Is Legislation in Malaysia Sufficient Post-Enron and Worldcom?

Pages: 7 (1978 words) Published: July 6, 2010
DIRECTOR’S RESPONSIBILITIES
Is Legislation in Malaysia sufficient post Enron & Worldcomm?

Abstract

Directors being pillars of corporate governance (Cowan, 2004) should at all times act honestly and use reasonable diligence in the discharge of their duties. This is more so in light of recent major corporate issues like ENRON & Worldcomm in the United States and the Transmile case in Malaysia. In essence directors are agents of the company and as agents, they owe a duty of trust to the company and shall do their utmost to put the interest of the company first before personal ones.

Cowen (2004) wrote that since directors are agents of the company, they are accountable to shareholders and to stakeholders in various guises. It is also clear that as a custodian of something that does not belong them, directors owe a fiduciary duty of care to safeguard the company’s assets and maximize returns for shareholders and to ensure that the other stakeholders needs are met as well. The principle that a company is a legal entity by itself and separate from its shareholders, directors and managers also lent to the need for directors to act honestly and diligently in the position that they are entrusted to.

1. INTRODUCTION

The statement in Section 132(1A) of the Companies Act 1965 in Malaysia states that a director of a company shall exercise reasonable care skill and diligence. Section 132(1) of the same act further states that a director of a company shall at all times exercise his power for a proper purpose and in good faith in the best interest of the company. The statement is more obvious when seen in the context that a company is a legal entity and it exists independently from both shareholders and staff. Playing the role of the middleman, directors are the link between the providers of capital and the company together its operational management team.

However, it must be noted that a director can also be a shareholder because although physically one person, the director plays the role of two distinct legal identities. This principle of separate and legal entity between the company and shareholders was first established in the landmark case of Salomon vs Salomon & Co. Ltd.(1985) where the term “Veil of incorporation” was established.

Fok (1996) , mentioned that a director is a person elected by the shareholders or appointed by the board to participate in management of the company. It goes without saying then that directors should safeguard the shareholders’ investment in the company and at all times act honestly and use reasonable diligence in the discharge of his duties to shareholders. Cowen (2004) wrote that since directors are agents of the company, they are accountable to shareholders and to stakeholders in various guises. It is also clear that as a custodian of something that does not belong them, directors owe a fiduciary duty of care to safeguard the company’s assets and maximize returns for shareholders and to ensure that the other stakeholders needs are met as well.

2. NEED FOR DIRECTORS

Directors are stewards of the company and who provide the company with leadership, guidance and directions. Directors of a company would include the following positions or designations;

• Managing Director
• Executive Director
• Chairman
• Independent non-executive Director
• Non-independent no-executive Director

All companies in Malaysia are required to have a board of directors and the minimum number is two. In essence the two originating directors of a company would most likely also be the shareholders as well. It is also common for shareholders to continue to hold office as directors and the board to be filled with trusted associates and relatives. Therefore we tend to take the issue of due diligence and honesty on the part of directors as a non-issue. Why would someone cheat themselves or their relatives?

However, when a company grow and it attracts capital apart from the original shareholders, the...

Bibliography: 1.Cowan, Neil 2004, Corporate Governance that Works!, Prentice Hall, Jurong, Singapore
2.Lee, Mei Pheng 2005, General Principles of Malaysian Law 5th Ed., Oxford Fajar, Selangor, Malaysia.
3.The Institute of Internal Auditors Malaysia, 2006, The Professional Practices Framework, The Institute of Internal Auditors, Kuala Lumpur Malaysia.
4.Fok, William, 1996, A Practical handbook on Company Secretarial Practice, Leeds Publications, Kuala Lumpur, Malaysia.
5.Legal Review Board, 2008, Penal Code (Act 574) as at 15th January 2008, International Law Book Services, Petaling Jaya, Malaysia.
6.Finance Committee on Corporate Governance, 2000, Malaysian Code of Corporate Governance, Malaysian Institute of Corporate Governance, Kuala Lumpur, Malaysia.
7.Ministry of Finance Malaysia, 2007, Companies Act and Regulations- Amendments up to September 2007 26th Edition, MDC Publishers Sdn. Bhd., Kuala Lumpur Malaysia
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