Assessment task title Essay (Critical Evaluation of Legal) .docx

Assessment task title: Essay (Critical Evaluation of Legal)
Details of Task:
"The directors of companies,... being managers of other
people’s money than their
own, it cannot well be expected that they should watch over it
with the same anxious
vigilance with which partners in a (...partnership...) frequently
watch over their own. ...
Negligence and profusion, therefore must always prevail more
or less, in the management
of the affairs of ...a company. ( Adam Smith, The Wealth of
Nations (Random House, New
York :1937), 700)
Support, refute or refine the above assertion in the light of
corporate governance theories.
Critically assess the success of the Codes of Corporate
Governance Codes in addressing the
problems identified by Adam Smith.
Word limit: 1900- 2000 words
Criteria for marking: The marking rubric will be posted on
Moodle
Learning objectives assessed: 2, 3 and 4

WRITING AN OPINION ON A LEGAL ISSUE
Introduction
The presentation of an opinion on a legal issue will be
considered under two heads as follows:
(a) The pre-writing stage; and,
(b) The actual writing.
The pre-writing stage encompasses the collection of data,
making notes and making preliminary decisions about the
information amassed and avoiding pitfalls. Very often, the
position adopted – for or against – an issue is emotional and is
part of the pre-writing stage.The validity of your position has to
be tested against the facts, opinions and other data you compile
even before you begin drafting your outline.
Before the writing begins
Normally, you will be given a set of facts involving one or more
issues which may involve the law . The facts give rise to a
difference of opinion with some arguing in favour of an issue
and others arguing against it.. You are usually asked to support
a given point of view or to rebut it or to refine it. Several
preliminary matters must be considered before you actually put
pen to paper.
Legal issues are usually carefully crafted and are highly
unlikely to contain any unnecessary facts. Thus every fact
furnished is likely to be important. It is therefore necessary that
you do not dismiss out of hand, any detail as “superfluous”.
Even if you think that a fact is surplusage, consider it carefully
to determine its impact on the issue; chances are that it does
affect the legal position. Close consideration of such a fact will
usually enable you to establish its relevance to the legal issue

under scrutiny.
Normally, the fact situation given is complete and you are not
expected to supply any missing facts. This does not, however,
mean that you cannot draw attention to facts that appear to have
been omitted from the issue. One situation in which this must be
done is where, in your opinion, the missing facts will drastically
affect alter the legal position you are arguing.. However, before
you do this, you must ensure that you have scrutinized all the
given facts to ensure that the fact perceived to be missing is not
actually incorporated in, or negated by, a detail or two in the
rest of the statement of the issue.
Where you are arguing for or against a particular point of view ,
you argument must be balanced regardless of whether you are
arguing pro or con. Your advice would necessarily be based on
the facts as well as the legal principles and authorities that
favor your position. However, such advice would not be worth
very much if it ignored the facts, logic and the law that
favoured the other side. The ideal argument would, even as it
emphasizes the factors that favor your position, consider the
facts and the arguments against him. Where possible, it would
show how the adverse facts can be distinguished or, at the very
least, how the unfavorable law and facts affect your position..
It is possible that a particular point of law is not settled. In that
event, state the differing legal options (supported by appropriate
authorities) and discuss them. You should state which of the
options you prefer. Show why that option is to be preferred over
the others. This necessarily involves highlighting the strengths
of your preferred option and conceding its weakness. Do not
pretend that the uncertainty in the law does not exist as that is
tantamount to an admission of ignorance of the state of the law.
Very often, it is possible to have a variety of different
perspectives to an issue rather just one correct viewpoint.

answer. In arguing a position, what matters is that the
applicable arguments are raised and marshalled to reach a
conclusion. It is even possible to differ with the law or logic as
conclusively defined by authority provided that answer reveals
knowledge of the applicable law or facts or authority What
counts is the quality of the argument advanced (and the legal or
logical or data on which it is based). Remember, as important as
what you have to say, is how you say it!
When you are expressing an opinion, what you write has to be
shaped by, among other things, your purpose and your
audience/reader. Your purpose, evidently, is to advise your
reader as to his options. To realize this purpose, you will
generally have to identify the applicable law and logic apply it
to the given facts so as to lead to a conclusion about your
reader’s legal position or preferred option. Your task, as the
advocate , is to furnish advice that is comprehensible to your
reader. Normally, your client is a lay person unacquainted with
the law. Your reader does not cease being a lay person simply
because he throws out a few legal terms such as “consideration”
or “estoppel” or “misrepresentation” in his conversation with
you. Thus, unless there is compelling evidence to the contrary,
you should presume that your reader is a lay person. Treat your
reader as a reasonably intelligent, reasonably well-informed
individual able to grasp any argument or concept that is
explained to him. This imposes upon you the obligation to
define and explain any legal concepts that you have to use in
your opinion. Failure to do this may be adversely construed
against you. Remember, in theory at least, you are not writing
for your examiner who may be presumed to know your subject .
You will compile material for your opinion by reading. This is
usually a bigger job than the actual writing of the advice. Check
the accuracy of the legal data (including judicial or logical
authorities) you collect. Before you begin writing, decide the
order in which you want to present your material. An outline

would definitely be assist you to organize your material. An
outline would also enable you to determine the relevance of
your material Ensure that the different parts of your opinion
relate to each other and lead inexorably to the opinion you are
supporting
Writing an opinion
Perhaps the best way to approach an opinion legal problem is
not to forget that an opinion , like all writing, has to present
material that is organized to make a point. Writing an opinion r
may be said to include the following stages:
(a) The Introduction;
(b) The Body of your answer; and,
(c) The Conclusion.
To discuss the three stages, we shall consider a problem set in a
previous semester. The problem is reproduced below.
“Corporate governance gatekeepers have vital antifraud roles
and responsibilities” Support, refute ore refine this assertion
(a) The Introduction
Begin your answer by defining the key terms in the statement.
Here you would obviously have to identify the corporate
governance “gatekeepers”. Who/Who are these? (board of
directors, the audit committee, external audit and internal audit)
What do they do? How do they do whatever it is they are
supposed to do? Once you have addressed these questions, you
may declare whether you support or disagree with the statement
. Or do you want to modify it?. The Introduction should close
by announcing the arrangement of your main ideas. Avoid
details which belong properly to the body of your answer.
If you decide to set out your conclusions in the introduction,
make sure you state clearly that this is what you are doing;
otherwise your reader will be puzzled as to why preliminaries
(such as definitions) and other supporting material comes later
in the paper. You also run the risk of generating the impression

that your paper is confused and disorganized.
(b) The Body of your answer
State the law on the legal point in issue (give the statutory or
judicial authority for it) and apply the law to the given facts;
and,
Where, as in this case, more than one legal concept has to be
explained and applied to the facts, the task may appear be
daunting. What you need to do is to be systematic. Identify each
concept, define it (if possible), explain it (that is, list and
explain its ingredients or the rules associated with it) and apply
it to the given facts. Remember to furnish the judicial or
statutory authority for each applicable legal principle or concept
Do this for each of the concepts. This process of exposition has
to applied for each of the concepts.
Many an answer consists of the reproduction of all that the
writer can write about a legal concept regardless of its
relevance to the issue at hand. This seems to be the result of
two unvoiced premises. The first is that the writer who has
complied such a vast body of material should not be required to
trim it. The second seems to be that answer must be in the flood
of material unloaded and it is up to the reader to identify the
applicable portion. Examiners are not impressed by such
“unloading” and even if they are willing to wade through the
mass, will do so reluctantly.
The facts constituting a legal position may be based, as they
usually are, on the facts of a decided case. The facts of the
decided case may be used with or without modification in the
problem. Whether or not the facts from the precedent are
modified, the reproduction of the facts and holdings of one or
more case authorities followed by some statement to the effect,
“Based on the cases reproduced above, X is likely to succeed”
is not likely to score more than a passing mark. Such an

approach does not reveal either any understanding of the legal
principle responsible for the decision of the precedent or
demonstrate how the ratio of the precedent applies to the facts
of the problem. Without any exposition of the law established
by the precedent and of how it applies to the facts of the
problem, the bare reproduction of case facts and holdings
remains a mechanical exercise.
Case authorities should be cited to provide the source of a legal
principle. Resist the temptation to list all the authorities which
appear to be related to a legal concept – especially if you have
not read them. Padding an answer with inapplicable case
citations will cost, rather than gain, marks.
A question frequently asked about the use of case authorities is
whether it is the holding of a case or both the facts and holding
of the case that should reproduced in an answer. The response
has to be, “Neither, in the preponderance of case”. A case
authority is useful for the principle it established. Ideally, you
should be able to state and apply that principle. If that is what
you do then all you need to do is provide the case citation
without more. For example, look at the following sentence.
“The law is that generally, an advertisement for sale in
newspapers, magazines etc is an “invitation to treat”, that is, an
invitation to make an offer and is not itself an offer: Patridge v
Crittenden [1968] 1 All ER 421
The writer has reproduced neither the facts nor the actual
holding; he has merely stated a legal principle and cited its
source. On the other hand, if you are going to draw close
parallels to the facts of a case, then you need to cite the facts.
Another situation in which it is adviseable to cite the facts of a
case authority is where you want to show how the facts in your
problem differ from the facts in the authority.
When you reproduce passage from a case or other reference
material, acknowledge the source. Note that the conventional

abbreviation for “page” is a lower case “p.” followed by the
page number while the abbreviation for more than one page is,
also in lower case, a “pp.” followed by the page numbers.
Consider whether the acknowledgment should be incorporated
in the text or moved to a footnote or endnote.
· Where the sources of a quotation is a case and that is
incorporated into the text, the case should be cited in full as in
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 at p. 258.
· Where the source is a book, it should be cited as follows:
author(s) / comma / title in italics / comma/ open bracket /
publisher/colon/year of publication/ close bracket / comma /
page number(s) – if applicable/full stop. Examples:
Kwan, Rachel. Playing with the Law, (Mining University Press,
2018), p. 52.
Kwan, Rachel and Marco Joynt (2005) Not Playing with the
Law (Kako House Press: 2015), pp. 544 - 548.
· If you decide to use footnotes or endnotes, they should be
numbered consecutively, beginning with 1, throughout the
paper. The footnote or endnote number is a superior number and
stands clear in the text – without brackets or other
embellishments. Luckily, your computer will insert and number
footnotes and endnotes for you.
(c) The Conclusion.
Your analysis should lead you to a definite conclusion: your
reader either has a case or he does not, he is either entitled to
the option he prefers or he is not. Do not equivocate by
declaring, “Whether XX can succeed depends on the court’s
decision”. Everybody already knows that! Perhaps the only
situation in which such a stance is permissible is where your
analysis establishes that both option/points of view are finely
balanced with very little to distinguish between them. But this
is rare as problems are drafted to allow you to make a decision,
not sit on the fence and to pass the buck to the court.
Caveat

What is presented above is admittedly prescriptive. But it is
only a starting point. With experience will come the confidence
that will enable you to vary what is said here to suit your
particular purposes.
2
Lecture 3
Agency Theory
Shareholders of a corporation may not be able to run the
company when it becomes more widespread and diverse as this
would involve too many people in management rendering the
whole process time-consuming and unwieldy. In modern listed
corporations, where shares are bought and sold on the stock
exchange daily, it is impossible for shareholders to take part in
the day to day running of the company. As a result, managers
have to be employed to run the corporation.[footnoteRef:1] [1:
A A Berle and G C Means, The Modern Corporation and Private
Property (Transactions Publishers, New Brunswick: New Jersey,
1991) 66.]
The relationship between shareholders and managers is that of
principal and agent. The managers are supposed to act on the
instructions of the principal which is the corporation as their
contract is with the corporation and not the shareholders,
however often managers have sufficient expertise to run the
corporation according to their skills sets. The duty of the
managers is to maximize the wealth of the shareholders and in
return receive remuneration (salary) for doing so. However
where managers are given free rein in running the corporation,

they may lose sight of their duty and run the corporation
without the interests of the shareholders in mind. This is known
as agency problem and gives rise to agency
costs.[footnoteRef:2] They may be interested in short-term
profits which make them look efficient and result in larger
compensation (salary and bonus) while shareholders may
benefit from long-term plans that do not show immediate
benefits. [2: E F Fama, ‘Agency Problems and the Theory of
the Firm’ (1980) 88(2) Journal of Political Economy 288; E F
Fama and M C Jensen, ‘Separation of Ownership and Control’
(1983) 26(2) Journal of Law and Economics 301.]
As a result, shareholders elect a board of directors to set the
strategic direction of the corporation to maximize shareholder
wealth and to oversee that the management is aligned with the
same interests. The board should comprise members who have
the skill and knowledge relevant to running a corporation and in
some instances, a few of the directors should have in-depth
knowledge of the corporation’s business.[footnoteRef:3] The
Board does not take over management’s role but oversees its
role. Some members are employed by the corporation on a full
time basis to oversee the managers and operations of the
corporation. These are known as executive directors. Other
directors attend board meetings on a monthly or quarterly basis
and depend upon information provided by the management and
company secretary to make decisions. These are known as non-
executive directors who are either independent with no
connection to the corporation’s shareholders, board or
management and are not service providers to the corporation,
and non-independent non-executive directors who usually
represent majority shareholders or a group which has an interest
in the corporation. [3: M C Jensen and W H Meckling, ‘Theory
of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure’ (1976) 3 Journal of Financial Economics 305.]
One of the main problems in monitoring corporations is that the

managers have more insider information compared to the
shareholders and often the board of directors. This is known as
information asymmetry and is one of the problems that arise
when shareholders are unable to manage the corporation that
they own.[footnoteRef:4] Agency theory dominates perpectives
on corporate governance and results in the use of gatekeepers to
monitor management.[footnoteRef:5] These gatekeepers are
mainly the board of directors but auditors too are now perceived
as gatekeepers. These gatekeepers incur monitoring costs to
control managers and bonding costs which are the cost of
establishing compliance by managers through quarterly reports,
internal controls and other frequent checks on the behaviour of
managers. In spite of the presence of gatekeepers, not all
opportunistic behaviour can be eradicated. [4: A Shleifer and
R W Vishny, ‘Large Shareholders and Corporate Control’
(1986) 94 Journal of Political Economy 461.] [5: J Kirkbride
and S. Letza, ‘Can the non-executive director be an effective
gatekeeper? The possible development of a legal framework of
accountability’ (2005) 13(4) Corporate Governance: An
International Review 542.]
Stewardship theory
In contrast to the agency theory, the stewardship theory states
that managers have an orientation towards achievement,
altruism and want to gain a reputation for good work that will
make them marketable. They also want the satisfaction of a job
well done when the business expands or makes higher profits.
This is in line with maximizing shareholders’
wealth.[footnoteRef:6] This theory emphasizes that managers
should be trusted and given the necessary authority to carry out
their dureis and are stewards who protect shareholder wealth.
They will not engage in opportunistic behaviour and as a result
there is less need for gatekeepers to oversee them. This theory
focuses on empowering managers instead of controlling
them.[footnoteRef:7] [6: L Donaldson and J H Davis,
‘Stewardship Theory or Agency Theory: CEO Governance and

Shareholder Returns’ (1991) 16(1) Australian Journal of
Management 49.] [7: J H Davis, F D Schoorman and L
Donaldson, ‘Toward A Stewardship Theory of Management’
(1997) 22(1) Academy of Management Review 20.]
Managerial Hegemony Theory
This theory states management makes decisions without
involvement of the board of directors. Independent directors are
not effective gatekeepers because of information asymmetry
between the CEO and management and the board. The board is
therefore a legal fiction in spite of its formal governing power
over the management and is in effect dominated by top
management. The board exists only because it is required under
corporate laws. It is actually an ally of management as the
members are selected by the Chief Executive Officer (CEO) and
the board is used to legitimise management’s recommendations.
There is a suggestion that directors who are elected during a
particular CEO’s tenure may feel loyal to that CEO and neglect
their role as gatekeepers.[footnoteRef:8] [8: M.L. Mace,
‘Directors: Myth and Reality’ in T Clarke (ed) Theories of
Corporate Governance: The Philosophical Foundations of
Corporate Governance (New York, Routledge, 2005) 93. ]
Cadbury Code on Corporate Governance
The Cadbury Code resulted due to financial scandals in the UK.
Sir Adrian Cadbury headed a committee established in 1991 by
the Financial Reporting Council, the London Stock Exchange
and the accountancy profession. The Committee was of the view
that while a Code establishing best practices in corporate
governance should be introduced, it should not be made
compulsory as corporations would end up ticking boxes instead

of attempting to genuinely improve governance practices in
their firms. As a result the best practices were introduced and
corporations were encouraged to comply on a voluntary basis.
The Cadbury Code of corporate governance was one of the
earliest comprehensive codes on corporate governance in the
UK and advocated self-regulation. It emphasized the difference
that the Board can make to the governance of a corporation and
that the board should not depend upon auditors or regulators to
set standards of good governance. It stated that good corporate
governance practices lies with the board and the management
takes its cue from the Board. The Code introduced major
principles of governance comprising openness, integrity and
accountability by stipulating that financial reporting should be
honest. This does not mean that corporations were dishonest but
these principles were a reaction to the financial scandals in the
1980s and early 1990s. It also set a standard for the Board to be
accountable to shareholders as there was a perception that the
Board did not always regard itself in this role. It recommended
that financial reports should present a true and fair view of the
corporation’s financial position. The Cadbury Report suggested
making quarterly reports to shareholders and although this was
not a recommendation in the Code, the suggestion was later
applied by stock exchanges and auditors.
One of the main points raised in the Code was to emphasise that
there is a difference between the role of executive directors
(EDs) and non-executive directors (NEDs) and the latter had an
important role to review performance of the board and take the
lead in potential conflict of interest situations. NEDs should
lead the Board on issues of strategy, performance, resources,
key appointments and standards of conduct. Prior to the
Cadbury Code, NEDs were not perceived as making much of a
contribution to the board. In addition the Code emphasized the
role of independent NEDs (INEDs) who were expected to be
independent of the board and management in order to carry out
their watchdog role while also providing leadership in key
areas. The Code referred to domination of the Board by

individuals like the CEO or Chairman and implied that INEDs
would reduce incidences of domination. The idea of a ‘shelf
life’ for INEDs was mooted although a time frame was not
stipulated clearly. The Code recommended that corporations
establish a nomination committee to select competent directors
to serve on the board and an audit committee to liaise with
internal and external auditors. This resulted in greater emphasis
on the role of internal audit in addition to external auditors
which provided better protection to shareholders. It also
recommended a remuneration committee which would
recommend salary structures for the Board and senior
management which would be disclosed to shareholders. This
ensured that their salaries were not determined by one of two
individuals only.
The Code’s recommendations on the role of the Board included
having a formal schedule and minutes of meetings, training for
directors to familiarize themselves with the corporation’s
business and with the latest developments in corporate
governance and allowing directors access to external advice
when carrying out their duties. It also emphasized that the board
should take responsibility for establishing internal controls in
the corporation.
The Code emphasized the role of auditors and with some
foresight they touched upon the conflict of interest when the
same audit firm offered audit and non-audit services and as the
latter service may bring much higher revenue which may tempt
auditors not to be honest in their audits. This became a major
reason for the Enron scandal less than 10 years later! The
Report recommended the split between audit and non-audit
services but most countries including the UK did not implement
this until much later. The Report also recommended rotation of
auditor firms but this was not incorporated in the Code.
Rotation of audit partners has only recently been implemented
in many countries.
The establishment of the audit committee (AC) provides a clear
reporting line for auditors as the AC is a sub-committee that is

responsible for investigating any unusual financial activity
discovered by the auditors. The AC also has to follow up on
interim reports by the auditors pointing out deficiencies in
internal controls or financial irregularities. It was suggested by
the Committee that auditors who suspected or had proof of
financial mismanagement by the Board have a duty to report it
to the board. This suggestion was not implemented in the Code
but has become mandatory under the US Sarbanes Oxley Act
2002 (SOX) after Enron and also under various whistleblower
provisions in Malaysia and Australia. The Report also suggested
that auditors should self-regulate and impose high standards on
the profession. This has not yet been implemented in the UK but
has been implemented through SOX in the US and also by the
Audit Oversight Board in Malaysia since 2010.
The Cadbury Report emphasised the accountability of the board
to shareholders. In many cases, shareholders were apathetic and
did not know how to uphold their rights and the board acted
without fully taking the shareholders into consideration. The
Report was an important and timely reminder to boards that they
were there to service the shareholders and were agents of teh
shareholders. The Report also suggested that shareholders be
empowered through shareholder organisations and through
proxies or legal support. While shareholders have been
empowered recently, the process has been very slow. The
Malaysian Companies Act for example does not permit proxies
other than certain categories of persons and the method of
voting is also in question. Recently amendments to the Act
permit shareholders to sue the corporation with the leave of the
court whereas in the past, shareholders could only take action if
their personal rights were affected.
The Cadbury report emphasised the role of institutional
shareholders as they have the resources and hold sufficient
shares to make demands or changes to the board. The Code
encourages institutional shareholders to have regular contact
with the Board. In many instances, institutional shareholders are
represented on the Board by NEDs. The Report’s

recommendations have been realised through the Institutional
Shareholders Code in the UK and also the Corporate
Governance Blueprint 2011 in Malaysia. However as many
institutional shareholders in Malaysian GLCs are GLICs and
there are political links between the these corporations and
political parties, the benefits of institutional shareholders in
highlighting shareholders concerns is questionable. There may
be instances where the interests of minority shareholders and
GLICs may differ as the latter is attempting to fulfil
government policies while minority shareholders are merely
interested in increasing the value of their investments.
Many recommendations in the Cadbury Report have been
implemented and in some instances been made mandatory by the
Stock Exchange or regulators. The Report shows foresight and a
deep understanding of the requirements of good corporate
governance.
Greenbury Committee
The Greenbury committee was established in 1995 to review
directors’ remuneration as directors were being paid large
salaries with little accountability to shareholders. Large payouts
were not justified by performance. The Committee
recommended that the remuneration of all directors should be
included in a report and tabled before shareholders with details
of each director’s salary and not the aggregate. The
corporation’s policies for salaries, stock options, long-term
investments, pensions termination payments also have to be
disclosed to shareholders with accompanying explanations as to
justification as for payments made or benefits granted.
Hampel Committee
The Hampel Committee report was published in 1998 and it
endorsed most of the recommendations in the Cadbury and
Greenbury reports. The Hampel Committee recommended a
hybrid approach instead of a purely voluntary approach to
corporate governance. It stressed that while the board has the
role of leading the company for future strategies and growth it
also has the role as corporate watchdog. It recommended

separating the role of Chairman and CEO as the latter leads
management while the Chairman leads the board. The
Committee stressed on the role of INEDs which is separate from
other NEDs and EDs. It also stated that the term ‘independent’
required further definition. This is an issue that is difficult to
resolve. Stock exchanges such as Bursa Malaysia have defined
independent directors as persons who have no commercial or
family ties with the board or senior management. However one
of the main problems is that directors may not be independent in
their mind which is difficult to assess. There are suggestions to
limit the term of independent directors to reduce chances of
familiarity with other members of the board resulting in greater
‘group think’ than independence. The Hampel Committee also
stressed the role of institutional shareholders and indicated that
there should be dialogue between these shareholders and the
company.
In addition the Committee stressed on the importance of internal
controls and financial reporting by stating that the standards
applied to yearly financial reports should also be applied to
interim reporting. Listing Rules now require companies follow
this and also to make public disclosure of any material impact
on the company’s financial position. The
Committeerecommended that external auditors should have to
report independently to shareholders and that companies should
limit non-audit services to a proportion of audit services (10%)
so as not to compromise auditor independence; an occurrence in
Enron which was only discovered several years after the
Committee’s report.
Turnbull Report
As a result of the Committee reports above, the UK Combined
Code of Corporate Governance was enacted on a comply or
explain basis. The Institute of Chartered Accountants in
England and Wales (ICAEW) set up a committee to provide
guidance to companies to implement the internal control
requirements of the Code as sound internal controls and risk

management procedures would safeguard a company’s and
shareholder’s assets.
The Turnbull report stated that the board should consider the
nature and extent of risks facing the company, risks that are of
acceptable level of the company, likelihood of those risks
arising, the company’ s ability to reduce those risks and its
impact, costs of managing the risks and the benefit. The Board
should communicate its assessment to the management which
will have to implement board policies on risk and control
through standard operating procedures which give employees
the authority, information and skills to manage risks. The
company has to put in place policies and processes to manage
risks in its documentation and reporting procedures.
The Board has to review whether the internal control systems in
place are effective and this should be done on a continuous
basis (annual). Any weaknesses should be addressed and
procedures put in place to reduce those weaknesses and the
board needs to make a statement to this effect in the annual
report. Internal auditors are an important part in ensuring that
internal controls are in place and they should be required to
make a risk assessment to report this.
Higgs Report
This Report was issued in 2003 to review the role and
effectiveness of NEDs. The review was due to changes in
Europe, several committee reviews in the UK and the SOX in
the US due to scandals like WorldCom, Enron and Parmalat
(Italy).
The Report stated that the BOD is collectively responsible for
promoting the success of the company and supervising its
affairs. Board sub-committees should publish a report in the
annual report and the number of board meetings and each of its
committees should be disclosed. The board should reflect a
diversity of experience and skills but should not be so large as
to be unwieldy. The Report recommended that ½ the BOD
should be INEDs and there should be more EDs to replace NEDs
as EDs have information about the company. The Report also

stated that the board should meet at least once a year without
EDs and chairperson present to discuss matters.
The Report recommended that prior to taking up an appointment
NEDs should conduct due diligence on the company to find out
more about its financial position, CG reputation, the type and
extent of business, obtain information about other members of
the board and their skills, the financial viability of the
company, the background of its main shareholders, whether
there was any threatened legal action against the company, risks
attached to joining the board, conflicts of interest and whether
the director could make a contribution to the company.
The Report also recommended that a senior independent non-
executive director should be appointed to liaise with
shareholders in the event that the shareholders had any concerns
which they felt were not taken seriously by the rest of the
Board. The Report recommended that the definition of
independence should be included in the Code and should mean
that the director is independent in character and judgment and
there are no relationships or circumstances that will affect the
directors’ judgment. An independent director must not be a
former employee unless there is a gap of 5 years since he/she
was employed, have a material business relationship with the
company within 3 years, have received additional remuneration
from the company or participated in share option scheme etc.,
have close family ties with the directors, advisers or senior
employees, cross-directorships with other directors, represents
significant shareholder or served on the Board for more than 10
years.
The Higgs report in hindsight was able to draw lessons from
Enron and the Report stressed on the independence of directors
as Enron had many INEDs who were not independent in
judgment and character as they had close ties with the other
members of the board and senior management.
The Higgs report also recommended that the nomination
committee (NC) should comprise a majority of INEDs and
should be chaired by a INED. It should evaluate a balance of

skills, knowledge and experience on the board and prepare a
role and prepare a description of the role and capabilities of
required for a particular appointment. It should also state in
detail the process used for appointments and if the positions
have not been based upon external advice or open
advertisements, it should provide an explanation. Another
recommendation was for NEDs get a letter of appointment with
details about the time commitment, committee memberships and
involvement outside board meetings expected. In return NEDs
should disclose to the chair the nature and extent of their other
appointments and confirm that they will be available to carry
out their role.
The Higgs report emphasized the role of the nomination
committee to ensure proper succession planning for
appointments to the board and proper induction for new
appointees. It recommended training for directors to update
their skills and knowledge and also recommended annual
performance evaluation of the board and various committees
which should be reported in the annual report. It recommended
a time frame for NEDs which is a maximum of 9 years but the
preferable term is 6 years and stated that the nomination
committee should evaluate if they are able to give the time and
responsibility required of them. EDs should not take on more
than 1 NED position and should not become a chairperson of
another company. The Chairperson must not hold a similar
position in another company.
The Report recommended that a NED’s remuneration should
reflect the workload, scale and complexity of the business and
the responsibility involved. It should be divided into annual fee,
meeting attendance fees, chairmanship of board committees,any
further roles such as senior INED but they should not be given
stock options. NEDs should take their concerns to the chair and
their fellow directors and should ensure that their concerns are
recorded in the minutes of the meeting. If they feel that
resignation is the only course of action left, a written statement
should be made to the chairperson for circulation to the board

giving reasons for the resignation. The remuneration committee
should work closely with the NC to ensure that the incentives
for directors and senior executives are appropriately structured
to avoid rewarding poor performance. Senior INEDs should
attend meetings with a range of shareholders to develop a
balanced understanding of themes, issues and concerns of
shareholders. In addition, NEDs should upon appointment, meet
with major shareholders as part of the induction.
Further Readings - (Chapter 2, Corporate Governance in
Malaysia)
BTW 2320: Current Issues in Corporate Governance
Marking Rubrics
Student name :
_____________________________________________________
___________ Intake :
_____________________________________
Criteria
Outstanding
Good
Satisfactory
Unsatisfactory
Marks
Knowledge & understanding
The essay demonstrates thorough understanding of the issues
case; where the details were comprehensively identified and
discussed.

The essay demonstrates good understanding of the issues; where
the details were identified and discussed.
The essay demonstrates satisfactory understanding of the issues;
where some of the details were identified and discussed.
The essay demonstrates poor understanding of the issues; where
the student fails to identify or discuss most of the detail sues.
Analysis
The essay is well researched, showing in-depth analysis, with
arguments that are clear and persuasive.
The essay is competently researched, showing good analysis,
with arguments that are reasonably clear and persuasive.
The essay shows some research and analysis of the issues; with
attempts to construct logical and persuasive arguments.
The essay shows limited research and insufficient analysis;
where the arguments are poorly constructed.
Clarity & coherence
The structure and organization of the essay is systematic and
logical. The writing is clear and concise.
The structure and organization of the essay is reasonably
coherent. The essay is generally well written.
The structure and organization of the essay is satisfactory. The
writing is difficult to follow in parts.
The structure and organization of the essay is incoherent or
confusing. The essay is poorly written and difficult to follow.
Presentation, footnoting & referencing
Minimal errors in grammar, spelling or punctuation. Full and
accurate citation of authorities and sources.
Occasional lapses in grammar, spelling or punctuation.
Authorities and sources are generally cited correctly.
Some lapses in grammar, spelling or punctuation. Some
missing, incomplete or incorrect citations of authorities and
sources.
Frequent lapses in grammar, spelling or punctuation.

Unsatisfactory citation of authorities and sources.
Total marks: …./15%
BIBLIODATA ON SOME PAPERS ON CORPORATE
GOVERNANCE
Pek Yee Low, and Abdul Majid, “CEO Dominance, Family
Control and Modified Audit Opinions in Hong Kong,” Corporate
Ownership & Control, volume 5, issue 2 , Winter 2008,
(Continued -1), pp.179-187.
Mark A. Bliss, Balachandran Muniandy and Abdul Majid,
“CEO Duality, audit committee effectiveness and audit risk: A
Study of the Malaysian Market,” Managerial Auditing Journal,
vol. 22, No. 7 (2007), pp. 716-728.
Michael J. Ferguson and Abdul Majid, “To Sue or Not to Sue:
An Experimental Study of Factors Affecting Hong Kong
Liquidators Audit Litigation Decisions” Journal of Business
Ethics, vol. 46 (2003), pp. 363- 374.
4. Abdul Majid, Ferdinand A. Gul, and Judy S.L. Tsui, “An
Analysis of Hong Kong Auditors’ Perception of Selected Red
Flag Factors in Risk Assessment” Journal of Business Ethics,
vol. 32 (2001), pp. 263-27.
Abdul Majid, Ferdinand A. Gul, and Judy S.L. Tsui, “An
Analysis of Hong Kong Auditors’ Perception of Selected Red
Flag Factors in Risk Assessment” Journal of Business Ethics,
vol. 32 (2001), pp. 263-27.
Abdul Majid, Low Chee Keong & Krishnan Arjunan, "Company
Directors' Perceptions of their Responsibilities and Duties: A
Hong Kong Survey" Hong Kong Law Journal vol. 28, Part 1
(1998), pp. 60-89.
Abdul Majid and John Pragasam, "Interactions of Intolerance of

Ambiguity and of Contingent Liabilities on Auditors' Avoidance
of Litigation" Psychological Reports, vol. 81 (1997) pp. 935-
944. 18.
Abdul Majid and Marian Tong, "Auditor's Legal Liability for
Client Fraud and Other Irregularities: An Empirical
Perspective" Hong Kong Journal of Business Management vol.
xiv (1996), pp. 69-81.

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