To ensure that company directors are capable of making sound and prudent decisions, processes for the selection, appointment and re-election of individuals to board roles need to be closely supervised. For public listed companies required to meet high standards of corporate governance, ‘fit and proper’ policies often function as a gatekeeping mechanism, to prevent individuals who pose a risk to company interests from either taking on a role in the first place or from continuing in their role if a serious issue arises.

A series of changes introduced by Bursa Malaysia to its listing rules for Main and ACE Market companies in January this year includes a mandatory requirement that listed issuers now adopt a fit and proper policy and properly disclose rationales applicable to the selection and nomination of directors to their board.

1. From 1 July, these companies are required to publish the policy on their website.
2. Annual reports issued for the financial year need to include disclosure of how the new fit and proper rules are applied in relevant company decisions.

The enhanced rules, which also limit the tenure of an independent director to not more than a cumulative tenure of 12 years in a listed issuer, will require companies to communicate any redesignations. These revisions are aimed at further strengthening board independence, quality and diversity, said Bursa, in its note to listed issuers.

A check shows that companies have been quick to comply with the required publication of their respective fit and proper policies on their corporate website, with some having tabled the said policy for approval and adoption by the board as early as February this year.

Mak Yuen Teen, associate professor of accounting at the NUS Business School and a corporate governance advocate, said that what underpins the enhanced Bursa listing requirements are already “high-level considerations”, but it remains to be seen how listed issuers in Malaysia will develop and apply the fit and proper policy. “Beyond the minimum requirements imposed by the rules, the actual criteria adopted will depend on the standard that a board aspires to achieve, and the tone it wants to set.”

How to Carry Out the Fit and Proper Assessment?

Under Bursa's current listing requirements, all listed issuers establish a nominating committee which comprises exclusively of non-executive directors, a majority of whom are independent. This committee now plays a crucial role in documenting the application of the new fit and proper policy when drafting the company's annual report and communicating how it has discharged its duties when assessing and justifying its board composition.

Case Study: Heineken Malaysia Berhad

Brewer Heineken Malaysia's nomination and remuneration committee is entrusted with the annual reviews of the structure, size and diversity of the board.

In the selection process, the committee refers to a set of approved criteria listed in the company's policy, and proceeds to conduct reference checks and due diligence based on information provided by potential candidates, said Rachel Ng, Heineken Malaysia's company secretary.

The company's fit and proper policy includes a Form of Information on Prospective Directors which requires candidates to fill up information like their professional qualifications and working experience; past and present directorship details; declarations related to corporate ownership, past convictions and bankruptcy, as well as political involvement.

An overview of Heineken Malaysia's corporate structure, which includes a nomination and remuneration committee. Source: Corporate Governance Overview Statement, Annual Report, Heineken Malaysia

Typically, the assessment is discussed through both formal and informal contact sessions, and in the event when additional information is required, the committee can request for appointees to supplement any written information already provided. “The committee also holds engagement sessions with the shortlisted candidates to determine their suitability before recommending them to the Board for approval,” said Ng.

Bursa Malaysia's Corporate Governance Guide (4th Edition) also adds that boards can benefit from engaging an external and independent party once every three years to facilitate the assessment process. “The said party is expected to deliver a neutral view of the board's strengths and areas for improvement, and can also add insights gained from other evaluations.”

It goes on to recommend that the nominating committee and the board “devote sufficient time to review, deliberate and finalise the nomination and/or selection of directors”. The main factor affecting the timing of an assessment is usually the availability of information. Another factor is the complexity of the assessment, taking into account the role and position of the individual being assessed. In some jurisdictions, deadlines are set out in national law, and compliance is encouraged.

A Proactive Approach to Reassessment

According to Mak, a company's fit and proper policy should be as comprehensive as possible in considering fit and proper criteria for existing directors and new directors. He recommended that NRCs refer to some form of checklist to assess whether a director is fit and proper.

“However, no checklist can possibly cover all situations,” Mak said. “For example, would a director who had been reprimanded by Bursa be considered fit and proper? What if it happened many years ago?”

Boards will need to consider how these unique situations affect the suitability of a director for appointment or re-appointment, said Mak.

There are many complexities that nominating committees may have to deal with that go beyond a simple box-ticking exercise when it comes to evaluating directorships, Mak said. “A policy can only be as good as the people on the board and those tasked with implementing it,” he said.

Nominating committees may also need to consider the need for ad-hoc suitability assessments, for example when directors are threatened with a particular law enforcement action or negative press. KPMG references a series of reassessments by the European Central Bank in 2021 that found only 5 out of 17 banks in 8 countries had proactively triggered reassessments of their management bodies.

“What is clear is that the “wait-and-see” approach should be avoided,” said KPMG in
an article on the fit and proper framework.

It is also recommended for banks to define and document criteria by which individuals could require a revised suitability test and ensure that reassessments are well-documented, describing the events that took place, what actions have been done to address findings and lessons learnt.

Communicating Fit and Proper Policies with Stakeholders

According to Mak, among the questions the nominating committee and the board need to consider are whether or not they would be able to support the appointment if questioned by shareholders. Boards need to ensure they can explain the process and considerations that underpin the appointment, he said.

“Having a comprehensive fit and proper policy and a good skills and diversity matrix to support the director appointment process can help the nominating committee to convey if a candidate is not suitable,” Mak said.

Case Study: LB Aluminium Berhad

For LB Aluminium Berhad, one of Asia's largest aluminium extrusion manufacturers, whose board approved its fit and proper policy in March this year, it took a further step to publish its evaluation form for directors and a self-assessment checklist for independent directors.

Questions focused on integrity and ethics, willingness to maintain effective internal controls and risk management practices, as well as an assessment of the director's qualifications and contributions.

An excerpt of LB Aluminium Berhad's independent directors' self-assessment checklist.

Defining a Comprehensive Set of Criteria

Guidelines from Bursa Malaysia list three high-level considerations that underpin a fit and proper policy of a listed corporation and its subsidiaries. These include:

1. Character and integrity
2. Experience and competence
3. Time and commitment

There is also a need to take a broader view and consider if there is the added value of a particular candidate for the board as a whole, and how the candidate fits within its overall composition, to determine suitability. This ensures that gaps in the board's skills matrix, competency or experience are identified and plugged through the recruitment of suitably qualified directors.

Bursa's Corporate Governance Guide also advises listed issuers to maintain succession planning on its radar. “A far-sighted and effective nominating committee will keep an eye on the need for succession in the boardroom, identify appropriate candidates for board's approval to fill casual vacancies and nominate candidates for the board's consideration.”

Building a Stronger Challenging Culture

A good fit and proper policy, Mak said, would go beyond the minimum requirements laid out by the regulator.

“Often this requires judgement. The nominating committee and board need to consider - would we be able to support the appointment if questioned by shareholders? Would we be able to explain the process and considerations that underpinned the appointment?” he said.

This is crucial in the face of potential challenges the nominating committee may face from shareholders, such as when a controlling shareholder insists on appointing a director who is not fit and proper, Mak said.

“The other challenge is that the nominating committee is not the only gateway to appointing directors. Shareholders can requisition for an extraordinary general meeting and propose resolutions to appoint directors,” he said.

A highly independent and competent nominating committee needs to ensure that there is a robust policy, that there are proper checklists covering the areas in the policy, and most importantly, that it spends time deliberating on issues that may not be clear-cut, he said.

Bursa Malaysia in its guidebook says that an effective application of the fit and proper policy should ensure that activities are carried out “without being beholden to executive directors or controlling shareholders”. Even with a fit and proper policy in place, companies need to continuously explore and consider better governance practices and structures; under-performing directors should receive notice that improvement is expected lest they find themselves being eased out of the board.

Corporate Governance Guide (4th Edition)