Human governance is key to better corporate integrity
THE primary aim of the Malaysian Code of Corporate Governance 2017 (MCCG) is to instil greater governance culture not only among listed entities but also among all companies which are now encouraged to adopt the practices outlined.
Companies are also required to disclose in their respective annual reports the level of compliance to the MCCG, which is a key departure from the previous “comply or explain” to the current mantra of “apply or explain an alternative”.
In addition to what has been spelt out under the MCCG, listed companies have another level of compliance to adhere to under Bursa Malaysia’s Listing Requirements (LR), specifically under Chapter 15. What is interesting is that while both the MCCG and LR focus on the companies and their conduct and to a large extent the directors, where they fail to provide greater scrutiny is the human aspect of governance-related issues. So, what is human governance?
In essence, literature tells us that human governance is an “internal mechanism that is a guide to the human behaviour in a company”. After all, the action or non-action of a company is not done by the company itself but the persons who are acting on behalf of the company, which includes not only the directors of the company but also key management staff, especially those C-level personnel.
Hence, the objective in human governance is to govern these persons as they effectively “make the company” and are in actual fact the soul of the company. Thus, as both the MCCG and LR are focused on the corporate’s behaviour, driven by rules and regulations as well as legislations, human governance goes a step back and looks at the individual as he/she is the one who can dictate the company’s direction and level of compliance to corporate governance.
Judging by this, it is widely understood that human governance is driven by the spirit of the law while corporate governance in essence is driven by the letter of the law.
Why is this an important concept to understand and how can it be adopted in the MCCG?
In today’s environment as we have seen serious corporate failures not only among listed companies like Transmile, MAS, Proton or FGV that had exhibited serious governance issues, we have also seen it in government-linked companies or institutions like 1MDB, Felda and the latest being Tabung Haji. This is not mere corporate governance failure at work but more importantly, failure of human governance.
How do companies ensure that human governance is well governed in the absence of rules, regulations and legislations? This is where companies need to press the reset button and look internally at what are their core objectives of being in existence.
Yes, profit is the main objective and we cannot deny that. The question is what is the price to pay for the individuals entrusted to pursue the profit goal? At all cost? Certainly this cannot be the case as the rights of other stakeholders will then be compromised.
Corporates today need to find a balance in terms of stakeholders’ interest in a company’s business operations. This include the rights and interest of its employees, the consumers, the environment, the community at large, the government, the shareholders and the right of its lenders. With the presence of human governance, we will see a shift in focus among corporates from being focus on profit to interest of other stakeholders as well as lower incidence of cases whereby individuals with vested interest are in a position of power or decision making.
One of the steps necessary for the change of corporate governance culture to human governance is to look at the individuals and here the key is quite similar to how we define what an independent director is.
Independent director
Under the Chapter 1 of Bursa Malaysia’s LR and cross referenced with Practice Note 13, the definition of an independent director is clear, and is defined as follows, i.e. in essence, he or she is:
> Not an executive director (ED)
> Not an officer of the company within the last two years;
> Not a major shareholder of the company; > Not a family member of an ED or major shareholder of the company;
> Not acting as a nominee of the ED or major shareholder of the company;
> Not engaged as an advisor by the company; and
> Not engaged in any transaction with the company.
While the above clearly defines what an independent director is, the definition of an “officer of the company” is not clearly spelt out. This include key positions, which we all know to be that of the CEO and CFO or other C-level positions and key management personnel. Perhaps the MCCG in its next revision could add what is the definition of an “officer of the company” which should incorporate some of the points that qualifies a person to be an independent director.
In this way, we are able to humanise corporate governance and increase the level of integrity, especially among public companies. It’s about time we introduce human governance for better corporate integrity
Of course the other thing that the MCCG needs to move on to is to legislate the code into law as Malaysia cannot afford to be in the limelight of the corporate world for the wrong reasons with scandal after scandal. While we are now into the “apply or explain an alternative” under the code, we should move further towards governance via legislation and not merely a guideline to be complied with.