of the need for gender diversity and will develop appropriate policies in future. 65% of listed issuers who had appointed new directors during the financial year disclosed their board nomination and election process. Approximately 76% disclosed briefly the criteria for appointment of new directors. 76% disclosed that they had conducted a performance evaluation for the board and individual directors, 80% did not disclose the criteria used in the performance evaluation of board committees 71% disclosed their board nomination and election process Page 20

22 66% disclosed that they had also conducted a performance evaluation for the board committees. 73% disclosed the remuneration policy and 79% linked it to the listed issuer s performance and long-term strategy. 97% categorized remuneration into executive directors and non-executive directors remuneration 84% disclosed the remuneration of directors in bands of RM50,000. 9% or 40 listed issuers disclosed directors remuneration by name Page 21

23 Principle 3: REINFORCE INDEPENDENCE Page 22

24 PRINCIPLE 3: REINFORCE INDEPENDENCE Principle 3 is about ensuring the effectiveness of independent directors. In this review, we focused on whether independent directors are assessed annually and whether they are redesignated as non-independent after 9 years. Our review showed that listed issuers assess independent directors annually and in most cases, the basis of assessment was done against the definition of independent director pursuant to the LR 19 i.e. items (a) to (g) of the definition. Nevertheless, listed issuers should be reminded that the definition contained in the LR has a preceding provision which defines an independent director as a director who is independent of management and free from any business or other relationship which could interfere with the exercise of independent judgement (emphasis added). Paragraph 2.1, Practice Note 13 of the LR also makes mention that directors must give effect to the spirit, intention and purpose of the said definition. If a director does not fall within any of items (a) to (g) of the said definition, it does not mean that the director will automatically qualify to be an independent director. The director concerned as well as the board of directors of the listed issuer must still apply the test of whether the said director is able to exercise independent judgment and act in the best interests of the listed issuer as set out in the said definition. A director could be in a position where he or she does not exercise independent judgement. This could be due to long relationships and familiarity with other members of the board which may cause the director to form comfortable opinions and relationships with the rest of the board. Independent directors are important not only because of their independence, knowledge and skills but because they refresh the board by bringing new ideas and perspectives to the board. When listed issuers retain independent directors for a long period of time, they carry the risk that fresh perspectives of the business could be lost. Diagram 5 shows that 367 listed issuers (c. 81.6%) reviewed have achieved a score of 60% and above for their disclosures. Further, 216 listed issuers (c. 48.0%) achieved a score of 90% and above, which shows that the disclosures under Principle 3 are mostly of quality. 19 LR1.01 Page 23

25 Number of Companies Distribution of Scores for Principle 3: Reinforce Independence % 30-39% 40%-49% 50-59% 60-69% 70-79% 80-89% % Range of Scores in Percentage (%) Diagram 5 The majority of listed issuers did not have a clear policy to limit the tenure of independent directors to 9 years but we found that most listed issuers stated that if an independent director were to be retained beyond the 9 year tenure, the listed issuers would obtain shareholders approval. A small number of listed issuers were silent on their policy on the tenure of independent directors but in most cases, these listed issuers were either newly listed or did not have any director who had exceeded 9 cumulative years of service. Some of these listed issuers may have been under the impression that the issue of limiting the tenure of independent directors need not be addressed until it arises. We recommend that all listed issuers should have a clear policy in place on the tenure of independent directors. We noted that in most instances listed issuers provided justification for retaining independent directors beyond the 9 year tenure. The Commentary to Recommendation 3.3 of the MCCG indicates that the board must make a recommendation and provide strong justification to shareholders in a general meeting and the shareholders may in exceptional cases and subject to the assessment of the Nominating Committee vote to retain the independent director although he or she has served a cumulative term of 9 years. We noted that listed issuers have not given due attention to the Commentary as the justifications provided to retain such independent directors were not only generic but similar justifications were provided for all Page 24

26 independent directors who had served beyond 9 years. There was no disclosure that the nominating committee had assessed whether there were circumstances that could interfere with such director s exercise of independent judgement. Some listed issuers even stated that since such director did not fall within any of the categories in (a) to (g) of the LR, he or she was considered independent. We recommend that listed issuers review their approach towards independent directors as they may not be providing shareholders with new and fresh perspectives of the listed issuer s business strategies, and the benefits that are derived from new interactions within the board. The purpose of Recommendation in the MCCG is to ensure that the board composition is constantly refreshed and also to prevent group think which may occur when directors are familiar with each other over a long period of time. We noted that a few listed issuers adopted best practice by either re-designating their independent directors to non-executive directors or not allowing their independent directors to seek re-election upon reaching the 9-year limit. In some instances, the independent director voluntarily resigned from the position upon reaching the 9 year tenure. We commend these listed issuers for adopting best practices. Some listed issuers stated that they retained their independent directors in spite of such directors serving a cumulative period of 9 years as it was difficult to find new directors with similar skills and knowledge on their board. We noted that some large listed issuers with complex businesses were nevertheless prepared to refresh the board with new independent directors every 9 years. We also recommend that in instances where the listed issuer decides to retain independent directors who have served for 9 cumulative years, there should be clear justification for each independent director who is retained which will show that the nominating committee considered the matter seriously. A high number of listed issuers had a separate resolution in the notice of annual general meeting to retain independent directors. We noted that in most instances, if a director had offered himself for re-election, this resolution was not bundled together with the resolution to re-appoint the director as independent director. Furthermore, there was justification (albeit in generic terms) provided in the notes to the notice of annual general meeting. We urge the nominating committee in listed issuers to go a step further to adhere to best practice and justify to shareholders that the circumstances are exceptional and warrant the shareholders voting to retain the independent directors. 20 Recommendation 3.2 states that the tenure of an independent director should not exceed a cumulative term of nine years. Upon completion of the nine years, an independent director may continue to serve on the board subject to the director s re-designation as a non-independent director. Page 25

27 The positions of Chairman and CEO were held by the same individual in some listed issuers 21 (approximately 15%). In 28% of the listed issuers reviewed, the Chairman and CEO were related. We strongly recommend that such listed issuers should at least ensure that there is a strong element of independence in the board by refreshing the board with new independent directors. Most listed issuers reviewed had appointed a non-executive director as chairman. Approximately 43% of chairmen in the listed issuers reviewed were independent directors. The MCCG recommends that the majority of the board should comprise independent directors where the chairman of the board is not independent. 22 We found that 31% of listed issuers who did not have independent chairmen, adopted the recommendation. Approximately 38% of listed issuers who did not adhere to this recommendation provided no justification while the remaining 31% who did not adhere to this recommendation did provide justification. MEANINGFUL DISCLOSURES INCLUDE: A policy on independent directors that includes a tenure limit or the board of director s view on the tenure limit of independent directors Strong justification where the listed issuers wish to retain independent directors beyond the 9 year tenure Application of the subjective assessment pursuant to the LR definition of independent directors, in determining continued independence of such director Justification to be provided for nonadoption of majority independent board members where the chairman is an executive. 21 Recommendation 3.4 The positions of Chairman and CEO should be held by different individuals, and the chairman must be a non-executive member of the board. 22 Recommendation 3.5 The board must comprise a majority of independent directors where the chairman of the board is not an independent director. Page 26

28 Key Findings 97% boards comprised one-third or more of independent directors 43% had an independent chairman 60% disclosed a policy on the tenure of independent directors although this is not mandated 31% of listed issuers without an independent chairman had appointed a majority of independent directors to the board 78% independent directors were assessed annually 96% provided justification for retaining independent directors beyond 9 years but the justifications were not strong 85% of listed issuers separated the role of chairman and CEO. 75% had chairmen and CEOs who are not related Page 27

29 Principle 4: FOSTER COMMITMENT Page 28

30 Number of Companies PRINCIPLE 4: FOSTER COMMITMENT It is important for directors to devote sufficient time to carry out their duties responsibly. Directors should ensure that they have sufficient time, not only to attend meetings but to prepare for the meetings. We have indicated elsewhere in this review that listed issuers should disclose the number of days stipulated for board papers to be circulated prior to the board meeting. 23 Best practice dictates a minimum of 7 days. 24 This is to ensure that the listed issuer provides the board with sufficient time to go through the board papers thoroughly. Recommendation 4.1 of the MCCG also states that the board should set out the expectations on time commitment for directors and protocols for accepting new directorships. The LR limits directors to holding directorships in not more than 5 listed issuers 25 for the purpose of ensuring that they devote sufficient time to their duties. Diagram 6 shows that 335 listed issuers (c. 74.4%) reviewed have achieved a score of 60% and above for their disclosures. Further, 180 listed issuers (c. 40.0%) achieved a score of 80% and above, which shows that the disclosures under Principle 4 is generally of quality. Distribution of Scores for Principle 4: Foster Commitment % 30-39% 40%-49% 50-59% 60-69% 70-79% 80-89% % Diagram 6 Range of Scores in Percentage (%) Diagram 6 23 Discussion under Principle Corporate Governance Guide Towards Boardroom Excellence (2 nd Edition) 25 LR Page 29

31 Listed issuers disclosed that directors were informed at the beginning of the year, about the number of board or board committee meetings that will be scheduled during the year. In many instances we noted that the board charter disclosed the minimum number of meetings that would be held in a year while the annual report disclosed the actual number of meetings and directors attendance at these meetings. Approximately 60% of listed issuers disclosed the protocols for accepting new directorships Listed issuers disclosed that directors were expected to inform the chairman of the listed issuer of any new appointment that the director had accepted. Some listed issuers also required such directors to provide the chairman with an estimation of the time commitment involved in the new appointment and also to provide the chairman with assurance that the director would be able to fulfil his or her commitment to the listed issuer in spite of the new appointment. We recommend this as a best practice which will ensure that the director is fully committed to fulfilling his or her role in the listed issuer. Recommendation 4.2 states that the board should ensure that its members have access to appropriate continuing education programs. 97% of listed issuers disclosed that directors had attended training during the financial year. The LR 26 requires the board to disclose in the annual report, a statement on the training attended by directors. The statement also has to disclose that the board has undertaken an assessment of the training needs of the directors. We noted that listed issuers continued to disclose that Directors are encouraged to attend trainings to keep abreast with the latest developments or The board is aware of the continuous training needed to broaden their Directors perspective. Such disclosures or self-assessments of training needs fall short of the LR which expects the board or nominating committee to conduct a formal assessment of the training needs of directors. 51% of listed issuers did not disclose whether the board had undertaken the assessment of training needs of each director There should also be a brief description on the type of training that the directors have attended during the financial year. We commend the listed issuers (57%) that disclosed the type of training attended by each individual director during the financial year. We also noted that many listed issuers did not disclose individual directors training, but instead disclosed the names of the training programs attended by the directors. This falls short of disclosing whether all the directors have attended at least one of these training programs. We recommend that listed issuers make this clear in their annual reports. 26 LR (3) Page 30

32 A few listed issuers disclosed that their directors had attended training during the financial year but did not disclose the types of training that directors attended. We consider that these disclosures fall short of the LR. Nevertheless, there were some detailed disclosures about the trainings attended by each director and it was clear from these disclosures that such listed issuers encouraged their directors to continuously update and upgrade their knowledge and skills. We commend these listed issuers for their disclosures and their approach towards directors training. We noted that some listed issuers did not disclose any attendance at training programs by their directors and provided no reasons for the non-attendance. This does not comply with the LR as the FAQs issued in relation to the LR indicate that in exceptional circumstances where any director has not attended any training during the financial year, valid justifications must be provided. Nonattendance due to work commitments is not good justification as it does not amount to exceptional circumstances. 27 MEANINGFUL DISCLOSURES INCLUDE: Disclosures on whether the board has specifically set out time commitments expected of its directors Disclosures on whether the listed issuer has in place a policy for directors to notify the chairman prior to accepting new appointments Disclosures to show that the board has a policy in place to assess the training needs of each director and that it has actually carried out such assessments A brief statement about the training programmes attended by each 27 Questions and Answers in relation to the LR, Chapter 15, Corporate Governance, paragraph at: 3/Consolidated%20Main%20FAQs%20[071315].pdf Page 31

33 Key Findings 96% listed issuers provided some form of expectation of time commitments to directors, mostly in the form of scheduling the number of meetings for the year 100% disclosed the attendance of directors at board meetings 57% disclosed the training attended by each director 100% complied with the LR that limits directors to holding no more than five directorships in listed issuers Page 32

34 Principle 5: UPHOLD INTEGRITY IN FINANCIAL REPORTING Page 33

35 Range of Scores In Percentage (%) PRINCIPLE 5: UPHOLD INTEGRITY IN FINANCIAL REPORTING Principle 5 28 emphasises the role of the audit committee in ensuring that financial statements are reliable. 29 It also emphasises the role of the audit committee in assessing the suitability and independence of external auditors. 30 We assessed disclosures in the Audit Committee Report vis-à-vis the disclosure requirements stipulated under the LR. 31 This shows that the quality of the disclosures under Principle 5 while adequate, could be improved further. Listed issuers complied with the LR on the composition of the audit committee such as the number of audit committee members and the requisite qualifications. They also disclosed the number of meetings attended by the audit committee during the financial year. In addition, they disclosed the written terms of reference of the audit committee. Diagram 7 shows that 256 listed issuers (c. 56.9%) reviewed have achieved a score of 60% and above for their disclosures. DISTRIBUTION OF SCORES BY PRINCIPLE 5 : UPHOLDING INTEGRITY IN FINANCIAL REPORTING % % % % % %-49% % 0-29% Number of Companies Diagram 7 28 Principle 5 The board should ensure financial statements are a reliable source of information 29 Recommendation 5.1 The Audit Committee should ensure financial statements comply with applicable financial reporting standards. 30 Recommendation 5.2 The Audit Committee should have policies and procedures to assess the suitability and independence of external auditors 31 LR to 15.12, and Page 34

36 We identified three areas for further improvement under Principle 5 which are disclosures about the activities of the audit committee and internal audit as well as disclosures about policies and procedures to assess the suitability and independence of the external auditors. Where the audit committee report is concerned, we noted that listed issuers focused on disclosing the audit committee s terms of reference or charter but did not emphasise on how it actually carried out its role and responsibilities during the financial year. We recommend that listed issuers disclose static information on their website, and in the annual report, focus on how the audit committee and internal auditors discharged their roles and responsibilities when describing the audit committee s and internal audit s activities during the financial year. The summary of activities of the audit committee and internal audit should be augmented further so as to provide readers of the audit committee report with insight into how the audit committee and internal audit functioned during the financial year. Some listed issuers had excellent audit committee reports which provided quality disclosures. The common theme in such reports is that the focus was not on the terms of reference of the audit committee but on the areas that the audit committee exercised its oversight. For example, as opposed to a generic statement that the audit committee reviewed the quarterly statements and the annual audited financial statements, some listed issuers provided further details such as the dates when the audit committee met with the external (and internal) auditors without the presence of management and the topics discussed, identified new MFRS and other standards that were discussed and which may have had a significant impact on the listed issuer s financial statements, that there was assurance provided by the Chief Financial Officer to the audit committee that matters such as prudent judgments and estimates had been made in accordance with the MFRS 134 or that adequate processes and controls were in place for effective and efficient financial reporting and disclosures under the MFRS. Some listed issuers disclosed that the audit committee analysed the impact of changes in accounting policies and that it reviewed cashflow assumptions and working papers in order to determine the recoverability of major assets. For the most part, the audit committee reports on external auditors used generic language to indicate that the Committee had exercised oversight on the external auditors and discussed the scope of the audit plan with them. This tended to repeat the terms of reference of the audit committee. Some good disclosures related to the type of non-audit services that the external auditor had been engaged to do and provided information on the fees paid for this work compared to the audit fee. The purpose of disclosures on non-audit services is to allow investors to assess whether Page 35

37 the fee paid to the external auditor for such services may affect their independence. With reference to the independence and suitability of the external auditor, similar to the 2014 review, we noted that most listed issuers may have interpreted independence to mean that the audit committee met with the external auditor or was independent of management, which does not address the intention of the MCCG Recommendation 5.2. We recommend that listed issuers make further disclosures on their policy and processes to assess the suitability and independence of the external auditor. This would involve disclosing the processes used to ensure that the auditor had the competency to conduct the audit, especially prior to their appointment. We noted that while some listed issuers disclosed the policies and processes in place to assess the suitability and independence of their external auditor, they did not disclose if an actual review was carried out prior to the appointment or re-appointment of the external auditor during the financial year. A few listed issuers obtained written confirmation from their auditors about their independence during the financial year but most listed issuers disclosed that the audit committee met with the external auditors, without the presence of management. This however does not amount to assessing the independence and suitability of the external auditor. Furthermore, while some disclosures showed that external auditors had provided written assurance of their independence, listed issuers should also have their own mechanisms in place to assess the independence of the external auditors and as a best practice should disclose this in their annual reports. We found that the summary of internal audit activities for the most part was written using generic language. Disclosures such as The internal audit function assists the Audit Committee in discharging its duties and responsibilities by undertaking independent and systemic reviews of the system of internal control and risk management framework so as to provide reasonable assurance that such systems are operating and continue to operate satisfactorily and effectively 32 are insufficient to provide much insight into the actual areas that were audited during the financial year or how internal audit performed its function. We noted that many listed issuers disclosed their internal audit s objective and approach. Approximately 59% disclosed the use of international practices such as the International Professional Practices Framework as the basis of their internal audit work. Other common generic phrases that we noted were The internal audit department submits regular reports on their activities, findings, recommendations for improvement opportunities, management responses and action plans at the Audit Committee meetings. or that the Internal Auditors had carried out audits according to the internal audit plan approved by the Audit Committee during the financial year. Listed issuers should avoid generic statements and, disclose the areas that were audited during the financial year. As was the case for other Principles, there were also good disclosures on the activities of internal audit. In some instances listed issuers disclosed the number of internal audit 32 This generic statement was repeated verbatim in some annual reports Page 36

38 assignments completed during the year and stated whether these were aligned to the audit plan. These listed issuers also disclosed the specific areas that were audited such as finance, sales, marketing, procurement, etc. with details of the specific aspects audited. In some instances, listed issuers disclosed that the scope of internal audit engagements were aligned with the companies risk management profile i.e. that they audited areas that were identified as key risk areas. Some disclosures went on to reveal that internal audit s reports were discussed at the senior management level and that action plans were put in place to complete the necessary preventive and corrective actions. Such disclosures made it clear that a summary of internal audit s findings and management s responses were tabled to the audit committee to ensure that management undertakes the agreed remedial actions. We also recommend the audit committee to be vigilant and ensure that sound internal controls are put in place to support the work of the audit committee. Internal audit is meant to be the eyes and ears of the audit committee. When internal audit is outsourced, the audit committee should ensure that the scope of the audit is wide or at least covers financial and key risk areas. This is because the board is ultimately responsible for the internal controls in a company. Our conclusion based on the data provided is that while there was a high level of compliance with the LR, the quality of the audit committee report could be further improved. Some listed issuers disclosed that the audit committee had assessed the competency of the internal audit and whether it had adequate resources to carry out its duties. Their conclusions were backed by data on the number of internal auditors working for the listed issuer. In large companies, this data was at times broken down to show how many auditors were involved in specific areas audited. Some listed issuers also provided an analysis of the variations in the internal audit costs or fees with explanations. We commend these listed issuers for their disclosures. We noted that many listed issuers outsourced the internal audit function. We encourage the audit committee in such listed issuers to require the outsourced internal audit firm to adopt the International Professional Practices Framework issued by the Institute of Internal Auditors (Global). Page 37

39 MEANINGFUL DISCLOSURES INCLUDE: Oversight of financial reporting which includes significant issues the audit committee has considered and how it has addressed these, adherence to the appropriate accounting standards (MFRS), review of reasonableness of accounting policies, integrity of the processes and controls in place, and other relevant matters; Oversight of external auditors in terms of topics deliberated or significant issues highlighted; Oversight of internal auditors in terms of significant topics and issues discussed, review of adequacy and suitability of internal audit team and resources; Disclosures of policies on external auditors and provision of non-audit services by them; Disclosure of processes, procedures and tools in place during the year with regards to external auditors appointments, assessment on suitability, assessment on independence and tenure; Board statement on suitability and independence of external auditors. Page 38

40 Key Findings 100% audit committees comprised at least 3 members, the majority of whom were independent directors. 88% disclosed a summary of internal audit s activities of which 13% provided exemplary disclosures 100% audit committee chairmen comprised independent directors & no alternate directors was appointed as members 100% disclosed the functions of the audit committee 87% disclosed the audit committee s oversight of financial reporting of which 13% provided exemplary disclosures. 78% disclosed the audit committee s oversight of the external auditors of which 7% provided exemplary disclosures. 95% disclosed internal audit s objectives and approach of which 59% disclosed it had adopted a risk based approach or followed an international practices framework 60% provided some form of disclosures of the areas that were subjected to internal audit. 66% disclosed that the board assessed the suitability and independence of the external auditor but did not disclose the processes in place. Page 39

41 Principle 6: RECOGNISE AND MANAGE RISKS Page 40