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Principles of Corporate Governance

Info: 1241 words (5 pages) Essay
Published: 6th Aug 2019

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Jurisdiction / Tag(s): UK Law

Company cannot take any activities or function on its own because it is an artificial person. Furthermore, a company is separate legal personality which means the member and the management is separate from the company. So companies need people who can undertake its function and activities that are called an agent. The agent is the middle person who acts as a director of the company.

In section 4 of the Companies Act 1965 (CA) defines director as “any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act and an alternate or substitute director”. This means that director is a person who can take decision for the company. All listed company should be lead by an effectual board that should control and direct the company. The board should consist of a stability of executive directors and non-executive directors which take account of independent non-executives with the purpose of no individual or minor group of individuals can control the board’s judgment. The board should be detailed about information of the company and enable it to fulfill its duties. Additionally, there should be an official and crystal clear course of action for the appointment of new directors to the board. Then, all directors should be compulsory to submit themselves for re-election at customary times and at least every three years.

The fiduciary duty of a director is to act bona fide in the interest of a company. Act on bona fide in the interest of a company means to act with good faith for the advantage of the company. A director who is on a duty to make sure that whichever act he carry out is with a vision to enhancing the significance of the company either by enhancing profits, plummeting costs or even optimistic advertising of the company. In the case of Re Hdyrodam (Corby) Ltd (1994) , Millett J, defining a de facto director is one who has not been formally appointed as such and therefore is not a de jure director but has nevertheless acted as a director in so far as he has openly undertaken a directorial role in the conduct of the company’s affair.

Directors also owe fiduciary duties to the company to act in good faith in the company’s interest but not to the individual shareholders such as in the case Percival v Wright, exercise due care and skill in the discharge of their duties, and avoid conflict between their duties and their private interests, among other things. This can be seen in the case of The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin Syed Mohamed & Anor, the judge found that there was a clear breach of fiduciary duties. The judge here applied three tests to determine whether a director could be held liable for breach of fiduciary duty by obtaining personal profit which in equity belong to the company. Furthermore, the director is put in trust but he is not the trustee of the company.

Moreover, the directors who misappropriate company funds have no defense. They cannot assert that since there was no intention to case wrongful loss to company or that they did not consider the company to be another person and therefore there was no misappropriation. In the case of Tan Sri Hian Tsin v PP and Chong Lee Swee v PP, it held that misusing company funds for a director own benefit constituted a criminal breach of trust.

In addition, the directors cannot misuse of confidential information. This can be seen in the case of Electro Cad Australian Pty Ltd & Ors v Metagi RCS Sdn Bhd & Ors, the judge stated what amounts to confidential information where “Confidential information is generally information which is the object of an obligation of confidence and is used to cover all information of a confidential nature. These include trade secrets, literary and artistic secrets, personal services and public and government secrets.

Meetings and Proceedings

Pursuant to the Companies Act a shareholders’ meeting may be assemble by two or more members who investment in the company’s issued share capital which should not less than one-tenth, and the directors of the company should not failed to organize a meeting without a good validation, where they have the right to requested to do so.

Companies should set up an official and crystal clear procedure for building up policy on executive salary and for setting up the remuneration packages of individual directors. The company’s annual report should include facts of the payment of each director. Intensity of wages should be adequate to catch the attention of the directors and keep hold of the directors desirable to run the company fruitfully. The executive directors wages should be planned between the connection of rewards to corporate and the person’s performance, however, non-executive directors wages replicate the level of responsibilities undertaken by the particular non-executive concerned and the experience that person have.

Accountabilities and Audits

In the financial reporting, the board should present an understandable and balanced review of the company’s situation and forecast. The board should uphold a sound system of internal control to the company’s assets and safeguard shareholders’ investment. The board should set up official and crystal clear measures for uphold a proper relationship with the company’s auditors. The Companies Act obliges the directors to make sure that profit and loss account and the balance sheet present fair and accurate analysis of the company’s financial dealings and its profits and losses for the accounting periods.

The evidence of low audit fees being charged can be found in the case of Transmile. A review of the audit fees of Transmile showed that the fees were low when the audit assignment was performed by Deloitte KassimChan: RM150,000 was charged in 2006 and RM73,000 in 2005 at a time when revenue was RM655,831,000 and RM356,379,000 respectively. However, when the audit assignment was taken over by KPMG, the audit fees shot up to RM280,000 while the revenue dropped to RM616,227,000 in 2007.

The Companies Act 1965 has played a crucial role in ensuring that credible accounting information is provided by Malaysian Companies. Section 169 of Companies Act 1965 stipulates that every company shall keep appropriate accounting records and that the accounts are required to be audited by approved company auditors as defined under Section 8 of the Act. Sections 172 to Section 175 of the Companies Act 1965 stipulate the provisions relating to the appointment, powers and duties of the company auditors (Messier et al 2007:19). For example, Section 174 requires the auditors to: (i) report to the members of the company on the financial statements; (ii) ensure the audit report is submitted timely by the company; (iii) express an opinion on whether or not the financial statements give a true and fair view; and (iv) ensure the financial statements are in compliance with the requirements of the Companies Act 1965 and the applicable “approved accounting standards”

(Fadzly & Ahmad 2004).

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