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Appointed or elected member of the board of directors
Directors of a company are appointed or elected member of the board of directors. He or she has the responsibility for determining and implementing the company's policy. There is no requirement that an individual must possess any form of educational or professional qualification to become a director of a company. An individual may not have to be a shareholder or an employee of the company to be the director of the company. Although the Companies Act 1965 does not require directors to be a shareholder of a company, however, there are times when the article of the company does require the director to satisfy the share qualification.
There are four types of directors, namely executive and non executive directors, associate directors, nominee directors, and alternate directors. Executive director carries out the day to day activities of the company business while the non executive director does not involve in the day to day activities of the company and is appointed from outside the company. Thus, non executive director can provide an independent voice to the board. Nominee director is appointed to represent the interests of a specific shareholder on the board. Lastly, the alternate director is appointed by directors to present on behalf of them in meetings which they could not attend.
The major reform in the company amendments of 2007 which came into force in Malaysia on 15th August 2007 brought about amendments in various sections as well as introduction of new sections, and deletion of old sections. These amendments have altered the roles and responsibilities of company directors. According to Section 132 of the Companies Act 1965, the general fiduciary duties of directors include acting bona fide in the interests of the company, exercising powers to serve proper purposes, retaining their discretionary powers, and avoiding conflicts of interests.
As required by the Companies Act 1965, directors who are interested in a contract must disclose their interest pursuant to Section 131. Section 131 involves the disclosure of interest in contracts, property, offices and others. With the new amendment, the director must disclose as an interest the interest of a spouse and a child, including adopted child and stepchild. In addition, any contract or proposed contract entered into in breach of Section 131 is voidable at the instance of the company, except if the person had no knowledge of the breach and had given valuable consideration.
Apart from that, there were introduction of new sections which is Section 131A and Section 131B. The new Section 131A stipulates that the interested directors of public company or a subsidiary company of a public company to be withdrawn from the discussion relating to the contract, and from voting. In Section 131B, the directors have the authority to manage or supervise the affairs of the company.
There was also amendment on Section 132C. According to the Amendment Act, a prior authorization of the shareholders of a company in a general meeting should be obtained if a company wishes to enter into an agreement or contract with the director of the company or any person related to the director regarding the purchase of or disposal of company’s undertaking and property as the provision now prohibits it. Section 132C updates the new provision, where it broadens the prohibition to significant shareholders of the company. The new provision update also necessitates the directors, significant shareholders or any related parties to withdraw from voting on the resolution. In addition to that, the term “non-cash assets of the requisite value" has an updated definition under this new provision update. With regards to the amendment on Section 132C, there were also amendments on the substantial property transaction provisions under Section 132E and 132F.
The new Amendment Act requires the directors to act with proper purposes and in good faith. The new Section 132(1) replaced the previous Section 132(1) where statutory provision on the directors’ duties demand that the director to act honestly and diligently in performing his responsibilities. This new amendment requires that the director to act for appropriate purposes and in good faith. Directors are also required to practice reasonable care, skill and diligence while they are performing their duties which were stipulated in the new section which is Section 132 (1A).
Besides that, there is a new Section 167A which relates to the system of internal control. This section emphasizes on the set up of a system of internal control by the board of directors of a public company or a subsidiary of a public company to protect the company from suffering any losses due to the unauthorized use of its assets. Furthermore, it also emphasizes on the maintenance of proper records to ensure that the assets are properly accounted for.
Impact on Good Governance in the Management of Companies
There are several amendments being made to the Companies Act 1965 during year 2007. One of the amendments is done to Section 131 (Disclosure of interest in contracts, property, offices, etc). This amendment has positive impacts on the governance of the management of the company because spouse and children are considered as immediate family. This means that they will have the desire for the same outcome and thus they may act according to the will of the director, which indicates that the director is indirectly controlling the act and decisions of the company. This will then leads to fraud, which ultimately impairs the company’s good governance. By requiring a director to disclose the interests of his immediate family in the company, it can prevent unlawful control over the company by the director. Besides that, it also enables other members of the board to assess and judge the proposal of actions to be taken, that are made by the director and his immediate family. If there is any suspicion about conflict of interests, proper action can be taken before it is too late.
Another amendment to the Companies Act is done by introducing a new section, which is Section 131A (Interested director do not participate or vote). This section will also have positive impacts on the good governance of company. This is because it reduces the possibility of fraud occurrence. The probability of fraud occurrence is reduced because any directors that have personal interests in the contracts entered into or proposed to be entered into are not allowed to be involved in the contracts at all. For instance, they are not allowed to join any discussions or vote on matters that are related to the contracts, to prevent them from influencing the outcomes of those meetings. Thus, they are not able to indirectly lead the board of director to make decisions that are favourable to themselves.
Another amendment that has been made is the introduction of section 131B (Functions and powers of the board). This will have positive impacts on good governance because, the person in charge, which is the board of director will have sufficient power to improvise or modify the company’s current internal control in order to ensure compliance with the regulations imposed. Besides that, the board of director will also have the power to give proper rewards or punishments to the employees, in order to strengthen the compliance of rules, and encourage good practices. Consequently, the corporate culture with good governance can be cultivated.
The Companies Act is also amended by substituting subsection 1 of section 132 with another subsection that requires the director of a company to exercise his powers for a proper purpose and in good faith. This will have positive impacts on the company’s good governance because the directors have to act in the best interest of the company throughout their service under the company. Thus, they will not commit frauds and will try their best to prevent and discourage frauds, which eventually promotes good governance. Besides that, there is also an addition of subsection to section 132, which requires the directors to exercise reasonable care, skill and diligence over the knowledge, skills and experience that they obtained in their official capacity. Thus, it will have positive impacts on the good governance as well. This is because it can prevent the directors from abusing the information, skill, and experience that they obtained by leaking it to the competitors, for their personal interests.
The other amendment to the Companies Act is done to section 132C. This amendment will have positive impacts on good governance as well. With this amendment, an unfair decision making is avoidable. This is because if the director was to make a decision by himself, conflict of interest may occur. Thus, it would result in a decision that is not in the best interests of the company. Besides avoiding the conflict, it can also create a more democratic atmosphere in the company where opinions of others will be taken into consideration as well. Thus, it will ultimately result in a fairer and wiser decision.
Besides those amendments, the other change in the Companies Act is the introduction of section 167A. This new section of the act will have a good impact on the governance of a company because it promotes the set up of a system of internal control which is able to limit the job scope of the employees. Therefore, by having the internal control system, a company is able to commence smoothly with a minimal possibility of fraud or mistake, as no overlapping work will occur. Section 167A also requires a company to ensure that the company has a proper book keeping and the records of assets. This will have a positive impact to the company as it ensures that the company complies with the law. This is because those documents and records may be needed for future references and investigation if necessary. For an example, the field visitation by auditors may require those records to assist them in their audit work, and the investigation officers of the Inland Revenue Board may need those records for investigation. In short, this helps to improve and boost the governance and control system of the company.
As we know, there is nothing perfect in this world. Thus, no matter how many amendments made toward the Companies Act, there will always still be flaws and rooms for improvements. As an example, although amendment has been made to Section 131, the directors can still interfere in the decision making process during the meeting. For instance, he may use his position to pressure others and influence the ultimate outcome of the meeting.
Besides that, the amendment in Section 132C may result in the company suffering losses in the other way round. This is because some decision has to be made immediately to reduce losses or to maximize gains. If urgent decisions have to pass through the meeting each and every time, it would be time consuming and the company may miss a golden opportunity. Besides, there are times where the decision of director is correct while others oppose to it due to lack of experience.
In addition, although the Companies Act requires the director to act in good faith all time round, there may be times where the act is unable to prove that the directors had acted in good faith. Hence it is best to avoid conflict of interest between the director and the company.
As a conclusion, ethical culture which is encouraged through education of the director is an essential way to ensure that the director acts in good faith, and thus for best interest of the company that will eventually ensure the good governance of the company.