Indicadores que evalúan el grado de aplicación de las PAPs

Undeniably, corporate governance is all about disclosure of any interest that a director may have in his corporate dealings to a corporation as well as disclosure of information to shareholders. Mallin (2002) highlighted that “information to shareholders is one of the most important aspects of corporate governance, as it reflects the degree of transparency and accountability of the corporations towards its shareholders”. Knowing the importance of disclosure requirement, Cadbury (1999) believed that “the foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to centres of economic activity that inspire trust”. Shareholders must be able to put their complete trust upon a board to represent their interest. It is necessary to develop a strong foundation of trust and confidence in corporations by way of frank disclosure and open policies.

Without sufficient disclosure, directors may hide negative financial results or information from the public

On the opposite side of the same coin, directors may also use the sensitive information of a corporation to their advantage by manipulating the share price of the corporation. Seligman (1983) viewed that “in the absence of a compulsory corporate disclosure system some issuers will conceal or misrepresent information material to investment decisions.” Most often than not,

made by directors as they do not have direct access to material information in a corporation. But this “information asymmetries” should not be allowed to compromise the very corporate governance principle that speaks of corporate d

information to shareholders and o

rests on Corprimacy norm that shareholders have

corporation. This reflects the mandatory requirement of corporate disclosure system implemented in the Malaysia

Illustration 5.4: Existing disclosure requirements towards disclosure STEP 1 Mandatory Bursa Announce ment & Quarterly Financial Reporting STEP 2 Change of Substantial Shareholdi ng Disclosure s

Without sufficient disclosure, directors may hide negative financial results or from the public, especially shareholders for fear of dropping of share price. On the opposite side of the same coin, directors may also use the sensitive information of a corporation to their advantage by manipulating the share price of the corporation. iewed that “in the absence of a compulsory corporate disclosure system some issuers will conceal or misrepresent information material to investment ions.” Most often than not, shareholders and investors may not judge the decision they do not have direct access to material information in a corporation. But this “information asymmetries” should not be allowed to compromise the very corporate governance principle that speaks of corporate d

shareholders and other relevant stakeholders. This principle of disclosure norm that shareholders have legal rights to access

corporation. This reflects the mandatory requirement of corporate disclosure system implemented in the Malaysian corporate scene.

5.4: Existing disclosure requirements towards disclosure-based regime STEP 2 Change of Substantial Shareholdi Disclosure STEP 3 Corporate Governance and Internal Control Statement in Annual Report EXISITN G Disclosure- based Regime Stepping Stone 153 Without sufficient disclosure, directors may hide negative financial results or shareholders for fear of dropping of share price. On the opposite side of the same coin, directors may also use the sensitive information of a corporation to their advantage by manipulating the share price of the corporation. iewed that “in the absence of a compulsory corporate disclosure system some issuers will conceal or misrepresent information material to investment judge the decision they do not have direct access to material information in a corporation. But this “information asymmetries” should not be allowed to compromise the very corporate governance principle that speaks of corporate disclosure of ther relevant stakeholders. This principle of disclosure information in a corporation. This reflects the mandatory requirement of corporate disclosure system

based regime New Board Disclosur e & Transpar ency

154 The Illustration 5.4 above spells out the existing disclosure requirements for public- listed corporations in Malaysia which are driven towards a disclosure-based corporate regime. It is noted that this section is not intended to reinvent the corporate wheel in regards of the existing disclosure requirements. The discussion goes beyond the boundary of mandatory disclosure as required under the Companies Act 1965 and the Bursa Listing Requirements. This is because disclosure ought not to be confined to quarterly financial reporting and major Bursa announcement only. It is neither satisfactory to stop at step 2 and 3 (as shown in Illustration 5.4) if one wishes to achieve higher board disclosure and transparency. In the context of Corprimacy, the stepping stone acts as the link or bridge for the existing disclosure-based corporate regime to reach a new level of board disclosure for the purpose of better transparency. The stepping stone here is meant to be the enhanced disclosure best practices that shall form part of the corporate governance system in a corporation.

Under the Malaysian Bursa Listing Requirement, a board is required to give a statement in Bursa announcement as to their opinion that a particular transaction or dealing by a corporation is in the best interest of the corporations and its shareholders. There is no further explanation or justification required from directors as to how the board had exercised their business judgment in good faith for proper purpose in arriving at the opinion that the transaction or dealing is in the best interest of the corporation. This is a fundamental flaw in the disclosure practice. In adopting the Corprimacy approach, it is proposed that a board should be made to disclose to the Bursa and the public pertaining to the various factors that they have considered in justifying that a particular transaction is in the best interests of a corporation by going beyond mere statement of “best interest of the corporation and its shareholders”. It is viewed that such disclosure is vital in

155 ensuring the decision made by the board is acceptable in business sense to the corporation and its shareholders as a whole. This is because what is in the best interest of the corporation in the mind of the board might not be the same with the opinions of other relevant stakeholders.

In this regard, one may raise doubts as to the practicality of having such a disclosure where it would lead to never-ending decision-making process. The response to this will be that the requirement of disclosure of information is not intended to hinder a board from making their decisions. Rather, the rationale of such disclosure is in line with the objective of Corprimacy to transcend all legal boundaries in stepping into higher ethical decision and board accountability. It will indirectly incorporate a sense of ethical values in the board when deciding whether a particular transaction is in the best interest of the corporation. That is why Corprimacy sternly believes in having shareholders to act as a watchdog over a board for the purpose of ensuring check and balance in the corporate management.

Another proposed best practice covers the extent of interest which a director is bound to disclose. It should be extended and not limited to only related-party transaction and interested matters. In other words, a director is obliged to disclose any interest or connection that he may have or know of in a particular transaction. It is not sufficient that the director merely disclose certain information pertaining to his interest but it should also include any third party interest directly or indirectly related to him that may be at variance with the interest of the corporate entity as a result of the transaction. This is to ensure that directors exercise their best independent judgments while deciding whether a proposed transaction is in the best interest of the corporation. This enhanced

156 disclosure best practice is vital in protecting minority shareholders whilst leaving no room for directors to commit malpractices.

In term of better transparency, there should be full board disclosure to shareholders on the background of the nominees who hold shares on behalf of the directors concerned. Mushera (2001) also recognised the problem of “nominee holdings by hiding the true beneficial owner” in public-listed corporations. This problem is worsened in a family- concentrated corporation where the director who founded the corporation will usually hold substantial amount of shares through his nominee holdings. In other words, it will be hard for other shareholders and investors to understand the real picture of shareholdings a director has in a corporation by screening through the financial reports. This may lead to manipulation of share price by the director concerned via huge acquisition or disposal of his nominee shareholdings in the corporation if they withhold any sensitive information from the public.

The focus of this disclosure best practice in corporate governance system should be put on the basis of protecting minority shareholders. The objective of having constant full disclosure regarding the affairs and financial matters of a corporation is to educate shareholders so that they are kept updated with the latest information. With sufficient information, they may then easily form their decision based on the constructive data and figures in hands. Ho (2003) assumed that “if minority shareholders grow increasingly active and knowledgeable and become the ‘first line of defence’, more protection for minority shareholders will be put in place. For instance, disclosure requirements need investor vigilance to monitor actual practices, particularly in terms of related-party transaction disclosures”. One ought to remember that most of the minority shareholders are unsophisticated retail investors as compared with large institutional shareholders.

157 They may not have the necessary resources to be vigilant enough in monitoring the board practices. As a result, enhanced disclosure best practice shall be the stepping stone to complement the lack of resources and inadequate shareholder activism amongst minority shareholders.

Having greater level of disclosure and transparency, minority shareholders would have the opportunity to pull out their investment from a corporation if there is any untoward situation faced by the board. At the same time, shareholders will be well aware of any unfavourable transaction that a director intends to enter into, of which the director’s interest conflicts with the best interest of the corporation in the short run. Such enhanced disclosure will help to ensure that minority shareholders are given sufficient notice to act rationally and swiftly.