CREATIVE circumvention has now become easier than ever, despite both rules and codes that have been updated to reflect the latest developments in good corporate practices.
The Malaysian Code of Corporate Governance was updated in April 2017 while the Companies Act 2016 came into force on Jan 1, 2017 as regulators attempt to upgrade existing rules to be more relevant and appropriate in the ever-evolving business world.
One would assume that with the latest changes and improvement to the various existing rules, the level playing field has risen as has the benchmark of transparency.
However, this is actually furthest from the truth; the underlying factor that continues to cast a cloud on the situation is the lack of desire to adhere to the processes laid out in the Code and the Act, as well as the reluctance to implement new processes that uphold the spirit of the rules.
In this column, we will be going through some pertinent weaknesses and how companies deliberately work the existing processes to suit their own interests.
There are also examples of individuals circumventing the rules for either self-gratification or self-remuneration. In simple words, how individuals are cheating the system.
Below are three points arising from the new requirements of the Companies Act 2016:
> The new Companies Act no longer requires a common seal or share certificates.
We recently reviewed a company which was proud to announce that without the need for a common seal, this created a loophole for them to sign for a loan document and fill out forms without the directors having to verify the authenticity or authority of the loan application. The second level of management was now applying for loans on behalf of the company without the knowledge of the directors.
The story gets more interesting: as there is no requirement for share certificates under the new Act, and as the company had not put in place Standard Operating Procedures (SOP) to determine the actual ownership of the shares pledged for a loan, middle management was able to pledge the shares of the company as collateral.
Of course, they claim that they were not doing this with the intention of cheating the company. However, the directors were not told of the loan application or of the collateral being pledged, since the new SOP requirements have not been designed to take into account the new Companies Act.
Adding the removal of the requirement under the Companies Act for a private company (Sdn Bhd) to issue share certificates unless specifically requested by the shareholder is going to give crafty individuals more ammunition to defraud.
Again, this will give rise to possible abuse or collusion or falsification of the Register. And any unscrupulous second-tier managers or executive directors can charge the company’s rights over their subsidiaries to banks using less-than-honest confirmation of ownership.
If banks and counter-parties are in collusion, the poor company or holding company will find their prime assets possibly being charged or sold.
We can clearly see that all it takes is a bunch of “good friends” from the company to put in false papers to sell off prime assets without the knowledge of either the directors or the owners.
> Under the new Act, a company does not have to adopt a constitution (formerly known as the Memorandum and Articles of Association, or M&A).
If a company chooses not to adopt its own constitution, the powers, duties and obligations of the directors will, by default, be determined by the Companies Act 2016. Now, readers may ask if that really is an issue.
Going back to the example of the company that had not put in place an SOP for loans – well, the middle management had taken out a loan for construction but the company had decided to use the funds to redecorate their offices ahead of their anniversary, and a renovation of one of the general manager’s house. Thus, the issue gets deeper – without a constitution, it is very hard to protect against the misuse of capital or loans that have been taken out for a specific purpose.
> Approval of directors’ fees and benefits for the year ahead.
Clearly, there is now a move by many companies to get shareholders’ approval for directors’ remuneration. Some may ask, what is the danger in that? The answer is: if the company performs poorly, then they should not be paying directors exorbitant fees when they haven’t done a good job or they have not been attending board meetings.
Although the directors who do not turn up for the minimum number of meetings will not be re-elected, the damage has been done and the directors will still walk away with their fees.
There are also cases that directors and their benefits can be very opaque. (Benefits paid by the company have included rental of overseas apartments and automobiles for unrelated even unknown individuals.).
So far, we haven’t seen any protests from voters over the last two weeks. The only objection we witnessed was from a large pension plan which has declared that they will vote against advance approval of fees, where the advance fees are lumped with benefits, and they will garner support to ensure that the entire resolution will be voted against.
We can see the consistent abuse of when “fees and benefits” are lumped together as there is reduced transparency what exactly the company is paying for.
We are alarmed at what is now on the corporate buffet platter.
The new rules make it all too easy: there is no need for a Common Seal, a certificate as evidence of title or even a company constitution. And directors can lump their fees and benefits upfront for shareholders’ approval.
We already know what corporate hijackers have been doing all this while: falsifying identities and selling off large tracts of dormant properties under rich or passive owners who often fail to monitor the state of their long-undeveloped lands. Now, these corporate hijackers’ tools are enhanced with the latest lax requirements under the Companies Act 2016.
Brace yourselves, ladies and gentlemen, this is going to be a tricky ride
© CORSTON-SMITH ASSET MANAGEMENT SDN BHD 2014