HIS ROYAL HIGHNESS
SULTAN NAZRIN MUIZZUDDIN SHAH
AT THE LAUNCH OF
‘CORPORATE GOVERNANCE AND ETHICS’
NIK NORZRUL THANI, IZAHAR IZHAM AND LIYA SAFFURA
DATE: MONDAY, 25 APRIL 2022, 11.00 AM
ASIAN INTERNATIONAL ARBITRATION CENTRE,
BANGUNAN SULAIMAN, KUALA LUMPUR.
Ladies and Gentlemen
- It gives me great pleasure to see you all here today to celebrate the launch of this book on corporate governance and ethics. The subject matter at first glance may seem somewhat academic and dry. We may think of corporate governance as being a topic mainly of interest to specialists such as lawyers and accountants. We would be mistaken, however. On the contrary, this book addresses issues which are highly relevant to our world today, providing an effective and timely introduction to this important topic.
- We are reminded almost daily in the news of the ways in which corporate governance shapes our world. From the Asian Financial crisis of the late 1990s; to the Enron scandal of the early 2000s; to the Global Financial Crisis triggered in 2007; and various examples closer to home, the subject is rarely far from the spotlight of media attention.
- Countless articles in the media and academic journals have been devoted to understanding individual corporate governance failures and their role in wider financial crises. Much attention has also been given to what good corporate governance consists of, and how it can be achieved. All of this, and more, is synthesized so brilliantly in this new book. So permit me, for a moment, to share some thoughts and observations that have been brought to my mind by the subject matter.
- One issue that is still hotly debated is whether the interests of shareholders in a company should take precedence over those of its broader stakeholders. Traditionally, and following Milton Friedman, the only responsibility a company has is to its own shareholders. It is then up to the shareholders to decide whether and how any social issues should be dealt with. This approach is increasingly being challenged, however, by the concepts of corporate social responsibility and Stakeholder Capitalism. There is growing recognition that companies do need to take account of their broader impacts on society, and of the interests of other stakeholders beyond just their shareholders. This shift can be seen in the 2019 statement by the Business Roundtable, an influential group of CEOs in the United State, who have committed to broadening their focus, rather than just maximizing shareholder value only.
- But committing to change, and implementing it, are two very different things. We are still far from seeing this more ethical approach play out on a global level.
- What is interesting is that, although this change of approach by businesses feels new, the core principles upon which it is founded are not. Consensus has long been reached on many if not most of the core aspects of corporate governance. No-one questions its fundamental principles – for instance, ethical behaviour on the part of the company’s directors and management; accountability; transparency; and, the more recently added, sustainability. The practical implications of these principles are also little disputed. Numerous Codes, regulations, and legislation, globally and locally, set out in detail how they should be applied. So how do we move from theory, guideline, principle, to practice?
- Of perhaps paramount importance is to have an effective Board of Directors to guide and oversee decision-making processes. Board members must strike the right balance between oversight and detachment. They have to provide guidance and overall control, while avoiding any undue meddling in the domain of the hands-on executives. This can prove challenging, especially as many Board members will themselves have been in active managerial roles previously. But such a division of labour is essential to good corporate governance.
- A strongly-developed sense of ethics and duty is of course another absolutely essential quality for Board members. It is they, after all, who carry the ultimate responsibility for effective corporate governance, as this book so excellently emphasizes. Anyone lacking this basic moral commitment is fundamentally unfit to serve on a corporate board. Examples of corporate governance failure can often be traced to a lack of integrity on the part of Board members, who have failed in their duties of oversight and control. There are case studies set out in the book which clearly illustrate this point.
- The role of individual ethics in corporate governance is a topic I feel particularly passionate about, because it resonates so strongly with Islamic teachings. Charity, giving, and social responsibility are at the very core of the Islamic approach to finance and wealth. As the Qu’ran teaches, “By no means shall you attain righteousness unless you spend (freely) of that which you love; and whatever you spend, indeed Allah is in full knowledge of it.” (Surah Ali-`Imran: (3:92)).
- Thus, Islamic finance institutions often have additional, specific governance guidelines, stipulating the establishment of Sharia Advisory or Supervisory Boards to ensure that Sharia rules and principles are being followed. As well as elements such as a prohibition on certain investments, Sharia-compliance also involves an over-arching commitment to acting in an ethical manner, in keeping with the fundamental moral principles of Islam. In this way, Sharia Advisory Boards provide an additional layer of oversight in relation to corporate ethics for this sector.
- When it comes to turning the promise of change into change itself, greater diversity on corporate boards is another key priority. This is not just important from an equity point of view, to even up the current and historical imbalance. It is also necessary from a business point of view. Numerous studies demonstrate a whole range of benefits from greater board diversity and increased female representation. These include improved company reputation; better financial performance; lower risk-taking; and reduced fraud.
- Much attention has been paid to this issue, and quotas have been introduced in some jurisdictions and on some bourses. Many European countries now have gender diversity requirements for corporate boards, including Germany, the Netherlands, France, Spain, Norway, and Iceland. The US-based Nasdaq, and California, have introduced even broader diversity quotas. These rules have been justified by the weight of evidence showing that diverse representation makes good business sense, despite some resistance. But under-representation of women and minority groups continues. And while all-male Boards have become rarer among publicly-listed companies in the West, they are still common elsewhere.
- Effective, well-balanced and ethical Boards of Directors are thus a major aspect of good corporate governance. Its other central component is rigorous reporting structures. This includes the ‘harder’ financial auditing, and ‘softer’ environmental, social and governance, or ESG, metrics. The financial elements of reporting are well-established, and have long been set out in regulations and legislation. The ESG elements are still evolving, however. Unlike financial reporting, many of these are still voluntary to some extent, in that they are not, as yet, required legally.
- ESG metrics have nevertheless become a standard and expected part of company reporting. They are increasingly viewed as an essential element of good corporate governance. This reflects the changing climate in which companies operate. The interests of stakeholders more broadly are now taken into account far more than used to be the case. This includes direct shareholders, who may have become ‘activists’ themselves with concerns about ESG issues. It includes employees. So potential employees, for example, may compare companies’ records on sustainability and social issues when deciding which to join.
- It also includes consumers, perhaps the most important stakeholders of all. Across numerous business sectors, from agriculture to clothing, consumers now take a much greater interest in the products they buy than was the case in the past. Consumers today are concerned about a wide range of environmental impacts, from deforestation to pesticide use. They are concerned about the treatment of workers. And they are concerned about other human rights and social aspects. Increasingly, they expect the companies they buy from to make efforts to address these issues, and to report on these efforts.
- It is here that ESG reporting comes in. There are growing sets of metrics in each of these areas of environment, social and governance. These all aim to record and quantify the various steps that companies are taking. They reflect the progress that companies have made towards meeting their ESG goals, and fulfilling the expectations of their stakeholders in this regard. Companies can no longer only pay lip-service in these areas, but have to demonstrate they are taking action and having positive impacts.
- Through these mechanisms, public and private companies alike progress towards better governance. This in turn helps them to maximize returns to both shareholders and stakeholders. Effective Board oversight and robust reporting structures should together also ensure that opportunities for corruption and mismanagement are minimized, if not avoided altogether.
- The principles and practice of good corporate governance are thus well-established and broadly undisputed. But serious challenges remain, however, in relation to implementation. This is particularly the case for small and medium sized companies with limited resources. Even for larger companies, putting these codes of conduct into practice is far easier said than done.
- This is partly due to the substantial costs that are involved. It also reflects the significant time commitment on the part of management and staff that is necessary to understand and then implement the various requirements. This challenge has only deepened with the addition of ESG goals and metrics. Few companies yet have the expertise to implement these properly.
- It is in this area of the implementation of corporate governance that I feel this book makes its most useful contribution. It presents the relevant issues in a comprehensible and comprehensive manner. The book aims to provide a practitioner-oriented guide, and it succeeds admirably in this objective. This guidance is useful both to those who are already familiar with the topic, and to those who must master it in order to implement good governance in their own companies.
- The book sets out clearly all the main components of corporate governance and ethics. As well as giving the more global context, it includes many Malaysia-specific elements. There is an overview of the regulatory and legislative structures here, and it even reproduces in full the Malaysian Code of Corporate Governance. This is our most comprehensive regulation which is continually updated to reflect global advances.
- Another useful section covers the question of good governance in the public sector. As the authors point out, the fundamental principles and practices of good corporate governance apply across the board. This underlines further just how incontrovertible these are. Public sector entities must make all efforts to implement them, in exactly the same way as a private sector business, if they are to achieve the best possible outcomes. Their application cannot help but lead to more effective management, and ultimately contribute to better outcomes for all stakeholders. Managers and others trying to understand and apply corporate governance would thus do very well to read this book.
- Implementation will remain challenging, however, again particularly for small and medium size companies. The difficult current operating environment has only made this challenge worse. The severe disruption of global supply chains and the inflationary pressures resulting from the Covid-19 pandemic are now being heightened by the war in Ukraine. This is prompting fundamental structural shifts, away from the globalization of production and consumption which previously seemed unstoppable. The ‘just in time’ supply chains of the past are being replaced by ‘just in case’ ones. In addition to speed and cost, the priority now is security of supply.
- Many businesses may be tempted to de-prioritize their governance efforts as a result, to save both time and money. They may prefer to focus on more immediate and pressing business matters. But ESG efforts are no longer an optional extra or luxury that can be put off until better market conditions return. Performance on ESG goals has become an integral part of a company’s image and reputation. Companies that are lacking in these areas are increasingly likely to be penalized – whether by their employees or potential employees; by customers; or by their shareholders and investors. Conversely, those that perform well will be rewarded.
- So, despite the difficulties they may face in financing these efforts and training staff to implement them, companies must make all efforts to implement better corporate governance. And it is no longer enough just to have an ESG plan. Companies must ‘walk the talk’, and demonstrate transparently how they are meeting their targets, and fulfilling their commitments. Again, this is increasingly essential not only for ethical reasons, but because it makes good business sense.
26. This book provides a very useful starting point for the important and ongoing process of strengthening corporate governance. I warmly congratulate the three authors on its publication. As practitioners themselves in this area, and so drawing on their own direct working knowledge of it, they have produced a highly readable guide to the topic. I strongly recommend all involved in this field to read it and learn from it. It cannot fail to enrich both the understanding and the practice of this crucial aspect of both business and the public sector. It is with great pleasure that I now launch ‘Corporate Governance and Ethics’, by Nik Norzrul Thani, Izahar Izham, and Liya Saffura.