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Penalties imposed on independent directors adequate, says Securities Commission

The Edge Malaysia
The Edge Malaysia • 6 min read
Penalties imposed on independent directors adequate, says Securities Commission
SINGAPORE (Nov 11): Between 2017 and so far this year, a total of 54 enforcement actions have been taken against 25 independent directors of 10 listed issuers, says Bursa Malaysia.
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SINGAPORE (Nov 11): Between 2017 and so far this year, a total of 54 enforcement actions have been taken against 25 independent directors of 10 listed issuers, says Bursa Malaysia.

A spokesperson for the stock market regulator says common breaches are in the areas of disclosures, such as financial reporting (delay and inaccurate submission of financial statements), and corporate transgressions, such as material or related-party transaction (RPT) requirements and provision of financial assistance. “The penalties typically imposed on independent directors are private/public reprimand and/or fine. So far, based on actions taken from 2007 up to now, the heaviest penalty imposed on an independent director is a public reprimand and total fines of about RM300,000 [$98,548] for financial reporting breaches,” the spokesperson says in an email interview with The Edge Malaysia.

In determining the penalties to be imposed, Bursa says it considers factors such as the facts and circumstances, nature, severity/extent and impact of the breach, antecedent character, background as well as the conduct of the independent director, mitigating and aggravating factors and public interest/deterrent element of the penalty.

“In ascertaining whether the independent director has caused, aided, abetted or permitted the listed issuer’s breach, Bursa will examine the culpability of the director, including the discharge of the director’s fiduciary duties (duty of care, skill and diligence) to the public limited company (PLC) based on documentary evidence and representations made,” it adds.

The types of penalties that may be imposed by Bursa on a director (including independent directors) under the listing requirements include:

  • Reprimand (private or public);
  • Fines of up to RM1 million; and
  • Remedial actions (for example, mandatory training and rectifying the breach such as announcements where there is no disclosure of the material information).

“Enforcement actions are also published through the issuance of a press release and displayed on our website. Publishing the details of these enforcement actions also acts as a general deterrent to other directors that culpable directors are held to account when they contravene the listing requirements,” says Bursa.

In comparison with other benchmarked stock exchanges/jurisdictions such as the Singapore Exchange and the Hong Kong Stock Exchange, Bursa says the listing requirements these exchanges do not expressly provide for the imposition of fines on directors.

Meanwhile, the Securities Commission Malaysia (SC) says the penalties for independent directors prescribed in the Capital Markets and Services Act 2007 are adequate and that it has no plans to amend the law at this point in time.

“The SC closely monitors the progress of companies and collaborates with relevant stakeholders to strengthen the corporate governance (CG) standards of companies, and will take action where there are breaches of the securities laws,” the regulator tells The Edge Malaysia.

“More importantly, improvements to the CG practices of listed companies require the collective efforts of all stakeholders, including greater engagement between companies and their stakeholders.”

The SC urges shareholders to carefully review board appointments, including how candidates are identified, outcomes of board and director effectiveness evaluations and the tenure of independent directors, because gaps or weaknesses in board leadership can have a negative impact on the company and its stakeholders.

It agrees that independent directors should provide more independent oversight proactively, as this is in line with what is expected of them. “Independent directors play a critical role in board deliberation on matters concerning shareholders’ interests and good corporate governance. They are expected to objectively challenge viewpoints deliberated in the boardroom and, at the same time, provide oversight of management.

“Bursa’s listing requirements (Paragraph 2.1 of Practice Note 13) set out the definition of independent director and emphasise the need for directors to exercise independent judgment and act in the best interests of the company,” it says.

Nevertheless, Bursa notes that there is greater awareness and understanding by directors of their role and responsibilities. “Outcomes achieved include seven PLCs aborting questionable transactions (including private placement, disposal of assets, capitalisation exercise) between 2017 and 2018.

“Independent directors have also proactively alerted the exchange on various matters, including irregularities in the preparation and approval for release of quarterly reports, and their investigation of transgressions that they have uncovered.”

Bursa also notes a declining trend in contravention of listing requirements and enforcement as a result of better compliance of the listing requirements by PLCs and their directors: 71 actions against 44 PLCs in 2008 versus 55 actions against 15 PLCs in 2018; and 89 actions against 50 directors in 2008 versus 62 actions against 22 directors in 2018.

Enforcement actions taken against independent directors

March 2019

The Securities Commissions Malaysia reprimanded Herman Widjaja, former independent director of China Stationery, for furnishing false or misleading financial statements to Bursa Malaysia.

The SC also reprimanded Zhou Liyi, former senior independent director of Xingquan International Sports Holdings, for falsely recording a loss of RMB415.7 million ($80.7 million) from the sale of inventory by Xingquan’s wholly-owned subsidiary; furnishing to Bursa a false agreement between the said subsidiary and a third party, furnishing false or misleading financial statements to Bursa and recording cash and bank balances in eight bank accounts collectively belonging to Xingquan that were false or misleading.

The SC reprimanded Maxwell International Holdings independent director Su DeMou for recording in the company’s financial statements a payment of RMB45.6 million by its wholly-owned subsidiary, which was false or misleading information; and furnishing false or misleading financial statements to Bursa.

July 2018

The SC commended the actions of the independent directors of China-based sports equipment company, Telent Outdoor (Hong Kong) Technology Co, for the unwavering discharge of their duties and responsibilities. The independent directors provided independent oversight of the investigations carried out by the advisers and also fully cooperated with the SC. Following this, the regulator reprimanded the company and imposed a permanent moratorium on its executive director Hui Tang Tat and his father, Hui Chi Keung, who is managing director of Telent, for submitting false information to the SC for the listing of the company on the Main Market of Bursa in 2014.

December 2017

The SC reprimanded and fined three independent directors of Trive Property Group — Wong Kok Seong, Thu Soon Shien and Mohamad Amin Mohamad Salleh — RM539,000 each for knowingly furnishing false or misleading statements in the 2014 audited financial statements of the company to the SC and Bursa.

October 2011

Two former Transmile Group independent directors, Jimmy Chin Keem Feung and Shukri Sheikh Abdul Tawab, were found guilty under Section 122B(b)(bb) of the Securities Industry Act 1983 and sentenced to one-year imprisonment and charged a fine of RM300,000 (in default of six months’ imprisonment) for having authorised the furnishing of a misleading statement to Bursa in relation to the unaudited revenue figures for the fourth quarter and the cumulative period of 2006.

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