Transition period of 3-5 years to adjust to new corporate governance standards

Bank Negara Malaysia (BNM) recently announced key changes to the corporate governance guidelines to raise the standards of financial institutions.

The changes included strengthened requirements on board composition such as in having a majority of independent directors and enhanced expectations for the board and its committees, including a requirement to approve and maintain credible recovery and resolution plans under conditions of stress.

The enhanced corporate governance standards, which came into effect on Aug 3, 2016, with certain requirements subjected to a transition period, are applicable to licensed banks, investment banks, Islamic banks, insurers, takaful operators and financial holding companies.

BNM Governor, Datuk Muhammad Ibrahim, said the transition period would allow the institutions to adjust to the new standards.

"We will give them a transition period but it is important, we do not do this retrospectively and this is not only applicable for corporate governance matters ... it also applies to many other policies when we come out with new initiatives," he said.

Muhammad said this to reporters after announcing the country’s second quarter economic growth performance here today.

Under the new corporate governance, he said, the total tenure that a director could be on a board would be nine years.

"If they stay more than nine years they need to be re-appointed as non-independent directors.

"Under the new and very important policy, the majority of the board members must be independent. If you stay too long you will be re-designated as non-independent members," he said.

He said the transition period of between three and five years would not disturb the stability of the banking institutions.

It was reported that the central bank has also expanded the requirements on remuneration arrangements which promoted a sound risk culture, aligned with prudent risk-taking; and, strengthened expectations for effective group-wide governance arrangements.