Balancing act for effective governance

IN the aftermath of high-profile corporate scandals like Enron,1MDB and most recently Serba Dinamik, questions surrounding the dynamics between the board, management and auditors have come under intense scrutiny.

These scandals have highlighted the critical role that boards play in the oversight and monitoring of companies, as well as the complex interplay of interests and relationships within corporate governance structures.

As we delve into these dynamics, it becomes evident that effective governance hinges on transparency, accountability and the ability of all stakeholders to navigate the delicate balance of power and responsibility.

Institutional investors in Malaysia wield considerable influence as we remain net buyers of the capital markets, often mopping up what foreign investors sell off.

In a capital market size of RM3.8 trillion (where institutional investors’ assets under management are RM2.4 trillion or more), and many of our members managing funds for the general rakyat’s pension, social security, etc, our chosen board representatives play a pivotal role in shaping these dynamics, bringing an additional layer of scrutiny and accountability to the governance process.

As stewards of shareholder interests, institutional investors advocate and continue to demand for transparency, disclosure and alignment of interests between management and shareholders.

In the recent Asian Corporate Governance Association (ACGA) CG Watch 2023 report, Malaysia ranked first for the Auditors and Audit Regulators category an accolade that Malaysia has held for three consecutive years. Malaysia ranked fifth overall out of the 12 markets, with so much still to be done.

In addition to regulatory reforms, corporate governance codes (including Malaysian Code for Institutional Investors, and investor activism from MSWG over the years, there has been a greater emphasis on governance, although given that we live in a permacrisis era, there is always room for improvement.

Let’s look at the respective roles of the three main players:

Managing day-to-day operations and implementing the board’s strategic vision is the responsibility of management. Managing performance and risks is their responsibility, and they are overseen by the board. The board also provides guidance, support and resources to enable them to perform their duties efficiently.

On the other hand, auditors provide an independent assessment of a company’s financial statements and internal controls. They offer assurance to stakeholders regarding the accuracy and reliability of financial information. While they report to the board, they maintain professional independence to ensure impartiality in their assessments.

The board serves as the cornerstone of corporate governance, entrusted with the task of safeguarding the interests of shareholders and stakeholders.

This tripartite relationship translates into a system of checks and balances.

However, navigating the tug-of-war between boards, management and auditors requires a delicate balancing act, as competing interests and priorities often come into play.

As institutional investors, we must strike a fine balance between supporting management’s strategic vision and holding them accountable for performance and risk management.

Many of the major institutional investors here and its cohort of external fund managers have used their shareholding to demand significant change as can be seen in some of the GLCs such as FGV in the recent past.

Relationships form the bedrock of effective governance, shaping the dynamics between board members, management and auditors.

Trust, communication and mutual respect are essential ingredients for building strong relationships and fostering collaboration.

Board members must navigate these relationships with integrity, professionalism and a commitment to ethical conduct. By fostering open dialogue, constructive debate and collective decision-making, boards can cultivate a culture of accountability and transparency that underpins effective governance.

There are of course practical challenges. Listed companies with substantial family ownership can present unique challenges in terms of governance dynamics.

In these cases, founding families often wield significant influence over the board composition, management appointments and strategic decisions.

Balancing the interests of founding families with those of other shareholders requires a nuanced approach, grounded in principles of fairness, transparency and accountability.

Boards must ensure that decisions are made in the best interests of all stakeholders, rather than serving the narrow interests of a privileged few.

In the Malaysian context, navigating the effectiveness of boards in overseeing corporate governance is influenced by a myriad of factors, including company culture, board composition and concentrated ownership.

The presence of founding families involved in operations can pose additional challenges, as it may create conflicts of interest and impede independent decision-making.

However, Malaysia has made significant strides in strengthening corporate governance frameworks, enhancing board independence and promoting transparency and accountability.

The dynamics between boards, management and auditors are central to the governance of companies, shaping the way decisions are made, risks are managed and value is created.

A note of caution, though. The best auditors and independent board members will be rendered ineffective if there is collusion to conduct fraud.

What is clear is effective governance requires a concerted effort from all stakeholders to uphold principles of integrity, transparency and accountability, including that of ensuring that the regulations are complied and applied consistently.

By fostering strong relationships, promoting diversity and independence on boards, and aligning interests with shareholder expectations, companies can build trust, mitigate risks and create long-term value for all stakeholders.

As we navigate the complexities of corporate governance, let us remain vigilant in our commitment to ethical conduct and responsible stewardship because we are after all guardians to a significant portion of our capital markets.

This article first appeared in Star Biz7 weekly edition.