Governance Before Anyone Asks: Private Companies and the New Scrutiny

For much of the last two decades, conversations about corporate governance in Malaysia focused on listed companies. The Malaysian Code on Corporate Governance, the listing requirements and the attention of institutional investors set the tone. Private companies, particularly founder-led and family businesses, were largely left to govern themselves.

That has changed. In corporate work we now see governance questions raised in almost every funding round, financing and acquisition, whether or not a listing is ever contemplated. The question is no longer whether a company has good people at the top, but whether it can show how decisions are made, by whom, and on what information.

This note looks at why the scrutiny has arrived, where it tends to fall, and what a proportionate response looks like for a private company that does not want, or need, the apparatus of a listed group.

Why private companies are being asked

Three groups drive the change. Institutional and regional investors increasingly apply their own governance standards to portfolio companies, often borrowed from listed-company practice and from the expectations of their own investors. Banks and other lenders ask about board oversight and related-party dealings as part of credit assessment. And acquirers, particularly foreign strategic buyers, expect a target’s records to support what management tells them in meetings.

None of this reflects a change in the basic law. The Companies Act 2016 already sets out the core duties of directors: to exercise their powers for a proper purpose and in good faith in the best interests of the company, and to exercise reasonable care, skill and diligence. What has changed is how closely others now check that those duties are observed in practice, and how much weight they place on the paper trail.

There is also a quieter driver. As founder-led companies grow, the people who joined early become managers of managers, and decisions once made across a single table now pass through several layers. Governance is partly the discipline of making sure that growth does not quietly remove the checks a smaller company had by accident.

Where scrutiny tends to fall

In due diligence the same areas come up again and again. They are rarely dramatic. More often they are matters handled informally when the company was small and never revisited as it grew.

• Board composition: whether the board includes anyone independent of the founders or the family, and whether its members are genuinely involved in decisions.
• Conflicts of interest: how transactions with directors, shareholders and their related businesses are identified, approved and recorded.
• Records: whether resolutions, minutes and statutory registers are complete and match what actually happened.
• Delegation: whether management authority is clearly defined, or whether everything still runs through one person.
• Group structure: whether intercompany arrangements, guarantees and shared services are documented, or simply assumed.

Each of these is usually fixable. The difficulty is timing. A gap discovered by an investor’s lawyers in the middle of a transaction becomes a negotiating point: a price adjustment, a specific indemnity, a condition to completion, or simply a delay while the records are repaired. The same gap found eighteen months earlier by the company itself costs little more than an afternoon of a director’s time.

Related-party dealings deserve particular care

In privately held groups it is common, and often entirely sensible, for a company to deal with businesses owned by its directors or shareholders: a property company that owns the premises, a sister company that provides staff or services, a relative’s business that supplies goods. Investors understand this. What concerns them is not the existence of such arrangements but the absence of a process around them.

A simple approach goes a long way. Identify the related parties. Record the arrangements in writing, on terms that could be explained to an outsider. Have conflicted directors declare their interest and stand back from the decision, and minute the approval. Where the law requires a particular approval for a transaction involving a director, obtain it before the transaction rather than after someone has noticed.

What a proportionate response looks like

For most private companies, good governance does not require a large board or an elaborate committee structure. It requires a small number of habits, applied consistently.

Some companies benefit from adding an independent or non-executive director. Done well, this brings experience and an outside view that founders often value more than they expected. Done as a box-ticking exercise, it adds cost without adding judgement. The right person is someone the founders will actually listen to.

Timing is the whole point

Governance put in place well before a transaction reads as part of how the business is run. Governance assembled during a transaction reads as a response to it, and investors and buyers can tell the difference. For founder-led companies considering outside investment in the next two or three years, the sensible course is to start now, modestly, and let the habits settle before anyone asks to see them.

In most cases the first steps are simple, inexpensive and entirely within the company’s control. The harder part is deciding to take them while nothing is forcing the issue.