Analysis of Corporate Governance Disclosures in Annual Reports. Annual Reports

Transcription

1 Analysis of Corporate Governance Disclosures in Annual Reports Annual Reports December 2014

2 Contents Executive Summary 1 Principle 1: Establish Clear Roles and Responsibilities 10 Principle 2: Strengthen Composition 15 Principle 3: Reinforce Independence 20 Principle 4: Foster Commitment 26 Principle 5: Uphold Integrity in Financial Reporting 30 Principle 6: Recognise and Manage Risks 37 Conclusion 42 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 of Corporate Governance 2012 ( MCCG ) to its particular circumstances having regard to the Recommendations under each Principle. Listed issuers must disclose any Recommendation which the listed issuer has not followed and to provide reasons for not doing so and alternatives adopted, if any; 2) LR an Audit Committee Report that contains, amongst 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; 3) LR 15.26(b) an Internal Control Statement where in making the disclosures, the listed issuers should be guided by the Statement of Risk Management and Internal Control: Guidelines for Directors of This Review Bursa Malaysia conducted a review of 300 listed issuers 2012 and 2013 annual reports. The purpose of the review was to assess the level and quality of disclosures in relation to the MCCG and LR, in the Corporate Governance Statement, Audit Committee Report and Internal Control Statement in particular relating to the Principles and Recommendations under Principles 1 to 6 2 of the MCCG. We also assessed if listed issuers made disclosures 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. Meaningful disclosures pertaining to the above mentioned LR will be discussed in detail in the relevant subsequent chapters of this Report. Listed Issuers. 1 1 Practice Note 9, paragraph Principle 7 of the MCCG 2012 is being assessed continuously and Principle 8 will be assessed separately in

4 We assigned a score of 0.5 for areas which only require brief disclosures of compliance with the LR, for example, the number of audit committee meetings held and the attendance of audit committee member 3. Listed issuers were assigned the full 0.5 points if they provided the information and a score of 0 if they failed to do so. A maximum score of 6 points was assigned to areas that required in-depth and meaningful disclosures which provided insight into the listed issuer s corporate governance practices. These areas were Recommendations pertaining to:- (i) disclosures on clear functions reserved for the board and those delegated to management, and the board s clear roles and responsibilities in discharging its fiduciary and leadership functions under Principle 1; (ii) disclosures on the criteria used by the nominating committee in the selection and assessment of directors under Principle 2; (iii) disclosures on the tenure of independent directors, strong justification for retention of such directors as independent directors beyond the 9 year tenure and obtaining shareholder approval under Principle 3; (iv) disclosures on the time commitment of directors under Principle 4; 3 LR15.15 (3)(c). (v) (vi) disclosures on the audit committee s policies and procedures to assess the suitability and independence of external auditors under Principle 5; and disclosures on a sound framework to manage risks and the internal audit function under Principle 6. Listed issuers that used general or generic statements 4 in their disclosures in the above areas were given 1 to 2 points. The maximum total score a listed issuer could obtain is 75.5 points (or 100%). Breakdown of the total score for each Principle is as follows:- Principle 1 18 points (23.8% 5 ) Principle 2 12 points (15.9%) Principle 3 6 points (7.9%) Principle 4 6 points (7.9%) Principle points (29.8%) Principle 6 11 points (14.6%) The sample size in our review comprised annual reports of 300 listed issuers 6 from the Main and ACE Markets and were representative of corporations with large (>RM 1 billion) 7, medium (RM500 million RM 1 billion) 8 and small (< RM500 million) 9 market 4 Generic or general statements in this context includes statements which are limited in terms of the description of the practice, lacked in the depth and information, cut and paste narratives from the LR or MCCG or re-use of narratives from previous CG statements, all of which does not provide the reader with meaningful insight into the company s actual practice. 5 Rounded to the nearest figure (1 decimal place). 6 The term listed issuers in this document refers to the 300 listed issuers whose annual reports were reviewed listed issuers listed issuers listed issuers. 2

5 capitalization. This represents approximately 32% of our listed issuers. The review covered annual reports with FYE 31 st December 2012 to 30 June Detailed information and statistics for each Principle will be addressed in this report. Our observations, findings and conclusions are based on the sample of these 300 listed issuers annual reports. Listed issuers were regarded as having complied with the Corporate Governance Statement disclosure under LR in relation to a particular Recommendation if it disclosed information pertaining to that Recommendation. Listed issuers were regarded as having made meaningful disclosures if readers were given insight into understanding the listed issuer s corporate governance practices under the Recommendation. The average scores for Principles 1 to 6 of the MCCG for all 300 listed issuers reviewed are reflected in Figure The scores in Figure 1 represent the quality of disclosures under the MCCG. We noted that although there was high adherence to the LR as well as embracement of the Principles and Recommendations as set out in the MCCG, the quality of disclosures under Principles 1, 5 and 6 needs to be improved further. We noted that listed issuers are embracing each Principle of the MCCG and adopting a majority of the Recommendations set out in the MCCG. Listed issuers who did not adopt any Recommendation in particular, disclosed their non-compliance although they did not always provide reasons for their non-compliance or disclose any alternative practice. We also found a high level of compliance ranging from 95% to 100% with the relevant disclosures required under the LR for the CG Statement, AC Report and Internal Control Statement. 10 These have been rounded to the nearest figures. 3

6 Figure 1 CG Statement Review : Average Score 80% 70% 60% 61% 73% 73% 71% 58% 59% Percentage (%) 50% 40% 30% 20% 10% 0% Principle 1 - Establish clear roles and responsibilities Principle 2 - Strengthen composition & LR15.08A Principle 3 - Reinforce independence Principle 4 - Foster Commitment Principle 5 - Uphold Integrity of Financial Reporting Principle 6 - Recognise and Manage Risks MCCG Six Principles 4

7 Adherence to Listing Requirements It was clear from our review that there is strong adherence to the LR. This was deduced from disclosures in the Corporate Governance Statement and Audit Committee Report. As noted earlier, adherence to the LR ranged from 95% to 100%. Although adherence to the LR was high, we noted the continued use of general or generic statements by 30% of listed issuers particularly in the disclosure of the CG Statement which suggests that some listed issuers continue to adopt a tick-box approach without providing meaningful disclosures. In such instances we noted a tendency for listed issuers to repeat the Recommendations in the MCCG without disclosing how they had applied those Recommendations. Boards are paying attention to board quality We also noted that disclosures on board quality under Principles 1 to 4 were varied in nature. In relation to Principle 1, listed issuers disclosed adherence to the Recommendations under the MCCG by disclosing clear processes in place for the board to have access to information and advice, including advice from independent professionals at the listed issuer s expense. The majority of listed issuers also disclosed that they had a board charter although they did not always make this publicly available. There was lack of depth in the quality of disclosures on clear functions reserved for the board and those delegated to management as well as on directors discharging their fiduciary and leadership functions. Nevertheless, we noted some good disclosures which clearly showed the functions reserved for the board, the authority delegated to management and limits of that authority. Disclosures on whistle blowing were very brief as listed issuers mostly provided a contact person or address to receive communication from potential whistle blowers. We noted lack of disclosures about appropriate communication and feedback channels to facilitate whistle blowing. In relation to Principle 2, our review showed that there was a high level of disclosure on the composition of the nominating committee and its terms of reference. We noted some high quality disclosures pertaining to the activities of the nominating committee as well. Some listed issuers have clearly implemented best practices in strengthening board composition in their own organizations by disclosing clear processes for the appointment of new directors. They have also disclosed the selection criteria in place for such directors. 5

8 Furthermore they have given due consideration to the mix of board skills and diversity when appointing new directors. Some disclosures show clear processes for appointment of new directors and clear criteria for selection of such directors These listed issuers also disclosed the assessment criteria for the board, board committees and individual directors. We commend them for the depth and quality of their disclosures. Nevertheless, we observed that many listed issuers continued to use general or generic statements in disclosures about policies on board composition (mix of skills, independence and diversity including gender diversity) 11. Furthermore, many listed issuers did not disclose the criteria used in the selection and assessment of directors 12. In relation to Principle 3, we noted that the majority of listed issuers assessed their independent directors annually. More than ½ of listed issuers had independent directors who had exceeded nine years of service but many of them stated that in the board s view, the independence of such director was not affected by his tenure. There were good disclosures which revealed that the listed issuer s criteria was not only whether independent directors continued to be independent under the LR but also whether the director consistently provided objective and constructive feedback at board meetings, and showed readiness to challenge others assumptions and gave viewpoints for the benefit of the listed issuer. Most of these listed issuers obtained shareholders approval to retain such director. We noted however, that most listed issuers who sought shareholders approval did not clearly disclose in the notice of annual general meeting, that approval was sought as the director had exceeded the nine year tenure. Many listed issuers continued to use general or generic descriptions in disclosures on board composition 11 LR15.08A(3)(a). 12 LR 15.08A (3)(b),(c). We also noted that in most listed issuers, the position of Chairman and CEO was held by separate individuals. Furthermore such individuals were not related. This shows that listed issuers have adhered to best practices. Although approximately one third of listed issuers had executive directors as chairmen of the board, half of this number had a majority of 6

9 independent directors on the board as recommended by the MCCG 13. We noted, however, that the number of listed issuers where the Chairman also acted as CEO, increased slightly in 2013 compared to In 2012 annual reports there were 12.8% Chairmen who acted as CEO while in 2013, this number increased slightly to 13.3%. We will be observing this closely in In relation to Principle 4, we noted that almost all listed issuers disclosed the training attended by directors during the financial year. Boards also disclosed the expectations of time commitment of directors usually by informing them of the number of meetings that were expected to be held during the financial year. Disclosures on risk management and internal control require further improvement Our review of Audit Committee Reports showed that there was a high rate of compliance with the LR. However, disclosures under Principle 5 were generally not of very high quality especially where the summary of activities of the audit committee is concerned. We observed that the majority of listed issuers reviewed, had a tendency to repeat the terms of reference of the audit committee or audit plan in the description of the audit committee s activities, which indicated that Audit Committee Reports used a tick box approach rather than engaging in meaningful disclosures. Furthermore, we noted that there was a lack of disclosure on whether boards had a policy to assess the suitability and independence of external auditors. Principle 6 requires the board to establish a sound risk management framework and internal controls system. We reviewed disclosures on risk management and internal control 14 in the Internal Control Statement in light of further guidance provided by the Statement on Risk Management and Internal Control: Guidelines for Directors of Listed Issuers ( SRMIC ). Our observations were that listed issuers disclosed the main features of their risk management and internal controls and stated that there was a process in place for identifying, evaluating and managing risks but did not explain the process. In many instances, these disclosures were not very insightful or informative. We noted that a high number of listed issuers disclosed receiving assurance from the CEO and CFO on whether risk management and internal controls are operating adequately and effectively in all material aspects. They also disclosed that external auditors reviewed the 13Recommendation 3.5 -The board must comprise a majority of independent directors where the chairman of the board is not an independent director. 14Principle 6 MCCG, LR 15.26(b) and Practice Note 9. 7

10 state of internal control of the listed issuer and reported the results to the board. A high number of listed issuers disclosed receiving assurance from the CEO and CFO on whether risk management and internal controls are operating adequately and effectively We also noted that some listed issuers described their risk management and internal controls in detail. The disclosures comprised how the system was implemented throughout the organization, the persons in charge of each aspect and the outcome of the review of the system during the financial year. These disclosures were comprehensive and informative and we commend listed issuers who made such disclosures. Average scores The average score across six Principles for all 300 listed issuers was 63.7%. Figure 2 shows the distribution of average scores across the 300 listed issuers. We noted that about 67% of listed issuers scored an average of above 60% across all six Principles whereas 33% scored below the 60% average. The highest score achieved by a listed issuer for disclosures under Principles 1 to 6 of the MCCG is 89.4% and the lowest score is 43%. Each listed issuer will be provided with the results of their own assessment together with this report in order to assist them in preparing their own disclosures in the future. Some listed issuers described their risk management and internal controls in detail 8

11 Figure 2 - We noted that about 67% of listed issuers scored an average above 60% across all six Principles whereas 33% scored below the 60% average. Distribution of PLCs by Percentage of Total Score 13 PLCs - 4% 9 PLCs - 3% 52 PLCs - 17% 87 PLCs - 29% 80% to 90% 70% to 80% 60% to 70% 50% to 60% 40% to 50% 139 PLCs - 47% *PLC Public Listed Companies 9

12 PRINCIPLE 1: ESTABLISH CLEAR ROLES AND RESPONSIBILITIES 10

13 PRINCIPLE 1: ESTABLISH CLEAR ROLES AND RESPONSIBILITIES AREAS COVERED UNDER THE ASSESSMENT:- 1) A description of the functions that have been reserved for the board and those which have been delegated to management; 2) Narrative on the responsibilities of the board and how it has discharged its fiduciary and leadership function; 3) Description on the establishment of a code of conduct, whistle-blowing policy and how the board has monitored its compliance; 4) Access to information and advice; 5) Qualified and competent company secretary; 6) Establishment of board charter and contents of the board charter. Our review of disclosures under Principle 1 15 namely the clear disclosure of the roles and responsibilities of the board showed that there was adherence to best practices by listed issuers. The depth of disclosures varied as some listed issuers provided a lot of information on how they had applied each Recommendation under Principle 1 while others provided more general information. The majority of listed issuers disclosed that they had a board charter which was sometimes known as a Director s Handbook. Some listed issuers disclosed the charter on their website but most listed issuers did not make it publicly available. A small number of listed issuers disclosed that they were in the process of creating a board charter. However, their disclosures showed that they already had formal documents and processes in place and called these documents by different names to establish clear functions that were within the purview of the board. The functions reserved for the boards were generally on areas such as the Group s strategy, major investments, acquisitions and divestments and oversight of risk. There was adherence to best practices by disclosing clear roles and responsibilities of the board 15 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. 11

14 Range of Score for Principle 1: Establish Clear Roles and Responsibilities No of PLCs Score Range (%) We noted however, that in matters delegated to management, disclosures were very general and vague, such as the board has delegated the day-to-day management of the Group to the Executive Chairman/ CEO. Disclosures on matters delegated to management were general and vague We also noted that in relation to disclosures on the board s roles and responsibilities in discharging its fiduciary and leadership functions 16, the disclosures used general or generic statements and about a quarter of listed issuers repeated verbatim the words used in the Commentary of the MCCG. Our review showed that there were clear processes in place for the board to have access to information and advice, including advice from independent professionals at the listed issuer s expense. 16 Recommendation 1.2 The board should establish clear roles and responsibilities in discharging its fiduciary and leadership functions. 12

15 Clear processes in place for the board to have access to information and advice The depth and quality of these disclosures were extraordinary and showed their commitment to implementing whistle blowing policies within their own organisation. Almost all listed issuers disclosed the qualifications of the company secretary but some listed issuers provided greater details about the profile and scope of work of the company secretary, together with details on how the company secretary keeps the board updated on regulatory developments. We commend these listed issuers for such disclosures. Some listed issuers provided greater details about the profile and scope of work of the company secretary We noted that not many listed issuers made disclosures about appropriate communication and feedback channels to facilitate whistle blowing. About 20% of listed issuers disclosures were limited to providing a contact person for whistleblowers to communicate with. Nevertheless, an equal number of listed issuers disclosed detailed policies pertaining to whistle blowing such as protection that was offered to whistleblowers, the methods for whistleblowers to communicate with the listed issuer and how feedback would be provided. MEANINGFUL DISCLOSURES WOULD INCLUDE:- A summary of the functions reserved for the board and functions for management; A description of fiduciary responsibilities which would include:- How strategic planning process was carried out; How the board ensures that the business is being effectively managed; The board s views on succession planning and its authority and mandate; A summary of the shareholder communications policy and how the company communicated with shareholders during the financial year; Whistle blowing policy with appropriate communication and feedback channels. A summary of the board s Code of Conduct. 13

16 KEY FINDINGS: 99% disclosed that there were procedures in place to obtain expert advice 96% disclosed that boards were given access to information but did not disclose the time frame for the board to view documentation prior to board meetings 96% disclosed that they had a board charter 91% 75% reported that a code of conduct for the directors had been implemented disclosed the qualifications of their company secretary 53% disclosed clear delegation of authority to management 41% disclosed the existence of a whistle-blowing policy 55% reported a formal schedule of matters has been established 14

17 PRINCIPLE 2: STRENGTHEN COMPOSITION 15

18 PRINCIPLE 2: STRENGTHEN COMPOSITION AREAS COVERED UNDER THE ASSESSMENT:- 1) Composition of nominating committee; 2) Board diversity; 3) Nomination and election process of directors and criteria for selection; 4) Criteria for assessment of the board, board committees and individual directors; 5) Remuneration process and disclosure. Our review assessed disclosures under Principle 2 of the MCCG and also covered disclosures under the LR 15.08A and Appendix 9C pertaining to the nominating committee and remuneration of directors. We found a high level of disclosure under Principle 2. Our listed issuers have clearly taken the necessary steps to establish nominating committees comprising nonexecutive directors, the majority of whom are independent and also appointed independent directors as chair of the committee. We also found that over a quarter of listed issuers have appointed a senior independent director to chair the nominating committee. We commend those listed issuers for adopting best practices. The Corporate Governance Statements that we reviewed disclosed the terms of reference of nominating committees. It also revealed that such committees were tasked with selecting and recommending new directors for board approval and assessing the performance of existing directors, board committees and the full board. 93% of listed issuers mentioned conducting such performance assessments. 93% disclosed conducting board However, we noted that many listed issuers did not disclose the criteria used for such assessment 17. Similarly, there was lack of disclosure on the board nomination and election process of directors and the selection criteria used 18. Such disclosures, if any, tended to be brief. An example is, The Nominating Committee has in place the process and procedure for assessment of new appointments, re-appointment and reelection of directors and the criteria used in such assessment. 17 LR 15.08A(3) (c) 18 LR 15.08A(3) (b) performance assessments 16

19 Range of Scores for Principle 2: Strengthen Composition No. of PLCs Score Range (%) Listed issuers should also disclose the process of sourcing board candidates We noted that although there were no disclosures of policies on board composition with regard to the mix of skills on the board 19, 99% of listed issuers boards comprised directors with varied qualifications, professional experience and background. We encourage listed issuers to improve disclosures in this area and to also disclose the process of sourcing candidates such as whether they utilized search firms or accepted recommendations by other board members or shareholders when sourcing candidates. 99% of listed issuers boards comprised directors with varied qualifications, professional experience and background A(3)(a) 17

20 Listed issuers also disclosed that they were aware of the need to have policies on diversity including gender diversity 20, but did not provide further information on whether they would be considering this in the coming financial year. There was a general lack of disclosure on gender diversity targets and measures to meet those targets. Only 2% of listed issuers disclosed that their target was to appoint at least 1 woman director on board and 1% disclosed clear gender diversity policies with targets and measures to achieve those targets. In respect of Recommendation , we noted that 82% of listed issuers disclosed that their executive directors remuneration is linked to the corporate and/or individual performance whilst non-executive directors remuneration is based on experience and their level of responsibility. MEANINGFUL DISCLOSURES WOULD INCLUDE:- Description of the process of sourcing of candidates; Description of the selection criteria used when assessing candidates for appointment; Disclosure 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. All listed issuers disclosed the number of directors whose remuneration falls in each successive band of RM 50,000, distinguishing between executive and non-executive directors 22. 3% disclosed individual directors remuneration and we commend them on these disclosures and hope that more listed issuers will disclose such information A(3)(a) 21Recommendation The board should establish formal and transparent remuneration policies and procedures to attract and retain directors. 22 Appendix 9C(11) 18

21 KEY FINDINGS: 99% disclosed that their nominating committees comprised exclusively non-executive directors, the majority of whom were independent 97% disclosed remuneration in successive bands of RM50, % disclosed individual directors remuneration 93% disclosed that they conducted an assessment of boards, board committees and individual directors 78% reported that the nominating committee was tasked with the role of selecting new directors for board approval 78% appointed independent directors as chair of the nominating committee. Out of this, 29% comprised senior independent directors. 4% appointed non-independent directors as chairman of the nominating committee 75% disclosed gender diversity policy 19

22 PRINCIPLE 3: REINFORCE INDEPENDENCE 20

23 PRINCIPLE 3: REINFORCE INDEPENDENCE AREAS COVERED UNDER THE ASSESSMENT:- 1) Independent directors annual assessment; 2) Tenure of independent directors. assessments on the independence of its Independent Directors focusing on events that would affect their ability to continue to bring an independent and objective judgment. This does not reveal the criteria by which the independent directors are assessed. Our review of disclosures under Recommendation revealed that most listed issuers disclosed undertaking annual assessments of independent directors. Most listed issuers disclosed undertaking annual assessments of independent directors MEANINGFUL DISCLOSURES WOULD INCLUDE:- Any additional bright-line test that the board applied when assessing independence should be highlighted, apart from the definition and tests of independence pursuant to the LR; The process undertaken by the board to assess directors independence and the criteria used. As highlighted in the Executive Summary, some listed issuers reviewed the conduct of independent directors such as whether they actively participated at board meetings and provided constructive feedback that benefited the listed issuer. This formed part of the assessment as to whether such directors were independent. However, we also noted that some listed issuers continued to use general or generic statements such as The Board conducts annual 23 Recommendation The board should undertake an assessment of its independent directors annually 21

24 Range of Score for Principle 3: Reinforce Independence No of PLCs Score Range (%) There has been much discussion about the tenure of independent directors 24 and subsequent shareholder approval 25. The MCCG recommends that such directors should be redesignated as non-independent directors upon expiration of the nine year tenure. However, it states that boards could seek shareholders approval to retain such directors as independent director beyond the nine year tenure. 24 Recommendation 3.2 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. 25Recommendation 3.3 The board must justify and seek shareholders approval in the event it retains as an independent director, a person who has served in that capacity for more than nine years. We noted that a small number of listed issuers were silent on their policy towards independent directors. Listed issuers whose policy is different from any of the Recommendations in the MCCG must highlight this and give reasons for not following the Recommendations as well as state alternatives if any % disclosed their policy towards independent directors 26 Paragraph 3.2 of Practice Note 9. 22

25 MEANINGFUL DISCLOSURES WOULD INCLUDE:- Policy on independent directors that includes tenure limit or board of director s view on tenure limit of independent directors; Strong justification for retaining the independent director beyond the nine year tenure. Our review showed that 55% (165) of listed issuers retained independent directors beyond the nine year tenure and most of them provided some form of justification for their decision. Listed issuers who have provided justification to retain an independent director beyond the nine year tenure must also seek shareholders approval. If they do not seek shareholders approval, they must provide reasons and an alternative practice, if any. In this respect, our review found that only about 6% in this group of listed issuers did not seek shareholders approval. We noted that the majority of listed issuers, who disclosed that they would seek shareholders approval, did not make this clear in the Notice of the Annual General Meeting. We found that often, the resolution for reelection of such directors was presented as reelection under LR 7.26(2) or under section 129 of the Companies Act. The resolution did not make it clear that the director is also an independent director who has exceeded the nine year tenure. MEANINGFUL DISCLOSURES WOULD INCLUDE:- Clear indication in the Corporate Governance Statement that the board will seek shareholders approval in the coming annual general meeting or reasons as to why the board is not seeking shareholders approval; Specific resolution seeking shareholders approval in the notice of annual general meeting which makes it clear that shareholders approval is obtained on the grounds that the independent director has exceeded the 9 year tenure. This should not be bundled with other resolutions such as re-election of that independent director under LR 7.26(2) or section 129 of the Companies Act or any of the listed issuer s articles of association; Justifications in the Notes to the Notice of the Annual General Meeting for declaring that the director is independent. 23

26 As indicated in our executive summary, the position of Chairman and CEO is held by separate individuals in most of the listed issuers reviewed 27. listed issuers had a majority of independent directors on their board. Different individuals held the position of Chairman and CEO in most listed companies We also noted that approximately two thirds of listed issuers had an independent non-executive director as chairman of the board. This shows that listed issuers have embraced best practices to reinforce independence of the board. Approximately two thirds had an independent non-executive director as chairman of the board Notwithstanding the above, we noted that the position of Chairman and CEO remains combined in about 13% of listed issuers and that the chairman and CEO in 22% of listed issuers are related. As the chairman in these listed issuers is non-independent, the majority of the board should comprise independent directors. We noted that only about half of these 27 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. 24

27 KEY FINDINGS: 87% disclosed that the positions of chairman and chief executive officer are held by different individuals 78% disclosed that they have undertaken assessments on their independent directors annually 67% have non-executive directors as chairman of the board 55% have independent directors who have served the company for 9 years or longer 22% disclosed that the chairman and CEO are related. However, 45% of these companies have independent boards 25

28 PRINCIPLE 4: FOSTER COMMITMENT 26

29 PRINCIPLE 4: FOSTER COMMITMENT AREAS COVERED UNDER THE ASSESSMENT:- 1) Time commitments of the Board members; 2) Continuing education programmes; 3) Formal assessment of training needs. About 34% of listed issuers disclosed protocols for accepting new directorships in other companies. These comprised notifying the chairman before the director accepts any new directorship. In some instances, directors were also required to notify the chairman of the time that would be spent in the new appointment. Principle 4 of the MCCG states that directors should devote sufficient time to carry out their responsibilities, regularly update their knowledge and enhance their skills. Listed issuers disclosed that directors were informed at the beginning of the financial year about the number of board and board committee meetings that would be held. Directors are expected to undergo training as part of the efforts to update their knowledge and enhance their skills. Listed issuers are required to disclose information as to whether the board has undertaken an assessment of the training needs of each director, provide a brief description on the type of training that the directors have attended for the financial year Range of Score for Principle 4: Foster Commitment No of PLCs Score Range (%) 27

30 and provide valid justifications for nonattendance in exceptional circumstances 28. MEANINGFUL WOULD INCLUDE:- DISCLOSURES Although the LR clearly states that the board has to disclose that it has undertaken an assessment of the training needs of each director, most listed issuers disclosed 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' perspectives. Nevertheless, 12% of listed issuers disclosed that the board or the nominating committee undertakes a formal assessment of training needs of directors. We commend these listed issuers for having a formal process in place. 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 assessment; A brief statement about the training programmes attended by each director. We noted that 97% of listed issuers not only disclosed that their directors had attended training but also disclosed in detail, the specific types of training attended by directors. We also noted that not all directors attended training during the financial year. A few listed issuers disclosed that directors did not attend training due to work commitments. This is not a good justification as it does not amount to exceptional circumstances LR 15.08(3). 29 Chapter 15, Corporate Governance, Questions and Answers, at tion_rules_faq_main_chap_15.pdf 28

31 KEY FINDINGS: 99% complied with the LR that limit directors to holding no more than five directorships* in listed issuers 95% 95% disclosed the board s expectations of time commitments of directors disclosed that the board is aware of the training needs of directors but only 12% of this number disclosed that there was a formal process in place to assess the training needs of directors 97% provided a description of training attended by directors during the financial year * LR 15.06(1) 29

32 PRINCIPLE 5: UPHOLD INTEGRITY IN FINANCIAL REPORTING 30

33 PRINCIPLE 5: UPHOLD INTEGRITY IN FINANCIAL REPORTING AREAS COVERED UNDER THE ASSESSMENT:- 1) Audit committee composition and function in ensuring a reliable source of financial information; 2) Summary of audit committee activities; 3) Summary of internal audit activities; 4) Existence of policies and procedures to assess suitability and independence of external auditors. Principle 5 30 emphasizes the role of the audit committee in ensuring that financial statements are reliable 31. It also emphasizes the role of the audit committee in assessing the suitability and independence of external auditors 32. In addition, we also reviewed disclosures on policies and procedures in place to assess the suitability and independence of external auditors and information on the tools in place to carry out such assessment. We noted that there was room for improvement of the disclosures under the abovementioned areas in Principle 5 and the LR. Where the summary of audit committee activities was concerned, we noted that all companies disclosed the audit committee s terms of reference or charter 34. While this is commendable, we would like to highlight that listed issuers are encouraged to publish static information on the listed issuers website and make reference to the website in the report 35. We assessed disclosures in the Audit Committee Report as required under the LR, which includes disclosures pertaining to the composition of the audit committee, its terms of reference, details of audit committee meetings, summary of the activities of the Listed issuers are encouraged to publish static information e.g. terms of reference, policies and processes of board committee on their website audit committee and internal audit function Principle 5 The Board should ensure financial statements are a reliable source of information 31 Recommendation 5.1 The Audit Committee should ensure financial statements comply with applicable financial reporting standards. 32 Recommendation 5.2 The Audit Committee should have policies and procedures to assess the suitability and independence of external auditors. 33 LR to 15.12, and LR 15.15(3)(b) 35 LR 9.25(1), Practice Note 9 and Revised Questions & Answers in relation to the LR. 31

34 Range of Score for Principle 5: Uphold Integrity in Financial Reporting No of PLCs Score Range (%) The Audit Committee Report should only highlight any changes to the terms of reference, policies and processes, if any. This practice will focus on substance rather than form. We also noted that general or generic statements continue to be used in disclosures on the audit committee s activities. Currently many such disclosures tend to repeat the terms of reference of the audit committee, internal audit charter or audit plan for the year without any explanation or further elaboration on how the responsibilities were discharged and the outcome of the activities. Instead, the narrative should comprise information such as whether the audit committee approved and recommended to the board the adoption of the quarterly results presented by management, rejected or asked the external auditors to modify the annual audit plan, whether it reviewed the performance of the listed issuer, or the quarterly results against the budget and/or preceding year s corresponding quarter to-date. 32

35 MEANINGFUL DISCLOSURES WOULD INCLUDE:- A narrative of: 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. Where the summary of internal audit activities is concerned, it is commendable that many listed issuers disclosed that they have adopted a risk-based approach to internal auditing or have followed the globally recognized audit methodology e.g. International Professional Practices Framework, as the basis of their internal audit work. Many disclosed that they have adopted a risk-based approach to internal auditing or have followed the globally recognised audit methodology Some listed issuers made high level disclosures which described the scope of internal audit for the financial year and a description of the specific process or activities that were reviewed during the year (e.g. operational audits on regional sales and distribution, procurement and payment to suppliers or a compliance review on corporate governance and financial regulations). In some instances, listed issuers disclosed the actual dates when the audit was carried out and provided a brief outcome of the audit findings and recommendations. We noted however, that many listed issuers used general or generic statements and made disclosures such as internal audit performed operational audits on business units to ascertain the adequacy and integrity of their system of internal controls and made recommendations for improvements where weaknesses were found. In order to make more in-depth and meaningful disclosures, listed issuers could 33

36 make the type of disclosures highlighted above and also explain the focus areas in such audits in general terms, and whether recommendations made to the audit committee were acted upon. A majority disclosed that the Board had adopted procedures to assess external auditors during the year Our review also revealed that while listed issuers disclosed whether their internal audit function is outsourced or undertaken in-house, a small number did not disclose the internal audit costs % disclosed the internal audit costs We noted that while most listed issuers disclosed that the audit committee had obtained written assurance from their external auditors, confirming that they were, and had been, independent throughout the conduct of the audit engagement, there were no disclosures to indicate whether listed issuers had carried out their own assessment on the suitability and independence of the external auditors. Recommendation 5.2 states that audit committees should have policies and procedures to assess the suitability and independence of external auditors. The most common policy on external auditors is where the audit committee s terms of reference includes the review on the appointment and performance of external auditors, and review on the independence and objectivity of the external auditors and their services. A majority of listed issuers disclosed that the Board had adopted procedures to assess external auditors during the year. In most cases, no further details were provided on what the review process or procedures entailed. We also noted that listed issuers generally addressed the suitability and independence of external auditors through disclosure of private sessions between the audit committee and external auditors, external auditors having direct access to the audit committee members, and the board having a close and transparent relationship with the external auditors via invitations to audit committee meetings and annual general meetings. This shows that the audit committee had met with the external auditors independent of management but this information or description of practices, does not address the intention of Recommendation Appendix 9C (30) 34

37 Disclosures under Recommendation 5.2 should indicate the policies in place for the audit committee to assess during each financial year whether the external auditor is suitable 37 to carry out its role and whether the external auditor continues to remain independent. The disclosures should also describe the process and procedures the audit committee had under taken during the financial year to assess suitability and independence of its external auditor. A few listed issuers disclosed that they had an audit independence policy which entailed a change in the lead engagement partner after a certain period. These listed issuers disclosed how they assessed the independence of the external auditor. We commend them for such disclosures. MEANINGFUL DISCLOSURES WOULD INCLUDE:- Disclosure 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. 37 LR

38 KEY FINDINGS: 100% disclosed that their audit committees comprised a minimum of 3 members comprising non-executive directors, the majority of whom were independent directors 100% of chairmen of audit committees comprised independent directors and there were no alternate directors appointed as members of the audit committee 100% provided a summary of the activities of the audit committee but only 92% provided a summary of internal audit activities 63% disclosed policies on external auditors and 57% disclosed processes and procedures that were carried out during the year to assess the suitability and independence of external auditors 36

39 PRINCIPLE 6: RECOGNISE AND MANAGE RISKS 37

40 PRINCIPLE 6: RECOGNISE AND MANAGE RISKS AREAS COVERED UNDER THE ASSESSMENT:- 1) Main features of risk management and internal control; 2) The process in place for identifying, evaluating and managing risk; 3) Commentary by the board or the audit committee on the adequacy and effectiveness of the risk management and internal control; 4) The process in place to address risks and material internal control aspects of any significant issues highlighted in the annual reports and financial statements; 5) Assurance from the CEO and CFO; 6) Whether the external auditor has reviewed the Internal Control Statement. We reviewed whether listed issuers disclosed details of their risk management framework and internal control systems in the Internal Control Statement 38. We also reviewed whether listed issuers disclosed information following the SRMIC as Practice Note 9 states that listed issuers should be guided by the SRMIC. 99% of listed issuers disclosed the main features of risk management and internal controls, but we noted that the focus was on the main features of internal controls and less focus was placed on disclosures about risk management. Although listed issuers disclosed that they had an ongoing process for identifying, evaluating and managing significant risks, they did not provide much information about these processes. Approximately 4% of listed issuers provided clear and detailed information on how they identified, evaluated and managed risks. For example, they disclosed initiatives undertaken by the Risk Management Department such as holding a management colloquium with senior management to internalize and embed risk management culture in the group, conducting forums, awareness and review sessions, to communicate the application of enterprise risk management in the Group s daily business operations, conducting risk management compliance reviews across the Group to establish the adequacy of enterprise risk management implementation, and the effectiveness of identified mitigation controls, even to the point of setting up a helpdesk system to support queries and feedback. 38LR 15.26(b), Practice Note 9 and Principle 6. 38

41 120 Range of Score for Principle 6: Recognise and Manage Risks No of PLCs Score Range (%) Listed issuers that have clear structures and process in place throughout their organization for risk management and internal controls had high quality disclosures The majority of listed issuers, however, disclosed that they had undertaken a review of their risk management and internal control systems but did not disclose any outcome from this review. We noted that disclosures on reviews used general or generic statements such as, The Board regularly reviews the adequacy and integrity of the systems of internal controls and risk management including mitigating measures to address the areas of key risks as identified or The audit committee has reviewed the adequacy and effectiveness of the risk management and internal control system. The majority of listed issuers did not disclose any outcome from the review of their risk management and internal control systems 39