Corporate Governance: The Subtle Art of Crafting a Constitution

Introduction

Corporate governance refers to the mechanisms and processes in which a company is structured, managed, and how its decision-making processes are organised. It involves the balancing of interests among the many stakeholders while focusing on the company’s long-term sustainability and success. Corporate governance provides a framework for attaining a company’s objectives, ensuring accountability, and safeguarding the interests of all stakeholders.

The main body of corporate governance rules for a company in Malaysia is the Companies Act 2016 (“CA 2016” or “Act”). The company Constitution is often relegated to a supporting role in the operations of a company, and it is in fact, widely overlooked as a key driver of a company’s corporate governance. A well-formed constitution serves as the cornerstone of your company’s growth and development, no matter big or small. This document is a key instrument in defining the rules and principles that govern the company, contributing significantly to the overall corporate governance framework.

Just as a skilled artisan meticulously moulds a masterpiece, business leaders can shape a governance masterpiece through the intentional crafting of their company constitution. This approach not only fosters a culture of accountability and transparency but also sets the stage for sustainable success by integrating the company’s distinct ethos into the very fabric of its governance structure.

 

Importance of Adopting a Constitution

The current CA 2016 has eliminated the requirement for a constitution, except for a company limited by shares where a constitution is mandatory. The Act has implemented statutory default rules for overseeing corporate internal management, categorising them into two main groups: one which can be customised or modified; and the other comprising mandatory, non-negotiable rules.

If the company has no constitution, the default rules in the Act will automatically apply. If a company elects to adopt a constitution, it may modify the default rules tailored to suit the management and governance of the company.

1. Default rules are scattered throughout the CA 2016

• • The default rules are scattered throughout the CA 2016, making it challenging to interpret or locate the specific rules governing the company. This is especially considering the extensive and lengthy nature of the CA 2

 

2. Modification and customisation of rules

• • The default rules outlined in the CA 2016 may not always align with the specific needs and interests of a company. Companies may find that these default rules are unsuitable or, in some cases, could have unintended adverse consequences.
  • The constitution allows the company to customise its internal rules, aligning them with its specific needs and objectives. This customisation serves as a preventive measure against disputes or conflicts that may arise, by addressing potential issues through tailored provisions. Such provisions can be customised to enhance governance, flexibility, operation and establish a structured framework within the organisation.

 

3. Single consolidated document

• • Having a written constitution is useful because it sets out the company’s rules and management in a single consolidated document, which is easier to navigate than the relevant provisions of the CA 2016.

Adopting a constitution streamlines the interpretation of the company rules and reducing the likelihood of potential misinterpretations or oversight of the provisions of the CA 2016. This provides the company with overall clarity and a well-structured operational framework that is modified in accordance with the company’s needs and best interests.

 

Customisable Provisions in the CA 2016

This section sets out examples among the broad categories of the customisable provisions in the CA 2016:

1. Board Proceedings:

• • Under the CA 2016, a constitution can address the appointment, removal of directors, and board proceedings, which offers flexibility to a company. A constitution may be helpful for foreign companies who are unfamiliar with the CA 2016, as a constitution serves as a guide, enhancing their understanding and facilitating a more informed decision-making process.
  • The Third Schedule of the Act contains default provisions governing board proceedings such as requirements relating to notices of meetings, quorum, voting and resolutions. For example, the quorum at directors’ meetings, companies may customise the constitution so that a particular class of director or directors must be present in order for the quorum to be met.

 

2. Pre-emptive Rights

• • The Act provides that if a company issues new shares which rank equally to existing shares as to voting or distribution rights, the existing shareholders will have pre-emptive rights over the new shares^[1]. A company’s constitution can establish a framework allowing to customise the pre-emptive rights provisions by stipulating that those shares would be offered to specific individuals first and not be offered to the holders of existing shares. Depending on the company’s commercial objectives, this flexibility may also open up opportunity for the company to attract new investors without being constrained by the need to offer shares first to existing shareholders.

 

3. Meetings of Members:

The CA 2016 permits members’ meetings at multiple venues using modern communication technology^[2], which is of importance in situations where members may be unable to travel or attend physical meetings in Malaysia. Customising a constitution provides the opportunity to include specific details for meetings at different locations, offering flexibility and cost-effectiveness, which may be particularly beneficial for foreign investors.

 

 Customisation of the Constitution

Considering that a company operates within the framework of its constitution and the CA 2016, the company would be at risk if the constitution is unsuitable. This could expose the company to potential legal challenges, posing a significant risk.

As such, the customisation and structuring of your constitution involves tailoring its provisions to uniquely fit the specific needs and best interests of your company. There is no one-size-fits-all constitution as every company has its own distinct goals, values, and operational dynamics.

  

Conclusion

To conclude, the CA 2016 and the company constitution work hand in hand to establish a sustainable and resilient framework within the company. The Act sets the legal foundation, while the constitution provides the flexibility needed for companies to tailor their governance structures to their specific needs. Understanding this interplay is crucial for companies seeking not only legal compliance but also effective and adaptive corporate governance practices that contribute to business sustainability.

 

 

[1] Section 85, CA 2016.

[2] Section 327, CA 2016.