The 6 th Asian Roundtable on Corporate Governance

The 6 th Asian Roundtable on Corporate Governance Implementation and Enforcement in Corporate Governance Nik Ramlah Mahmood Securities Commission Malaysia Theme II – Session 1 Agency Enforcement Seoul, Korea 2 -3 November 2004 1 those of the author and do not necessarily represent the opinions of the OECD or its Member countries or the World Bank The views expressed in this paper are

Agenda I I II Enforcement of Corporate Governance: Introduction Public Enforcement: Malaysia’s Experience Issues and Challenges 2

Agenda I Enforcement of Corporate Governance: Introduction 3

Legal and institutional reforms in corporate governance must be backed by enforcement Post crisis, many Asian jurisdictions including Malaysia had introduced significant legal reforms to the corporate governance environment Awareness of corporate governance is now significantly greater But developmental efforts would be stunted if not backed by a focus on strengthening enforcement 4

Enforcement of corporate governance must be viewed holistically Unlike developed markets, most developing markets do not enjoy strong private (“bottom-up”) enforcement This makes strong public (“top-down”) enforcement crucial Public monitoring & enforcement by regulatory agencies l l Private monitoring & enforcement by the market Timely and consistent l Board monitoring enforcement of rule violations l Shareholder monitoring l Reputational intermediaries (auditors, corporate advisers) l Other parties (investment analysts, financial press) Enforcement powers must include ability to take action against reputational intermediaries 5

Core pre-requisites for public and private enforcement core pre-requisites Market maturity & level of sophistication The level of awareness of directors of their duties, shareholders of their rights and the presence of reputational intermediaries Transparency and disclosure Market discipline is premised on the reliability of disclosures The presence of enforcing institutions The integrity and efficacy of regulatory agencies and the court system The supporting legal framework The whole range of laws in the corporate and financial system must be firmly in place 6

Agenda II Public Enforcement: Malaysia’s Experience 7

Public enforcement: Malaysia’s experience As with most developing countries private monitoring and enforcement are at a relatively nascent stage of development Responsibility for corporate governance enforcement is shared by several agencies Regulatory agencies are endowed with strong investigative powers and a wide range of sanctioning options Criminal sanctions are increasingly being complemented by civil and administrative sanctions 8

Public enforcement of corporate governance is shared by several agencies Agency Securities Commission (supported by exchange front-line regulation) Jurisdiction Securities Legislation and Listing Standards Disclosure violations and false submissions - False/misleading statements in corporate submissions - Breach of conditions of approval on corporate proposals - False/misleading statements in prospectuses Market offences - Market manipulation - Insider trading - Other market offences Breach of exchange listing rules - periodic and continuous disclosure obligations - Independent directors, audit committees - related party transactions Companies Commission Police, Anti-Corruption Agency Powers Company legislation and common law Breach of directors’ fiduciary duties Other company law offences (1) Criminal sanctions (2) Civil sanctions (certain cases) (3) Administrative sanctions (1) Criminal sanctions (2) Civil sanctions (3) Administrative sanctions (1) Criminal sanctions Penal Code Criminal breach of trust (1) Criminal sanctions 9

Regulatory agencies endowed with comprehensive investigative and enforcement powers Consistent with IOSCO’s principles of securities regulation powers of Securities Commission include: Power to seek various orders from the court Power to impose administrative sanctions Power to require surrender of travel documents Power to disqualify Directors and CEOs of PLCs Power to require production of books and records Protection of informers and information Power to prosecute (with consent of Attorney General) 10

Increasingly criminal sanctions are being complemented by civil and administrative sanctions Securities law – The law reform towards greater civil and administrative sanctioning options began in securities law, and now cover, inter alia, - insider trading and market offences - false and misleading submissions to regulators - false and misleading prospectus disclosures - breach of listing standards Company law - Under the Corporate Law Reform Programme, company legislation in Malaysia is currently being reviewed with a view towards modernisation. Reforms will likely incorporate a greater reliance on civil and administrative enforcement options Caveat - In empowering regulators with administrative enforcement options, checks and balances in the exercise of power are crucial as enforcement is taken outside the court system. In Malaysia as with other common law countries, challenge is typically provided for under the administrative law framework 11

The relative merits of different sanctioning options Criminal sanctions Civil sanctions Strong deterrent value Subject to procedural delays of the court system High burden of proof (‘beyond a reasonable doubt’) Deterrent value lower than criminal sanctions Subject to procedural delays of the court system Burden of proof lower than criminal standard (on a balance of probabilities) sanctions Deterrent value lower than criminal or civil sanctions Allows for speedy action (not subject to procedural delays of the court system) Regulatory agencies determine standard of proof Need for checks and balances in exercise of power Private rights of action Requires/allows for a market-based enforcement response Subject to procedural delays of the court system Burden of proof lower than criminal standard (on a balance of probabilitie Administrative 12

An array of different sanctioning options is crucial for effective enforcement Nature of sanctions meted out by the Securities Commission (2002 – Aug 2004) • Restitution • Restrain dealing in assets • Appointment of receivers • Revocation of license Disciplinary actions Civil actions 4% 2% Warning & public reprimand 26% Other administrative actions 3% • Barring of submissions • Issuance of directions Prosecution 38% Compound 27% 13

Criminal prosecution is used for serious breaches of the law Profile of Offences Prosecuted by the Securities Commission (1999 -August 2004) Fraud (5. 7%) (3 cases, 11 individuals) Corporate Governance (45. 3%) (24 cases, 40 individuals) Short selling & licensing related offences (32%) (17 cases, 18 individuals) Futures industry Offences (17%) (9 cases, 17 individuals) Corporate Governance offences include: – Providing false or misleading info on proposals/dealings in securities or affairs of company – Fraud involving directors or management – Mis-utilisation of public issue proceeds – Breach of condition of SC’s approval – Trading offences involving directors or management 14 14

Increasingly a significant proportion of criminal prosecution relates to corporate governance offences Profile of Offences Prosecuted by the Securities Commission (1999 -August 2004) Fraud 3 cases, 11 individuals 5. 7% 17. 0% 9 cases, 17 individuals Futures industry offences Short selling & licensing related 32. 0% 17 cases, 18 individuals offenses 45. 3% 24 cases, 40 individuals Corporate Governance offences 0. 0% 5. 0% 10. 0% 15. 0% 20. 0% 25. 0% 30. 0% 35. 0% 40. 0% 45. 0% 50. 0% Source: Securities Commission 15

For effective enforcement of corporate governance, public enforcement agencies need a wide array of powers Case study 1: Energro Berhad (August 2004) Issue - The case involved a restructuring and listing exercise which entailed alleged breaches of securities law, ie, false and misleading submissions to the SC and prospectus disclosures Enforcement action taken - Revoked prior granted regulatory approval for listing Directed the company to transfer monies raised from the restructuring exercise into trust accounts to safeguard investors interests Initiated civil enforcement action, to restrain any dealings with assets, and for restitution of monies to affected investors/subscribers Prosecuted promoter and accountant Criminal trial pending 16

Regulators also need to be empowered to take action against ‘reputational intermediaries’ such as external auditors Case study 2: Kiara Emas Asia Industries Bhd (KEAIB) – August 2004 Issue - A company (KEAIB) had utilised the proceeds of its rights issue in breach conditions of a prior granted approval of the SC. False disclosures were submitted to the SC Enforcement action taken - Director charged for criminal breach of trust (CBT) as the preferred charge, and in the alternative, the breach of condition of SC's approval in the utilisation of KEAIB's rights issue under securities law - Internal accountant charged for role in submitting false information to the SC - External auditor charged for role in submitting of false information to the SC 17

Our efforts in public enforcement have shown results CLSA Reports on Corporate Governance in Asia (2001 -2004) Year-on-year improvement in relation to country rating on corporate governance enforcement: CLSA Country Ratings on Enforcement (Malaysia) – Trend Analysis Year Enforcement 2001 2002 2003 2. 0 3. 5 2004 5. 0 18

Agenda III Issues and Challenges 19

Various issues potentially arise in a multiple agency environment The surveillance, investigation and prosecution of corporate governance violations typically involve the overlapping jurisdictions of multiple regulators Inter agency co-operation and information sharing at all stages are crucial During investigations, there may be restrictions either operationally or at law, which impede information sharing and co-operation, slowing down the enforcement process Upon investigation, agencies may often discover that the preferable charge for a given wrong may lie outside their jurisdiction Different agencies may have varying levels of capacity and resources to meet enforcement challenges The fact that agencies are accountable to different government ministries does not facilitate co-operation 20

In Malaysia enforcement of corporate governance may involve numerous agencies Domestic regulatory agencies that may be involved in corporate governance breaches include: Prime Minister’s Dept Attorney General Consent required in criminal prosecutions Anti- Corruption Agency May pursue certain offences involving corruption Ministry of Home Affairs Ministry of Domestic Trade and Consumer Affairs Police Companies Commission Securities Commission Central Bank Penal Code Company Law Securities Law Banking Law Ministry of Finance Key agencies involved in enforcing corporate governance violations of listed companies Government ministries and other relevant agencies 21

Formal and informal channels for cooperation and information sharing are vital Working committees/dialogues - Regular inter-agency meetings between government agencies to discuss operational issues and sharing of information Formal agreements/arrangements - Various MOUs were entered into between the SC and other domestic and foreign regulators (eg. , between Securities Commission and Labuan Offshore Financial Authority) - Prosecutors from the Attorney General’s Chambers are seconded to the Securities Commission, allowing speedy charges for Penal Code offences to be brought (eg. , criminal breach of trust) Joint training and education efforts - The Securities Commission provided training programmes for the Police and the Judiciary on matters related to securities law and its enforcement Overarching/national level committees - A High-Level Enforcement Committee was formed chaired by the Securities Commission, which includes the Police, and the Companies Commission which reports to Prime Minister to ensure accountability 22

Other possible options The ‘hot pursuit’ model: - The Malaysian Anti-Corruption Agency (ACA) is statutorily empowered to apply its powers of investigation and prosecution to ‘prescribed offences’ under the jurisdiction of other regulators. (eg. , the Penal Code, Elections Act and Customs Act) - Is this model relevant for the enforcement of corporate governance-type offences in a multiple regulator environment? A dedicated agency for enforcement: - Should enforcement reside, not with the securities regulator or the registrar of companies, but with a single agency dedicated to enforcement? Widening powers of the securities regulator: - Would the widening of the scope of securities laws to include all offences involving elements of fraud in public listed companies make enforcement more effective? 23

Reducing dependence on public enforcement Strengthening the legal foundations for private enforcement: In securities law, the trend has been towards statutorily entrenching private rights of enforcement… - Insider trading and market offences (1997) False and misleading prospectus disclosures (2000) Breaches of the listing standards and the Securities Industry Act 1983 (2004) Prospective developments: The current review of company law under the auspices of the Corporate Law Reform Programme will, inter alia, review the merits of introducing… A more facilitative regime for class actions A legislative framework for statutory derivative actions Investor education is vital. 24

Developing expertise and building capacity in agency enforcement Public enforcement agencies must be well funded Public enforcement is resource intensive Public enforcement agencies must have staff with appropriate investigative and prosecutional skills Public enforcement agencies must be able to handle international 25

Comprehensive public enforcement powers require accountability on the part of regulators The exercise of wide powers endowed at law – What measures need to be in place to ensure consistent and fair action? Is redress under administrative law enough – or are other simpler challenge or appellate structures necessary? Transparency - Meaningful disclosures of enforcement activities by regulatory agencies are crucial for accountability Enforcement disclosures by the Securities Commission: l The SC annual report is tabled before Parliament. Enforcement activity disclosures include, inter alia: - investigations taken - criminal prosecutions - civil and administrative actions taken l The SC website includes the annual report and quarterly updates on enforcement activity. (see www. sc. com. my) 26

With comprehensive tools and wide powers, regulators must have an enforcement strategy Use of criminal vs Civil powers or administrative Cost vs. Benefit Serious Offences vs. `Technical’ breaches Quantity vs. Quality of enforcement action When to take action on behalf of investors 27

Thank you Kindly refer to the website of the Securities Commission for further information regarding our work on corporate governance and enforcement: www. sc. com. my 28