law

1. Directors

2. Definition
• The definition of a director has been changed to include “a person in
accordance with whose directions or instructions the majority of the
directors of a corporation are accustomed to act”.
• A public company must have at least two directors who must be
resident in Malaysia, ie have his principal or only place of residence in
Malaysia (s 196). Such director(s) cannot resign or vacate office if this
will cause the number of the company’s directors to fall below two.
• For a private company, there must be at least one director who must
be resident in Malaysia, ie have his principal or only place of
residence in Malaysia.
• Directors must be at least 18 years of age.

3. Types of Directors
• Executive Director: A director may be full time working Director,
namely managing or Whole Time Directors covered by a service
contract.
• Non-Executive Directors: A company may also have Non-Executive
Directors who do not have anything to do with the day-to-day
management of the company.
• Shadow Directors: Another category of Directors can be recognized
as per certain provisions of the Malaysian Companies Act- “Shadow
Directors”. These so called “Deemed Directors” acquire their status by
virtue of their giving instruction according to which “appointed”
Directors are accustomed to Act.

4. The role of the board
4. Decision making and monitoring roles
The role of the board of the directors is a combination of decision-making
and monitoring.
A board should retain certain responsibilities, and should make decision in
these areas itself.
After delegating the responsibilities to executive management it should
monitor the performance if management. For e.g. CEO.
In addition the board should monitor the system of internal controls that
management has put in place.
The board should accountable to shareholders for its performance in
carrying out these twin roles of decision-making and monitoring.

5. Chairman and CEO
Ultimate leadership of the organisation consists of a number of strands,
most importantly:
• Leading the board of directors – the chairman
• Leading the management team at and below board level – the chief
executive officer or CEO

6. Role of chairman
• Running the board and setting its agenda
The chairman should ensure the board focuses on strategic matters and
takes account of the key issues and the concerns of all board members. He
should ensure the contributions of executives and non-executives are co-
ordinated and good relationships are maintained.
• Ensuring the board receives accurate and timely information
We shall discuss this further later in the Text, but good information will
enable the board to take sound decisions and monitor the company
effectively.
• Ensuring effective communication with shareholders
The chairman should take the lead in ensuring that the board develops an
understanding of the views of major investors. The chairman is often the
public face of the company as far as investors are concerned.

7. Role of chairman
• Ensuring that sufficient time is allowed for discussion of controversial
issues
All members should have enough time to consider critical issues and not be
faced with unrealistic deadlines or decision-making.
• Taking the lead in board development
The chairman is responsible for addressing the development needs of the
board as a whole and enhancing the effectiveness of the whole team, also
meeting the development needs of individual directors. The chairman
should ensure that the induction programme for new directors is
comprehensive, formal and tailored.
• Facilitating board appraisal
The chairman should ensure the performance of the whole board, board
committees and individuals is evaluated at least once a year.

8. Role of chairman
• Encouraging active engagement by all the members of the board
The chairman should promote a culture of openness and debate, by, in
particular, ensuring that non-executive directors make an effective
contribution to discussions.
• Reporting in and signing off accounts
Financial statements in many jurisdictions include a chairman's
statement that must be compatible with other information in the
financial statements

9. Role of CEO
• The CEO is responsible for running the organisation's business and for
proposing and developing the group's strategy and overall commercial
objectives in consultation with the directors and the board.
• The CEO is also responsible for implementing the decisions of the board
and its committees, developing the main policy statements and reviewing
the business's organisational structure and operational performance.
• The CEO is the senior executive in charge of the management team and is
answerable to the board for its performance. They will have to formalise
the roles and responsibilities of the management team, including
determining the degree of delegation.

10. Role of CEO
• Business strategy and management
The CEO will take the lead in developing objectives and strategy having regard to
the organisation's stakeholders, and will be responsible to the board for ensuring
that the organization achieves its objectives, optimising the use of resources.
• Investment and financing
The CEO will examine major investments, capital expenditure, acquisitions and
disposals and be responsible for identifying new initiatives.
• Risk management
The CEO will be responsible for managing the risk profile in line with the risk
appetite accepted by the board. They will also be responsible for ensuring that
appropriate planning, operational and control systems and internal controls are in
place and operate effectively. The CEO has ultimate ownership of the control
systems and should take the lead in establishing the control environment and
culture.

11. Role of CEO
• Establishing the company's management
The CEO will provide the nomination committee with their view on the future roles
and capabilities required of directors, and make recommendations about the
recruitment of individual directors. They will also be responsible for recruiting and
overseeing the management team below board level.
• Board committees
The CEO will make recommendations to be discussed by the board committees on
remuneration policy, executive remuneration and terms of employment.
• Liaison with stakeholders
Like the chairman, part of the CEO's role will be to deal with those interested in the
company. The chairman's focus, however, will often be on dealing with shareholder
concerns, whereas the CEO will also be concerned with other major stakeholders
who impact on the company's operations, for example its most important
customers.

12. Division of responsibilities
• All governance reports acknowledge the importance of having a
division of responsibilities at the head of an organisation to avoid the
situation where one individual has unfettered control of the decision-
making process.
• The simplest way to do this is to require the roles of chairman and
CEO to be held by two different people, for the following reasons.
• Demands of roles
It reflects the reality that both jobs are demanding roles and ultimately
the idea that no one person would be able to do both jobs well. The
CEO can then run the company. The chairman can run the board and
take the lead in liaising with shareholders

13. Division of responsibilities
• Authority
• There is an important difference between the authority of the chairman
and the authority of the chief executive, which having the roles taken by
different people will clarify. The chairman carries the authority of the
board whereas the chief executive has the authority that is delegated by
the board.
• Separating the roles emphasises that the chairman is acting on behalf of
the board, whereas the chief executive has the authority given in their
terms of appointment.
• Having the same person in both roles means that unfettered power is
concentrated into one pair of hands. The board may be ineffective in
controlling the chief executive if it is led by the chief executive

14. Division of responsibilities
• Conflicts of interest
The separation of roles avoids the risk of conflicts of interest. The chairman
can concentrate on representing the interests of shareholders.
• Accountability
The board cannot make the CEO truly accountable for management if it is
led by the CEO.
• Board opinions
Separation of the roles means that the board is more able to express its
concerns effectively by providing a point of reporting (the chairman) for the
non-executive directors.

15. Composition of the board
• Executive and non-executive directors (Note: UK listed companies may be
required to include non-executive directors on their board. Other companies are
not required to appoint non-executive directors, but might do so voluntarily.)
 Executive Directors are directors who also have executive management
responsibilities in the company. They are normally full time employees of the
company. Examples are CEO, CFO/Finance directors.
 Non-executive Directors or NEDs are directors who do not have executive
management responsibilities in the company. (They might be an executive
director in a different company.)
 o NEDs are not employees of the company.
 o They are not full-time employees. When they are appointed there should be
clear understanding about how much time they would spend discussing
company’s affairs (monthly or yearly). However, the status of ED and Ned, as
directors, is exactly the same.

16. Composition of the board
• Independence
 Independence means reaching opinions, expressing them and not
necessarily agreeing with everything that fellow directors say.
 All directors should show the independence of character.
 In corporate governance, however, ‘independence’ means something
much more specific than having an independent mind.

17. Composition of the board
• Independent directors
An independent director is the one who:
• has no link to a special interest group or stakeholder group. For e.g.
management, other employees of the company, major shareholder, a
supplier or a major supplier or customer of the company.
• has no significant personal interest in the company, such a significant
contractual relationship with the company.
This is impossible for an executive director to be independent, because
he/she has a direct link with executive management. Only NED can be
independent. However all NEDs are not independent

18. Composition of the board
• According to Malaysian CCG a director is not independent when he:
1. has been an employee with in past five years.
2. has (or has had within the previous three years) a material business relationship
with the company. For e.g. shareholder, director or senior employee.
3. receives remuneration in addition the fees as NED. For e.g. participant in share
incentive scheme, PRP, pension.
4. close family ties with a director, senior employee or professional advisor the
company.
5. has significant links with the other directors through involvement in other
companies or entities.
6. Represents a major shareholder
7. Has served on the board for more than nine years since the date of his election
as director.

19. Composition of the board
• Board balance and independent directors
A board should consist of directors with a suitable range of skills, experience
and expertise. However, there should also be a ‘balance of power’ on the
board, so that no individual or small group of individuals can dominate
decision-making by the board. Example:
• The Maxwell Communication Corporation (Robert Maxwell).
Misappropriated £900 million form pension fund, using the fund in the
expansion of the company and to support the group companies that were in
financial difficulty in 1992.
• Polly Peck International (Asil Nadir)
• Both the companies collapsed in the early 90s.

20. Composition of the board
• The UK CC states: ‘The board should include a balance of EDs and NEDs (and in
particular independent NEDS) such that no individual or small group of
individuals can dominate the board’s decision-taking.’
• Further it states that: ‘To ensure the power and information are not concentrated
in one or two individuals, there should be a strong presence on the board of both
EDs and NEDs.’
• The CC specifies that:
o At least 50% of the board, excluding the chairman, should consist of independent
NEDs, except for smaller listed companies. (It is usual for the chairman of a UK
listed company to be independent.)
o In smaller listed companies, there should be at least two independent NEDs.
o In Singapore CCG states that independent directors should make up at least one
third of the board. Because codes vary form country to country.

21. Appointment and Removal of Directors
• A director shall ordinarily reside in Malaysia by having a principal place of
residence in Malaysia. This has imposed a higher requirement where the
director must show he is ordinarily resident in Malaysia and he has a
principal place of residence in Malaysia (Section 196(4), CA 2016).
• The Board of Directors may, at any time, appoint a director in addition to
existing director and the director so appointed shall hold office, in the case
of a public company, until the next annual general meeting and in the case
of a private company, in accordance with the terms of
appointment (Section 202, CA 2016).
• The circumstances that disqualify a person from being appointed as a
director is enhanced. These circumstances now include:
contravention of his duties as a director, and
habitual contravention of the Companies Act 2016

22. Directors’ Duties and Responsibilities
• Who are the duties owed to?
The act makes it clear that directors owe their duties to the company, not the
members. This means that the only company itself can take action against a
director who breaches them.
• Who are the duties owed by
Every person who is classed as a director under the Act owes the company a
number of duties. Certain aspects of the duties regarding conflicts of interest and
accepting benefits from third parties also apply to past directors
in Percival v Wright3 (1902) it was held that the duties of the director
were owed to the company .
The application of this common law principle is illustrated in Peskin v
Anderson4(2001) where the claimants failed to establish that the directors
owed duties to the shareholders of the company

23. Directors’ Duties and Responsibilities
• To act in Best Interest of the Company
Section 213(1) provides that a director shall at all times exercise his powers in
accordance with the CA 2016, for a proper purpose and in good faith in the best interest
of the company, retaining the provision in Section 132(1) of the CA 1965.
The onus of proving that the directors have acted in breach of their fiduciary duties lies
on the person asserting the breach, as held by L.P. Thean J.A. in Intraco Ltd v Multi – Pak
Singapore Pte Ltd [2].
What is in the best interest of the company is explained in the case of Petra Perdana Bhd
v. Tengku Dato’ Ibrahim Petra Tengku Indra Petra & Ors[3]. The Court held that when the
shareholders’ resolution provides a barometer as to what is in the best interest of the
company, the director will be considered not acting in the best interest of the company if
he exceeds the limit set by the shareholders. However, a company might have their own
customized constitution; therefore, the principle in Petra Perdana shall apply in case to
case basis.
•

24. Duty to act bona fide in the interest of the
company
• In Intraco Ltd v Multi-Pak Singapore Pte Ltd [1995] 1 SLR
313, the Court held that the proper test in determining
whether the directors have acted bona fide was whether an
honest and intelligent man in the position of a director in the
whole of the existing circumstances, have reasonably
believed that the transactions were for the benefit of the
company.

25. Duties of Directors
• Duty to promote the success of the company (s 172)
In performing this duty, a director must have regard to all relevant matters,
but the following are specifically identified in legislation:
the likely consequences of any decision in the long term;
the interests of the company's employees;
the need to foster the company's business relationships with suppliers,
customers and others; the impact of the company's operations on the
community and the environment;
the desirability of the company maintaining a reputation for high standard
business conduct; and the need to act fairly as between members of the
company.

26. • Re Smith & Fawcett Ltd [1942],
Facts:Act 10 of the company constitution said directors could refuse to
register share transfers. Mr Fawcett, one of the two directors and
shareholders died. Mr Smith co-opted another director and refused to
register a transfer of shares to the late Mr Fawcett’s executors. Half the
shares were bought, and the other half offered to the executors.
Held:that in absence of mala fides, this was proper

27. Duties of Directors
• To exercise independent judgment, (173)
that is, not to subordinate the director’s power to the will of others.
This does not prevent directors from relying on advice, so long as they
exercise their own judgement on whether or not to follow it.

28. • Fulham Football Club v Cabra Estates plc [1994])
In this case the directors of a company had entered into an
undertaking to support and refrain from opposing planning
applications by another party for the development of certain land in
return for the receipt by the company of large sums of money.
The directors subsequently wanted to give evidence to a planning inquiry
opposing the development and sought a
declaration that they were not bound by the undertakings and
were entitled to give such evidence to the inquiry as they considered to
be in the interests of the company.
The court of Appeal disagreed. It held that they had not improperly
fettered their discretion.

29. Directors’ Duties and Responsibilities
• To act with Reasonable Care, Skill and Diligence
• A director of a company shall exercise reasonable care, skill and
diligence with:
• (i) the knowledge, skill and experience which may reasonably be
expected of a director having the same responsibilities; and
• (ii) any additional knowledge, skill and experience which the director
in fact has (Section 213(2), CA 2016).

30. Duties of Directors
• Duty to exercise reasonable skill, care and diligence (s 174)
This requires a director to be diligent, careful and well informed about
the company's affairs.
If a director has particular knowledge, skill or experience relevant to his
function (for instance, is a qualified accountant and acting as a finance
director), expectations regarding what is ‘reasonable’ will be judged
accordingly (regulation 25). -

31. • (Re City Equitable Fire Insurance Co Ltd [1925],
Facts: some directors who were negligent escaped liability due to an
exclusion clause in the company’s articles.
It was held that the director had no obligation to give continuous attention to
the affairs of the company.

32. • Re D’Jan of London Ltd [1994],
a director was negligent in not reading fire insurance form which
resulted in the company going into liquidation. Hoffmann LJ held that the
standard of care expected of a director was contained in the wrongful
trading provisions in s214(4)IA 1986.
This recognises the idea of a reasonable director and applies the higher
of either an objective or subjective standard.

33. Directors’ Duties and Responsibilities
• Duty to Avoid Conflict in Interest
A director has a duty to make disclosure on particulars relating to shares,
debentures, participatory interests, rights, options and contracts (Section 219, CA
2016).
 every director who is in any way, whether directly or indirectly, interested in a
contract or proposed contract with the company shall, as soon as practicable
after the relevant facts have come to the director’s knowledge, declare the
nature of his interest at a meeting of the board of directors. These provisions are
similar with Section 135 and Section 131 of the CA 1965 respectively.
• This duty is greatly emphasized in the case of Avel Consultants Sdn Bhd & Anor v
Mohamed Zain Yusof & Ors. The Court held that a director of a company was in a
fiduciary position and as such was precluded from acting in a manner which will
bring his personal interest into conflict with that of his company

34. Duties of directors
• To act within the power
This requires a director to comply with the company’s constitution and
decisions made under the constitution and to exercise the powers only
for the reasons for which they were given.

35. • In Hogg v Cromphorn11(1967)
it was held that the power to issue shares was a fiduciary
power that had been exercised for an improper purpose
and it was irrelevant that the managing director acted bonafide in
what he felt was in the best interests of the company. The breach was
,however, ratified by referring the matter to the
general meeting for approval by the members.