THE Capital Market Masterplan 3 (CMP3) is the Securities Commission’s (SC) five-year strategic plan to grow the capital market. The aim of the plan is to support economic growth that is sustainable and inclusive.
In a real sense, directors are the front-line soldiers of the CMP3. If we do our work well as a profession, the capital market has a good chance of growing in a sound manner.
On the other hand, if we do our jobs badly the repercussions can hurt the market as a whole. As 2007 dawned, most Malaysians had never heard of Transmile Group Bhd and Megan Media Holdings Bhd.
However, later that year, these relatively small companies were engulfed in near-simultaneous financial controversies that shook public trust in many of the pillars of the Malaysian capital market.
What has changed since the first Capital Market Masterplan?
First, there is a general acceptance that directors are now critical to ensuring a safe capital market. They are no longer regarded as being like “parsley on fish” – looking nice but adding nothing to the taste of the dish.
On the contrary, board meetings are now generally serious affairs. Attendance at meetings is normally 100%, and meetings can last entire days.
Directors are also more aware of the risks they run. They can face sanctions from regulators and law-enforcement agencies, and they can also lose reputations built over their entire careers.
Second, regulators are also more aware of what can go wrong, and have taken steps to improve the ecosystem. The SC started the Audit Oversight Board to “audit the auditors”. Hundreds of directors have passed through rigorous training by regulator-sponsored bodies like ICLIF (now part of Bank Negara’s Asian School of Business), FIDE Forum and the Institute of Corporate Directors Malaysia.
Basic corporate governance problems still arise
People often say that “we have all the rules”, as if to say that we have resolved basic corporate governance problems.
Unfortunately, not everyone received the memo. Basic mistakes occur. More worrying, intentional errors also seem to arise. Despite having a set of rules and codes that is among the strongest in the world, there is still bad conduct.
There is no magic bullet to stop this happening. Independent directors need to act independently, and regulators need to act swiftly to ensure public trust. There is an argument that people who are not fit and proper should be excluded from becoming directors of listed companies.
It’s a VUCA world
Business is far more complex than it ever was before. The interconnections between different geographies, industries, and problems are truly mind-boggling.
Layered on top of that, companies must cope with a blizzard of unexpected events with wide consequences. These range from the current pandemic, to geopolitical shifts, technological change, political instability and of course climate change.
After the end of the Cold War, the US Army coined the term “VUCA”: volatility, uncertainty, complexity and ambiguity. Company directors are certainly navigating a VUCA world now. How this has changed the director’s job
It is full-on: New board members are often assured that they will only need to attend one board meeting per quarter, plus perhaps another one. It rarely works out like that. Ad-hoc meetings and pre-meetings abound, especially as much of the detailed work is done by board committees.
It is more demanding: directors are expected to have a working knowledge of most subjects discussed, and to speak up. Silence is not golden in the boardroom, and can earn you a demerit in the mandatory board effectiveness evaluation.
The breadth is astonishing: finance, human resource, risk, the relevant laws, environmental, social and governance (ESG), climate change. Realistically, someone who is not comfortable with numbers and accounts will struggle in the modern boardroom. Legal threats are very real. Any board member who has not read the company’s directors and officers policy in detail would be well advised to ask for it.
In short, being a director is a proper job and needs to be professionalised if the capital market is to be safeguarded.
ESG and climate change: The defining issue of this generation
ESG and in particular climate change are probably the defining issue for this generation of directors. We are the first generation that can do anything about climate change, and we may be the last.
In February 2021, Bloomberg estimated that by 2025, one third of global assets under management will be in ESG funds.
Scientists in UCL, a university, estimated that climate change could reduce global gross domestic product by 37% by 2100. Risk committees take note.
On Nov 2, 2021, a group of investors warned that financial statements may be rejected in AGMs if they do not factor in the impact of climate change.
The next day, at COP26, global accounting standards-setters announced the establishment of the International Sustainability Standards Board. Audit committees take note. Even before this, the SC’s Malaysian Code on Corporate Governance 2021 created the requirement that the chief executive officer’s key performance indicator should contain an ESG dimension.
It also contained more stringent requirements for selecting new board members, so that proven ESG expertise is now being sought. Nomination and remuneration committees take note.
If you are a board member of a public listed company, you will definitely be “doing ESG”, if you aren’t already.
To conclude, the success of CMP3 will depend to a great extent on the professionalism of the front-line soldiers: the non-executive directors of public-listed companies.
Basic good governance is not yet a given, and bad conduct needs to be firmly stamped out. Directors operate in a bewildering VUCA world in which change is constant and swift.
ESG and climate change are a new and all-pervasive field that will occupy and complicate their work even more.
Directorship is very much a “real job”, and one which is much harder than it was.
This means that not everyone wants the job, and some who want it are not cut out for it. Those that do take up the challenge will, by their conduct and professionalism, decide the success of CMP3.
Datuk Seri Johan Raslan is a board member of the Institute of Corporate Directors Malaysia, the Securities Commission’s Audit Oversight Board and Sime Darby Property Bhd. He is a council member of Climate Governance Malaysia. The views expressed here are the writer’s own.