KUALA LUMPUR (Nov 24): The detailed disclosure of senior management remuneration on a named basis remained the lowest adoption among practices in the Malaysian Code on Corporate Governance (MCCG), with only 5% or 43 of listed companies on Bursa Malaysia adopting the practice last year, said the Securities Commission Malaysia (SC).

An additional 44 companies - out of which 34 are small-cap companies - had disclosed their top five senior management remuneration in bands of RM50,000 on a named basis, bringing the total number of listed companies that adopted the practice to 146 in 2020, up from 122 in 2019.

“Detailed disclosure of senior management remuneration on a named basis (Step Up Practice 7.3) is among practices in the MCCG with the lowest adoption level. In 2020, nine companies adopted this practice, including seven mid- and small-cap companies,” it revealed in the Corporate Governance Monitor 2021 (CG Monitor 2021) report released on Wednesday (Nov 24). The report presents an update on the adoption of the 2017 edition of the MCCG and the quality of corporate governance (CG) disclosures.

Reasons provided by the companies for not adopting the practice include to maintain the privacy of its senior management personnel, concerns on talent retention and poaching in a competitive market for talent, as well as personnel safety and security. Some companies, the SC said, had opted for an alternative practice to disclose the remuneration of its top five senior management personnel in bands of RM50,000 but not on a named basis -- RM50,000 to RM 100,000 for two individuals -- while one company had adopted the same approach albeit using a higher band of RM250,000.

Some companies had also attempted to justify their departure from the MCCG practice by saying that the non-disclosure of senior management remuneration is immaterial to stakeholders’ evaluation of corporate governance.

However, the SC pointed out that providing stakeholders with information on the remuneration of senior management enables them to evaluate if the remuneration is fair, able to attract, as well as retain talent, and review the link between pay and performance. "Transparency and clear explanation on the relationship between pay and performance can promote accountability on the part of the company while enabling stakeholders, in particular, shareholders to evaluate whether the incentive structures encourage the right behaviour from its management and ensure alignment of the individuals with the company’s strategic direction."

In the report, the capital market regulator issued a call to action for listed companies that have yet to adopt the disclosure of senior management remuneration to take necessary actions. It also encouraged shareholders to engage boards on the adoption of these practices.

Another practice in the MCCG on gender diversity on boards (Practice 4.51) recorded adoption levels of less than 50% of listed companies.

“It is disappointing to find that a large number of listed companies still depart from Practice 4.5 which recommends that the board discloses in its annual report, the company's policies on gender diversity, its targets and measures to meet those targets. A number of the companies that reported departure from Practice 4.5 explained that the company appoints directors based on merit, and does not discriminate based on gender,” said the SC.

“The SC would like to emphasise that boards are expected to ensure that any individual appointed to the board (regardless of gender) is appointed based on merit and possesses the skills and experience required for the position. Setting a gender diversity policy and target does not dilute this expectation. Moreover, boards should recognise that gender is a critical aspect of board diversity, alongside other factors such as skills, experience, age and nationality.

“Listed companies are reminded that it is mandatory to disclose the company’s policy on board composition, having regard to the mix of skills, independence and diversity (including gender diversity) required to meet the needs of listed companies. Failure to consider gender diversity and disclose company policy in relation to it may constitute a breach of Bursa Malaysia Listing Requirements,” it added.

Despite the Covid-19 pandemic, improvements were recorded in the overall adoption of the MCCG among listed companies on Bursa Malaysia last year, against 2019.

“Out of the 36 best practices, 24 had the adoption levels of at least 90%, which means that at least 90% of listed companies have adopted the practice. This compared with 23 best practices in 2019,” the SC said.

“However, the adoption levels of the step up practices (where companies are encouraged to go a step further in strengthening their CG practices) remained among the lowest, compared to other best practices in the MCCG,” it added.

The report also revealed that a total of 892 listed companies were scheduled to issue their CG reports for the financial year ended 2020.

“Only 864 CG reports were eventually issued between March 2020 and July 2021. The remaining 28 CG reports were not issued due to either a change in the companies' financial year, delisting or suspension. Seven companies that were newly listed in 2020 also issued their CG reports in the same year.”

For more stories on the SC CG Monitor 2021, click here.