Apollo Investment Management

Open letter to Securities Commission Malaysia
Feedback on Corporate Governance Blueprint 2011

CG Blueprint Team
Securities Commission Malaysia

Dear Sirs,

I write in response to the request for feedback on the Corporate Governance Blueprint 2011.

Dangers of over-prescriptive regulation

I welcome the declaration that "the cost to the market of over-dependence on regulatory discipline can be disproportionate to the benefits. It can result in regulations being overly prescriptive, additional costs to the market, and may foster a box-ticking culture. For this reason the SC is always guided by the principle that there should be no more regulation than necessary." (p.61)

Indeed I see excessive regulation as a significant threat to innovation and economic wellbeing, for society overall. It is certainly possible for "unproductive activity" to grow to the point where it crowds out "productive activity"; and although this is hard to measure, I believe that several mature economies may have reached this inflexion point.¹

In the specific field of Malaysian corporate governance, I believe that reintroducing a Continuing Professional Education requirement for directors (p.41) is a retrograde step.² Good directors have many other calls on their time: time spent on courses is likely to mean that much less time available for the strategic affairs of the company.

My impression is that the recent swelling of formalised compliance obligations and of the corporate governance sections of annual reports in Malaysia has been accompanied by a reduction in both extent and quality of the Management Discussion and Analysis text, the most important annual disclosure to shareholders of the current state of the business, principal challenges, and strategic priorities!

Accordingly, while I welcome the "greater focus on substance in terms of meeting corporate governance requirements" (p.47), there may be a danger that it is interpreted by expanding the number of words devoted to the formal CG regulations, when what is really required is a greater focus on the good governance of the company: sensible strategies, good disclosure, and equitable treatment of different stakeholders.

Importance of disclosure - and of maintaining quarterly reporting

Swift disclosure of relevant information to the market is of vital importance. The introduction of quarterly reporting, and the rapid dissemination of reports and corporate documents through the internet, have been among the most constructive developments of recent years. I therefore note with great concern the planned review on "whether to retain the current practice of quarterly reporting" (p.48).

A quarter may indeed "not provide a long enough period to draw a conclusion about a company's financial position or performance"; but nor does a half-year, or a single full year. Any long-term investor will analyse the company's development over a sequence of periods. The provision of quarterly information provides a better picture of the business, as well as a more up-to-date one. The text suggests that "the shorter time period lends itself to manipulative reporting": on the contrary, anomalies are much easier to spot in a quarterly context, and manipulation may be harder to sustain.

Quarterly reporting should be retained and enhanced, following international best practice. Examples to consider should not be the laggards cited in the text, but those of Thailand, Singapore, Indonesia, the US and Japan. Quarterly reports should be strengthened by the inclusion of a cashflow statement, full notes to the accounts, and the expectation of an informative statement (which need not be long) on current business developments.

Enforcement - a focus on corporate actions and controversies

The Blueprint notes the role played by journalists, analysts and other corporate governance advocates, and describes them as 'influencers' (p.53-56), but the enforcement section complains of 'the passive nature of shareholders, paired with a habitual reliance on regulators to detect wrong-doing and initiate investigations, [which] puts the burden of enforcement solely on government bodies' (p.61).

The Blueprint goes on to recommend a study on facilitating private litigation by aggrieved investors. This may be a good idea, as one more weapon in the arsenal, but in practice few institutional investors, let alone individuals, have the time and other resources to pursue legal action. Most will vote with their feet. This is not passive: it's active, and effective.

The description of the situation seems to me imbalanced, but it points the way to a solution: to focus regulatory resources, not on the paperwork of all market participants, but on controversies and on allegations of problems. It is understandable that regulators feel overburdened if they try to monitor all activitiy in the market - but they need not. Market participants, collectively, do a great job of detecting probable wrong-doing. Investigating suspicions and acting to prevent abuse is properly the responsibility of regulatory agencies. Regulators can therefore rely on market participants, journalists and bloggers to highlight the issues on which they should focus. An effective response to the issues raised would improve both governance and market confidence, while improving the flow of information in a virtuous circle. (The 'influencers' would love to be influential; many have become disillusioned after trying to engage in the past.³)

An effective response should be based on the principles of fairness, protection of minorities, etc. Clear explanations of decisions on controversial points would allow the build-up of a body of judgments analogous to case law ('case regulation?'), while providing ongoing guidance to practitioners on interpretation of the principles.

To summarise my recommendations:

  Yours faithfully

  Claire Barnes
  26 July 2011

  1. I consider this one of the major threats to prosperity, along with resource constraints, environmental limits, the debt cycle, and political consequences. See for example 'Bureaucracy and overcomplexity', my 2Q11 report for Apollo Asia Fund Ltd.
  2. While it is not covered in the CG Blueprint, I'd also like to repeat my request for abolition of the CPE/CPD scheme for fund managers. As discussed with the Securities Industry Development Corporation, and in the 2Q11 report, "continuing professional education" is regularly and ruthlessly dispensed by the markets, and our clients would be better served if we were able to focus on the job for which they pay us.
  3. For example, see http://whereiszemoola.blogspot.com/2011/07/letter-from-truly-disappointed-ex.html

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