Malaysia has become the first Southeast Asian country – and the second both in Asia and among emerging markets – to issue a code for institutional investors aimed at improving corporate governance (CG) among their portfolio companies.
There is substantial weight behind the code, which is supported by the Securities Commission Malaysia (SCM) and was drafted by the biggest investors in the country. These include the $185 billion Employees Provident Fund, Permodalan Nasional Berhad, $32 billion KWAP (pension trust fund), $12 billion Tabung Haji (the pilgrimage fund), $7 billion Social Security Organisation and $3 billion Armed Forces Fund (LTAT).
The Code for Institutional Investors sets out broad principles for institutional investors such as on disclosure of stewardship policies, monitoring of and engagement with investee companies and managing conflict of interests.
The only countries in Asia Pacific believed to have similar document are Australia and Japan; the latter introduced its own version just in March.
Moreover, the Malaysian code is comparatively more comprehensive and advanced than the Japanese one, said Motoyuki Yufu, director for the corporate accounting and disclosure division of the FSA, during the launch of the code on Friday. He said the Malaysian code incorporates a recommendation that companies incorporate sustainability principles in their CG framework.
From 2016, signatories are expected to report annually on their application of these principles on their website, annual report or other publicly accessible documents. An institutional investor council will be set up to discuss stewardship matters and monitor the take-up and application of the code.
Institutional investors have the clout to influence corporates to improve corporate governance, noted SCM chairman Ranjit Ajit Singh in a speech at the launch of the code on Friday. “Given the size and the long-term nature of institutional investor holdings, few others are better placed to control these levers of market discipline,” he said.
Teng Chee-Wai, chief executive of Hwang Investment Management, sees the code as a positive development for the industry and agreed it would drive adoption of best practice. For one thing, funds will be more transparent in explaining their decisions and how they manage agency risk, he told AsianInvestor.
Some have said Malaysia is less strict in its listing requirements than some jurisdictions and that it is difficult to find quality companies, added Teng. The code should help counter such views by demonstrating Malaysia’s commitment to better CG and global best practice.
There is a pipeline of potential signatories already. UK-based Hermes Fund Managers and Hermes Equity Ownership Services (Hermes EOS) on Friday said they have signed up to the code, after becoming one of the first signatories to Japan’s initiative. Hermes EOS has been involved in the development of the code, which is only the second one for an emerging market, after South Africa.
The code has been under development for the past year as part of Malaysia’s five-year 'blueprint' for improving CG, said Azryta Abdul Aziz, SCM's observer in the working group.
She stressed that while this recommendation originated from SCM, the regulator has taken the position that it should be a collective effort led by the industry. "As such we do not intervene in the discussions about how things should be done [such around the scope and extent of detail] under the code,” Aziz told AsianInvestor.
The Minority Shareholders Watchdog Group, a shareholder activists organisation, was tasked by the SC to lead the initiative. A steering committee, comprising senior individuals from the biggest institutional investors in the country, was then set up to drive the development of the code.
The committee looked at other such codes and took advice from the UK’s Financial Reporting Council, the International Corporate Governance Network and the Organisation for Economic Cooperation and Development.
The draft was also released for public consultation to allow other stakeholders to comment, including asset management firms and listed companies.