5th OECD Asian Roundtable on Corporate Governance:

Developments In Malaysia – The Private-Sector Perspective

Vincent Duhamel

State Street Global Advisors

March 2003

Agenda

Company and market valuation

Legal, regulatory, and supervisory framework

Shareholder rights and participation

Role and responsibility of institutional investors

Corporate Governance Structure

Corporate governance: – a system of checks and balances designed to produce efficient

corporations that deliver long-term value

Arm’s length model: – depends upon checks and balances between management, boards,

majority and minority shareholders and enforcement of shareholder and creditor rights

Relationship model: – governance exercised by controlling block-holders; minority

shareholder rights and role of independent board directors are weak

Impact on Company Valuation

Relationship-oriented companies and markets:

– lack effective risk oversight

– have ineffective mechanisms for shareholders to assess or influence management

– may be perceived as disregarding consequences of underperformance or failure of good governance

Investors increasingly link corporate governance with stock valuations and cost of capital/risk premiums for firms and emerging markets

– companies that follow international standards for governance are considered worth 20% more than companies lacking such standards

– corporate governance weaknesses erode shareholder value and jeopardize investor rights

– addressing weaknesses can dramatically increase investor interest

Legal, Regulatory, and Supervisory Framework

Prior to 1997 financial crisis, Malaysia took steps to strengthen corporate governance:

– rules for independent directors, audit committees, shareholder election of directors

– Securities Industry Development Centre established

Financial crisis highlighted importance of good corporate governance -- led to increased regulation:

– Quarterly financial reporting; adoption of International Accounting Standards

– New disclosures, corporate board requirements under Malaysian Code on Corporate Governance

– Revamped KLSE listing requirements, mandatory director training for listed companies

– Limits to insider trading, dealings by directors and substantial shareholders, voluntary suspension of share trading

Malaysian Corporate Governance: A Moving Target

Many improvements are being made…

– increased partnership between government and private sector with greater separation of ownership and management

– authorities pressuring boards to respect shareholder interests

– effective legal system and adequate legislation protect private property

– unique system for training directors

. . . But problems persist

– concentrated ownership

– corporate attitudes undervalue transparency, accountability and integrity

– lack of division between politics and corporate sector

– Mind-set of shareholder passivity

Shareholder Rights

“Best practice” requires shareholder rights to participate in corporate strategic decision-making

Malaysia has good track record protecting shareholder rights and complies with many best practice standards, e.g.:

– All shareholders entitled to attend AGM and vote or appoint proxies

– Meeting and proxy information conveyed in timely manner

– Re-registration of shares into beneficial owners’ names not required

– Shares being voted are not blocked for trading

– Responsibilities of depository bank for ADR shares are clear

– Split voting is possible

– Issuers cannot reject votes if full compliance with voting requirements

Shareholder Participation

Level of participation by minority shareholders in corporate governance remains relatively low:

– Corporate governance historically dominated by majority investors

– Changing entrenched or traditional practices is a slow process

But shareholder participation beginning to grow:

– foreign investors imposing demands and pressures

– local investors considering how they can exercise their rights

– large institutional investors realize they can wield substantial influence

– Organizations like the Malaysian Institute of Corporate Governance contributing to training and education

– Minority Shareholder Watchdog Group– Badan Pengawas– working to unite minority shareholders and raise governance standards

Role and Responsibility of Institutional Investors

Institutional shareholders have right and duty to exercise influence on company value

– Investment managers must uphold duty of care and loyalty to beneficial owners to add value and protect interests

SSgA’s corporate governance philosophy and process

– “sacred trust” to ensure that clients receive best possible return on investments within acceptable level of risk

– vote proxies in best economic interest of the owners, always considering cost-benefit trade-offs

– set and follow proxy voting principles and procedures

– maintain “open door policy” to encourage discussion; be responsive to requests from companies and shareholders to consider issues of concern

– make and act on decisions through investment committee, proxy voting service unit, and thorough decision making process

How Investors Can Effect Change

Shareholder activism

Relationship investing

Quiet diplomacy

Proxy voting

Engage in dialogue with government, regulators, stock exchanges, trade associations, and self-regulatory bodies

Adopt best practice policies and standards and communicate them to the market

Conclusion

Good corporate governance:

– Embraces accountability and transparency

– Enhances perceived integrity of management and board

– Has tangible positive effects on value of a company’s stock

– Is an important factor for investors in evaluating opportunities

Investors recognize improvements made by government, regulators and corporations but challenges remain:

– Convergence in regulations, attitudes and pressure from institutional investors and shareholder groups must continue

– Strong supervision and enforcement of new standards essential for success

– Market “state of mind” must firmly recognize and put into practice the precepts of accountability, transparency and integrity

Thank you