Oxford Brookes UniversityAn Assessment of the Quality of Corporate Governance Within Bursa Malaysia Bhd and the Impact on The Organization‟s Key Stakeholders (6528 words) Being a Research and Analysis Project Submitted in Partial Fulfillment of the Requirements of BSc (Hons) in Applied Accounting Oxford Brookes University Name : Loh Jia Ying ACCA Registration Number : 2513940 Submission Period : 10 th May 2013 Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 2 Table of Contents PART 1: PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACHPAGE 1.1 Topic Area 5 1.2 Reasons for Choice of Topic 5 1.3 Organization Background 6 1.4 Reasons for Choice of Organization 6 1.5 Project Objectives and Research Questions 7 1.6 Overall Research Approach 8 PART 2: INFORMATION GATHERING AND ACCOUNTING/BUSINESS TECHNIQUE 2.1 Sources of Information 10 2.2 Methods of Information Collection 10 2.3 Limitations of Information Gathering 11 2.4 Ethical Issues 12 2.5 Accounting and Business Techniques Used 13 PART 3 RESULTS, ANALYSIS, CONCLUSIONS AND RECOMMENDATIONS 3.1 Extent of Compliance with the Malaysian Code on Corporate Governance 17 3.1.1 Establish Clear Roles and Responsibilities 18 3.1.2 Strengthen Composition 20 3.1.3 Reinforce Independence 23 3.1.4 Foster Commitment 24 3.1.5 Uphold Integrity in Financial Reporting 25 3.1.6 Recognise and Manage Risk 26 3.1.7 Ensure Timely and High Quality Disclosure 27 3.1.8 Strengthen Relationship between Company and Shareholders 29 Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 3 3.2 Identification of Key Stakeholders 30 3.3 Impact of Good Corporate Governance On Company’s Key Stakeholders 3.3.1 Government and Regulatory Authorities 32 3.3.2 Shareholders 33 3.3.3 Employees 36 3.3.4 Community 37 3.4 Conclusions and Recommendations 39 Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 4 PART 1: PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 5 1.1 TOPIC AREA The topic that I have chosen for my Research and Analysis Project is Topic 17, “An Assessment of the Quality of Corporate Governance within an Organization and the Impact on the Organization‟s Key Stakeholders”. One of the earliest attempts to define corporate governance (CG) is made by The Cadbury Report (1992) in which it is defined as “the system by which companies are directed and controlled”. In Malaysia, the High Level Finance Committee on Corporate Governance (1999, p.20) define CG as “the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long term shareholder value, whilst taking into account the interests of other stakeholders”. This is a clear indication that CG is not only applicable to shareholders but has a profound impact on other stakeholders as well. 1.2 REASONS FOR CHOICE OF TOPIC One of the main reasons I have chosen this topic is in view of the worldwide increased understanding and emphasis placed on CG and its role in assuring suppliers of finance to receive adequate returns on their investment (Shleifer and Vishny, 1997). High profile corporate scandals for the past decade, ranging from Enron and Worldcom to the more recent Olympus and Hewlett Packard cases have further elevated the awareness of the importance of good CG. The long lasting debate on the correlation between CG and a company‟s financial and non-financial performance also stirred my interest in further exploring existence of such relationship. I have gained prior exposure to the topic of CG through ACCA Paper F4 “Corporate and Business Law‟ and Paper F8 “Audit and Assurance”. During my last semester, further in depth studies on the topic was undertaken through ACCA PaperP1 Governance, Risk and Ethics. Researching on this topic provides me the opportunity Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 6 of applying all my previous studies in practical context in real life situations and instills a more holistic understanding on this topic. 1.3 ORGANIZATION BACKGROUND Bursa Malaysia is an approved exchange holding company under Section 15 of the Capital Markets and Services Act 2007. A public company limited by shares under the Companies Act 1965, Bursa operates a fully-integrated exchange with about 1,000 companies across 50 economic activities, offering equities, derivatives, offshore listings, bonds as well as Islamic products, and provides a diverse range of investment choices globally (MIDA, 2012). Established in 1973, the Kuala Lumpur Stock Exchange changed its name to Bursa Malaysia Berhad in 2004 following a demutualisation exercise to enhance its competitive position and to respond to global trends in the exchange sector by being more customer-driven and market-oriented. On 18 March 2005, Bursa was listed on the Main Board of Bursa Malaysia Securities Berhad (Bursa, n.d.). Committed to make the Malaysian capital market attractive to investors worldwide, the exchange places great emphasis in ensuring a fair and orderly market at all times, with high priority on investor protection. Its strength lies in its progressive regulatory approach to ensure that high standards of conduct are practiced by market players (MIDA, 2012). 1.4 REASONS FOR CHOICE OF ORGANIZATION Together with the Securities Commission (SC), Bursa Malaysia is one of the two main regulators of Malaysian capital markets which have the responsibility of maintaining the proper functioning of the market. Being publicly listed, Bursa is accountable to its shareholders but as a market regulator, it is also ultimately accountable to the general public and investors. Such delicate balance of different stakeholders‟ interest has attracted my interest in researching on this organization. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 7 Malaysia has made significant progress in CG over recent years, especially where corporate culture is finally showing signs of openness (ACGA, 2012). It would be interesting to see how Bursa has actually walked the talk. Its governance practice could also have a profound impact on CG development within the country. Moreover, Bursa has won numerous awards in terms of CG best practice (The Edge, 2011) whileits annual reports havealso been forthcoming and provides extensive coverage on governance issues. Such transparency and easy access of reliable information would save precious time in information gathering and allow me to focus on assessing its governance quality and impact on its stakeholders. 1.5 PROJECT OBJECTIVES AND RESEARCH QUESTIONS The objectives of this research are as follows: To assess Bursa Malaysia‟s extent of compliance with the Malaysian Code on Corporate Governance (MCCG) To evaluate the impact of CG practices on Bursa‟s key stakeholders To assess methods taken by a listed market regulator in discharging its accountability to different groups of stakeholders To identify the relationship between quality of CG practice and company‟s financial and non-financial performance The following are research questions relevant to the objectives set: What is the extent of Bursa‟s compliance with MCCG? Is it merely in terms of codes and rules or in spirit and substance? What are the impacts of CG and how they affect stakeholders of the company? How does a market regulator balance the interests of different stakeholders and discharge accountability? What is the relationship between CG practice and company‟s performance? Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 8 1.6 Overall research approach Generally, a primary research via surveys or interviews would result in more specific, relevant and up-to-date data collection (Onkvisit & Shaw, 2009). However, due to cost and time constraints, analysis of secondary data has been chosen as the more pragmatic approach to relieve the otherwise extensive demand expected of a primary research. Moreover, there are various sources of secondary data available to allow critical assessment of Bursa‟s CG practice. In the process of secondary analysis, a literature review has been conducted by reviewing journals, articles and researches produced by relevant professionals in the governance topic, including the latest pronouncement by relevant authorities such as the Securities Commission, Malaysian Institute of CG and the Minority Shareholder Watchdog Group. These provided me extensive insights and facilitated my understanding on the topic background before proceeding on my research. A triangulation process in which qualitative data is combined and integrated with quantitative data is used to minimize their respective limitations and complement each other (Taylor, 2005).A benchmarking of Bursa‟s CG practice against best practices or relevant companies in the same industry has also been conducted to understand the organization‟s current position and identify potential recommendations for improvements to be made. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 9 PART 2: INFORMATION GATHERING AND ACCOUNTING/BUSINESS TECHNIQUE Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 10 2.1SOURCES OF INFORMATION There are two main sources in which information can be collected for a research: Primary Source Primary source provides first-hand testimony or direct evidence concerning a topic under investigation (Yale University, n.d.). Use of such source would have allowed relevant information being presented in a more specific context. However, due to concerns over time and cost pressure, it is not used in this project. Secondary Source A secondary source is a report on the findings of the primary source. While not as authoritative as the primary source, it often provides a broad background and readily improves one‟s learning curve (Stacks, 2011). Due to its nature, information obtained from such source may suffer from potential limitations such as credibility issues or being out of date. Nevertheless, it is preferred in the preparation of this project due to its relative ease of access. 2.2 METHODS OF INFORMATION COLLECTION Internet The internet plays an increasingly important role in this era of advancement in information technology. With the assistance of search engines such as „Google‟ and „Yahoo!‟, information from various sources can be obtained. With easy access to relevant scholarly articles, e-books, e-journals and researches, this allows wide ranging exposure which facilitates the overall research process. Many information specific to Bursa Malaysia has been obtained from its corporate website: http://www.bursamalaysia.com/corporate/.The website provides access to the most recent annual reports, sustainability reports and other investor relations information which are not available elsewhere. Committed to high standards of integrity and transparency as a market regulator, Bursa has dedicated almost half of its annual reports to governance and sustainability issues. All these formed the fundamental bases of information for this project. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 11 Library The Sunway University‟s College library facility has been useful in the process of preparation for this project. With an extensive collection of books, periodicals, journals and other reference books, it provided me with great amount of relevant and reliable resources. The presence of e-databases also makes information collection much more efficient and effective. 2.3 LIMITATIONS OF INFORMATION GATHERING Reliability of information One of the main concerns of utilizing secondary data is reliability of information obtained. Information obtained directly from Bursa‟s website, while comprehensive, may suffer from element of management bias. The company may present itself in better light while there are limited avenues for me to verify the credibility of such information. Such concern applies to other sources of information as well, especially those extracted from the Internet, as there are relatively lack of standards and controls on their accuracy (University of Illinois, n.d.). Such potential limitation is overcome by cross-referencing the information obtained, ensuring only those consistent throughout various sources are being utilized. There is also a conscious effort to avoid data in which author or original source cannot be traced. Timeliness of Information As Bursa‟s financial year (FY) 2012 Annual Report is only released on 28/2/2013, it is not available at the time when this research was started. However, since the new set of Malaysian Code of Corporate Governance (MCCG) is only applicable for annual reports from FY2012 onwards, I have decided to utilize the latest annual report to gain exposure on the latest MCCG. Significant difficulties are faced in the initial stage of this research due to non- availability of certain information. Therefore, I have adapted my research approach by first doing extensive background reading on CG topics and collection of other Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 12 relevant information before incorporating context specific information from the latest annual report. It is also a challenge to assess Bursa‟s performance. It is the only exchange holding company in Malaysia and there are no other comparable companies. London and Singapore Stock Exchanges have been chosen as the main proxies for comparisons. However, all three companies have different year ends and thus adjustments are needed on the financial results. While less than ideal, this is nonetheless the most practical way for like-to-like comparisons to be made. Ease of Access Much of the internal information on governance of Bursa used in this project is not available elsewhere and only accessible through the company‟s annual reports. As noted above, use of information provided by the company has its limitations although careful scrutiny has been undertaken to ensure critical and objective assessment of their validity. Besides, access to certain CG reports or findings is restricted where payments are required. Consequently, data from other alternative sources are collected to ensure full understanding on the topic is not being compromised. 2.4 ETHICAL ISSUES Plagiarism While past years‟ research paper submissions are sampled to obtain a clearer idea on the project approach, I have been vigilant to avoid any unconscious act of representing any of the students‟ ideas as my own. Proper citations and references of published information used in this project are also conducted through the Harvard Referencing System to ensure the original works of the authors are being acknowledged. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 13 Objectivity Due to the heavy reliance of secondary information, there is risk of undue influence by authors who may have vested interest in the company. Personal bias due to the company‟s reputation may also affect the validity of judgements and conclusions made. Therefore throughout the research, a clean state of mind is maintained and information used is corroborated from different sources to confirm their credibility. Professional Competence and Due Care It is crucial that one is well versed and knowledgeable in the topic of research. While I have exposure to CG through previous studies, extensive read up on the topic was nevertheless carried out to ensure adequate technical knowledge and skills for a proper research. It is also important to keep abreast with the latest developments, such as the revamp of the Malaysian Code on Corporate Governance alongside with revisions on other guidelines. 2.5 ACCOUNTING AND BUSINESS TECHNIQUES USED Malaysia Code on Corporate Governance (MCCG) 2012 As a listed company, Bursa is required to report on its compliance with MCCG provisions and thus the Code is used as the main benchmark to assess the quality of Bursa‟s CG. MCCG 2012 is preferred as it supersedes the 2007 Code (Securities Commission Malaysia, 2012). However, use of such national Code has potential limitations as its application is country-specific and thus any comparisons with foreign companies‟ practices would have certain difficulties. Mendelow’s Matrix Mendelow's matrix provides a way of mapping stakeholders based on the power to affect the organisation and their interest in doing so. It identifies the responses which management needs to make to the stakeholders in the different quadrants (Management Accountant Blog, 2008) as seen in the diagram below: Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 14 Diagram 1: Mendelow’s Matrix Source: Mendelow (1991) However, there are certain limitations in application of this framework as it is very difficult to measure power and interest of Bursa‟s stakeholders and thus involve inherent elements of subjectivity (BPP Learning Media, 2010). Furthermore, over time, the ongoing fluctuations in stakeholders‟ power and interest would render such static approach inadequate (CRC Construction Innovation, 2009). Ratio Analysis Ratio analysis, both horizontal and vertical, is performed to compare Bursa‟s performance against past trend as well as performance of other companies in the same industry. The main ratios analyzed in this project include earnings per share, dividend per share, share price growth and total shareholders‟ return. While easy for understanding and comparisons, ratio analysis also has its limitations as ratios of companies with different accounting policies and practices would be distorted and unsuitable for analysis. Besides, it only provides an indication of company‟s performance without offering any potential underlying reasons. Further Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 15 analysis and judgment would be needed to identify and assess the reasons behind such favorable or unfavorable variances. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 16 PART 3 RESULTS, ANALYSIS, CONCLUSIONS AND RECOMMENDATIONS Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 17 3.1 ANALYSIS OF EXTENT OF COMPLIANCE WITH THE MALAYSIAN CODE ON CORPORATE GOVERNANCE The MCCG draws from the United Kingdom‟s (UK) experience set out in the Hampel Report. Best practices are prescribed for compliance and reasons of non-compliance will need to be disclosed. Such approach establishes sound principles for CG but yet accord the flexibility for each company to develop its own procedures and alternatives that may be just as sound. However, if relevant matters are not disclosed in a company‟s annual report, actions can be taken against the company of its directors as set out in the Listing Requirements of Bursa Malaysia. Diagram 2: Main Principles of CG in Malaysia Source: Securities Commission (2012) MCCG 2012 Establish Clear Roles and Responsibilities Uphold Integrity in Financial Reporting Strengthen Composition Recognise and Manage Risk Reinforce Independence Ensure Timely and High Quality Disclosure Foster Commitment Strengthen Relationship between Company and Shareholders Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 18 3.1.1 ESTABLISH CLEAR ROLES AND RESPONSIBILITIES Clear Functions, Roles and Responsibilities Unclear roles and responsibilities may result in unclear source of authority, lack of accountability and commitment (HRA Consulting, n.d.). In Bursa, the Governance Model (Appendix 1) and Authority Limits Document (ALD) are prepared. These documents clearly distinguish the functions and relevant matters reserved for the board, board committees and management (Bursa Malaysia, 2012, p. 56). Both documents are reviewed and amended as and when required to adapt to the company‟s changing circumstances. Bursa‟s board‟s charter is embedded in the Governance Model document which is easily available on Bursa‟s corporate website. The charter is a source reference and primary induction literature, providing insights to prospective board members and senior management (SC, 2012). Bursa‟s board takes on the key responsibilities as recommended in MCCG 2012. Among those, management strategies and plans are deliberated and challenged by the board before approval. Independent advice by PricewaterhouseCoopers Advisory Services Sdn Bhd is also sought to review the 2012 Corporate Balanced Scorecard (CBS) which is then used by the board to oversee the conduct of the company‟s business (Bursa Malaysia, 2012, p.57). Code of Ethics As the nation‟s securities exchange, Bursa would naturally attract high public scrutiny. The company responded by formulating Codes of Ethics for directors and employees to govern the ethical standards and conducts expected, particularly in the areas of information confidentiality, conflict of interest and securities dealing. A whistleblower policy and report form is also in place and available on Bursa‟s website. Audit Committee (AC) oversees implementation of the policy while all reports are addressed to the Non-Executive Chairman or Senior Independent Non- Executive Director. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 19 It is also noteworthy that Bursa signed the Corporate Integrity Pledge during the year. The pledge is encouraged by the Malaysian Anti-Corruption Commission to combat corruption and enhances the confidence among foreign investors (The Star, 2012a). The act of signing demonstrates Bursa‟s commitment to integrity and good governance in its operations. Sustainability Bursa promotes the application of sustainability practices. This can be seen through its participation in various global environmental, social, governance and sustainability initiatives such as Earth Hour, the Carbon Disclosure Project and Global Reporting Initiative (GRI). Responsible use of resources and the importance of environmental protection are promoted among its employees and stakeholders. Unlike certain countries such as Australia and France which mandate sustainability reporting, there is no such requirement in Malaysia. Nevertheless, Bursa produced its inaugural Sustainability Report in 2011. On a broader scale, Bursa is also contributing towards drafting a Framework for Greenhouse Gas (GHG) Reporting for Malaysian companies (Bursa, 2012). Access to Information and Advice All directors in Bursa have individual and independent access to advice and support services of the company secretary. The directors may also seek direct interaction with management or independent professional advice at the company‟s expense in furtherance of their duties. Company secretaries play an important role in advising and supporting the board to discharge its functions effectively. While details of the training programs undertaken by Bursa‟s company secretaries during the year are not provided, the secretaries are members of The Malaysian Institute of Chartered Secretaries and Administrators (MAICSA) and thus should be professionally competent. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 20 3.1.2 STRENGTHEN COMPOSITION Nominating Committee Bursa combines both nomination and remuneration roles into one Nomination and Remuneration Committee (NRC), which is less ideal than 2 separate committees discharging the separate functions. All 5 members of NRC are non-executive directors (NEDs) of who three are independent and the other two are Public Interest Directors (PID). This is in compliance with the MCCG (2012) which states that the committee should comprise exclusively of NEDs, a majority of whom must be independent. Directors’ Recruitment and Annual Assessment Bursa‟s board composition is regularly reviewed to enable progressive refreshing and effective functioning. It has established a pool of potential directors for its reference when considering new appointments. As an exchange holding company, Bursa‟s recruitment process is slightly complicated by the need of obtaining the concurrence of the Securities Commission for the proposed appointments (Malaysian Government, 2007, s10(1)(b)). Bursa takes the annual assessment of directors and committee members seriously. A Board Effectiveness Evaluation (BEE) is carried out each year by the NRC while an external consultant is engaged every three years for assistance (Bursa Malaysia, 2012, p.62). The results will form the basis of NRC‟s recommendation to the board for re-election at the next AGM. In 2012, the NRC recommended for 4 directors to retire and 3 suitable candidates to replace them. The recommendation is approved by the board and shareholders. The change has positive effects on the board‟s overall age profile and tenure as seen in Appendix 2. The gender diversity of Bursa‟s board is non-satisfactory in comparison with fellow stock exchanges in Singapore and London. While marginally higher than the average women participation rate on the board in Malaysia of 7.1%, it is far from the 30% target set by the Malaysian government (The Star, 2012b). As the market Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 21 regulator, Bursa would have been expected to take the lead in heeding the government‟s call. Table 1: Number of Women Directors in the Board Bursa SGX LSE Number of women directors in board 1/12 2/14 2/12 Percentages 8% 14% 17% Source: Bursa Malaysia, Singapore Stock Exchange, London Stock Exchange Annual Reports (2012) The company plans to achieve its target of having three female directors by 2016 through the progressive refreshing of the board yet none of the three newly nominated directors are female. It appears that there are no concrete plans or actions in place to achieve such targets. Remuneration Policies The incentives of top management have been characterized as an important mechanism of corporate governance as it ensures the alignment of the management and the shareholders interest (John et al 2004, cited in Abdul Hadi, M. Fazilah, MdIshak, n.d.).Bursa‟s NRC is responsible for recommending the remuneration policy. Its policies are formal and transparent as individual directors‟ remuneration breakdowns is disclosed (Appendix 3). While directors‟ fees have not increased since 2009, the meeting allowances are revised during the year, with an increase of 33%-67% (Table2). This partially contributed to the worrying increase in directors‟ remuneration in recent years (Appendix 3). Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 22 Table 2: Bursa’s Meeting Allowances Meeting Allowance Board of Directors Board Committees 2011 2012 Increase 2011 2012 Increase Chairman RM 3,000 RM 4,000 33.3% RM 1,500 RM 2,500 66.7% Member RM 1,500 RM 2,000 33.3% RM 1,000 RM 1,500 50% Source: Bursa Annual Report (2012) However, the main cause of such increase is the change in CEO. The salary was increased from RM 1.2 million in 2009 to RM 5.1 million in 2012 (Table 3). Salaries are fixed in nature and should attract higher scrutinisation from shareholders as they are non-performance related. Bursa‟s current CEO was previously Managing Director of RHB Bhd and was then enjoying a remuneration of around RM 3 million. Further investigation would reveal that RHB Bhd has almost RM 152 billion in assets and generates Earnings per Share (EPS) of 69 cents compared to Bursa‟s RM 2 billion and 28 cents respectively (RHB Capital, 2011). While there are heavy responsibilities placed on a stock exchange‟s CEO, it is still baffling that a company with smaller asset base and profits is paying its CEO more than 60% higher than his previous corporate position. Table 3: Executive Director’s Remuneration Breakdown Executive Director‟s Remuneration (RM‟000) 2009 2010 2011 2012 Salaries and other emoluments 1243 1322 4729 5095 Defined contribution plan – EPF 192 187 354 418 Share options granted under ESOS 3 - - - Estimated money value of benefit-in-kind 31 31 32 32 Total 1469 1540 5115 5545 * Current CEO is appointed on 1 April 2011 Source: Bursa Malaysia Annual Report (2012 & 2010) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 23 Furthermore, CEO‟s remuneration alone is more than double the total remuneration of all other directors in Bursa. Simple comparison with other stock exchanges (Table 4) can also show that Bursa has indeed grossly over-remunerated its CEO. No plausible explanations are given and there is cause for concern on misusing of shareholders‟ funds. Table 4: Comparison of Salaries Comparison of Salaries Bursa LSE SGX CEO‟s Salary (RM/£/ S$ „000) 5095 675 755 Market Capitalization (RM/£/ S$ billions) 1465 3500 934 Remuneration: Market Capitilization 3.5 0.2 0.8 * Calculations focus on fixed salaries and not total remuneration * Market capitalization refers to combined market capitalization of all listed companies in respective exchanges as an indication for extent of responsibilities Source: Bursa Malaysia, Singapore Stock Exchange, London Stock Exchange Annual Reports (2012) 3.1.3 REINFORCE INDEPENDENCE Assessment of Directors’ Independence The BEE assessment is used to ensure directors‟ ability to exercise independent judgment at all times. A senior independent director is also appointed in the board. As a result of the adoption of a nine-year policy for independent NEDs, 3 directors retired in the recent AGM without seeking re-appointment. However, 2 directors who have served for more than 9 years are reappointed and consequently, re-designated as a non-independent director. Separation of Chairman and CEO Concentration of power in one individual could lead to decisions made in their own self-interest at the expense of shareholders. Separation of roles would promote accountability and facilitates division of responsibilities among them (SC, 2012). In Bursa, the Chairman and CEO have distinct and separate roles, with a clear division of responsibilities which is in line with the recommendations in MCCG 2012. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 24 Board Composition Although there are no conclusive results thus far, Adams and Mehran (2003) suggested that increases in proportion of outside directors on the board would increase performance due to the greater effectiveness in monitoring of managers. Bursa‟s board composition is partly influenced by the regulatory requirements of the Capital Market Services Act (2007) where one-third of the members of the board must be appointed by the Minister of Finance as PIDs and one of them shall be appointed as the non-executive chairman. Together with the high proportion of independent NEDs (Chart 1), there should be adequate safeguards to ensure protection of investors and public interest. Source: Bursa Annual Report (2012) 3.1.4 FOSTER COMMITMENT Time Commitment To ensure that its directors have adequate time to fulfill their roles and responsibilities effectively, Bursa capped other Public Listed Companies‟ (PLCs) directorships at not more than 5. Directors are also required to provide an update of their other directorship status every quarter. The attendance record of the directors during the year (Appendix 4) should suggest that they have devoted sufficient time to their roles. 1 7 4 Chart 1: Directors' Independence Executive Director Indendent Non-Executive Directors Public Interest Directors* * Appointed by the Minister of Finance pursuant to Section 10 of the Capital Market Services Act 2007 Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 25 Directors’ Continuing Education Directors are charged with critical responsibilities to act as advisors to companies and safeguard shareholders‟ interests, and as such, it is important that they are sufficiently knowledgeable, experienced and well-trained (Singapore Institute of Directors, 2005).Being at the forefront of the securities market, Bursa acknowledges the importance of its directors‟ continuing education. A dedicated training budget is provided each year and board policy is set that each director must attend at least 3 training sessions each year on capital market developments (Bursa Malaysia, 2012, p.65). In 2012, all directors attended at least 6 training programs (Appendix 5). 3.1.5 UPHOLD INTEGRITY IN FINANCIAL REPORTING Compliance with Applicable Financial Reporting Standards Bursa‟s audited financial statements and quarterly financial reports are in compliance with the Malaysian Financial Reporting Standards (FRS) and International FRS as well as requirements of the Companies Act. It has never been issued a qualified audit report and the external auditors have never raised any issues or complications during their audit engagements. The Audit Committee (AC) is made up of 4 independent NEDs and 2 PIDs. Together with their accounting or financial related qualification and experience (Appendix 6), they fulfill the Listing Requirements and are in good position to review the financial statements as well as provide relevant recommendation to the board and shareholders. Assessment of External Auditors Bursa adopted an Auditors‟ Independence Policy since 2006 which requires the lead and concurring audit engagement partners to be subject to a 5-year rotation with a 5- year cooling off period. The last rotation of partners from Messrs Ernst & Young (EY) was in 2010. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 26 RM‟000 Gul and Teoh(1986) suggests that the provision of non-audit services reduces public confidence in auditors‟ independence. Bursa appears to recognize this and has reduced the proportion of non-audit fees over recent years (Chart 2),The AC also undertakes an annual assessment and is satisfied with EY‟s technical competency and audit independence. Chart 2: Bursa Auditor’s Remuneration Breakdown Source: Bursa Malaysia Annual Report (2012 & 2010) 3.1.6 RECOGNISE AND MANAGE RISK Risk Management A nationwide survey on “Risk Management Practices in Malaysia” has revealed that companies are placing increasing importance on risk management as it aid in business decision-making and enhance shareholder value (IIA Malaysia &EY, 2011). In Bursa, the risk management committee (RMC) oversees, reviews and makes relevant recommendations to the board on the Enterprise Risk Management framework and policies. The framework is reviewed periodically to ensure that it is relevant and adequate to manage the evolving risk Bursa is exposed to in the changing business environment. 0 100 200 300 400 500 600 700 800 900 2009 2010 2011 2012 Audit Non-audit Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 27 Having previously suffered trading system failure in 2008 and 2000 (New Straits Time, 2008, cited in Malaysian Bar, 2008), a comprehensive Business Continuity Plan, including a Disaster Recovery Plan is prepared and tested annually to prevent repeat of such incidents. Internal Audit Since 2008, Bursa has mandated all listed companies in Malaysia to establish an internal audit function and report directly to AC (MIA, 2008). Bursa has complied with such requirement. Bursa‟s AC is tasked to review the adequacy and effectiveness of internal controls. There ispractice of segregation between the company‟s commercial and regulatory functions. Internal policies, standards and procedures are also in place to ensure compliance with internal controls and relevant laws and regulations applicable to the company. 3.1.7 ENSURE TIMELY AND HIGH QUALITY DISCLOSURE Disclosures For disclosure of material information, Bursa has set clear roles, responsibilities and levels of authority for all employees, including directors and CEO. Besides, due to sensitive nature of an exchange, there are internal control policies to avoid leakage or improper use of confidential information. Bursa is determined to disclose reliable financial results in timely fashion (Table 5). While there are no legal obligations for auditors‟ involvement, external auditors are engaged to conduct a limited review on the quarterly results. Besides, the results are released well within the stipulated time period (2 months for quarterly results and 6 months for Annual Report) and in par with Public Bank Bhd which is a frequent winner of corporate governance excellence awards. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 28 Table 5: Comparison of Days to Release Financial Results Financial Results 2012 Bursa Public Bank Berhad Date of Issuance Number of days after reporting date Date of Issuance Number of days after reporting date Q1 19/4/2012 19 18/4/2012 18 Q2 18/7/2012 18 23/7/2012 23 Q3 19/10/2012 19 18/10/2012 18 Q4 31/1/2013 31 6/2/2013 37 Annual Report 28/2/2013 59 21/2/2013 52 Source: i3investor.com (2013) Leverage on Information Technology Bursa Malaysia has revamped its website in 2012 and divided it into the corporate and market sections to provide a clear differentiation of its dual role as a listed company and an exchange marketplace (The Star, 2012c). The corporate section enhances the investor relations function by providing all needed information and announcements from Bursa. There are also dedicated areas for corporate governance and investor relations in the website. The company leveraged on information technology through the Bursa Listing Information Network (LINK). It has proven to be a much broader and effective dissemination of information to shareholders as well as the investing public. Diagram 3: Flow of Listing Information Network (LINK) Source: Bursa Malaysia (n.d.) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 29 3.1.8 STRENGTHEN RELATIONSHIP BETWEEN COMPANY AND SHAREHOLDERS Encouraging Shareholder Participation Bursa has committed to dispatch its Annual General Meeting (AGM) notice at least 28 days in advance, well above the regulatory requirement of 21 days. Besides, Bursa has also attempted to encourage shareholder participation by allowing participation either in person, corporate representative, proxy or attorney. To further promote participation, the company recently amended its Articles of Association to explicitly include the right of proxies to speak at AGMs. The recent AGM was held in Putra World Trade Center which is easily accessible. However, being held on a Thursday morning (28/3/2013) deters participation of shareholders who are working on weekdays. Poll Voting Electronic voting is currently unavailable although Bursa‟s board indicated that it will consider adoption of such technique to facilitate greater shareholder participation (Bursa Malaysia, 2012, p.69). Resolutions in Bursa were put forth for shareholders‟ approval merely by show of hands. No poll voting is employed, possibly due to the clear majorities obtained in approval. However, it is encouraged by MCCG 2012 to put substantive resolutions to poll and Bursa should emulate fellow Singapore Stock Exchange which has implemented electronic poll voting since 2009. Effective Communication and Proactive Engagements Q&A session is provided during AGM as directors, management and external auditors are all present to respond to the any shareholders‟ queries. The CEO also shared the company‟s response to questions submitted in advance of the AGM by the Minority Shareholder Watchdog Group. Overall, the engagement with shareholders seems genuine. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 30 3.2 IDENTIFICATION OF KEY STAKEHOLDERS Stakeholder is defined by Freeman (1984) as “any group or individual who can affect or be affected by the achievement of an organization‟s objectives”. Stakeholder theory emphasizes that companies are not merely shareholders‟ private property, but also a forum of interaction between various stakeholders. For Bursa, its 4 key stakeholders include government and regulatory authority, shareholders, employees and the community (Diagram 4). Diagram 4: Stakeholder Mapping Source: Mendelow (1991) The Government and Securities Commission of Malaysia are highly interested in Bursa‟s running as an exchange-holding company. Besides, the government yields high power through the control of almost 43% direct and indirect stakes in Bursa (Table 6). Moreover, the Capital Market and Services Act (2007) grant the Securities Commission and Minister of Finance direct power and influence, ranging from the appointment of Bursa‟s directors up to the review of its annual report. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 31 Table 6: Substantial Shareholders as at 31 January 2013 No. Name % of Issued Shares 1. Capital Market Development Fund 18.55 2. Minister of Finance Incorporated 16.20 3. Employees Provident Fund Board 8.64 Total 43.39 Source: Bursa Annual Report (2012) Unlike other public listed companies, shareholders of Bursa only have limited power as they are prohibited from acquiring more than 5% voting shares without prior approval of the Minister (Malaysian Government, 2007, s25(1)). Therefore, despite their interest, they have limited power over the direction of the company. Nevertheless, they should be kept informed on progress of the company and their investments. Employees and the community also fall within the quadrant of high interest, low power. The former is concerned with job security and benefits while the latter would be concerned of how public interest is being safeguarded. Considering the absence of strong trade unions or public voice out mechanism, both groups of stakeholders have little power over Bursa‟s governance. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 32 3.3 IMPACT OF GOOD CORPORATE GOVERNANCE ON COMPANY’S KEY STAKEHOLDERS 3.3.1 Government and Regulatory Authorities With Malaysia striving to be a high income nation by 2020, the government has identified the capital market as a key driver of the Economic Transformation Program (PEMANDU, n.d.). 2012 was an exciting year as a result of Bursa‟s strong governance and leadership. The benchmark FBM KLCI Index ended the year at historic high and the Islamic market retained its global leadership position for the 4 th consecutive year. Moreover, the ASEAN Exchange is set up to facilitate freer flow of capital across borders while Bursa was also the world‟s 4 th largest IPO destination(Bursa, 2012). With its unique role as a front-line regulator, Bursa is expected to take the lead in enhancing CG standards of Malaysia‟s PLCs. During the year, Bursa has aligned the Listing Requirements and Corporate Governance Guide for PLCs to reflect the new principles and recommendations of MCCG 2012. A series of CG initiatives are championed as well to promulgate the importance of embracing CG‟s best practices among PLCs (Bursa, n.d.). As a result, the CG Watch 2012 Report saw Malaysia‟s rankings improved to 4 th (ACGA, 2012) while the country is also recognized by World Bank as a regional leader in CG (Business Times, 2013). Bursa itself is included in the Top 50 CG ranking of mid/small caps in Asia Pacific by ACGA (Bursa, 2012). With the appointment of PIDs, regulatory committees and presence of strong internal controls, Bursa has managed to comply with all the relevant regulations and standards in both form and in substance. This would be in line with demand of the Securities Commission for Bursa to uphold its statutory duty by acting in public interest, having particular regards for the need for investor protection. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 33 RM‟million RM‟cents 3.3.2 Shareholders Shareholders who invested in Bursa would be interested in financial returns and protection of their investments. Recent years have been challenging for the financial industry but Bursa‟s operating performance has been resilient. While some foreign exchanges have experienced reduced revenues and profits, Bursa has managed to achieve a compound annual growth rate (CAGR) of 6.5% and 9.4% for its revenue and earnings per share respectively in the last 5 years. Chart 3: Revenue and EPS Source: Bursa Annual Report (2012) However, Bursa has been less satisfactory in terms of shareholders‟ returns. From a 5-year perspective, its share price underperformed fellow London Stock Exchange (LSE) and Singapore Exchange Limited (SGX).In 2012 alone, the share price also underperformed by dropping 7% from RM 6.70 to RM 6.22 mainly due to foreign fund selling as Bursa is reclassified from MSCI Mid-Cap Index to Small-Cap Index. 0 5 10 15 20 25 30 0 50 100 150 200 250 300 350 400 450 FY 08 FY 09 FY 10 FY 11 FY 12 Revenue Earnings per share Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 34 Chart 4: Bursa Share Price Performance Source: Yahoo Finance UK, Bursa (2013) After taking into account dividend, Bursa has still failed to enhance shareholders‟ value during 2012 (Table 7). It is worth noting that share prices are often affected by many different factors not wholly within the control of the company. It would be grossly unfair to blame the company especially when it has improved the operating performance and increase its dividend year on year (Chart 5). Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 35 RM‟cents Chart 5: Dividend Payout Ratio and Dividend per Share Source: Bursa Annual Report (2012) Table 7: Total Shareholders Return Bursa (%) SGX (%) LSE (%) 2012 (3.7) 18.8 40.5 2011 (10.8) (24.0) (1.9) 2010 0.2 5.0 (20.2) 2009 58.6 68.2 45.6 2008 (62.2) (60.0) (73) Total (48.4) (37.6) (53.1) Detailed calculations shown in Appendix 7 Source: Yahoo Finance UK (2013) 10 12 14 16 18 20 22 24 26 28 86 87 88 89 90 91 92 93 94 95 96 FY 08 FY09 FY10 FY 11 FY 12 Dividend Payout Ratio Dividend per Share % Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 36 3.3.3 Employees As Bursa strives to achieve leadership in the marketplace, it places great emphasis on its employee‟s development and well-being. It practices a system of total rewards management which encompasses not only compensation and benefits but also performance recognition, work-life integration as well as professional development and career progression (Bursa, 2012). Bursa‟s total pay philosophy is positioned at the market 50 th percentile for total pay while outstanding employees are distinguished and positioned at the market 75 th percentile (Bursa, 2010, p.55). A share grant plan is also introduced as part of the long term incentive to reward and recognize employees‟ contribution. There are also excellent staff training and talent development programs in Bursa. 252 development programs were held in 2012 and thus it is no surprise that its employees are able to register 4.9 training days, which is 63% higher than its target of 3 training days (Bursa, 2012, p.40). There are also training facilities, knowledge centers available in Bursa while coaching and mentoring opportunities are offered. Work-life balance is obtained by providing gymnasiums and indoor sports court for employees. Bursa provides promotion opportunities internally and set up frameworks for succession planning (Diagram 5). Various consultative programs such as Individual Development Plans and Customized Accelerated Development Programs are crafted based on individual employee‟s behavioral and technical competence, forming the foundation for short to middle-term career progression. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 37 Diagram 5: Succession Planning Framework Source: Bursa Malaysia Annual Report (2012) To gain insight on the employees‟ views and gauge their feedbacks, an annual Employee Engagement Survey (EES) is conducted by an external firm. The score is on an increasing trend since 2008, reflecting that employees are generally pleased with Bursa‟s efforts. Post EES intervention initiatives would also be taken to address any areas below benchmark norms. However, there is important information regarding employees which is not included in Bursa‟s annual report. Unlike London and Singapore Stock Exchange, Bursa has not disclosed its employee turnover rate. It is one of the common indicators on employee satisfaction and thus should be disclosed to enhance transparency. 3.3.4 Community Nowadays, corporations are realizing that their activities could have a pervasive impact on the local and global community. As an exchange holding company, Bursa has a statutory duty to act in public interest (Malaysian Government, 2007, s11 (3)(a)) and would be expected to be socially responsible in areas such as marketplace, community, environment and workplace. Bursa has pursued various initiatives to ensure market quality and integrity. Besides, it serves the community through act of philanthropy where scholarships, internships Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 38 and trainings for unemployed graduates are provided. In 2012, Bursa also co- sponsored The Edge-Bursa Malaysia Rat Race and held The Great Cookout Day which raised more than RM 2.2 million to be distributed to 26 beneficiary organizations. Employee voluntarism is encouraged as well through its community outreach programs to assist the less fortunate. On environmental issues, Bursa has committed to reduce its environmental impact by minimizing operational carbon footprint. It promotes sparing in electricity usage, business air travel and paper consumption to reduce its greenhouse gas (GHG) emissions (Diagram 6). It manages to reduce GHG emission by 4.49% and 2.1% in 2011 and 2012 although the latter is below the 3% reduction target set by the company. As recognition of its environmental efforts, Bursa is being recertified for ISO 14001:2004 during the year. Table 8: Greenhouse Gas Emission Source: Bursa Sustainability Report (2011) Bursa has also taken the lead in participation of projects such as the Carbon Disclosure Project, Global Reporting Initiative etc. and this should set an example for all other PLCs. The ongoing drafting on GHG Reporting Framework for Malaysian companies could also potentially have a wider impact in the preservation of environment. Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 39 3.4 CONCLUSIONS AND RECOMMENDATIONS In conclusion, Bursa embraces good governance in spirit and in substance, demonstrated through its various initiatives and proactive actions. These in turn have largely met the demands of the key stakeholders, keeping them pleased and satisfied. There are strong elements of segregation within Bursa as it strives to balance the stakeholders‟ demands both as a public listed company and a market regulator. It is always conscious of its role and responsibility and thus avoids any potential conflict of interest. The relationship between corporate governance quality and company‟s financial and non-financial performance is not conclusive for Bursa. While the operating performance has been impressive, this is not reflected from the market sentiments on its share price. Besides, it is unlikely to be appropriate to conclude on any such relationships merely based on results of a single company. Nevertheless, there are some areas which still have room for further improvement. The NRC currently oversees nomination and remuneration matters. It is recommended for the committee to be split into 2 separate committees, allowing its committee members to specialize and not being overburdened. 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Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 46 Appendix 2: Age Profile and Board Tenure Name Age Board Tenure Tun Mohamed Dzaiddin bin Haji Abdullah 75 9 years Dato‟ Tajuddin bin Atan 53 1 year 11 months Datuk Dr. Syed Muhamad Bin Syed Abdul Kadir 66 2 years 7 months Dato' Dr. Thillainathan A/L Ramasamy* 68 8 years 10 months Datuk Dr. Md Tap Bin Salleh 63 2 years 11 months Encik Izham Bin Yusoff* 45 8 years 10 months Dato' Wong Puan Wah @ Wong Sulong 65 6 years 3 months Encik Cheah Tek Kuang* 65 8 years 10 months Dato' Saiful Bahri Bin Zainuddin 51 4 years 8 months Tan Sri Ong Leong Huat @ Wong Joo Hwa* 68 4 years 8 months Tan Sri Datuk Dr. Abdul Samad bin Haji Alias 70 1 year 8 months Datuk Puteh Rukiah Binti Abd Majid 60 1 year 9 months Datuk Karownakaran @ Karunakaran a/l Ramasamy# 62 - Chay Wai Leong# 49 - Ghazali bin Darman# 48 - Current Average 62 5 years 2 months Revised Average 60 2 years 10 months * Outgoing Directors # Incoming Directors Source: Bursa Malaysia Annual Report (2012) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 47 Appendix 3 Directors’ Remuneration 2009-2012 Source: Bursa Malaysia Annual Report (2012 & 2010) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 48 Appendix 4: Attendance Record of Directors in the Board and Committees Board Board Committee Source: Bursa Annual Report (2012) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 49 Appendix 5: Directors’ Training Programmes Corporate Governance Malaysian Code on CG 2012, 10 & 16 May 2012 / 21 November 2012 (Attended by Tan Sri Ong Leong Huat / Dato' Wong PuanWah @ Wong Sulong) CG Today and the Directors Moving Forward, 14 June 2012 (Attended by Datuk Dr. Syed Muhamad bin Syed Abdul Kadir) CG Blueprint and Malaysian Code on CG 2012, 18 June 2012 (Attended by Datuk Dr.Md Tap bin Salleh, Datuk Puteh Rukiah binti Abd Majid and Encik Izham bin Yusoff) Malaysian Code on CG 2012: The Implication and Challenges to PLCs, 3 July 2012 (Attended by Datuk Dr. Md Tap bin Salleh, Datuk Puteh Rukiah binti Abd Majid and Dato' Saiful Bahri bin Zainuddin) CG and Whistle blowing, 9 August 2012 (Attended by Encik Izham bin Yusoff) Risk Management and Audit Board Audit Committee Forum, 2-4 March 2012 (Attended by Dato' Dr. Thillainathan a/l Ramasamy) Role of the Audit Committee in Assuring Audit Quality, 22 May 2012 (Attended by Datuk Puteh Rukiah binti Abd Majid and Tan Sri Datuk Dr. Abdul Samad bin Haji Alias) Governance, Risk Management and Compliance: What Directors Should Know, 8 August 2012 (Attended by Dato' Wong Puan Wah @ Wong Sulong) The Key Components of Establishing and Maintaining World-Class Audit Committee (AC) Reporting Capabilities, 3 October 2012 (Attended by Dato' Dr. Thillainathan a/l Ramasamy, Encik Izham bin Yusoff and Tan Sri Datuk Dr. Abdul Samad bin Haji Alias) What Keeps an AC up at Night, 3 October 2012 (Attended by Dato' Dr.Thillainathan a/l Ramasamy, Encik Izham bin Yusoff and Tan Sri Datuk Dr. Abdul Samad bin Haji Alias) Leadership, Legal and Business Management IDEAS Conference: The Role of the Judiciary as a Key Check and Balance in Malaysia, 11 February 2012 (Attended by Tun Mohamed Dzaiddin bin Haji Abdullah) International Police Conference on Principled Policing: Rule of Law, Public Order and Sustainable Development, 13 February 2012 (Attended by Tun Mohamed Dzaiddin bin Haji Abdullah) Briefing on Goods and Services Tax, 22 March 2012 (Attended by Dato' Dr.Thillainathan a/l Ramasamy) Briefing on Personal Data Protection Act 2010, 15 March 2012 / 9 August 2012 (Attended by Tan Sri Ong Leong Huat / Dato' Saiful Bahri bin Zainuddin) Briefing on Competition Act 2010, 7 May 2012 / 16 August 2012 (Attended by Tan Sri Ong Leong Huat / Dato' Saiful Bahri bin Zainuddin) International Directors Summit 2012: Awakening the Corporate Entrepreneurship for High Income Economy, 21-22 May 2012 (Attended by Tan Sri Datuk Dr. Abdul Samad bin Haji Alias) Harvard Business School Management Development Programme, 4 & 7 July 2012 (Attended by Tan Sri Datuk Dr. Abdul Samad bin Haji Alias) Human Capital Management in the Boardroom, 14 August 2012 (Attended by Tan Sri Ong Leong Huat) Growth Through Innovation, 23 August 2012 (Attended by Datuk Dr. Syed Muhamad bin Syed Abdul Kadir) Professionalism in Directorship Programme: What Does It Take to be an Effective Corporate Director? 26-27 September 2012 (Attended by Datuk Puteh Rukiah binti Abd Majid) International Malaysia Law Conference 2012: Asian Perspectives, Global Viewpoints, 26-28 September 2012 (Attended by Encik Cheah Tek Kuang) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 50 Khazanah Megatrends Forum 2012: The Big Shift – Traversing the Complexities of a New World, 1-2 October 2012 (Attended by Datuk Dr. Syed Muhamad bin Syed Abdul Kadir and Tan Sri Datuk Dr. Abdul Samad bin Haji Alias) Khazanah Global Lectures: Institutionalising Knowledge to Build Malaysia's Human Capital, 29 November 2012 (Attended by Datuk Dr. Syed Muhamad bin Syed Abdul Kadir) Financial and Capital Markets Bank Negara Malaysia (BNM)'s Annual Report 2011: Financial Stability and Payment Systems Report Briefing, 21 March 2012 (Attended by Datuk Dr. Syed Muhamad bin Syed Abdul Kadir) International Financial Reporting Standards Conference, 28 March 2012 (Attended by Encik Izham bin Yusoff) Pillar 3 Disclosure on Basel II, 23 April 2012 (Attended by Datuk Dr. Syed Muhamad bin Syed Abdul Kadir) BNM Requirements for the Internal Capital Adequacy Assessment Process (ICAAP), 30 April 2012 (Attended by Datuk Dr. Syed Muhamad bin Syed Abdul Kadir) Understanding BNM's New Liquidity Framework, 9 June 2012 (Attended by Tan Sri Ong Leong Huat) Financial Institutions Directors Education (FIDE) Forum, 12 June 2012 (Attended by Tun Mohamed Dzaiddin bin Haji Abdullah and Tan Sri Ong Leong Huat) Rating Agency of Malaysia (RAM) Annual Bond Market Conference: Making the Asian Bond Market a Reality, 12 July 2012 (Attended by Dato' Dr.Thillainathan a/l Ramasamy) Anti-Money Laundering Act: Financial Crime Risk – CIMB Perspective, 10 September 2012 (Attended by DatukDr. Syed Muhamad bin Syed Abdul Kadir) Briefing on ICAAP, 20 September 2012 & 11 December 2012 (Attended by Tan Sri Ong Leong Huat) 52nd General Assembly of the World Federation of Exchanges, 14-17 October 2012 (Attended by Tun Mohamed Dzaiddin bin Haji Abdullah and Dato' Tajuddin bin Atan) 17th Malaysian Capital Market Summit: Malaysia the Rising Star – Geared for Growth, 29 October 2012 (Attended by Datuk Dr. Md Tap bin Salleh) 7th China International Oils & Oilseeds Conference, 6 November 2012 (Attended by Dato' Tajuddin bin Atan) Global Financial Leadership Conference, 12-14 November 2012 (Attended by Tun Mohamed Dzaiddin bin Haji Abdullah and Dato' Tajuddin bin Atan) 8th Asia-Pacific New Markets Forum: Enhancing the Quality of Emerging Markets in the Asia- Pacific Region, 29-30 November 2012 and 1 December 2012 (Attended by Dato' Tajuddin bin Atan) Application of Equity Valuation Methods, 8 December 2012 (Attended by Tan Sri Ong Leong Huat) Source: Bursa Malaysia Annual Report (2012) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 51 Appendix 6: Audit Committee Members’ Qualifications Name Status Academic/Professional Qualification(s) Tan Sri Datuk Dr. Abdul Samad bin Haji Alias (Chairman) INED Bachelor of Commerce, University of Western Australia Honorary Doctorate of Philosophy (Accounting), Universiti Utara Malaysia Institute of Chartered Accountants, Australia (Fellow Member) Malaysian Institute of Accountants (MIA) (Member) Malaysian Institute of Certified Public Accountants (MICPA) (Member) Datuk Dr. Syed Muhamad bin Syed Abdul Kadir PID Bachelor of Arts (Hon) and Bachelor of Jurisprudence (Hon), University of Malaya Master of Business Administration, University of Massachusetts, USA Masters of Law (Corporate Law), Universiti Teknologi MARA PhD (Business Management), Virginia Polytechnic Institute and State University, USA Certificate in Legal Practice (Malaysian Professional Legal Board) Chartered Institute of Arbitration, United Kingdom (Member) Dato' Dr. Thillainathan a/l Ramasamy INED Bachelor of Arts, University of Malaya Master and Doctorate of Economics, London School of Economics, United Kingdom Encik Izham bin Yusoff INED Bachelor of Accounting, University of Miami, USA Master of Business Administration (Accounting & International Business), University of Miami, USA Institute of Internal Auditors Malaysia (Associate Member) Encik Cheah Tek Kuang INED Bachelor of Economics, University of Malaya Institute of Bankers Malaysia (Fellow Member) Datuk Puteh Rukiah binti Abd Majid PID Bachelor of Economics (Hon), University of Malaya Master of Arts (Economics), Western Michigan University, USA *INED – Independent Non-Executive Director *PID – Public Interest Director Source: Bursa Malaysia Annual Report (2012) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 52 Appendix 7: Total Shareholders’ Return Bursa SGX LSE TR (RM) ISP (RM) TSR (%) TR (S$) ISP (S$) TSR (%) TR (£) ISP (£) TSR (%) 2012 (0.25) 6.7 (3.7) 1.15 6.13 18.8 321.7 795 40.5 2011 (0.84) 7.8 (10.8) (2.02) 8.42 (24.0) (15.7) 838 (1.9) 2010 0.02 7.99 0.2 0.415 8.28 5.0 (144.8) 718 (20.2) 2009 3.018 5.15 58.6 3.465 5.08 68.2 232.4 510 45.6 2008 (8.769) 14.1 (62.2) (8.06) 13.42 (60.0) (1444.6) 1979 (73) Total (6.821) 14.1 (48.4) (5.05) 13.42 (37.6) (1051) 1979 (53.1) TR – Total returns, comprising dividends and net share price movement ISP – Initial share price at beginning of year TSR – Total shareholder return, TR/ISP *SGX & LSE data are adjusted for different year ends Source: Yahoo Finance UK (2013) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 53 Appendix 8: Income Statement INCOME STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012 Group Company Note 2012 RM'000 2011 RM'000 2012 RM'000 2011 RM'000 Operating revenue 3 388,480 381,503 315,214 291,593 Other income 4 38,603 38,639 24,052 20,928 427,083 420,142 339,266 312,521 Staff Costs 5 (102,481) (104,122) (94,656) (96,275) Depreciation and amortisation 6 (33,713) (38,444) (30,999) (36,818) Other operating expenses 7 (74,857) (71,463) (53,815) (65,673) Profit before tax 216,032 206,113 159,796 113,755 Income tax expense 9 (58,286) (54,779) (9,248) (9,980) Profit for the year 157,746 151,334 150,548 103,775 Profit attributable to: Owners of the Company 151,458 146,160 150,548 103,775 Non-controlling interest 6,288 5,174 - - 157,746 151,334 150,548 103,775 Earnings per share attributable to owners of the Company (sen per share): Basic 10(a) 28.5 27.5 Diluted 10(b) 28.4 27.5 Source: Bursa Malaysia Annual Report (2012) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 54 Appendix 9: Statements of Comprehensive Income STATEMENTS OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012 Group Company 2012 RM'000 2011 RM'000 2012 RM'000 2011 RM'000 Profit for the year 157,746 151,334 150,548 103,775 Other comprehensive income: Net fair value changes in AFS financial assets 160 (16,920) 44 (16,983) Cumulative loss reclassified to income statement (Note a) - 1,164 - - Foreign currency translation (99) 59 - - Income tax relating to AFS financial assets 14 (25) 54 9 Other comprehensive income for the year, net of tax 75 (15,722) 98 (16,974) Total comprehensive income for the year 157,821 135,612 150,646 86,801 Total comprehensive income attributable to: Owners of the Company 151,533 130,446 150,646 86,801 Non-controlling interest 6,288 5,166 - - 157,821 135,612 150,646 86,801 Note a The cumulative loss reclassified to income statement is in relation to a recognition of impairment loss of an investment security. Source: Bursa Malaysia Annual Report (2012) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 55 Appendix 10(a): Consolidated Statement of Financial Position CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2012 Note 31.12.2012 RM'000 31.12.2011 RM'000 1.1.2011 RM'000 Assets Non-current assets Property, plant and equipment 12 209,733 218,397 231,104 Computer software 13 61,274 59,614 73,056 Goodwill 14 42,957 42,957 42,957 Investment securities 16 123,782 93,371 110,404 Staff loans receivable 17 9,140 11,678 13,805 Deferred tax assets 18 1,278 1,034 1,023 448,164 427,051 472,349 Current assets Trade receivables 19 30,262 27,870 33,526 Other receivables 20 14,281 12,932 10,197 Tax recoverable 4,296 388 4,586 Investment securities 16 54,936 33,441 27,335 Cash and bank balances not belonging to the Group 22 1,175,000 671,880 710,323 Cash and bank balances of the Group 23 471,503 499,943 449,938 1,750,278 1,246,454 1,235,905 Total assets 2,198,442 1,673,505 1,708,254 Source: Bursa Malaysia Annual Report (2012) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 56 Appendix 10(b): Consolidated Statement of Financial Position Equity and liabilities Equity Share capital 24 266,012 265,800 265,700 Share premium 90,505 87,553 86,101 Other reserves 25 26,828 25,429 40,147 Retained earnings 492,106 481,611 460,356 Equity attributable to owners of the Company 875,451 860,393 852,304 Non-controlling interest 15,770 14,232 11,266 Total equity 891,221 874,625 863,570 Non-current liabilities Retirement benefit obligations 27(a) 24,816 24,311 22,825 Deferred capital grants 28 9,934 11,850 10,986 Deferred tax liabilities 18 9,196 9,886 18,349 43,946 46,047 52,160 Current liabilities Trade payables 22 1,137,234 636,166 676,576 Clearing funds 22 35,938 34,485 33,543 Other payables 29 80,535 67,330 68,916 Tax payable 9,568 14,852 13,489 1,263,275 752,833 792,524 Total liabilities 1,307,221 798,880 844,684 Total equity and liabilities 2,198,442 1,673,505 1,708,254 Source: Bursa Malaysia Annual Report (2012) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 57 Appendix 11: Statement of Cash Flows FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012 Group Company 2012 RM'000 2011 RM'000 2012 RM'000 2011 RM'000 Cash flows from operating activities Profit before tax 216,032 206,113 159,796 113,755 Adjustments for: Amortisation of premium less accretion of discount 723 152 637 96 Depreciation and amortisation 33,713 38,444 30,999 36,818 Dividend income from investment security (3,038) (930) (3,038) (930) Grant income (1,916) (2,636) (1,566) (1,547) Gross dividend income from subsidiaries - - (165,259) (125,131) Impairment loss on amount due from a subsidiary - - 3,324 8,527 Impairment loss on computer software - 335 - 335 Impairment loss on investment security - 1,164 - - Interest income (23,153) (21,267) (11,735) (10,367) Net gain on disposal of investment securities (257) (328) (257) (223) Net impairment loss/ (reversal of impairment loss) on trade and other receivables 1,239 (188) 1,043 20 Net (gain)/loss on disposal of property, plant and equipment (4) 13 - 13 (Net reversal of impairment loss)/impairment loss on investment in subsidiaries - - (3,166) 5,734 Property, plant and equipment and computer software written off 17 836 15 836 Retirement benefit obligations 2,574 1,542 2,574 1,542 Reversal of provision for short term accumulating compensated unutilised leave (266) (70) (250) (100) SGP expense 4,488 2,548 4,215 2,342 Unrealised (gain)/loss on foreign exchange differences (25) 37 - - Operating profit before working capital changes 230,127 225,765 17,332 31,720 Decrease/(increase) in receivables 218 7,317 (1,344) (1,699) Increase in other payables 4,619 1,434 1,615 2,254 Changes in subsidiaries' balances - - (6,952) (6,498) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 58 Cash generated from operations 234,964 234,516 10,651 25,777 Staff loans repaid, net of disbursements 3,135 2,861 2,974 2,434 Retirement benefits paid (2,069) (56) (2,069) (56) Taxes paid, net of refund (71,016) (60,188) (10,098) (3,075) Net cash from operating activities 165,014 177,133 1,458 25,080 Cash flows from investing activities Interest received 21,104 18,200 10,266 8,292 Decrease/(increase) in other deposits not for short-term funding requirements 26,872 (34,218) (7,960) (7,694) Proceeds from disposal of investment securities 82,646 78,306 62,640 42,287 Proceeds from disposal of motor vehicles 4 156 - 156 Purchases of investment securities (134,425) (83,666) (74,358) (48,170) Purchases of property, plant and equipment and computer software (18,441) (17,654) (11,550) (7,195) Net cash used in investing activities (22,240) (38,876) (20,962) (12,324) Cash flows from financing activities Dividends paid (140,963) (124,905) (140,963) (124,905) Dividends paid by a subsidiary to non- controlling interest (4,750) (2,200) - - Dividends received 1,476 1,073 158,227 116,694 Grant received - 3,500 - - Net cash (used in)/from financing activities (144,237) (122,532) 17,264 (8,211) Net (decrease)/increase in cash and cash equivalents (1,463) 15,725 (2,240) 4,545 Effects of exchange rate changes (105) 62 - - Cash and cash equivalents at beginning of year 155,343 139,556 78,701 74,156 Cash and cash equivalents at end of year (Note 23 (iii)) 153,775 155,343 76,461 78,701 Source: Bursa Malaysia Annual Report (2012) Oxford Brookes University Research and Analysis Project Loh Jia Ying (2513940) Page 59 Appendix 12: 5-Year Highlights 31 DEC 2008 31 DEC 2009 31 DEC 2010 31 DEC 2011 31 DEC 2012 Key Results (RM Million) Operating Revenue 1 302.5 297.8 331.3 381.3 388.5 Operating Expenses 2 186.0 183.2 197.3 214.0 211.1 PATAMI 104.4 177.6 3 113.0 146.2 151.5 Other Key Data (RM Million) Total Assets 1,729.9 1,786.6 1,708.3 1,673.5 2,198.4 Total Liabilities 997.6 938.0 844.7 798.9 1,307.2 Shareholders' Equity 732.3 840.0 852.3 860.4 875.5 Capital Expenditure 34.0 22.1 21.9 13.6 26.7 Financial Ratios (%) Operating Revenue Growth 1 (33.3) (1.5) 11.2 15.1 1.8 Cost to Income Ratio 56.1 45.5 3 54.6 50.9 49.4 Net Profit Margin 31.5 44.1 3 32.0 36.0 36.9 ROE 13.8 22.6 3 13.4 17.1 17.4 Share Information Basic EPS (sen) 19.9 33.7 21.3 27.5 28.5 Net Dividends per Share (sen) 18.1 17.8 20.0 26.0 27.0 Payout Ratio (%) 90.9 92.9 94.0 94.6 94.8 Net Assets per Share (sen) 1.39 1.59 1.60 1.62 1.65 Share Price - High (RM) 16.30 8.59 8.66 9.02 7.72 Share Price - Low (RM) 4.68 4.36 6.75 5.76 5.91 Share Price as at 31 December (RM) 5.15 7.99 7.80 6.70 6.22 Price Earnings Ratio (times) 26 24 37 24 22 Company Market Capitalisation (RM billion) 2.7 4.2 4.1 3.6 3.3 1 Comparative figures have been restated to include administration fees and conference fees and exhibition related income. 2 Comparative figures have been restated to include commitment fees. 3 The results and ratios for 2009 which exclude the gain on disposal of a subsidiary are as follows: (i) (ii) (iii) (iv) PATAMI: RM101.6 million Cost to income ratio: 56.1% Net profit margin: 31.1% ROE: 13.6% Source: Bursa Malaysia Annual Report (2012)