Malaysia Governance Country Report

CORPORATE GOVERNANCE IN MALAYSIA | OCTOBER 2017
CORPORATE GOVERNANCE IN MALAYSIA

Family ties and government control heighten governance risks.
October 2017 Contents

Ownership Snapshot 2
 Tight family control and convoluted conglomerate structures preclude thorough investor analysis. Family Ownership 3
Uncertainty is compounded by looming succession questions surrounding aging patriarchs. Concerns Family Control 4
related to board entrenchment and infrequent board meetings leave minority investors at family firms Family Generational Succession 6
exposed to risks of decisions which heavily favor family groups. Financial Institutions 10
 As a response to the Asian and global financial crises, enhanced banking regulations have strengthened Strong Board Oversight 11
independent oversight and ensured increased executive pay disclosure at Malaysian banks. Grandfathered Institutions 12
State Participation 13
 Government-linked Companies (GLCs) are fundamental to Malaysia’s economy but we have identified Poor GLC Performance 14
concerns about poor performance, weak leadership structures and government intervention placing the Weak Leadership 16
national interest ahead of minority shareholders. Appendices
Regulatory Developments 19
 The MSCI Malaysia Index constituents underperform on corporate governance relative to both the MSCI
Corporate Overview 21
Emerging Markets and MSCI ACWI Indexes as a whole. 22
Board Overview
Gender Diversity 23
CORPORATE GOVERNANCE SCORE DISTRIBUTION Key Metric Overview 24
Best & Worst Scores 25
Ownership Diagrams 26
Top 5 Scores Bottom 5 Scores

CIMB Group 7.6/10 IHH Healthcare 2.7/10
Laggards Leaders
Alliance Financial Group 7.5/10 Genting Malaysia 2.4/10
Hong Leong Bank 7.4/10 Genting Plantations 1.7/10
Malayan Banking (Maybank) 7.3/10 YTL Power 1.4/10
0 1 2 3 4 5 6 7 8 9 10 RHB Bank 7.1/10 YTL Corporation 0.4/10
MSCI Malaysia Index MSCI Emerging Markets Index MSCI ACWI Index
This report is based on the 41 constituents of the MSCI Malaysia ACWI Index as at 11 September
AUTHORS 2017. Some references are made to other Malaysian companies in coverage.
Damion Rallis and Zanele Mtshali | Senior Associates OCTOBER 2017
© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.
MSCI.COM | PAGE 1 OF 30
OWNERSHIP SNAPSHOT
Governance risks vary widely depending on the nature of the company’s ownership, the separation of ownership and management, and the design of the capital
structure and its impact on shareholders’ voting rights. In 2016, Bursa Malaysia reported that foreign institutions held 27% of the Malaysian market on average, 53%
was held by domestic institutions and 20% by retail investors.
Largest Owner Classification Key Owner Types Complex Ownership Structures Control Enhancing Structures
Controlled ownership dominates in State-owned and family firms are most Pyramid structures are relatively common Multiple share classes with unequal voting rights are
Malaysia. 80.5% of MSCI Malaysia common, with each present in 34.1% of at Malaysian family conglomerates to not permitted in Malaysia. On the other hand, foreign
Index constituents include a MSCI Malaysia Index constituents. At 31.7%, help preserve family control at the ownership limits are common, particularly in strategic
shareholder or shareholder group who subsidiaries are the next most significant various listed entities. There are no sectors including telecommunications, banking and
control 30% or more of the voting group. recorded incidents of cross transportation. In addition, golden shares are still in
rights. No companies are widely held. shareholdings. effect at several state-owned firms.
80.5% MSCI Malaysia Index MSCI Malaysia Index MSCI Malaysia Index
87.8% MSCI Malaysia Index
MSCI Emerging Markets Index MSCI Emerging Markets Index MSCI Emerging Markets Index
68.3% MSCI ACWI Index
MSCI ACWI Index MSCI ACWI Index MSCI ACWI Index
MSCI Emerging Markets Index
37.3% 34.5%
28.2% 34.1% 34.1%
24.2% 31.7%
24.4% 16.0%
9.7% 12.2%
19.5% 18.6% 15.1% 14.6% 9.2%
11.8% 2.3% 1.8%
12.1% 10.5% 10.4% 0.0% 4.2% 1.2%
7.5% 5.4% 8.9% 7.2% 6.3% 0.0% 0.0%
3.5%
0.0% 0.0% 1.7%
Multiple Share Voting Rights Extra Voting Golden Shares
Classes w/ Limits Rights -
Controlling Principal Widely Held Founder Family State Corporate Cross Pyramid Unequal Voting Ownership
Parent Shareholdings Structure Rights Duration
Controlling – Largest shareholder or Founder – Founder serves as Chairman or CEO. Pyramids – Control is exercised through a Multiple share classes with unequal voting rights (or no
shareholder group holds 30% or more of chain of non-controlled companies that voting rights for one class) or classes which carry different
Family – Family hold 10% or more of the voting
the voting rights. rights and maintain at least one board seat. ultimately results in a shareholder gaining rights to vote on director appointments.
voting power which is misaligned with their
Principal – Largest shareholder or State – State directly or indirectly controls 10% Voting rights mechanisms include ceilings on ownership or
shareholder group holds between 10% economic interests. voting rights, voting rights limits based on nationality, or
of the voting rights.
and 30% of the voting rights. Cross shareholdings – Two or more entities additional voting rights accruing depending on ownership
Corporate Parent – Issuer is a subsidiary (30% or hold at least 0.5% of shares in each other, or duration.
Widely Held – No shareholder or
more) of a corporate, which itself may be listed. via a circular or more complex cross-
shareholder group holds greater than 10% Golden shares – Government veto rights for transactions or
*Owner types may overlap or separate owners owner shareholding arrangement.
of the voting rights. changes to governing documents.
may be of different types at a company
OCTOBER 2017
MARKET CHARACTERISTIC | FAMILY OWNERSHIP

NOTABLE DEVELOPMENTS | HONG
Controlled companies form the dominant ownership group in Malaysia (31 of 41 companies). Family firms, where the LEONG GROUP
dominant shareholder group includes more than one family member and at least one family member is a current
Changes afoot at Hong Leong include a possible
director, are a defining subset of the MSCI Malaysia Index. There are 14 family firms1, more than one-third of the market, generational shift in power. Will the empire lean
that hold 23% of the total market capitalization. Out of the 14 family firms, nine companies are representatives of family on external leadership to aid the succession?
conglomerates2, family-led groups consisting of at least two listed companies, with at least one of these constituent of Quek Leng Chan stepped down as Gouco Group
the MSCI Malaysia Index. chair, one of the key firms of the family’s Hong
Leong empire, handing the reins to his younger
Figure 1 | TSR Performance of MSCI Malaysia Index Family Ownership versus Peers (Average 5-Year TSR %) brother. A reconsolidation of the empire may be
3000 in effect, splitting it up by region among various
2717 younger brothers and sons. Outsider Grant
Kelley replaced Kwek Leng Joo as CEO at City
2500 Developments, will the trend continue as Quek
Leng Chan continues to hand over the reins?
2000
BIGGEST CONCERN | IOI CORP
In April 2016, for the second time in five years,
1500
the certification for IOI’s sustainable palm oil
TSR (%)
was suspended by RSPO, an industry-backed

1000 standards organization. The suspension led
609 several major clients (including Kellogg’s, Nestle
and Unilever) to terminate their supply contract
500 306
with IOI. While the suspension was lifted in
83 August, several contracts may be lost
147
0 39 50 57 permanently.
-10 -22 -63 -70
MSCI Malaysia Index Family MSCI Malaysia Index Family MSCI Malaysia Index (ex. MSCI ACWI Index Family Firms A closer look at the board reveals low
Conglomerates Firms Family Firms) (ex. Malaysia) independent oversight: four of eight directors
-500
are Lee family members, including the CEO and
5 Yr TSR High 5 Yr TSR Low 5 Yr TSR Average
Chair. Despite pressures in the market, there are
n. MSCI Malaysia Index Family Conglomerates = 9; n. MSCI Malaysia Index Family Firms = 14; n. MSCI Malaysia Index (ex. Family Firms) = 27; n. no female directors at IOI and the board met
MSCI ACWI Index Family Firms (ex. Malaysia) = 445 only five times in 2016.
Source: MSCI ESG Research. Data as at 11 September 2017.
1
Herein referred to as “family firms”: Genting, Genting Malaysia, Genting Plantations, Hong Leong Bank, Hong Leong Financial, Hartalega, IOI, IOI Properties, PPB, RHB Bank, Sapura Energy, Westports, YTL and YTL
Power.
2
Herein referred to as “family conglomerates”: Kwek/Quek family (Hong Leong Group); the Lee family (IOI Group); the Lim family (Genting Group); and the Yeoh family (YTL Group).
OCTOBER 2017
RISK – FAMILY CONTROL & LACK OF INDEPENDENT OVERSIGHT

 Tight family control and potentially convoluted family conglomerate Shareholder returns for family firms in the MSCI Malaysia Index underperform
structures preclude thorough investor analysis. both the rest of the constituents of the MSCI Malaysia Index and MSCI ACWI
Index family firms (ex-Malaysia). One of the main negative drivers is the TSR
 Board entrenchment and infrequent board meetings leave minority
underperformance of family conglomerates (see Figure 1).
investors exposed to risks of being shut out of decision-making.
Overall, the center of power at these firms is too tightly wound around family
 As family firms move through generations and founders’ original stakes are
control, leading to diminished independent oversight and leadership. There is
diluted, the lack of independent leadership may deter growth.
strong evidence that decision-making is hidden from public view, indicated by
 A high incidence of related party transactions, especially compared to the infrequent board participation at publicly-listed enterprises.
rest of the MSCI ACWI Index, suggests a higher risk of potential loss of
value for minority shareholders.
Figure 2 | Ownership Diagram of Hong Leong Empire (Malaysia)
Hong Leong Company (Malaysia) Bhd

(Quek Leng Chan)
Hong Leong Financial Guoco Group Ltd GuocoLand Assets Hong Leong
Group (78.5%) (75.6%) (Pte.) Ltd Manufacturing Group
Hong Leong
Hong Leong Hong Leong The Rank Group GuocoLand Ltd Malaysian Pacific
GL Ltd (66.5%) Industries
Capital (83.2%) Bank (65.6%) plc (52%) (65.2%) Industries (53.6%)
(74.6%)
GuocoLand Southern Steel Hume Industries

Malaysia (69.6%) (71.7%)
(65.2%)
Key: Unlisted Company MSCI Malaysia Index constituent Other Malaysian listed
HK listed Singapore Listed UK Listed
OCTOBER 2017
Figure 3 | More Entrenched Boards at Family Conglomerates

COMPLEX OWNERSHIP STRUCTURES
As family businesses expand and require more capital, family conglomerates 78%
have spun off subsidiaries or created new companies to help retain family
control – or in some cases, acquired companies to bring them under family
control. Through this process, the number of companies which are included in
family conglomerate structures has grown over time. Complex ownership
structures built to preserve family empires by expanding regional and
operational reach may represent one key area of potential loss of value for 13%
18%
minority shareholders.
One of the main risks of these complex ownership structures is lack of
MSCI Malaysia Index MSCI Malaysia Index MSCI ACWI Index
disclosure at the top of family-run pyramids, as the ultimate holding Family Conglomerates ex. Family Conglomerates
companies are sometimes private. Having ownership groups led by family-
owned private firms allows the family to avoid the burden of regulated
disclosure which occurs at listed companies. This may be an intentional Family influence on Nomination Committees may help ensure that the Board
mechanism to shield minority investors from the family’s primary decision- comprises directors loyal to the family. All 12 listed companies in the Hong
making bodies. A good example of this is the Hong Leong Group, run by the Leong empire in this study have appointed family members to the
Quek/Kuek family (See Figure 2). See also Appendix G for the ownership Nomination Committee. The family representative on the Nomination
diagrams of other Malaysian family conglomerates). Committee is usually the Chairman in control of the company.
For family firms, a key governance risk is the generational succession process
CONTROL ENHANCING STRUCTURES
with the possibility of family feuds over succession distracting management
Effective family control uses structures beyond mere share ownership. As focus. Companies can also struggle with the right balance of family versus
Malaysian firms are not permitted to make use of dual share classes, other external leadership. Entrenched boards, comprising long-tenured family firm
key control mechanisms are in play. At seven of nine family conglomerates, directors, have naturally constrained the benefits of external leadership.
we identify a sizable subset of the board comprised of a combination of family
members, former executives, or long-serving independent directors. Boards
dominated by a combination of family members and trusted associates are a
key mechanism used by family conglomerates to maintain and consolidate
power.
OCTOBER 2017
BOARD MEETINGS MINORITY PROTECTIONS – INDEPENDENT BOARDS AND INDEPENDENT

LEADERSHIP
Another notable feature of family-led companies is a lower frequency of
board meetings than at other Malaysian companies. We identify concerns For minority shareholders at family conglomerate firms, the role of
that the lower number of overall board meetings suggests that the board may independent directors in protecting the interests of minority shareholders is
in fact merely act as a rubber stamping authority and that key strategic fundamental to investor confidence.
decisions may be made elsewhere.
One clear characteristic of control at family conglomerates is a trend toward
As complex ownership structures are often headed by private companies the lack of independent board leadership. Coupled with the presence of
under family control, we suspect that centralized decision-making may be family members and/or founders, boards of this kind may diminish the
occurring out of sight of investor scrutiny, particularly at the private family effectiveness of minority voices.
holding companies at the top of these pyramids. Figure 5 | Board & Leadership at MSCI Malaysia Index Family Conglomerates
Figure 4 | Board Meetings at MSCI Malaysia Index Family Firms
from Management
Entrenched Board
9
Family Directors
No Independent
No Independent
No Independent
% Independent
Board Majority
Lead Director
& Ownership
6
5
Chair
Genting  43% 2   
MSCI Malaysia Index ex. MSCI Malaysia Index Family MSCI Malaysia Index Family Genting Malaysia  44% 2   
Family Firms Firms Firms Genting Plantations  50% 2  
w/ Entrenched Boards
Hong Leong Bank 56% 2  
Source: MSCI ESG Research. Data as at 11 September 2017. Hong Leong Financial  50% 1   
Among some of the family conglomerates, we note an even lower frequency: IOI  38% 4  
IOI Properties  50% 4 
 At the three Genting companies, the board met an average of less than    
YTL 31% 8
five times in 2016.    
YTL Power 31% 8
 Within the YTL group, each company met only five times in 2016. Source: MSCI ESG Research. Data as at 11 September 2017.
Combined with a lack of independent board leadership, this risk is multiplied. A concern is that the lack of diversity of experience and background
represents a major area of weakness for these boards. At all but one family
conglomerate, this is compounded by the lack of an independent chair. Only
two of nine family conglomerate firms have truly independent board
OCTOBER 2017
leadership. We note that while Genting Plantations has named an

RELATED PARTY TRANSACTIONS
independent lead director, he is a former company executive. While the
company considers him independent, MSCI Governance Metrics criteria does In the MSCI Malaysia Index, there is only one company (Hartalega) where
not. MSCI has not identified related party transactions (RPTs), in comparison to
the MSCI ACWI Index where less than half of companies are flagged.
Figure 6 | Independent Leadership at MSCI Malaysia Index Family Conglomerates
Furthermore, nearly two-thirds of RPTs at Malaysian companies are identified
by MSCI Governance Metrics criteria as being high risk.3
67%
Figure 7 | Related Party Transactions (RPTs)
43%
97%
16% 18% 62%

48%
22%
No Independent Leadership Percentage of Executive Directors
MSCI Malaysia Index MSCI Malaysia Index

Family Conglomerates ex. Family Conglomerates RPTs High Risk RPTs
Source: MSCI ESG Research. Data as at 11 September 2017. MSCI Malaysia Index MSCI ACWI Index ex. Malaysia

Despite the presence of independent directors on family conglomerate
boards, there is a trend at some family conglomerates is to appoint the same The risks of RPTs are considerable, representing not only potential conflicts of
individuals as “independent” directors on multiple boards within the interest but also loss of value for minority shareholders, where financial
conglomerate. Many serve for an extended period of time, raising concerns as transactions may favor company insiders over minority investors. In Malaysia,
to their ability to adequately represent the interests of minority shareholders these risks are highlighted by the amount of recurrent revenue and expenses
(we note Lean See Lim at Hong Leong and Chek Tin Quah at Genting). being transacted through these RPTs. The average ratio of recurring revenue
 At the three Genting firms, five of 10 independent directors have served is nearly 4%, a significant percentage of a company’s total revenues for a
for at least a decade; and given period. Common transactions in this market include the purchase and
sales of goods, and the rendering of professional services.
 at the two YTL firms four of eight independent directors have served for
at least a decade.
Long-tenured directors can often form relationships that may compromise
their independence and therefore hinder their ability to provide effective
3
oversight. High Risk criteria include, but are not limited to, RPTs with controlling shareholders or family
members, both common in Malaysia.
OCTOBER 2017
Like in many markets, Bursa Malaysia listing requirements4 covering RPTs individual related parties, precluding thorough analysis. Shareholders in
have been enacted to minimize the transactions’ negative potential. markets like Malaysia need to cautiously scrutinize any RPTs where disclosure
Malaysian companies must disclose RPTs that meet certain conditions, is incomplete, even if they satisfy local market norms. Boards with sufficient
including the type and valuation of the RPT. Where any one of the percentage independent oversight help to minimize risks associated with RPTs,
ratios of an RPT is 5% or more, a listed issuer must send a circular to representing an additional level of oversight even before potential
shareholders and obtain approval at the AGM before the terms of the shareholder votes.
transaction are agreed upon. Related parties involved in the transaction are
not permitted to vote on the matter. This prevents family conglomerates
from merely rubberstamping all RPTs.
Figure 8 | RPT Recurring Revenue and Expenses Ratios (%)
3.9%
2.8%
1.5%
1.2%
Recurring Revenue Recurring Expenses
MSCI Malaysia Index MSCI ACWI Index ex. Malaysia
While the requirement to vote on certain RPTs may lessen overall concern,
especially since the vote typically includes only independent investors,
Malaysian disclosure in this area is not quite at the level of other markets. As
an example, YTL Power’s 2016 annual report cites transactions “with entities
that are controlled, jointly controlled or significantly influenced directly or
indirectly by any key management personnel or their close family members.”
Unlike more heavily regulated markets, like the US, typical Malaysian
companies only present RPT amounts in aggregate, without any connection to
4
Chapter 10 Transactions; Bursa Malaysia Securities Berhad Main Market Listing Requirements,
December 2016.
OCTOBER 2017
RISK – GENERATIONAL SUCCESSION AT FAMILY CONGLOMERATES

FAMILY PRESENCE IN LEADERSHIP
 Succession risks are highest where family members continue to hold key
board roles and the current leadership is approaching retirement. Strong family leadership and board presence may limit the influence of
outside voices, potentially silencing the expertise and experience necessary to
 Outside influence in leadership roles may lessen the exposure to
carry off a successful leadership transfer at international conglomerates. Key
succession risks.
executive roles in the hands of outsiders may reduce risks associated with
generational succession. By and large, family members control leadership
PRESERVING GENERATIONAL SUCCESSION roles at Malaysian family conglomerates and dominate the board room.
For family firms, a key governance risk is generational succession. All but one family conglomerate, Genting, has separated the roles of
Diversification of revenue streams and simplifying the ownership structure Chairman and CEO – the separated roles providing more opportunity to
are two key ways family firms can survive beyond the second generation of appoint family members in prestigious leadership roles. Only the Quek family
control. Three of four Malaysian family conglomerates, however, have opted at Hong Leong combines non-family external leadership with minimal family
against this type of ownership pruning and continue to spread outside of board presence. IOI and YTL handle generational turnover with father as chair
Malaysia, listing in other markets. As we have seen, these complex ownership and son as CEO, combined with overloaded family involvement on the board.
structures pose risks of too tight family control coupled with a potential lack
Figure 10 | Family Involvement at MSCI Malaysia Index Family Conglomerates
of key disclosure. Second and third generation firms may be exposed to the
risk of family feuds diverting attention from running the business, including Family Leadership
internal power struggles and searches for potential heirs coming up empty. Family
Family Company CEO (Generation) Chair (Generation)
Directors
Figure 9 | MSCI Malaysia Index Family Conglomerate Generations
Hong Leong Financial External Quek Leng Chan (2nd) 1
2nd 3rd Kwek/
Quek
Hong Leong Bank External Quek Leng Chan (2nd) 2
•Lim family:
•Yeoh family: •Genting IOI Lee Yeow Chor (2nd) Lee Shin Cheng (1st) 4
•YTL •Genting Malaysia Lee
•YTL Power Intl. •Genting Plantations IOI Properties Lee Yeow Chor (2nd) Lee Shin Cheng (1st) 4
•Kwek/Quek family: Genting Lim Kok Thay (2nd) Lim Kok Thay (2nd) 2
•Hong Leong Bank
•Hong Leong Financial Lim Genting Malaysia Lim Kok Thay (2nd) Lim Kok Thay (2nd) 2
•Lee family: Genting Plantations Lim Kok Thay (2nd) External 2
•IOI
•IOI Properties YTL Yeoh Sock Ping (2nd) Yeoh Tiong Lay (1st) 8
Yeoh
YTL Power Yeoh Sock Ping (2nd) Yeoh Tiong Lay (1st) 8
OCTOBER 2017
The generational and geographic reach of some Malaysian family

conglomerates poses significant ongoing risks for successive family control.
The Hong Leong Group led by the Kwek/Quek family is one with particular
challenges. Overall, more than 15 family members control Hong Leong, which
is now into the third generation. There are signs of the family attempting to
stretch generational leadership as the second generation ages and begins to
retire.
CASE STUDY – HONG LEONG’S GROWING FAMILY TREE
 1st Generation: Hong Leong Group—founded by Kwek Hong Png, a

Chinese migrant who settled in Malaysia—established in Singapore in
1941.
 2nd Generation: The company is split up by its 2nd generation owners;
Quek Leng Chan, son of Kwek Hong Png, expands family empire to
Malaysia while his brother, Kwek Leng Beng, leads the family’s empire in
Singapore. In all, four brothers (including Kwek Leng Hai and Kwek Leng
San control about 20 listed firms in Hong Kong, Malaysia, Singapore, and
the United Kingdom.
 3rd Generation: There are 15 male offspring. In 2016, Kwek Hong Png’s
grandson and Kwek Leng Beng’s son, Sherman Kwek Eik Tse was
appointed Deputy CEO of City Developments, the Group’s property unit.
Nephew Kwek Eik Sheng is named Head of Asset Management and Quek
Leng Chan’s youngest son, Kon Shean, launches e-commerce company
GEMFive, part of the Group’s ongoing effort to groom leaders internally
while expanding its overall infrastructure.
OCTOBER 2017
MARKET CHARACTERISTIC | ENHANCED GOVERNANCE NOTABLE DEVELOPMENTS | PUBLIC

BANK
REQUIREMENTS AT FINANCIAL INSTITUTIONS Public Bank, the top performing bank in
After the impacts of the Asian financial crisis in 1997 and the even bigger global financial crisis of 2008, Bank Negara Figure 11, announced in July 2017 that
Chairman Teh Hong Piow (87), who
Malaysia (Malaysia’s central bank) has consistently introduced forward-thinking governance principles5 that have
founded the company in 1965, will be
strengthened Malaysia’s financial regime and led to notable improvement at Malaysian banks. During the Asian financial relinquishing his role of Chairman in
crisis, Malaysia refused to accept economic aid packages from the World Bank and IMF6. As a result of this refusal to January 2019 but will stay on as Chairman
accept centralized austerity measures, Malaysia’s economic recovery outpaced other Asian countries. Emeritus and Adviser. While no clear
succession plan has been announced, the
OWNERSHIP LIMITS AT FINANCIAL INSTITUTIONS early announcement gives the bank 17
months to name its new leader. None of
Banking regulations call for a clear separation between controlling shareholders and the management function. On top the Chairman’s four children are employed
of that, under the Financial Services Act (FSA) 2013, individuals are prohibited from owning more than 10% of any local at the bank so it appears that succession
financial institution. While only 10 of 41 MSCI Malaysia Index firms are not dominated by a controlling shareholder, four will not be a family affair. While speculation
of these are banks. Of those, one is controlled by pension funds associated with the Malaysian state and three others on his replacement has been taking place,
the bank’s early disclosure may bode well
take advantage of unregulated “grandfather rules” which allow more than 10% ownership.
for the change in leadership.
GRANDFATHER RULES
BIGGEST CONCERN | BOARD
An unwritten rule still in effect at Malaysian banks is the “grandfather rule” which allows three Malaysian banks (AMMB, SUCCESSION AT GRANDFATHERED
Hong Leong Financial and Public Bank) to ignore rules established in 1989 that limit individual share ownership to no BANKS
more than 10%7. The Financial Services Act 2013 does not directly address any future implications of these At the three grandfathered banks, where
grandfathered rules. As of 2017, these rules have not been challenged and remain active. the controlling chairs are all at least 75
years old, is the prospect of succession. At
Hong Leong, there is specualtion that Quek
Leng Chan is grooming his youngest son,
Quek Kon Sean, to take over the family
empire. Uncertainty also looms at AMMB
where Hashim Azman deso not have an heir
in place to continue family control. It
5
remains to be seen whether they will
Corporate Governance Guidelines are aligned with the principles of the Malaysian Code of Corporate Governance and the Bank of International merely sell their stakes or find some other
Settlements Guidelines on “Enhancing Corporate Governance for Banking Organisations.”
6
https://www.cnbc.com/id/49411589 and http://www.essentialaction.org/imf/asia.htm way to maintain control.
7
“Will the grandfather rule still apply?” The Star Online, May 28, 2016.
OCTOBER 2017
Leong Financial have a majority of independent directors on their boards, the

OPPORTUNITY – STRONGER GOVERNANCE STANDARDS only MSCI Malaysia Index banks that fail in this key area of oversight.
DRIVING BETTER QUALITY BOARD DECISIONS? Figure 11 | MSCI ACWI Index Banks Board Characteristics
MSCI Malaysia
MSCI Malaysia
Markets Index
Index - Banks
 Enhanced governance standards have strengthened independent
Index - Ex-
Emerging
oversight and led to more active boards (holding more board
- Banks
Banks
MSCI
meetings) at Malaysian banks, suggesting that these firms may be
better able to make effective board decisions. Board Criteria
Independent Board majority 87% 33% 65%
 Independence concerns, however, are pronounced at 1 or more female director 87% 78% 79%
“grandfathered” financial institutions. No entrenchment concerns 75% 72% 87%
No attendance concerns 100% 97% 92%
 Boards marked with a higher percentage of independent directors No overboarding concerns 100% 81% 80%
and greater gender diversity, mixed with the lack of overcommitted Financial Expertise (Audit Committee) 100% 97% 97%
directors, tend to be more active boards, increasing the likelihood Industry Expertise (Audit Committee) 63% 33% 59%
Risk Expertise 37% 15% 52%
of better quality decisions.
Source: MSCI ESG Research. Data as at 11 September 2017. Green shaded = best.
HIGH FREQUENCY OF BOARD MEETINGS

ENHANCED INDEPENDENT OVERSIGHT
Similar to MSCI Malaysia Index companies that are not controlled by families
Key regulatory enhancements—highlighted by limiting boards to one
or founders, there is a higher frequency of board meetings occurring at MSCI
executive director and a non-executive chair—have strengthened
Malaysia Index banks. Recent regulatory enhancements9 stipulate that board
independent oversight at Malaysian banks. As a result, regulators’ efforts to
meetings should be held monthly or no less than bimonthly.
promote financial sector stability are reflected in better board performance,
both relative to other MSCI Malaysia Index constituents and to other Figure 12 | Number of Board Meetings at MSCI Malaysia Index Companies
Emerging Markets banks8 (see Figure 11). 13
Additional progress in this area includes the central bank’s requirement to 7

limit the tenure for independent directors to no more than nine years,
reducing risk of entrenched boards.
However due to the grandfathered rules, the three grandfathered banks lag
MSCI Malaysia Index Banks MSCI Malaysia Index ex.
other Malaysian banks on independence standards. Neither AMMB nor Hong Banks
8 9
MSCI ESG Research independence standards differ from local market standards. http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/16_corporate_governance.pdf
OCTOBER 2017
MARKET CHARACTERISTIC | STATE PARTICIPATION NOTABLE DEVELOPMENTS | SIME

MSCI ESG Research identifies state-owned enterprises (SOEs) as those where the State directly or indirectly controls at DARBY
least 10% of the voting rights or has the right to appoint a majority of the directors10. There are 15 companies in the Sime Darby announced plans to break up
MSCI Malaysia Index that are categorized as state-owned under the MSCI ESG Research criteria. The Malaysian the company into three publicly traded
government refers to these 15 companies as Government-Linked Companies (GLCs) because they are companies in entities in order to create value, promote
growth and reduce debts. This
which it retains a significant stake either directly or through government investment companies (GLICs)11. The
restructuring is intended to take place in
remaining shares are listed on the Malaysian Stock Exchange, Bursa Malaysia (Bursa), and are available to all 2018 and the shares in the property and
investors. “Golden shares” in five GLCs are held by the Ministry of Finance (MoF Inc.) and grant it special powers, such plantation divisions will be distributed
as appointing directors to the board. among current Sime Darby shareholders in
proportion to their holdings. After the spin-
Figure 13 | Malaysian Government Ownership (%)
off, Sime Darby will not be a shareholder in
Petronas Dagangan 70% either Sime Darby Plantation or Sime Darby
Petronas Chemicals 64% Property but the government will maintain
MISC 63% 1% a controlling stake in all three companies.
Petronas Gas 61%
IHH Healthcare 59% BIGGEST CONCERN | FELDA GLOBAL
FGV 39% 12% VENTURES HOLDINGS (FGV)
Malaysia Airports 37% 14% In June 2017, four senior FGV executives
Government Investment Companies (GLICs) in Malaysia
TNB 29% 22% Minister of Finance (Incorporated) [MOF (Inc.)] including the CEO and CFO, were
Telekom Malaysia 26% 25% suspended by the board while it
Khazanah Nasional Berhad (Khazanah)
Sime Darby 43%
investigates corruption allegations at a
Employees Provident Fund (EPF) subsidiary, Delima Oil Products, where
Malayan Banking 42% Lembaga Tabung Haji (LTH) debts grew from USD 8.3 million in 2015 to
UMW Holdings 42% Armed Forces Fund Board USD 11.7 million in 2016. The Malaysian
Axiata Group 38% Retirement Fund (Incorporated) Anti-Corruption Commission is also
CIMB Group 29% Permodalan Nasional Berhad (PNBP) conducting its own investigation into the
allegations, and the government has
IJM 19%
appointed a former cabinet minister to
0% 50% look into the executives’ suspensions. The
Government Holding (%) Golden Share FGV Chair stood down in June 2017 which
the government said would help to
Source: MSCI ESG Research. Data as at 11 September 2017. preserve the integrity of the investigations.
Three new government representative
directors were appointed to the FGV board
10
in July 2017.
MSCI ESG Research Governance Metrics Methodology, December 2016
11
The Summary of Transformation Manual, March 2006
OCTOBER 2017
BACKGROUND ON MALAYSIAN STATE OWNED ENTERPRISES RISK – POOR GLC PERFORMANCE

Malaysian GLCs are integral to the Malaysian economy and play an important
 The GLC Transformation Program was developed by the government to
role in implementing the government’s national economic policies. Following improve GLC performance, but GLCs continue to underperform private
independence from British colonial rule in 1957, the new Federation of
MSCI Malaysia Index companies and global MSCI ACWI Index SOEs.
Malaya government pursued an economic diversification strategy in order to
reduce the country’s reliance on commodities such as rubber and tin. The  IHH Healthcare has the highest shareholder returns, while FGV is the
government established the New Economic Policy (NEP) to reduce poverty, worst financial performer despite its large 2012 IPO.
improve economic participation for ethnic Malaysians and restructure the  The government continues to intervene in GLCs in order to resolve
economy by 199012. State owned companies were established under the NEP governance issues, as illustrated by the recent board reshuffle at FGV.
to stimulate economic growth, provide public services and supply investment
in sectors where there are high initial investment costs such as oil and gas.
LONG-TERM GLC UNDERPERFORMANCE
TRENDS IN MALAYSIAN STATE OWNERSHIP Our study shows that as in the ACWI generally, GLCs underperform the other
GLCs were privatized in line with the Economic Planning Unit’s Guidelines on MSCI Malaysia Index constituents. State owned firms may carry obligations to
Privatization in order to hasten the achievement of the NEP’s goals and a wider range of stakeholders, including the public interest15.
reduce the government’s role in providing essential services. These Figure 14 | Financial Performance (5 Year Average TSR %)*
companies subsequently listed a portion of their shares on the Bursa Malaysia 5YR High 5YR Low Average
700
and made them available to ordinary investors, including foreign institutions.
600
However, the government has maintained substantial ownership stakes
500
through government-linked investment funds (GLICs), government
400
investment funds that allocate a portion of their funds to GLCs13. The
TSR (%)
300
government holdings comprise around 30% of the aggregate market
capitalization of Bursa Malaysia listed14. 200
100
56 71
40
0
-100
-200
12
MSCI Malaysia Index MSCI Malaysia MSCI ACWI Index SOEs
Z.A. Yusof and D. Bhattasali: Economic Growth and Development in Malaysia: Policy Making and GLCs Index (ex. GLCs) (ex. Malaysia)
Leadership, 2008
13
The Summary of Transformation Manual, March 2006 15
14
The World Bank Report on the Observance of Standards and Codes (ROSC): Malaysia, July 2012 R. Marshall: Ownership Forms & Governance Control, June 2015
https://www.msci.com/www/research-paper/ownership-forms-governance/0254448434
OCTOBER 2017
© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI.COM | PAGE 14 OF 30
n. MSCI Malaysia Index GLC = 14, n. MSCI Malaysia Index (ex. GLCs) = 27, n. MSCI ACWI PERFORMANCE-RELATED DIRECTOR PAY
Index SOE (ex. Malaysia) = 274. *IHH Healthcare and FGV not included, IPO in 2012.
Source: MSCI ESG Research. Data as at 11 September 2017. One way to encourage improved performance under the GLCTP was the
 The 15 GLCs have under-performed financially in comparison to MSCI introduction of performance-related pay for management and non-executive
Malaysia Index (ex. GLCs) and MSCI ACWI SOE (ex. Malaysia) constituents directors (NEDs). The aim was to introduce a culture of performance by
from 2012 – 2016. linking pay to corporate performance to align the board’s interests with those
of shareholders.
 Tenaga Nasional Berhad (TNB) has the highest performance at 141% TSR
Shareholder dissent to NEDs’ pay at poor performing GLCs was significantly
over a five-year period to the date of this report. As the country’s sole
higher than dissent at the best performers during the recent AGM season.
electricity provider and largest utility, TNB is not exposed to competitive
This shows that shareholders are not satisfied that these boards are
risk and is only affected by overall industry changes.
sufficiently aligned with their interests, and they will not support pay
 FGV’s shareholder returns are the lowest at -50%. This reflects the increases for NEDs who do not improve company performance. At TNB and
negative impact of the commodities price slump in 2014, along with labor IJM, which have had good long-term performance, there was no shareholder
and human rights problems in its supply chain that were reported by NGOs dissent to pay. Telekom Malaysia had the highest pay dissent although
and the international media. performance was better relative to most GLC peers.
Figure 15 | Shareholder Dissent to Director Pay at AGMs (% of Total Votes Cast)*
FUTURE PROOFING THROUGH THE GLC TRANSFORMATION PROGRAM? 145%
125%
In 2005, Malaysia implemented the GLC Transformation Program (GLCTP), a
105%
ten year strategy to improve GLCs’ governance, deliver financial performance, 85%
TSR (%)
and increase their contribution to national development. The main driver 65%
behind this program was the underperformance of GLCs in comparison to 45%
22% 18% 17% 17% 16%
other Malaysian listed companies and international peers. Among the ten 25% 13% 11% 11%
3% 0% 0% 0% 0%
major GLCTP initiatives were the introduction of key performance indicators, 5%
improving board effectiveness and composition, and director training and -15%
education.
As shown above, GLCs continue to underperform financially in comparison to
the rest of the MSCI Malaysia Index and they also provide lower average Shareholder Dissent (%) 5 YR TSR (%)
returns than their SOE counterparts in other countries. This indicates that the
program did not have the expected outcome while in operation, but the *IHH Healthcare and FGV not included, IPO in 2012. Source: MSCI ESG Research. Data as at
11 September 2017.
GLCTP board and corporate governance enhancements place GLCs in a
position to recognize and take advantage of opportunities to improve their
future performance.
OCTOBER 2017
RISK – WEAK LEADERSHIP

GOVERNMENT INTERVENTION IN GLC BOARDS
The 15 GLCs continue to dominate the Malaysian business environment. The  GLCs’ operations are expanding regionally and globally, which means that
pace of the divestment initiative that formed a cornerstone of the GLCTP has robust board oversight is required to protect all shareholders’ interests.
slowed following the global financial crisis and commodity price downturn in
 40% of GLCs do not have majority independent boards, which is a risk to
2014 – 2015.
minority shareholders.
Instead, there has been a recent increase in government intervention in GLCs
 Only 36% of GLC Audit Committees are fully independent and there are
when governance issues have arisen (see Notable Developments above). The
concerns about rigorous related party transaction oversight.
presence of the government as an active shareholder provides reassurance to
international shareholders that it will intervene to protect the company if
there is a governance or ongoing concern risk. However, minority INSUFFICIENT BOARD INDEPENDENCE
shareholders should be aware that the government places the national The Malaysian Code on Corporate Governance (MCCG) recommends that the
interest first so interventions may not be always be beneficial for minorities, boards of large companies should be composed of a majority of independent
as demonstrated by the case of Malaysia Airlines. directors16. The Bursa’s listing requirements define an independent director
as being independent of management17, which is in line with MSCI ESG
Research independence criteria. 60% of GLC boards are majority
CASE STUDY – NATIONALISATION OF MALAYSIA AIRLINES independent, which exceeds non-GLC boards (31%), but there are no fully
independent GLC boards. GLCs also outperform their global MSCI ACWI Index
Malaysia Airline System Bhd (MAS) was delisted following large financial
SOE counterparts on this governance indicator.
losses sustained after flight MH370 disappeared over the Indian Ocean and
flight MH17 was shot down over Ukraine in 2014. Khazanah Nasional, a GLIC, Figure 16 | Board Independence (%)
was the majority shareholder and bought out the remaining shareholders at a MSCI Malaysia Index GLCs 60% 40%
30% premium on the 2014 share price. It implemented a five-year program
involving cutting 30% of the workforce and restructuring the company. MSCI Malaysia Index (ex. GLCs) 4% 31% 65%
MAS had been underperforming for a number of years before these incidents,
MSCI ACWI Index SOE (ex.
but the severe impact prompted the government to intervene and propose a Malaysia)
5% 52% 42% 1%
strategy that should return the company to profitability. While this is a
Fully Majority Minority None
positive development, minority shareholders in MAS suffered losses over the Source: MSCI ESG Research. Data as at 11 September 2017.
course of their investment and their interests were not protected by the
company’s leadership or the controlling shareholder.
16
Malaysian Code on Corporate Governance, April 2017
17
Chapter 1 Corporate Governance; Bursa Malaysia Securities Berhad Main Market Listing
Requirements, December 2016
OCTOBER 2017
 60% of GLC Chairs are non-independent NEDs, which is slightly less than focused on government representative NEDs at FGV, Sime Darby and
Malaysian non-GLCs at 65%. There is no MCCG recommendation that the Telekom Malaysia. Axiata recorded the most votes against independent
Chair should be independent, but it does recommend that the roles of NEDs.
Chair and CEO should be separate18. It is notable that only one GLC (IHH This indicates that while shareholders are broadly in favor of MSCI Malaysia
Healthcare) has an executive Chair compared with 30% of the MSCI Index GLC board performance, they are concerned about government
Malaysia Index (ex. GLCs). directors’ effectiveness at companies with poor financial and governance
performance. It also indicates that minority shareholders are not necessarily
 10% of GLC NEDs are classified as government representatives under the
in favor of the government’s recent action in FGV’s board struggles.
MSCI ESG Research criteria, which means that they are either a serving
state official or their role is designated as representing the government. Figure 18 | % Shareholder Dissent to MSCI Malaysia Index GLC Directors (All Votes Cast
Excluding Government Votes)
 Overall, GLCs have more independent representation at board level than
Malaysian non-GLCs. This indicates that the efforts to improve board 50%
effectiveness and composition under the GLCTP are taking hold. 31% 33%
28% 26%
Figure 17 | MSCI Malaysia Index Director Independence (%)
60% 65% 14% 14% 14%
58%
50%
31% 30% 31% 0%

20% FGV Sime Darby Telekom Axiata IHH Healthcare
12% Malaysia
7%
Government Representative Independent NED Non-independent NED Executive

Non-Independent Executive Chair Independent Non-independent Executives
Chair NEDs NEDs Source: MSCI ESG Research. Data as at 11 September 2017.
MSCI Malaysia Index GLCs MSCI Malaysia Index (ex. GLCs)
GLC AUDIT COMMITTEE CONCERNS
The 2016 Bursa Malaysia Listing Requirements oblige listed companies to
SHAREHOLDERS’ BOARD COMPOSITION CONCERNS have an audit committee made up of only NEDs, a majority of whom are
independent19. Audit committees are responsible for overseeing companies’
Shareholders expressed concerns about MSCI Malaysia Index GLC board financial reporting and risk management functions, and independent directors
composition during the recent proxy season by significantly dissenting to the
re-election of directors at a number of AGMs. IHH Healthcare had the highest
shareholder dissent against an executive, however shareholder concern was
19
Chapter 15 Corporate Governance; Bursa Malaysia Securities Berhad Main Market Listing
18
Malaysian Code of Corporate Governance, April 2017 Requirements, December 2016
OCTOBER 2017
with an objective view of companies’ operations should provide rigorous MONITORING RELATED PARTY TRANSACTIONS
oversight of existing systems.
All 15 GLCs are involved in related party transactions (RPTs) with the
Figure 19 | Audit Committee Independence (%) government although the World Bank has noted that there is often
incomplete corporate disclosure of RPTs with GLCs and GLICs. There is a
MSCI Malaysia Index GLCs 40% 60%
requirement under local accounting standards for disclosure of transactions
with government-related entities, but this disclosure does not have to be as
MSCI Malaysia Index (ex. GLCs) 65% 35% detailed as those with other related parties21.
The audit committee is responsible for reviewing and reporting to the board
MSCI ACWI Index SOE (ex. Malaysia) 61% 34% 4% on RPTs, and any conflicts of interest that could compromise management’s
integrity22. Figure 20 shows a breakdown of the GLC NEDs’ classification under
Fully Not Fully Independent None the MSCI ESG Research criteria. To protect minority shareholders from
potential loss of value, it is important that GLCs’ audit committees are
brought in line with the MCCG 2017’s step up recommendation for complete
 Only 40% of GLCs’ audit committees are fully independent, under- independence in order to improve transparency and disclosure.
performing Malaysian non-GLCs at 65% and non-Malaysian MSCI ACWI Figure 20 | MSCI Malaysia Index GLC Audit Committee Composition (% NEDs)
Index SOEs (61%).
 Nine GLCs including FGV, Maybank and Malaysia Airports, do not have 7%
5%
completely independent audit committees based on the MSCI Governance

14%
Metrics criteria. The MCCG 2017 recommends that the audit committee
should be completely independent as a “step up” practice, but it is not a
standard Code recommendation20.
73%
 Five GLCs with non-independent audit committees also have designated


directors serving on this committee. This is a risk to minority shareholders Independent NED Government NED
because the government’s interests could be put before theirs in the event Non-independent NED GLIC NED
of audit-related concerns. FGV’s issues illustrate the importance of having
completely independent audit oversight.
20
Malaysian Code on Corporate Governance, April 2017 21
 The World Bank Report on the Observance of Standards and Codes (ROSC): Malaysia, July 2012
22
A designated director as defined by the MSCI ESG Research methodology “has ties to other (non- Chapter 15 Corporate Governance; Bursa Malaysia Securities Berhad Main Market Listing
management) interests, including employees, government or shareholder interests” Requirements, December 2016
OCTOBER 2017
APPENDICES  Exchanges
Bursa Malaysia www.bursamalaysia.com/market/
APPENDIX A | REGULATORY DEVELOPMENTS
 Regulators
COMPANIES ACT 1965 Securities Commission Malaysia www.sc.com.my/
Bank Negara Malaysia www.bnm.gov.my/
 In 2016, the Companies Act 1965 was amended to elevate the Malaysian corporate landscape on par with existing Companies Commission of Malaysia
international standards. Key changes include a push for increased oversight and transparency of board director pay by www.ssm.com.my/
requiring listed companies to approve directors’ fees and benefits of at the annual general meeting.  Investor Associations
BURSA MALAYSIA MAIN MARKET LISTING REQUIREMENTS Minority Shareholder Watchdog Group
www.mswg.org.my
 Following media reports that it was considering the introduction of dual share classes, Bursa Malaysia announced in Institutional Investor Council Malaysia
mswg.org.my/institutional-investor-council-malaysia-iic
August 2017 that it had no plans to facilitate dual share class listings and would maintain its “one share one vote”
Malaysian Institute of Corporate Governance
system. This is a positive move for Malaysian minority shareholders, as their ownership rights will remain protected. www.micg.net/
 Corporate Governance Code

MALAYSIAN CODE ON CORPORATE GOVERNANCE (MCCG)
Malaysian Code on Corporate Governance
 The MCCG was updated in April 2017 and it has shifted from “comply or explain” to “apply or explain an alternative”. www.sc.com.my/wp-
This is meant to encourage listed companies to apply more thought and consideration when adopting and reporting on content/uploads/eng/html/cg/mccg2017.pdf
their corporate governance practices. There is also the introduction of “Step Up” practices, to encourage companies to  Company Law
go further than recommended principles in achieving corporate excellence.23
The Companies Act 1965
www.ssm.com.my/acts/fscommand/CompaniesAct.htm
BOARDS
 Takeover Rules
 The board should be comprised of a majority of independent directors. This is in contrast to MCCG 2012 where boards
Rules on Take-overs, Mergers and Compulsory
were recommended to be comprised of at least 2 independent directors or ⅓ of the board (whichever was greater) or a
Acquisitions www.sc.com.my/wp-
majority of independent NEDs where the chair was not independent. content/uploads/eng/html/resources/guidelines/tom/160815/
m_rules_160815_complete.pdf
 Stewardship Code
The Malaysian Code for Institutional Investors
https://www.sc.com.my/wp-
content/uploads/eng/html/cg/mcii_140627.pdf
23
A proportionality approach is used to differentiate large companies from others. In this context, ‘large companies’ refer to these companies which are on
the FTSE Bursa Malaysia Top 100 Index or have a market capitalization of at least RM 2 billion. In this report, all 41 Malaysian constituents of the MSCI ACWI
Index are considered ‘large companies.’
OCTOBER 2017
 The board should be comprised of at least 30% women. MCCG 2012 recommended the establishment of a policy on boardroom diversity, but MCCG 2017 takes
a giant leap forward by establishing an actual target. Boards are recommended to disclose policies to appoint women to the board, targets and measures to
meet those targets.
 Increased scrutiny of independent directors’ tenure. Director tenure Figure 21 | Lack of Executive Pay Disclosure at MSCI ACWI Index Banks (%)
should not exceed nine years but a board may decide to extend it. In
70%
those cases, annual shareholder approval will be required from years 9 – 66%
12 but a two-tier voting process is to be adopted thereafter. Under this
process, both tier 1 (shareholders who hold 33% or more of the company)
and tier 2 (all other shareholders) must simultaneously approve the vote
in order for the long-tenured director to remain independent.
PAY
0%
 One of the key changes to MCCG 2017 is a call for increased disclosure of
director and executive pay. While enhancements to the code may not yet MSCI Malaysia Index MSCI Malaysia Index ex. MSCI ACWI Index EM
Banks Banks Banks ex. Malaysia
match the pay disclosure seen in other markets (non-binding in markets
with a ‘comply or explain’ model), a call for greater transparency may Source: MSCI ESG Research. Data as at 11 September 2017.
soon yield similar results.  It is also worth noting that the Companies Act 2016 introduced a new
 MCCG 2017 recommends detailed disclosure on a named basis of the requirement for all fees and benefits payable to directors (including any
remuneration paid to directors (this includes all fees, salary, bonus, and pay for loss of employment) to be approved by the shareholders at a
benefits), and the remuneration paid to the top 5 named executive general meeting. As of yet, there is still no say on pay for executive
officers within the bands of RM 50,000 (including all fees, salary, bonus, compensation.
and benefits).24
 Malaysian Central Bank rules provide greater disclosure and transparency
on pay practices for Malaysian banks. As a result, no MSCI Malaysia Index
Banks have been flagged for a lack of rigorous executive pay disclosure,
unlike the majority of other MSCI Malaysia Index companies (Figure 21).
24
As ‘Step Up’ best practice suggestions may be a harbinger of a future code release, MCCG 2017
encourages companies to fully disclose the detailed pay of each member of senior management.
OCTOBER 2017
AUDIT & ACCOUNTING

CASE STUDY – CORPORATE SCANDALS DRIVING REGULATORY CHANGE
 MCCG 2017 was enhanced to support effective audit, risk management
and internal control. A key change is that the board chair should not also There have been a number of financial scandals in Malaysia since 1981
be Audit Committee chair to avoid impairment of objectivity. involving government officials, GLCs or GLICs, which led to changes in the
 All members of the Audit Committee should be financially literate and regulatory environment. The latest scandal concerns 1Malaysia Development
the board should disclose whether internal audit personnel are free from Berhad (1MDB), an investment fund established in 2009 as a vehicle for
conflicts of interest. foreign investment and promotion of economic development.
The alarm was raised about the 1MDB fund in 2015 because its debt levels of
 The board should disclose the features of its risk management
around USD 12 billion threatened Malaysia’s credit rating. The fallout from
framework, including a discussion on key risk areas such as finance,
1MDB has had a negative effect on Malaysia’s political and economic
operations, regulatory compliance, reputation, cybersecurity and
environment. Global investigators believe more than USD 1 billion from the
sustainability.25
fund entered Malaysian Prime Minister Najib Razak's personal bank accounts.
The Public Accounts Committee’s investigation cleared Prime Minister Najib of
any wrongdoing, saying that a USD 681 million deposit in his accounts was a
donation from the Saudi Arabian royal family.
The scandal has caused a political crisis and threatens to upset years of one-
party rule in the country. A general election is expected to be called in 2018
and the 1MDB scandal will be referenced by opposition politicians to cast
doubt on Najib’s competence. However, the regulatory landscape is once
again positioned to gain from a swift, strong and binding response from the
election victor as a means of bringing the 1MDB scandal to an end.
25
Establish a risk management committee comprised of a majority of independent directors as a ‘Step
Up’ suggestion.
OCTOBER 2017
APPENDIX B | CORPORATE OVERVIEW

Shareholder rights are correlated to the jurisdiction of incorporation and the type of corporate entity that has listed or traded securities. The sector distribution
across the market may offer insights to the broader economy and the exposure to market and commodity cycles.
Incorporation Corporate Types GICS Sectors
All ACWI constituents with a Home All listed entities are public The 41 ACWI constituents with a Home Market of Malaysia are overweight in Consumer Staples,
Market of Malaysia are also companies. No limited partnerships, Telecommunication Services, and Utilities, and underweight in Consumer Discretionary, Materials, and Real
incorporated in Malaysia. co-operatives or other types of Estate. Notably there are no companies with GICS sector of Information Technology. Companies in the
corporate entities are identified materials and energy sectors may be particularly exposed to the commodities cycle, where periodically we
among Malaysian ACWI constituents. see companies required to report write-downs in the values of assets due to cyclical commodity price
movements.
100% 100%
Malaysia Public Company
MSCI Malaysia Index MSCI Emerging Markets Index MSCI ACWI Index
Incorporation, combined with the type of corporate entity, determines which Global Industry Classification Standard (GICS) is a four-tiered, hierarchical industry classification system. It
corporate laws apply to the company. Corporate law typical provides many of consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries. Companies are classified
the fundamental rights of shareholders. quantitatively and qualitatively. Each company is assigned a single GICS classification at the sub-industry
level according to its principal business activity.
OCTOBER 2017
APPENDIX C | BOARD OVERVIEW

Governance risks vary widely, depending on the nature of the company’s ownership and on the separation of ownership and management, and on the design of the
capital structure and its impact on the voting rights of shareholders.
Board Types Leadership Independence Committees
All Malaysian companies have a Board of Only two companies have combined roles Based on MSCI Governance Metrics All Malaysian companies have established all
Directors as the sole board type. (Genting and subsidiary Genting Malaysia), independence criteria, less than half of three key committees – Audit, Pay and
despite local best practice recommendations Malaysian boards are majority independent Nomination. However, only Audit
set by the MCCG. Lead Independent Directors of management. Several directors are not Committees are required to be fully
are common, less than 25% of companies deemed independent by virtue of their independent.
lack an independent chairman or a lead relationships with shareholders.
director.
4.9% 4.9%
22.0%
41.5% 43.9%
58.5%
68.3%
65.9%
36.6%
100%
100% 58.5% 56.1%

39.0%
36.6% 31.7% 29.3%
Board of Directors
Supervisory Board & Management Board 2.4%
Board of Directors & Audit Board Chair Lead Director Independent of Independent of Audit Pay Nomination
Management Other Interests
Board of Directors & Board of Supervisors None None
Combined with CEO
Executive Not fully Independent
Fully Majority Minority None
Non-executive, Not Independent Fully Independent
Non-executive, Independent
Malaysian companies follow the unitary The roles and offices of Chairman and CEO Per MCCG guidelines, companies should be Audit Committees required which should
board model, largely predominant at APAC should be separated, per MCCG 2017. No comprised of a majority of independent include at least three directors, at least ⅔
countries in the ACWI save China, Indonesia, best practice recommendation for directors. Previously, the greater of two being independent. Nomination Committees
and Japan. independent chairman or lead independent directors or ⅓ of the board was to be required, which should have a majority of
director. independent; or, if a non-independent chair, independent directors.
the board was to be majority independent.
© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. OCTOBER 2017
APPENDIX D | GENDER DIVERSITY

A formalized push for gender diversity in Malaysia began when Prime Minister Najib Razak announced formal national policy targets for the Female Labour
Participation Rate (FLPR) in 2010 and a target for women in leadership in the corporate sector in 2011. While neither was an official quota and targets are still
unfulfilled, dramatic shifts continue to occur, especially in the context of other Asian markets. In April 2017, the newly revised MCCG has introduced a 30% target for
female directors on listed boards, however there is no sanction for companies that do not meet this target. The importance of this formal inclusion is not to be
understated; Malaysia is a pioneer in Asian markets in its codification of gender diversity. India is the only other market in Asia which mandates gender diversity,
calling for at least one female director.
Figure 22 | Female Directors
% Women in Board Population Number of Female Directors Female Leadership
40.6%
30.6%
26.8% 29.3% 31.2%
24.4% 26.8%
22.5% 23.4% 22.9%
19.3% 17.3% 19.5% 17.1%
10.1% 11.8%
9.4% 9.4%
6.1% 6.1% 4.8% 3.1% 3.8%
2.4%
% Female Directors as % 0 1 2 3+ Chairman CEO CFO

Total Director Population
MSCI Malaysia Index MSCI Malaysia Index MSCI Emerging Markets Index
MSCI Malaysia Index MSCI Emerging Markets Index
MSCI Emerging Markets Index MSCI ACWI Index MSCI ACWI Index
MSCI ACWI Index
As at the date of this report, 10 MSCI Malaysia Index companies did not any women directors including MISC, a GLC.
29.3% of MSCI Malaysia Index constituents have reached the tipping point of female board representation in comparison
to 11.8% MSCI Emerging Markets and 31.2% of global MSCI ACWI Index constituents. Similar to other markets, there is a lack of women in leadership
roles in Malaysia as there is only one MSCI Malaysia Index
Companies Where Tipping Point Reached (3+ Female Directors) constituent with a female CEO. However, there are 11
AMMB Gamuda Sime Darby companies with female CFOs which indicates that the female
talent pipeline is stronger than in other MSCI Emerging Markets
Astro Malaysia Maybank Telekom Malaysia and ACWI Index constituents.
Dialog Group Malaysia Airports TNB
Digi.com Petronas Gas UMW

Three women on a corporate board represents a “tipping point” in terms of influence (MSCI Women on Boards Report 2016)
OCTOBER 2017
APPENDIX E | KEY METRIC OVERVIEW
Never Flagged Always Flagged Selected Problem Areas
A number of Key Metrics (noted below) are There are some areas where the regulatory Benchmarking MSCI Malaysia Index constituents against MSCI ACWI constituents globally,
never flagged due to the strengths of framework in Malaysia does not yet reflect identified areas of weakness in governance arrangements include certain voting rights
Malaysian regulatory provisions. emerging best practices around the world. related to foreign ownership, state-owned enterprises and controlling shareholders.
Shareholder rights are generally set in the In particular, the demand for annual director Board Independence issues in this market reflect the absence of majority independent
Companies Acts, which are drawn from the elections has not extended to this market – boards at almost half of firms despite best practice recommending majority independent
experience of other jurisdictions, especially directors only stand for re-election every three boards in certain circumstances.
Australia and the United Kingdom. years. Related party transactions are widespread in this market, reflecting the nature of the
In addition, equity holding requirements for predominant ownership structures.
executives and/or directors are not required in
this market. As most companies are family or
state controlled, executives’ interests are Figure 23 | Key Metric Outliers – Malaysian Constituents of MSCI ACWI Index
already considered to be aligned with those of
shareholders.
Multiple Equity Classes with Different Voting

Rights 97.6%
Annual Director Elections
Majority Voting
CEO Equity Policy 70.7%
Bylaws Amendments 58.5%
Director Equity Policy 48.1% 46.4%
Charter Amendments
32.0%
Poison Pill 19.5%
10.2% 12.2%
2.7%
Related Party Pay Committee Independent Controlling Auditor

Transactions Independence Board Majority Shareholder Independence
Concerns
MSCI Malaysia Index MSCI ACWI Index
OCTOBER 2017
APPENDIX F | BEST & WORST COMPANY SCORES

 Top Scores
Ownership &
Company Score Overall Board Pay Accounting Relative Strengths
Control
Board Skills & Diversity, Board Effectiveness, Strategic
CIMB Group 7.6 Best In Class Above Average Best In Class Below Average Average
Oversight
Board Leadership, Board Effectiveness, Ownership
Alliance Financial Group 7.5 Best In Class Above Average Above Average Average Best In Class
Structure
Board Effectiveness, Strategic Oversight, Audit
Hong Leong Bank 7.4 Best In Class Average Best In Class Average Above Average
Oversight
Malayan Banking Board Skills & Diversity, Board Effectiveness,
7.3 Best In Class Above Average Above Average Above Average Average
(Maybank) Ownership Structure
Board Effectiveness, Severance & Change of Control,
RHB Bank 7.1 Above Average Above Average Best In Class Below Average Below Average
Strategic Oversight
 Bottom Scores
Ownership &
Company Score Overall Board Pay Accounting Key Areas of Concern
Control
IHH Healthcare 2.7 Worst In Class Average Worst In Class Worst In Class Average Board Independence, Pay Figures, Ownership Structure
Board Independence, Pay Figures, Board Skills &
Genting Malaysia 2.4 Worst In Class Worst In Class Below Average Average Average
Diversity
Accounting Risk, Board Independence, Board Skills &
Genting Plantations 1.7 Worst In Class Worst In Class Average Average Worst In Class
Diversity
YTL Power 1.4 Worst In Class Worst In Class Average Below Average Below Average Board Independence, Pay Figures, Ownership Structure
YTL Corporation 0.4 Worst In Class Worst In Class Average Below Average Worst In Class Accounting Risk, Board Independence, Pay Figures
EXPORT THE FULL SET OF SCORES FOR MALAYSIAN MSCI ACWI CONSTITUENTS
Using the Screening and Issuer Tabs on ESG Manager it is possible to export an updated dataset including all ACWI companies for this Home Market (as used for this
report) and/or a broader dataset, as required.
Company Rankings are assessed against other Malaysian companies in MSCI coverage (includes non-ACWI constituents).
OCTOBER 2017
APPENDIX G | SIMPLIFIED OWNERSHIP DIAGRAMS – FAMILY CONGLOMERATES

Ownership Diagram of Genting Group (Lim Family) Ownership Diagram of YTL Group (Yeoh Family)
Genting Group (Lim Kok Thay

and Lim Keong Hui) YTL Group (Yeoh Tiong Lay
& family)
Genting Berhad YTL Corporation

(39.7%) (49.9%)
YTL Power YTL Land &

Genting Plantations Genting Malaysia YTL Hospitality Starhill Global
Genting Singapore International Development
(51.9%) (49.3%) REIT (61.1%) REIT (35.2%)
(52.8%) (63.2%) (68%)
Source: MSCI ESG Research. Data as at 11 September 2017. Source: MSCI ESG Research. Data as at 11 September 2017.
Ownership Diagram of IOI Group (Lee Family)
IOI Group (Lee family)

MSCI Malaysia Index
Other Malaysia listed
IOI Corporation (54.5%) IOI Properties Group (60.5%) MSCI Singapore Index
Private company
OCTOBER 2017
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OCTOBER 2017
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CORPORATE GOVERNANCE IN MALAYSIA | OCTOBER 2017

CORPORATE GOVERNANCE IN MALAYSIA

October 2017 Contents

Top 5 Scores Bottom 5 Scores

MARKET CHARACTERISTIC | FAMILY OWNERSHIP

was suspended by RSPO, an industry-backed

RISK – FAMILY CONTROL & LACK OF INDEPENDENT OVERSIGHT

Figure 2 | Ownership Diagram of Hong Leong Empire (Malaysia)

Hong Leong Company (Malaysia) Bhd

GuocoLand Southern Steel Hume Industries

Source: MSCI ESG Research. Data as at 11 September 2017.

Figure 3 | More Entrenched Boards at Family Conglomerates

BOARD MEETINGS MINORITY PROTECTIONS – INDEPENDENT BOARDS AND INDEPENDENT

leadership. We note that while Genting Plantations has named an

16% 18% 62%

MSCI Malaysia Index MSCI Malaysia Index

Source: MSCI ESG Research. Data as at 11 September 2017.

Recurring Revenue Recurring Expenses

MSCI Malaysia Index MSCI ACWI Index ex. Malaysia

Source: MSCI ESG Research. Data as at 11 September 2017.

RISK – GENERATIONAL SUCCESSION AT FAMILY CONGLOMERATES

The generational and geographic reach of some Malaysian family

CASE STUDY – HONG LEONG’S GROWING FAMILY TREE

 1st Generation: Hong Leong Group—founded by Kwek Hong Png, a

MARKET CHARACTERISTIC | ENHANCED GOVERNANCE NOTABLE DEVELOPMENTS | PUBLIC

Leong Financial have a majority of independent directors on their boards, the

HIGH FREQUENCY OF BOARD MEETINGS

Additional progress in this area includes the central bank’s requirement to 7

Source: MSCI ESG Research. Data as at 11 September 2017.

MARKET CHARACTERISTIC | STATE PARTICIPATION NOTABLE DEVELOPMENTS | SIME

BACKGROUND ON MALAYSIAN STATE OWNED ENTERPRISES RISK – POOR GLC PERFORMANCE

RISK – WEAK LEADERSHIP

31% 30% 31% 0%

Government Representative Independent NED Non-independent NED Executive

completely independent audit committees based on the MSCI Governance

 Five GLCs with non-independent audit committees also have designated

 Corporate Governance Code

AUDIT & ACCOUNTING

APPENDIX B | CORPORATE OVERVIEW

Incorporation Corporate Types GICS Sectors

Malaysia Public Company

APPENDIX C | BOARD OVERVIEW

Board Types Leadership Independence Committees

100% 58.5% 56.1%

APPENDIX D | GENDER DIVERSITY

% Women in Board Population Number of Female Directors Female Leadership

% Female Directors as % 0 1 2 3+ Chairman CEO CFO

APPENDIX E | KEY METRIC OVERVIEW

Never Flagged Always Flagged Selected Problem Areas

Multiple Equity Classes with Different Voting

Related Party Pay Committee Independent Controlling Auditor

MSCI Malaysia Index MSCI ACWI Index

Source: MSCI ESG Research. Data as at 11 September 2017.

APPENDIX F | BEST & WORST COMPANY SCORES

APPENDIX G | SIMPLIFIED OWNERSHIP DIAGRAMS – FAMILY CONGLOMERATES

Genting Group (Lim Kok Thay

Genting Berhad YTL Corporation

YTL Power YTL Land &

Ownership Diagram of IOI Group (Lee Family)

IOI Group (Lee family)

Other Malaysia listed

+ 1 212 804 5299

+ 612 9033 9339