KUALA LUMPUR: Having a diverse and well-represented board of directors is vital in ensuring good corporate governance, the Sultan of Perak, Sultan Nazrin Shah said today.
Many studies, the ruler said, found that greater board diversity and more female representation could improve a company's reputation, lead to better financial performance, lower risk-taking and reduce fraud.
"When it comes to turning the promise of change into change itself, greater diversity on corporate boards is another key priority.
"This is not just important from an equity point of view, to even up the current and historical imbalance, but is also necessary from a business point of view."
He said much attention has been paid to this issue, and quotas have been introduced in some jurisdictions and on some bourses.
"Many European countries now have gender diversity requirements for corporate boards, including Germany, the Netherlands, France, Spain, Norway, and Iceland. The US-based Nasdaq, and California, have introduced even broader diversity quotas.
"These rules have been justified by the weight of evidence showing that diverse representation makes good business sense, despite some resistance. But, the under-representation of women and minority groups continues.
"And while all-male boards have become rarer among publicly listed companies in the West, they are still common elsewhere," he said in his speech at the launch of the "Corporate Governance and Ethics" book, at the Regent Auditorium, here, today.
Sultan Nazrin said an effective board of directors to guide and oversee decision-making processes in a company is of paramount importance.
"Board members must strike the right balance between oversight and detachment. They have to provide guidance and overall control while avoiding any undue meddling in the domain of the hands-on executives.
"This can prove challenging, especially as many board members will themselves have been in active managerial roles previously. But, such a division of labour is essential to good corporate governance.
"A strongly developed sense of ethics and duty is, of course, another absolutely essential quality for board members. Anyone lacking this basic moral commitment is fundamentally unfit to serve on a corporate board," he said.
The role of individual ethics in corporate governance, Sultan Nazrin said, also resonates strongly with Islamic teachings.
"Charity, giving, and social responsibility are at the very core of the Islamic approach to finance and wealth.
"Thus, Islamic finance institutions often have additional, specific governance guidelines, stipulating the establishment of Shariah Advisory or Supervisory Boards to ensure that Shariah rules and principles are being followed," he said.
Besides having an effective, well-balanced and ethical board of directors, Sultan Nazrin said rigorous reporting structures are also crucial to uphold good corporate governance.
This, he said, includes the "harder" financial auditing and the "softer" environmental, social and governance (ESG) metrics.
"The financial elements of reporting are well-established, and have long been set out in regulations and legislation. The ESG elements are still evolving, however.
"Unlike financial reporting, many of these are still voluntary to some extent, in that they are not, as yet, required legally," he said.
Sultan Nazrin said small and medium-sized companies with limited resources face serious challenges in implementing good corporate governance.
"The difficult current operating environment has only made this challenge worse. The severe disruption of global supply chains and the inflationary pressures resulting from the Covid-19 pandemic are now being heightened by the war in Ukraine.
"Many businesses may be tempted to de-prioritise their governance efforts as a result, to save both time and money. They may prefer to focus on more immediate and pressing business matters.
"But ESG efforts are no longer an optional extra or luxury that can be put off until better market conditions return.
"And it is no longer enough just to have an ESG plan. Companies must 'walk the talk', and demonstrate transparently how they are meeting their targets, and fulfilling their commitments," he said.