How to Conduct Effective ESG Due Diligence in Malaysia

How to Conduct Effective ESG Due Diligence in Malaysia

How to Conduct Effective ESG Due Diligence in Malaysia

Businesses today face increasing pressure and expectations from their stakeholders to operate responsibly, ethically, and sustainably. This means that they not only need to consider the financial implications of their activities but also the environmental, social, and governance (ESG) aspects. These factors can have significant impacts on the long-term success and viability of a business.

How can businesses ensure that they are addressing the ESG aspects of their activities comprehensively and effectively? How can they identify and evaluate the ESG risks and opportunities that they face and take appropriate actions to mitigate the risks or capitalise on the opportunities? How can they demonstrate and communicate their ESG performance and progress to their stakeholders? This is where ESG due diligence comes in.

What is ESG?

ESG stands for Environmental, Social, and Governance. These are the three main categories of criteria that measure the sustainability and ethical impact of a business.

ESG criteria can help investors, customers, employees, and other stakeholders evaluate how an organisation performs on the following aspects:

This refers to how a business protects the environment and minimises its negative effects on natural resources, climate, and biodiversity. Some examples of environmental criteria are greenhouse gas emissions, energy efficiency, waste management, and water conservation.
How does a business treat its people and the communities where it operates? The social criteria answer this question by looking at aspects such as labour standards, human rights, diversity and inclusion, health and safety, and customer satisfaction.
A business that manages and governs itself with integrity and transparency is more trustworthy and accountable. The governance criteria help measure this by looking at elements like board structure, executive compensation, business ethics, anti-corruption, and transparency.

ESG criteria are not fixed or universal but rather depend on the industry, market, and context of each business. Different stakeholders may have different expectations and preferences for ESG performance and disclosure. Therefore, companies need to conduct ESG due diligence to identify and address the most relevant and material ESG issues for their operations and stakeholders.

Due diligence

What is Due Diligence in ESG?

Due diligence in ESG is the process of identifying, evaluating, and addressing a business’s ESG risks and opportunities. Organisations may do this for various purposes, such as mergers and acquisitions, investment decisions, compliance and reporting, and stakeholder engagement. It helps them understand their ESG performance, liabilities, and potential and align their ESG strategies, policies, and practices with the best practices and standards in their industry and market. Due diligence in ESG also assist companies in demonstrating and communicating their ESG commitment and contribution to their stakeholders and the wider society.

What Are the Steps Involved in ESG Due Diligence?

ESG due diligence can vary depending on the scope, objective, and context of the process.

However, a general framework for ESG due diligence can consist of the following steps:


Begin by clearly defining the purpose, scope, and timeline of the ESG due diligence Identify key ESG issues, stakeholders, and relevant information sources to shape the direction of the evaluation.


Initiate the process with a preliminary assessment of the business’s ESG risks and opportunities. Prioritise the most significant and relevant issues, setting the stage for further in-depth investigation and necessary actions.


Delve into a comprehensive analysis of the business’s ESG performance, identifying gaps and potential areas for improvement. Verify collected ESG information, benchmark against industry standards, and assess alignment with best practices to provide a thorough evaluation.


Translate findings into a proactive ESG action plan. Develop and implement strategies based on the evaluation, outlining clear goals, indicators, and targets. Allocate resources and responsibilities strategically to ensure effective execution of the action plan.

Monitoring and reviewing

Keep a vigilant eye on ESG performance, tracking progress and impact. Regularly review and assess results and communicate outcomes to stakeholders. Adjust and enhance the ESG due diligence process as needed, ensuring continuous improvement.

Malaysia due diligence process

What Is the Importance of ESG Due Diligence?

ESG due diligence is not only a good practice but also a strategic necessity for businesses that want to succeed in the long term.

It can help organisations to:

  • Enhance their financial performance: ESG due diligence can help businesses identify and capitalise on the ESG opportunities that can improve their efficiency, innovation, and competitiveness. It can also help them mitigate and manage the ESG risks that can affect their profitability, liquidity, and solvency.
  • Strengthen their reputation: ESG due diligence empowers companies to showcase not just their commitment but also their active contribution to ESG concerns valued by stakeholders. It acts as a foundation for building and sustaining trust, loyalty, and satisfaction among stakeholders. Additionally, ESG due diligence serves as a protective shield, averting potential reputational damage and crisis scenarios.
  • Foster their sustainability: ESG due diligence propels organisations towards aligning their operations with ESG principles that support sustainable development. It serves as a guiding force, steering them to create positive ESG impacts. In turn, these benefits not only their immediate stakeholders but also contribute to the broader well-being of the community and the environment.

Are There Any Tools or Bodies That Help with ESG Due Diligence?

Various tools and bodies can help businesses with ESG due diligence, including:

  • ESG frameworks and standards: These are sets of guidelines and criteria defining and measuring the ESG performance and impact of a business. Some examples are the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the UN Principles for Responsible Investment (PRI).
  • ESG ratings and indices: These are tools that evaluate and compare the ESG performance and impact of a business. Notable examples encompass the Dow Jones Sustainability Indices (DJSI), the FTSE4Good Index Series, the MSCI ESG Ratings, and the Sustainalytics ESG Risk Ratings. For publicly listed companies in Malaysia, having a strong ESG rating can be a useful tool in demonstrating real sustainability action and compliance with exchange regulations.
  • ESG and auditors: These are professionals who provide ESG due diligence services and advice to businesses. They help enterprises conduct ESG due diligence, develop ESG action plans, and report ESG results and outcomes.

Common Challenges Faced in ESG Due Diligence

ESG due diligence is not without its challenges.

Some of the common challenges faced by businesses in conducting ESG due diligence are:

    Data quality and availability
    Companies face challenges due to scarce, inconsistent, or unreliable ESG data, especially in emerging markets or sectors. This complicates data collection, verification, analysis, and accurate reporting of ESG performance.
    Resource constraints
    ESG due diligence, particularly for SMEs or newcomers, is time-consuming, complex, and costly. Balancing ESG objectives with resource constraints requires careful allocation of resources and expertise.
    Stakeholder engagement
    Managing diverse stakeholders—regulators, customers, employees, suppliers, investors, and communities—in the context of ESG is challenging. Identifying, engaging, and satisfying their varied ESG interests demands a nuanced approach, including handling conflicts and trade-offs.
    Importance of ESG Due Diligence

    How Can BoardRoom Help You with ESG Due Diligence?

    BoardRoom is a leading corporate and advisory services provider in Malaysia and the Asia-Pacific region. BoardRoom can help you with ESG due diligence by offering the following:

    • ESG advisory: As a leading corporate services provider in Malaysia and the Asia-Pacific region, BoardRoom provides ESG expertise in multiple APAC jurisdictions . Tailoring strategies to your needs, BoardRoom assists in designing and implementing ESG initiatives, including due diligence, action plans, and reporting.
    • ESG compliance: BoardRoom helps ensure seamless ESG compliance with local regulatory requirements. BoardRoom also aids in preparing and submitting ESG disclosures, keeping your business aligned with evolving requirements.
    • ESG solutions: Access cutting-edge ESG reporting tool through BoardRoom. Facilitating connections with stakeholders, BoardRoom’s ESG Access enhances collaboration, and incorporate functionalities for reviewing, validating, and auditing. Stakeholders can contribute, review, and endorse reporting timelines, all within one platform. Our entity reporting feature allows you to easily organise users into groups (entities) and control/assign ESG metrics specific to each group, so you can improve decision making, identify growth opportunities and manage group risks. .

    If you are interested in ESG due diligence and how BoardRoom can help you, contact us today for a consultaion.

    Contact BoardRoom for more information:

    Tina Thomas_profile

    Tina Thomas

    Head of Environmental, Social and Governance

    E: [email protected]

    T: +60-3-7890 4800

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    ESG Reporting 101: A Definitive Guide for Malaysian Companies

    ESG Reporting 101 A Definitive Guide for Malaysian Companies

    ESG Reporting 101: A Definitive Guide for Malaysian Companies

    ESG reporting is gaining popularity in the business world, especially in the wake of the COVID-19 pandemic and the growing awareness of environmental and social issues. But what exactly is ESG reporting, and why is it important for companies? In this blog, we will answer these questions and provide you with some practical tips on how to do ESG reporting effectively and efficiently.

    What is ESG?

    ESG stands for Environmental, Social, and Governance and constitutes the fundamental pillars for evaluating a company’s performance impact on the environment, society, and its governance structure.

    It encapsulates a diverse array of considerations:

    Scrutinise the company’s management of its carbon footprint, waste, water, energy, biodiversity, and natural resources.
    Examine the company’s treatment of employees, customers, suppliers, communities, and stakeholders. Evaluate commitments to diversity, inclusion, health, safety, human rights, and customer satisfaction.
    Investigate how the company conducts its business with ethics and transparency. Assess measures ensuring accountability, compliance, risk management, anti-corruption, and meaningful shareholder engagement.
    ESG Reporting

    What is ESG Reporting?

    ESG reporting is the process of disclosing and communicating the company’s ESG performance to its internal and external stakeholders. It can take various forms, such as:

    • Sustainability Reporting: A comprehensive document encompassing the company’s economic, environmental, and social performance. It outlines sustainability goals, strategies, and policies.
    • Integrated Reporting: A succinct report that combines financial and non-financial performance. It includes the company’s value creation model, risks, opportunities, and future outlook.
    • ESG Disclosure: A specific report or section focusing on the company’s ESG performance, metrics, and initiatives. This often aligns with recognised frameworks or standards.

    What is the Difference between ESG and Sustainability Reporting?

    While ESG and sustainability are often used interchangeably, they are not the same. Sustainability reporting is the overarching concept that encompasses ESG reporting and covers a wider range of topics beyond ESG factors, including supply chain management, community engagement, human rights and more. On the other hand, ESG reporting is a more focused and measurable approach, assessing and reporting on topics such as carbon emissions, employee diversity, business ethics, etc. to its stakeholders.

    Why is ESG Reporting Important for Companies

    Why is ESG Reporting Important for Companies?

    ESG reporting is not only a matter of compliance or reputation but also a strategic tool that can bring many benefits to companies, including:

    Enhancing trust and credibility
    By showcasing a commitment to sustainability and social responsibility, ESG reporting enables companies to cultivate trust and credibility. Stakeholders, including investors, customers, employees, regulators, and society, witness a transparent dedication to ethical practices.
    Improving performance and competitiveness
    Unveiling ESG risks and opportunities, ESG reporting becomes a catalyst for companies to enhance their market performance and competitiveness. It serves as a dynamic tool to attract and retain talent, customers, and capital, fostering a culture of innovation and sustainable growth.
    Contributing to the global goals
    ESG reporting plays a pivotal role in aligning companies with international aspirations, such as the United Nations Sustainable Development Goals (SDGs) and the Paris Agreement on climate change. It allows companies to showcase their positive impact, emphasising their contribution to global challenges and collaborative solutions.

    ESG Reporting Frameworks

    There are many ESG reporting frameworks and standards available in the market, each with its own scope, methodology, and indicators.

    Some of the most widely used and recognised ones are:

    Global Reporting Initiative (GRI)

    Used by over 10,000 organisations worldwide, GRI is a leading sustainability reporting framework. It offers universal standards and indicators covering economic, environmental, and social aspects, including sector-specific topics. GRI facilitates alignment with other standards like the SDGs, TCFD, and IRF.

    Integrated Reporting Framework (IRF)

    IRF promotes integrated thinking and reporting by connecting financial and non-financial performance. It provides principles guiding the content, structure, and governance of integrated reports, demonstrating how companies create value for stakeholders.

    Sustainability Accounting Standards Board (SASB)

    Focused on ESG disclosure for investors, SASB provides industry-specific standards and metrics, ensuring material, comparable, and decision-useful information. Covering 77 industries across 11 sectors, SASB addresses environmental, social, and governance aspects of ESG.

    Task Force on Climate-Related Financial Disclosures (TCFD)

    TCFD aims to enhance the disclosure and management of climate-related risks and opportunities. Offering recommendations and guidance on governance, strategy, risk management, metrics, and targets, TCFD supports companies and investors in addressing climate-related issues.

    ESG Reporting Best Practices

    ESG reporting can be a complex and challenging process, but it can also be a rewarding and beneficial one.

    Here are some best practices that can help you do ESG reporting effectively and efficiently:

      Define purpose and scope
      Before commencing ESG reporting, clarify your purpose, scope, and objectives. Identify your target audience, stakeholders, and the relevant topics and indicators. Determine the frameworks and standards you want to follow or align with.
      Engage stakeholders
      ESG reporting is a dialogue, not a one-way communication. Engage stakeholders throughout the process, understanding their needs, addressing feedback, and inviting them to join your sustainability journey. Communicate ESG performance transparently.
      Collect and manage data
      Systematically collect and manage qualitative and quantitative data using reliable methods and tools. Ensure accuracy, completeness, timeliness, and comparability. Document data sources, methodologies, assumptions, and limitations. Provide assurance or verification when needed.
      Report and improve
      ESG reporting is an ongoing cycle. Regularly report performance using appropriate formats. Benchmark against peers, industry standards, and best practices. Set goals, monitor progress, and learn from feedback. Continuously improve the ESG reporting process and quality.

      Is ESG Reporting Mandatory?

      In Malaysia, ESG reporting has been made mandatory for all public listed companies since 2016. The Malaysian government and the Securities Commission Malaysia (SC) promote ESG reporting through initiatives like:

      • The Malaysian Code on Corporate Governance (MCCG): This code outlines corporate governance principles for Malaysian companies, including a section on sustainability. It mandates the disclosure of sustainability policies, practices, and performance in annual reports, encouraging an integrated reporting Companies are also urged to use recognised frameworks like GRI standards.
      • The Sustainable and Responsible Investment (SRI) Framework: This framework aims to boost the SRI ecosystem in Malaysia. Providing criteria and guidelines for SRI funds, SRI sukuk, SRI indices, and SRI tax incentives, it supports alignment with SDGs, TCFD, and IRF.
      • The ESG Index Series: This series of indices measures the ESG performance of Malaysian companies using the FTSE4Good Bursa Malaysia Index methodology. Comprising indices like FTSE4Good Bursa Malaysia Index, it serves as a benchmark for investors and companies to assess and enhance their ESG performance.
      Tailored support with transfer pricing in Malaysia

      How Can BoardRoom Help?

      With over 50 years of experience in corporate services, BoardRoom stands as a leading provider in Malaysia, specialising in ESG reporting and sustainability. Whether you require advisory, software, or training, BoardRoom can assist in designing and implementing your ESG reporting strategy. Our expertise extends to aligning your ESG reporting with relevant frameworks and standards, simplifying and automating your ESG reporting process, and tracking and monitoring your ESG performance and impact.

      BoardRoom equips you with the knowledge and skills needed for effective and efficient ESG reporting and sustainability reporting. As your trusted partner, BoardRoom is dedicated to supporting your journey in fostering transparency and responsibility.

      Get a free 7-day trial on our ESG Access reporting software now.

      Contact BoardRoom for more information:

      Tina Thomas_profile

      Tina Thomas

      Head of Environmental, Social and Governance

      E: [email protected]

      T: +60-3-7890 4800

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      Our guide to Performance Share Plans

      Our guide to Performance Share Plans

      Our guide to Performance Share Plans

      Performance share plans (PSPs) are a type of long-term incentive scheme that rewards employees with shares of the company based on the achievement of certain performance goals. In Malaysia, PSPs are becoming more popular among companies as a way to align the interests of employees and shareholders, motivate and retain talent, and foster a culture of ownership and accountability.

      What are Performance Share Plans (PSPs)?

      Performance share plans (PSPs) constitute a type of equity compensation where employees earn the right to receive company shares contingent on meeting or surpassing predefined performance goals across a typically three to five-year period. These objectives span financial, operational, or strategic metrics, such as earnings per share, revenue growth, return on equity, customer satisfaction, or market share. The number of awarded shares hinges on factors like an employee’s role, individual performance, and overall company performance.

      In contrast to stock options that grant the right to purchase shares at a fixed price, performance shares involve no payment from employees. However, these shares are subject to vesting conditions, requiring employees to stay with the company until the performance period concludes and performance criteria are met. Failure to meet targets may result in a reduced share allocation or none at all.

      Understanding Performance Share

      Types of performance metrics used in PSP

      There are three primary performance metrics commonly employed in performance share plans in Malaysia: Total Shareholder Return (TSR), Earnings-Based, and Strategic Goals.

      Total Shareholder Return (TSR) Performance Shares
      TSR performance shares tie the number of awarded shares to the company’s total shareholder return relative to a peer group or market index over the performance period, typically three to five years. For instance, if the company’s TSR ranks in the top quartile, employees may receive 150% of the target shares.

      While aligning employee and shareholder interests, TSR performance shares may be influenced by external factors beyond employee control, including market conditions and investor sentiment. This approach may not necessarily reflect the underlying value creation or long-term strategy of the company, focusing more on short-term fluctuations in share prices.
      Earnings-Based Performance Shares
      Earnings-based performance shares link the number of awarded shares to achieving specific earnings-related metrics like earnings per share, net income, operating profit, or cash flow. This method aims to incentivise employees to improve the profitability and efficiency of the company. It provides a clear and transparent way to communicate and track performance goals and expectations to employees.

      However, earnings-based performance shares may be susceptible to manipulation or distortion by accounting policies, adjustments, or one-off items. They may also fall short in capturing non-financial aspects of performance, such as customer satisfaction, innovation, or social responsibility. Additionally, this approach may inadvertently encourage short-termism or excessive risk-taking as employees focus on boosting earnings in the current period.
      Strategic Goals Performance Shares
      Strategic goals performance shares correlate the number of awarded shares with the accomplishment of specific strategic objectives such as market share, customer retention, product development, or environmental, social, and governance (ESG) criteria. Intended to motivate employees toward the company’s long-term vision, these shares foster a culture of innovation, collaboration, and social responsibility.

      Though flexible to tailor performance criteria to the company’s industry and strategic priorities, strategic goals performance shares may be difficult to define, measure, and verify, leading to a potential lack of comparability or consistency. The performance criteria may also vary across different business units, functions, or regions, which can create conflicts or trade-offs for employees who must balance competing or contradictory goals, such as profitability and sustainability.

      How Performance Share Plans work

      Ever wondered about the inner workings of performance share plans? Let’s lay it out step by step:

      1. Setting the Scene: The company starts by defining the performance period, target shares, and metrics for each employee or group.
      2. Conditional Grants: At the beginning of the performance period, employees receive a conditional right to secure target shares, contingent on meeting specific conditions.
      3. Performance Focus: During the performance period, employees work towards achieving set goals while the company monitors and evaluates progress.
      4. Outcome Assessment: As the performance period concludes, the company calculates the actual shares awarded to each employee, ranging from 0% to 200% of the target.
      5. Delivery Process: The company delivers the shares, either as actual stocks or a cash equivalent, deducting applicable taxes and fees.
      Advantages of Performance Shares

      Advantages of performance shares

      Performance share plans offer several benefits to both the company and the employees, such as:

      Aligned Objectives
      Employees and shareholders unite in the common goal of increasing the company’s value and share price.
      Talent Retention
      A powerful tool for motivating and retaining talent, rewarding employees for contributing to the company’s success.
      Culture of Ownership
      Fosters a culture of ownership and accountability, engaging employees in the company’s performance.
      Tailored Approach
      Offers flexibility and diversity, allowing companies to choose from various performance metrics and customise plans for different employee levels, roles, or situations.
      Enhanced Compensation Package
      Elevates the attractiveness and competitiveness of the compensation package, complementing the base salary and other benefits.

      Performance share restrictions & risk

      It’s important to remember that not all smooth sailing with performance share plans. Here are the constraints and risks to be mindful of:

      • Shareholder Dilution: Issuing new shares may dilute the ownership and earnings of existing shareholders.
      • Administrative Challenges: Implementation involves complexities and increased costs, including designing, monitoring, and complying with accounting, tax, and legal regulations.
      • Uncertainty and Volatility: The value and number of shares are subject to change based on performance and market conditions, introducing unpredictability.
      • Potential Misalignments: Performance metrics may not always align with the true value creation or long-term strategy, potentially incentivising undesirable behaviours or outcomes.

      For expert insights into the implementation and optimisation of performance share plans in Malaysia, consider exploring the services offered by BoardRoom, a leading provider of employee stock options plan services and more. Contact us today to learn more!

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      Comprehensive guide to Employee Stock Ownership Plan (ESOP) in Malaysia

      Comprehensive guide to Employee Stock Ownership Plan (ESOP) in Malaysia

      Comprehensive guide to Employee Stock Ownership Plan (ESOP) in Malaysia

      This Comprehensive Guide to Employee Stock Ownership Plans (ESOP) in Malaysia navigates the intricacies of ESOPs within  Malaysia’s business landscape. From understanding the fundamentals of employee stock option plans to practical implementation, it’s your go-to resource. Whether you’re a business leader, HR professional, or just curious about stock options for employees, we shed light on their significance and how they contribute to organisational success in Malaysia.

      Understanding Employee Stock Ownership Plan (ESOP)

      As Malaysia faces a shortage of skilled labour, especially in the science and technology field, understanding how Employee Stock Ownership Plans (ESOPs) work may be key to attracting and retaining talent in Malaysia.

      An ESOP is a scheme introduced by the company, issuing a share option to eligible employees by giving them the contractual right to acquire shares of the company in the future at a predetermined preferential price. This means employees gain the opportunity to become partial owners of the company, aligning their interests with its success.

      Understanding employee stock options in Malaysia’s competitive landscape

      How does an Employee Stock Ownership Plan (ESOP) work?

      In essence, employees are given the right to purchase or receive shares, often at a predetermined price, also known as the exercise price. This process involves the allocation of stock options, which employees can later exercise, allowing them to become partial owners of the company.

      The allocation and exercise of these share options are intricately linked to the company’s performance. As the company prospers, the share value typically increases, providing employees with a direct financial benefit. This mechanism aligns the interests of employees with the overall success and growth of the organisation.

      ESOPs often include a vesting period, during which employees must fulfil certain conditions, such as completing a specified tenure, to gain full ownership of the allocated stocks. This not only encourages employee retention but also ensures a gradual transition of ownership rights, promoting a sense of long-term commitment.

      Benefits of ESOP

      Employee Stock Ownership Plans (ESOPs) offer diverse benefits for both employees and companies. They serve as powerful motivators, fostering ownership and commitment among employees. This alignment leads to increased productivity and a positive organisational culture. ESOPs contribute to employee retention and can be instrumental in attracting top talent in Malaysia. From the company’s perspective, ESOPs provide a strategic tool for sharing growth benefits, making them a notable example of stock options for employees. Overall, ESOPs create a mutually beneficial relationship between employees and organisations for sustained success.

      Advantages of Performance Shares

      Implementing an ESOP in Malaysia

      Implementing an Employee Stock Ownership Plan (ESOP) in Malaysia requires a strategic and systematic approach aligned with the country’s legal framework. This begins with the careful design of the ESOP, addressing unique organisational goals, participant eligibility, share option allocation, and the vesting period.

      Design of the ESOP
      Designing the ESOP involves structuring the scheme to meet the company’s objectives. This includes deciding on the type of share options offered, whether they are outright grants or options to purchase at a predetermined preferential price. The design phase also considers the overall size of the stock pool, determining how many shares will be available for employees.
      Addressing Unique Organisational Goals
      Aligning the ESOP with organisational goals ensures that the plan serves as a strategic tool. This could involve fostering employee ownership to enhance motivation and engagement or using the ESOP as a retention strategy for key talent. Understanding and incorporating these specific goals into the plan’s design is crucial.
      Participant Eligibility
      Clearly defining participant eligibility establishes who, within the organisation, can benefit from the ESOP. This may involve criteria such as job roles, tenure, or performance levels. Striking a balance between inclusivity and strategic targeting is important to ensure the plan meets its intended purposes.
      Stock Option Allocation
      Determining how stock options are allocated involves deciding the amount granted to each eligible participant. This allocation can be based on various factors, including seniority, performance, or a combination of both. Striking a fair and motivating balance is key to the plan’s success.
      The Vesting Period
      Defining the vesting period outlines the timeline over which employees gain the right to exercise the granted stock options. This can be crucial in retaining talent, as it encourages employees to stay with the company to fully realise the benefits. The vesting period is often structured with a graded approach, providing increasing ownership rights over time.

      A well-considered approach to these elements ensures the ESOP aligns with the company’s vision, engages employees effectively, and complies with legal requirements in Malaysia.

      ESOP administration and compliance

      Ensuring the effective functioning and legal adherence of Employee Stock Ownership Plans (ESOPs) in Malaysia relies on diligent administration and compliance efforts. Administrative excellence involves accurate record-keeping of stock options, allocations, and transactions, with that helps to streamline these processes for real-time access and enhanced efficiency. An online paperless approach also aligns with sustainability efforts and streamlines documentation, enhancing efficiency and cost-effectiveness.

      On the regulatory front, staying informed about Malaysia’s legal framework is important. Adherence to guidelines from bodies like the Capital Markets and Services Act 2007 (CMSA) is essential to minimise risk of non-compliance.

      Implementing robust security measures, such as two-factor authentication and regular updates, is essential to safeguard sensitive personal data. 

      Administration and compliance of ESOPs in Malaysia require a blend of advanced technology that adheres to legal frameworks and a steadfast commitment to data security. This would ensure a smooth and successful implementation for companies considering employee incentive schemes,

      BoardRoom helps companies design, implement and manage effective ESOS and ESOP programs

      ESOP and other forms of employee ownership

      ESOPs represent one form of employee ownership. Other structures include Performance Share Plans (PSP), Restricted Share Plans (RSP), Share Appreciation Rights Schemes (SAR), and Phantom Share Schemes (PSS). Each structure offers flexibility for companies to tailor ownership incentives based on culture, financial goals, and employee engagement preferences. The array of employee stock option plans allows for customisation within the broader spectrum of employee ownership.

      Why is an ESOP good for a company?

      Implementing an Employee Stock Ownership Plan (ESOP) can bring several advantages for a company: 

      Employee Motivation and Productivity
      ESOPs instil a sense of ownership, aligning employees’ interests with the company’s success and boosting motivation and productivity.
      Talent Retention
      ESOPs can be a powerful tool for retaining top talent. Employees who have a financial interest in the company are likely to stay longer, contributing to continuity and reducing turnover costs.
      Attracting Talent
      Prospective employees are drawn to companies with ESOPs, which offer them ownership opportunities. Such companies provide a competitive advantage in attracting skilled and motivated individuals.
      Positive Organisational Culture
      ESOPs contribute to fostering a positive organisational culture. Employees tend to feel a stronger connection to the company, promoting teamwork and a collective sense of achievement.
      Financial Flexibility
      ESOPs allow companies to reward employees without spending cash upfront, offering ownership through stock options. This is particularly beneficial for companies with limited resources for traditional bonus structures.
      Succession Planning
      ESOPs can facilitate smooth succession planning, allowing key employees to take on ownership responsibilities gradually and ensuring continuity and stability during leadership transitions.

      ESOPs can be a strategic tool for enhancing employee engagement, attracting and retaining talent, and contributing to the overall success and sustainability of a company.

      Frequently Asked Questions (FAQs)

      1. What does ESOP stand for?

      ESOP stands for Employee Stock Ownership Plan, allowing employees partial ownership through stock options or shares.

      2. What is an example of an ESOP?

      A notable example of an Employee Stock Ownership Plan (ESOP) is the one implemented by Publix Super Markets, Inc. Publix, a large U.S. supermarket chain, established an ESOP that gradually transitioned ownership to its employees. Through this plan, Publix employees have the opportunity to acquire shares of the company over time, aligning their interests with the overall success and growth of the organisation. This example illustrates how ESOPs can be used as a strategic tool to create a sense of ownership among employees and foster a positive workplace culture.

      3. Are ESOPs good for employees?

      Yes, ESOPs benefit employees through financial ownership, motivation, long-term retention, financial security, and potential participation in decision-making. Effectiveness depends on factors like the company’s financial health and communication strategies. Employees should always carefully consider the details of the ESOP in Malaysia, and companies should ensure clear communication to maximise the benefits for all parties involved.

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      A closer look at Restricted Share Plans

      A closer look at Restricted Share Plans

      A closer look at Restricted Share Plans

      Restricted share plans (RSPs) are a form of equity compensation that grants employees shares of company stock with certain restrictions. It can help employers attract, retain, and motivate talent by aligning their interests with those of the shareholders. RSPs can also provide tax benefits for both employers and employees, depending on the type and design of the plan.

      In this article, we will explore the key concepts of restricted shares, the different types of RSPs, how they function, and their benefits. We will also discuss the legal and tax implications of RSPs and answer some frequently asked questions on this topic.

      Definition of Restricted Share Plans

      RSPs are a specific kind of equity compensation where employees receive company shares as part of their compensation package. These shares come with conditions: they either need time or certain achievements before employees fully own them. Additionally, there might be limitations on selling or transferring these shares, such as a holding period or the company’s right to refuse the transfer.

      RSPs differ from stock options, which grant the right to buy shares at a set price in the future. Unlike stock options that become worthless if the stock price drops, restricted shares maintain value even if the stock price falls. However, there’s more risk involved with restricted shares – employees might lose them if they don’t meet the ownership conditions or violate transfer restrictions.

      Understanding Restricted Shares

      Key concepts of restricted shares

      Some key concepts are essential to understand when dealing with restricted shares, such as:

      • Fair Market Value (FMV): This is the share price in an open market, determined by stock supply and demand. FMV is typically based on the stock’s closing price during grant, vesting, or sale.
      • Grant Date: The day the company awards restricted shares, establishing the plan’s terms.
      • Vesting Date: When employees meet vesting conditions and gain full ownership of shares. It can be a fixed date, a series, or linked to specific events like an IPO or merger.
      • Vesting Schedule: The timetable dictating when and how shares vest. It can be “cliff vesting” (all at once after a set period) or “graded vesting” (gradual portions over time).
      • Taxation: Involves determining and paying taxes arising from restricted share grants, vesting, and sale. Taxation specifics depend on factors like share type, timing, FMV, and relevant tax laws.

      Different types of Restricted Share Plans

      There are two main types of RSPs: restricted stock awards (RSAs) and restricted stock units (RSUs). Both are forms of restricted stock, but there are some key differences between them.

      Nominal Purchase Price
      A nominal purchase price may be required for RSAs, depending on the plan. RSAs entail direct grants of company shares to employees at the grant time, subject to vesting and transfer restrictions.

      RSUs, on the other hand, involve commitments to provide shares or a cash equivalent to employees upon vesting, with transfer restrictions.
      Share Ownership
      Another difference between RSAs and RSUs is the share ownership granted to employees. RSAs confer immediate shareholder status, including voting and dividend rights, unless specified otherwise. Meanwhile, RSUs do not grant actual shares or ownership rights until vesting occurs, and dividend equivalents may or may not be included, depending on the plan.
      How Restricted Share Plans Work

      How Restricted Share Plans function

      In Malaysia, restricted share plans are typically crafted and overseen by the employer, aligning with the company’s compensation strategy. The employer defines eligibility criteria, the quantity and value of granted shares, the vesting schedule, transfer restrictions, and the tax treatment of the plan.

      The employer reserves the right to modify, amend, or terminate the plan, guided by the plan’s terms and relevant laws. Additionally, the employer may exercise discretion to expedite or waive vesting or transfer restrictions under specific circumstances, such as a change of control, termination, or the employee’s death or disability.

      Upon receiving the grant, the employee must accept and adhere to the plan’s terms. If applicable, the employee may need to pay a purchase price for the shares. Compliance with vesting and transfer restrictions is mandatory, and the employee is responsible for reporting and settling any taxes associated with the plan.

      Legal and tax implications of restricted shares

      The implementation of RSPs carries legal and tax considerations contingent upon the jurisdiction, plan type, design, and grant circumstances. Some of the common legal and tax issues that may arise are:

      • Securities Laws Compliance: Complying with securities laws and regulations that regulate the issuance, registration, and trading of restricted stock, such as the Capital Markets and Services Act 2007, the Securities Commission Act 1993 in Malaysia.
      • Employment Laws Compliance: Complying with employment laws and regulations that regulate employment terms and conditions, such as the Employment Act 1955 and the Industrial Relations Act 1967 in Malaysia.
      • Tax Laws Compliance: Complying with tax laws and regulations that regulate the taxation of restricted stock, such as the Income Tax Act 1967.

      Due to the intricate and case-specific nature of legal and tax implications associated with RSPs, seeking guidance from a certified tax advisor before implementing or participating in an RSP.

      How can BoardRoom help

      Restricted share plans are a structured equity compensation method providing employees in Malaysia with company shares under specific conditions. These plans can efficiently meet compensation objectives for both employers and employees, offering mutual tax advantages. However, you must consider challenges like potential share loss, tax liabilities at vesting, and legal compliance and grasp the key concepts, types, functions, benefits, and implications of these plans before implementation.

      If you’re looking for a dependable partner for your restricted share plans in Malaysia, BoardRoom offers professional corporate services. As a leading provider in Malaysia, BoardRoom assists with designing, implementing, and administering various employee share option schemes, including RSPs, stock options, and performance shares. Contact us today to learn more!

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      Frequently Asked Questions (FAQs) on Restricted Share Plans

      What is the treatment of restricted shares after employment ends?

      Treatment varies based on plan terms, termination reasons, and timing:

      • Pre-vesting termination or voluntary exit: Shares are usually forfeited without compensation.
      • Post-vesting termination or voluntary exit: Employees typically keep shares and pay taxes but face transfer restrictions.
      • Termination without cause, retirement, death, or disability: Pro-rated/full vesting may occur. Transfer restrictions exemptions may apply.

      How do restricted shares influence the ownership structure of the company?

      Restricted shares can alter ownership structure by adjusting the number and percentage held by employees, management, and existing shareholders. They tend to increase ownership for employees and management but may decrease it for existing shareholders due to share dilution. The influence depends on the granted shares’ number and value, vesting conditions, transfer restrictions, and share market prices.

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