Today, sustainability has become more than a slogan for the long-term survival of our planet and society in an era of climate change, social inequity and resource scarcity. Nations are reassessing their legal framework and corporate laws to ensure firms are excellent environmental stewards and social advocates. Malaysia, famed for its economic development and cultural variety, has certainly made progress with revisions to the Companies Act in 2016, but it falls short of tackling 21st-century sustainability issues despite current environmental awareness and socially sensitive consumers. Crucial issues that impinge on sustainability should have been addressed.

The Companies Act 2016, since its implementation on Jan 31, 2017, has aimed to modernise the business landscape by improving transparency, accountability and governance in Malaysia. The legislation has improved efficiency and minority shareholder protection, and tightened government control, but is rather silent on sustainability and corporate social responsibility issues.

This is rather perplexing since the Corporate Law Reform Committee (CLRC), which was tasked with the responsibility of making recommendations for reforms for the rather antiquated Companies Act 1965, in 2003 acknowledged long-term sustainability problems and also recognised the existence of Section 172 of the Companies Act 2006 in the UK, which if incorporated in the reforms, would resolve those issues. The CLRC maintained that directors should not specifically include social responsibility considerations in their decision-making.

Section 172 introduced a broader perspective on corporate responsibility by requiring directors to consider the interests of shareholders, employees, customers, suppliers, the environment, and the community when making decisions. It emphasises long-term consequences and the impact of decisions on the company’s reputation, sustainability and stakeholder relationships.

In contrast, Malaysia’s corresponding Section 213 of the Companies Act 2016 focuses primarily on directors acting in the company’s best interests without explicitly considering wider stakeholder interests. The emphasis on financial success and shareholder interests tends to overshadow non-economic concerns such as environmental impact and social well-being. As a result, companies may prioritise short-term profitability over long-term sustainability, undermining efforts to build an ethical and robust economy.

However, after 2016, it is now compulsory for Malaysian companies to follow sustainability reporting standards set by the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). While being a step forward, these standards lack legal enforceability. Compliance is driven by financial reasons, since investors are more inclined to invest in companies that adhere to these standards. But, there are no legal requirements for directors to proactively consider sustainability issues as seen in the UK’s Section 172.

While these compulsory requirements do encourage adaptability and openness by forcing corporations to take responsibility for their activities, and forcing them to rethink sustainability issues in their decision-making processes, the drawback remains that there is lack of legal enforceability and there is no legal responsibility placed on directors as well. Since compliance is one that is based on monetary considerations, it may result in investors shying away from investing in a company that does not comply with the GRI and SASB reporting standards.

Companies may also possibly face the possibility of being delisted by Bursa Malaysia for non-compliance with the GRI and SASB reporting standards. However, there is no legal requirements for directors to be legally proactive, as seen in the UK due to Section 172 of the Companies Act 2006.

Malaysia’s Companies Act 2016 does make a significant improvement to the country’s corporate governance, yet it falls short in addressing contemporary sustainability imperatives. The Act’s failure to include specific sustainability reporting requirements and lack of emphasis on non-financial considerations hinder the development of a corporate sector that is transparent, accountable and actively contributes to a sustainable future. To be recognised as a forward-thinking and responsible global economic player, Malaysia should reconsider its corporate governance framework and integrate comprehensive sustainability criteria. By aligning economic motives with environmental and social responsibility, Malaysia can harness its economic potential to drive positive change.

Vijayganesh Pullikutthyayanar
Sunway Business School
Email: @email

This article was first published in The Edge, 4 September 2023.