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INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)
ISSN No. 2454-6186 | DOI: 10.47772/IJRISS | Volume IX Issue X October 2025
Directors’ Duties in Managing AI and ESG Under Malaysian Law: A
Doctrinal Analysis
Hariati Mansor
1*
, Rezashah Mohd Salleh
2
, Noraziah Abu Bakar
3
1
Faculty of Law; Universiti Teknologi MARA Cawangan Johor, Kampus Pasir Gudang, 81750 Masai,
Johor
2
Zahid Ahmad & Associates, Negeri Sembilan
3
Faculty of Law&Prosecutorial Science, ELMU University, Bandar Enstek, 71760 Nilai, Negeri
Sembilan, Malaysia
*
Corresponding author
DOI: https://dx.doi.org/10.47772/IJRISS.2025.910000732
Received: 02 November 2025; Accepted: 10 November 2025; Published: 22 November 2025
ABSTRACT
The emergence of Artificial Intelligence (AI) technologies and Environmental, Social, and Governance (ESG)
integration with corporate governance has redefined the company directors’ responsibility. This scenario has
changed the important legal questions on the extent the which directors in Malaysia are obliged to oversee and
govern emerging risks and opportunities related to AI and ESG. This article examines the directors’ duties
under the Companies Act 2016 using the doctrinal legal research methodology to determine whether there are
provisions in relation to AI and ESG governance. To answer the question, a systematic analysis of the statute,
case law and other regulatory frameworks is explored to clarify the emergence of legal duties of directors. The
positions from the United Kingdom, Australia and Canada are referred to highlight international trends and best
practices as a basis of comparison. The article asserts that directors are increasingly required to be actively
involved with ESG and AI-related governance risks, including ethical considerations, transparency and
sustainability reporting. It emphasised the need for legal reform, board competency enhancement, and clear
regulatory frameworks to ensure that the boards are well-positioned to address the growing challenges of AI
and ESG. In essence, the article suggests that directors must adopt a strategic and principled approach to
governance that aligns with both statutory obligations and stakeholder expectations in the digital and
sustainability-driven business landscape.
Keywords: Director’s duty; Artificial Intelligence; Environment Social and Governance (ESG); Corporate
Governance
INTRODUCTION
The law on directors’ duty has been subjected to substantial transformation throughout the years. The directors
traditionally are expected to exercise their duty of care under the common law and statute in the best interests
of the company (Keay, 2008). The courts have interpreted the best of the interests of the company to mean the
best interests of shareholders to maximise their wealth. The shareholders’ wealth maximisation theory viewed a
company as an association of shareholders formed for their private gain and to be managed solely by its board
of directors for that purpose (Halpern, Trebilcock and Turnbull, 1980). The Companies Act 2016 in section 210
and section 213 have codified the principles of common law in relation to directors’ responsibilities and
liabilities. Directors’ decision-making face new challenges with the rise of Artificial Intelligence (AI) in
corporate operations and must adapt to their responsibilities to meet these new challenges. (Sasaki, Kozuka &
Izumi, 2025). Gillis & Spiess (2019) discovered that directors are increasingly required to understand and
oversee the usage of AI tools on planning, customer profiling and compliance monitoring. In the
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decisionmaking process, legal and ethical concerns are raised in the areas of algorithmic bias, data privacy, and
transparency. Failure of a director to adequately assess the risks associated with the use of AI could be
considered as a breach of duty, especially if it causes harm and non-compliance (Brand, 2024).
Likewise, directors’ obligations are being shaped by the Environmental, Social, and Governance (ESG) factors.
The boards are required to take into consideration ESG risks as part of their fiduciary and statutory duties to
protect shareholders’ wealth, not merely for the company’s reputation (Ortega, 2024). To strengthen the
incorporation of ESG into corporate governance in Malaysia, Bursa Malaysia’s Sustainability Reporting
Guidelines in 2023 impose an obligation on listed companies to disclose ESG risks and strategies. At the
international level, ESG accountability is shaped by instruments like Task Force on Climate-related Financial
Disclosures (TCFD) and the UN’s Sustainable Development Goals (SDGs).
Hence, the development of AI and ESG is reshaping the expectations on directors when making decision in the
best interest of the company. When considering the best interests of the company, shareholder wealth
maximisation alone is no longer sufficient. Traditionally, directors have discharged their duty if their
decisionmaking results in shareholders’ wealth maximisation. Brand (2024) stated that directors are pressured
to adopt a future-oriented, risk-sensitive, and ethically aware approach to governance in the light of the
development of AI and ESG. This indicates a shift in the legal interpretation, where immediate financial
outcomes which is construed in the interests of shareholders’ wealth maximisation but also for long-term
stakeholder impact (stakeholders' interests’ theory) and systematic risks.
This paper aims to examine the development of the company directors’ duty in the age of AI and ESG in
Malaysia. The fundamental issue on this area of law is the absence of clear legal standard how directors should
address digital transformation and sustainability demand. The study adopts a doctrinal legal research method,
an analysis of statutes, judicial interpretation on case law and regulations and guidelines to determine the scope
of directors’ duties. It ends with, the recommendations and legal reforms to enhance corporate governance in
the area of directors’ duties.
LITERATURE REVIEW
Development of Directors’ Duties
In addition, the evolution of directors’ duties in Malaysia requires deeper anchoring in specific local judicial
precedents. For instance, the case of Kawin Industrial Sdn Bhd (in liquidation) v Tay Tiong Soong [2009] 1
MLJ 723 demonstrates the court’s willingness to recognize creditors’ interests during insolvency. More
recently, the increasing regulatory expectations under Bursa Malaysia’s Sustainability Reporting Guidelines
(2023) underscore the soft-law pressures on companies to disclose and act on ESG metrics. However, these
guidelines lack enforcement mechanisms and judicial precedents interpreting compliance failures, which
highlights a significant enforcement gap.
One of the central themes in corporate law jurisprudence is the shifting nature of directors’ duty in response to
the changes in legal frameworks, economic conditions and societal expectations. The shareholder primacy
theory is the foundation of the directors’ duty, which must be exercised in the best interests of the company.
This theory has long been established, advocates for maximising shareholder value (Friedman, 1970). As such,
case law has affirmed that in discharging their duties, directors must ensure that it is aligned with increasing
profits, enhancing share value, and delivering returns to investors (Hansmann & Kraakman, 1993).
In the late 20
th
century, shareholder maximisation faced growing criticisms due to corporate scandals,
environmental crises, and growing concerns over social responsibility. Consequently, the stakeholder theory
took shaped which requires the directors to consider broad range of stakeholder’s employees, consumers,
communities, and the environment (Freeman, 2010). The stakeholder theory is seen to be more in line with the
development of ESG, where the directors need to consider sustainable and ethical business practices is
discharging their obligations. This theory was supported by Keay (2008) and Millon (2011) who asserted that
stakeholders ' interests and ethical governance are crucial for long-term corporate interests. Tian & Zhang
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(2016) also pointed out that merely focusing on the shareholders; interests does not meet the needs of
economic and social development. This view was supported in the European Union Final Report in 2020,
which concluded that focusing too much on shareholder primacy can reduce a company’s long-term
sustainability efforts and lead to a limited view of what serves the company’s interests." In addition, the OECD
Principles of Corporate Governance and section 172 of the UK Companies Act 2006 reflected the explicit
recognition of stakeholders’ interests.
The Malaysian Code of Governance (MCCG) adopted the definition of corporate governance from the
HighLevel Finance Committee Report (1999) as “the process and structure used to direct and manage the
business and affairs of the company towards promoting business prosperity and corporate accountability with
the ultimate objective of realising long-term shareholder value while taking into account the interest of other
stakeholders.” Corporate governance is vital to prevent unwanted conflicts by furnishing a control
mechanisms framework to support the company in achieving its goals (MCCG, 2021).
When the MCCG was first introduced in 2010, the focus on the responsibility of the Board of Directors was on
the financial aspects of corporate governance. Many financial scandals were discovered during the time due to
a few's greed, leading to the companies' collapse and affecting millions of lives. The shift from shareholder
maximisation to stakeholder is prompted by the global financial crisis and corporate scandal such as Enron and
Lehman Brothers which revealed the implications of narrow interpretation of fiduciary. Malaysia also face
similar high-profile financial scandals like 1Malaysia Development Berhad (1MDB) in 2015 and Transmile
Group Berhad scandal in 2007 exposed weaknesses in governance and highlighted the importance of adopting
a stakeholder-inclusive approach to directors’ duties.
Unfortunately, accounting scandals are not the only contributing factor to the need for good corporate
governance.Climate change and environmental degradation from oil spills in sensitive areas threatening
wildlife and water supply to wildfire and floods have been attributed to companies. In 2021, the MCCG was
reviewed and updated to include the sustainability agenda in the board’s decision-making. The company must
prioritise the environment, social and governance (ESG) risks and benefits and integrate them into its
investment decisionmaking process as part of its fiduciary duty (MCCG, 2021). The Covid-19 pandemic has
woken companies to the importance of sustainability agenda. It enlightened that sustainability includes other
crucial matters such as workplace wellbeing, the fragility of the supply chain and access to health, and
environmental and financial crises.
Another important aspect in the development of directors’ duty is during corporate insolvency where the
interests of creditors become paramount. Courts in common law jurisdictions have recognised that directors,
who traditionally owe their duties to the company and by extension its shareholders, must shift their focus to
creditors when insolvency becomes likely. Mason J in Walker v Wimborne (1976) 3 ACLR 529 at 531 asserted
that failure to creditors’ interests would have adverse consequences for both the company and the directors and
such effect would be the company’s insolvent condition and the liability imposed on the directors. The House
of Lords in Winkworth v Edward Baron Development Co Ltd [1986] 1 W.L.R. 1512 at pp 1517 acknowledged
the duty owed to creditors when the company is insolvent. In that situation, directors have a duty to ensure that
the property of the company is sufficient to meet its obligation to the creditors. The rationale for imposing a
duty to the company and to creditors is to ensure that the affairs of the company are properly administered and
that its property is not dissipated or exploited for the benefit of the directors themselves to the prejudice of the
creditors. The Supreme Court of Canada, in Peoples Department Stores Inc. (Trustee of) v Wise (2004 SCC
68), concluded that the duty owed to the corporation although directors must consider the impact on creditors if
it affects the corporations’ ongoing viability.
The Malaysian courts, albeit later than in the UK, Australia and Canada, have also begun to acknowledge the
interests of creditors during insolvency (Mansor, 2011). The court Kawin Industrial Sdn Bhd (in liquidation) v
Tay Tiong Soong [2009] 1 MLJ 723, held that in exercising discretion, directors must act in accordance with
what they perceived as bona fide for the interests of the company. Therefore, it concluded purchasing goods
from third party when the company has ceased operation and insolvent could not be in the interest of the
company. The court also referred to the decision in Winkworth v Edward Baron Development Co Ltd [1986] 1
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W.L.R. 1512 and acknowledged directors owe duty to creditors not to act in their own interests to the prejudice
of creditors when the company is insolvent. Goode (2011) stated that these decisions reflect the reality that
creditors are the primary residual claimants in a financially distressed company (Goode, 2011). This position is
codified in the UK Insolvency Act 1986, section 214, and Australia’s Corporations Act 2001, section 588G,
which impose personal liability on directors who allow a company to incur debts while insolvent (Keay,2008;
Austin & Ramsay, 2010).
In Malaysia, the Companies Act 2016 codifies directors’ duties but retains ambiguity around how these duties
extend to ESG and AI-related responsibilities. Directors owe loyalty and good faith to the company, which
means they must advance the interests of the company (Re Smith and Fawcett Ltd, 1942). This concept is wide
enough to cover the interests of various parties in the company, for in most cases their interests are inter-
related, this being necessary for the survival of the company (Mansor, 2011). Difficulties arise when these
interests conflict with one another and in such cases, the question is whose interests should prevail. Since the
duty is owed by directors to the company, no interests should triumph over the others; it is essential for
directors in achieving their objectives and not to expose any groups to unnecessary risks (Mansor, 2011).
Directors should consider all interests without any preference.
Despite the positive feedback from investors on the company’s decision to consider the interests of
stakeholders
in the company, the study conducted by the European Union (2020) showed that shareholders’ supremacy still
takes precedent in corporate decision-making. In addition to the short-term financial market pressures,
company decision making often being made at the expense of more sustainable investments such as on
research and development (R&D) and the development of the employees.
The Importance of Artificial Intelligence in Corporate Governance and Its Implications
The incorporation of Artificial Intelligence (AI) in board decision signals a transformation of the board’s
operation in assessing risks and ensuring compliance. The use of AI in decision making promote efficiency,
transparency and accountability of corporate governance such as in financial reporting, internal audits, fraud
detection, customer behaviour analytics, regulatory compliance, and even boardroom decision support systems.
The implementation of AI driven tools has been found to strengthen the board’s oversight functions, especially
in identifying early signs of financial mismanagement or breaches of compliance (Ogunmokun, Bologun &
Ogunsola, 2025; Luis, 2024; Bar-Hava, 2024).
AI also enhance the key pillars of good corporate governance i.e. the transparency and accountability of the
board (Verhazen, 2020). Automated reporting system and predictive analysis help to detect discrepancies, to
monitor transaction flows and to ensure stakeholders receive accurate and immediate disclosure of information.
Nevertheless, the use of AI could also present legal and ethical implications (Ustahaliloğlu, 2025), such as lack
of algorithmic transparency which causes discriminatory outcomes and to ensure that AI systems do not
disproportionately affect populations. Cardoni et al., (2020) stated that to minimise such incident and create
fairer algorithms, companies are adopting constant monitoring and auditing procedures. Directors could be
subjected to breach of fiduciary duty if they rely on the AI system without sufficient knowledge on how the
system operates (Sarkar & Smith, 2025). Moreover, leaving the decision making to AI could result in
inaccurate recommendations and exposed the company to legal action. It remains uncertain as to who should
be liable in this situation. The uncertainty has prompted for a clear standard and regulation to guide the
application of AI in corporate governance (Mirishli, 2025). Other associated risks in Environmental, Society
and Governance (ESG), AI systems can support ESG initiatives such as carbon footprint tracking or social
impact assessments—but may also exacerbate social risks, such as discrimination in automated hiring or
surveillance of employees.
To sum up, AL presents significant opportunities to improve the effectiveness of corporate governance but
there is also the need for the board to acquire new skills, establish good governance structures and implement
appropriate legal protection. Failure to do so may harm their reputation and could subject them to legal
consequences.
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Lack of Legal Clarity in Directors' Duties on AI and ESG
The Covid-19 pandemic has accelerated the growing focus on the way the company makes decisions. A good
governance practice would require the company to consider various stakeholders' interests in making the
decision, especially when the investors have shifted their paradigm from purely on the value of the shares to
the broader agenda on sustainability. In fact, studies have shown that companies that adopted good ESG
performance obtained good financial results (Kell, 2018). The inclusion of ESG (Environment, Social and
Governance) factors covering a wide spectrum of issues which traditionally are not part of financial relevance
in the decisionmaking is consistent with the stakeholders’ wealth maximisation theory.
In the light of the emergence of AI technologies and the growing emphasis of ESG, the field of directors’ duty
are undergoing significant transformation. The current position on director’s duty is largely based on the
shareholders’ wealth maximisation theory which equates the company interests as shareholders’ interest.
Therefore, there is a critical gap in clarity regarding how the law on directors’ duty should adapt to the current
development (Gaske, 2025; Ortega, 2024). Bismuth (2023) argued that lack of definitive legal standards creates
uncertainty in the aspect of liability and compliance. The ambiguity raises questions not only on possibility of
breach but also the effectiveness of corporate governance frameworks (Andone & Leone (2022).
Traditionally, a company’s focus in making a decision is on the shareholders. Under the law, the company’s
interests have been interpreted to be the interests of the shareholders. The shareholders’’ interests in the
company take in the form of distributing income by receiving payment of dividends (in case the company
makes profits) and buybacks of shares. This view stems from the notion that shareholders were regarded as the
owners of the company and their interests were the only ones to be recognised as the object of the company’s
activity. The courts’ decisions in Re Smith and Fawcett Ltd [1942] Ch 304 and Greenhalgh v Arderne Cinemas
Ltd [1951] Ch 286 illustrated that company interests are akin to the shareholders’ interests to maximise their
wealth. The shareholders’ wealth maximisation theory viewed a company as an association of shareholders
formed for their private gain and to be managed solely by its board of directors for that purpose (Halpern,
Trebilcock and Turnbull, 1980).
The stakeholders’ theory rests on the idea of organizational management and ethics requiring management to
reflect the interests of those whose contribution results in either promoting or frustrating the company's
objectives (Phillips, 2003). It asserts that maximising shareholders‟ wealth is no longer suitable in the modern
corporate structure since shareholders are not the only bearers of residual risks (Kelly and Parkinson, 2000).
Discussion on this issue has intensified with the current development of industrial relations and economic
theories (Corfield, 1998). Moreover, it also reflects the progressive and effective means of corporate
governance since it involves considering the interests of various groups that form part of the company and the
benefits that accrue to society. As such, stakeholder wealth maximization not only expands the scope of
financial management activities but also embodies the essence of the modern enterprise. (Tian and Zhang,
2016). As such the stakeholder’s theory is not inconsistent with legal development of directors’ duty.
The conflict between these two theories heightens the difficulty of incorporating ESG into the existing
frameworks. As such, each of these groups has stakes in the corporation with a different magnitude of claims in
the company depending on the costs of producing the inputs (Mansor, 2011). Despite the positive feedback
from investors on the company’s decision to consider the interests of stakeholders in the company, the study
conducted by the European Union (2020) showed that shareholders’ supremacy still takes precedent in
corporate decisionmaking. In addition to the short-term financial market pressures, company decision making
often being made at the expense of more sustainable investments such as on research and development (R&D)
and the development of the employees. Keay (2008) called for the legal standards that incorporate both
considerations.
METHOD
The paper poses the question of whether the existing law on directors’ duty is aligned with the advancement of
AI technology and the growing importance of ESG and to answer the question, doctrinal legal research is
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employed. The method involves the analysis of statutes, cases law and regulatory guidelines for the purpose of
finding the development of directors’ duties concerning AI and ESG. In addition, the legal position in the UK,
Australia and Canada are analysed to highlight the best practice in directors’ accountability for AI and ESG
considerations.
The method is effective in clarifying legal principles and highlighting the legal gap in the existing law
(Hutchinson & Duncan, 2012; Chynoweth, 2008). Directors must equip themselves with knowledge on AI and
ESG to avoid liabilities and it is essential for the law to be clear. The results expected from this method
includes an understanding of current legal obligations, the identification of gaps in the legal framework and the
development of legal arguments. It allows the recommendations for legal reforms to ensure that the law on
directors’ duty is consistent with modern governance challenges. In addition, the findings contribute and enrich
the jurisprudence by proposing interpretation in the area of directors’ duty in light of influenced by AI and
ESG (Hutchinson, 2010).
RESULTS AND DISCUSSION
The European Union Final Report (2020) in their findings discovered that most corporate governance
frameworks and practices do not sufficiently acknowledge the interests of stakeholders. Although the study is
conducted in the European countries (including the UK at the time of the research), the same could be said of
the law on corporate governance i.e. the directors’ duty in Malaysia since the law originates from England.
Until today English law remains persuasive in the Malaysian legal system. Despite rapid changes in the
economy today and the investors who seem to favour comprehensive considerations in the company’s decision-
making, the law is quite slow to respond to these new changes. The decisions of the courts indicate that the
interests of the company are considering the interests of the shareholders.
While Section 213 of the Companies Act 2016 outlines directors’ general duties, enforcement trends in
Malaysia reveal limitations in practical accountability, especially regarding AI or ESG missteps. For example,
Malaysian case law has yet to address a situation involving directors’ negligence in overseeing AI applications,
such as automated credit profiling or hiring algorithms. The absence of case precedents on algorithmic harms
places directors in a grey area of liability. Similarly, ESG misreporting—such as underreporting environmental
risks or supply chain abuses—remains largely governed by reputational risk rather than statutory sanction,
unlike developments in jurisdictions like Canada or the EU where mandatory sustainability disclosures are
judicially enforceable.
Position in Malaysia
Section 213(1) of the Companies Act 2016 incorporates the duty of a director to exercise powers for proper
purpose and to act in good faith for the interests of the company. Section 213(2) incorporates the common law
duty to exercise reasonable care, skills and diligence. The section also imposes criminal sanction under section
213(3) to imprisonment for a term not exceeding five years or to a fine not exceeding RM 3 million. The Act is
silent on whose interests is considered as the interests of the company.
The courts, when interpreting the section, focus on shareholders’ primacy and stress the importance of
considering the interests of shareholders in making decisions. There is no specific mention of the use AI and
the inclusion of ESG consideration in the sections. However, the Bursa Malaysia Sustainability Reporting
Guidelines require listed companies to include in their annual report a sustainable statement which requires the
inclusion of ESG. This is to promote sustainable practice and to ensure transparency and enhance disclosure to
stakeholders and regulators. Although these guidelines have no direct legal implications, it is essential for listed
companies to comply to maintain listing status and investors’ confidence.
The duty to act in the interests of the company is wide enough to cover the interests of various stakeholders in
the company; the duty to determine the parameters of such interests falls on the courts. The judges have been
known for their reluctance to depart from the traditional view that directors owe a duty to the company as a
separate legal entity to act in the interests of shareholders. The reluctance stems from the judicial understanding
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that judge’s role is to interpret the law while the duty to make law is on the Parliament. This can be illustrated
in the judgement of Tun Suffian LP in Public Prosecutor v Datuk Harun bin Haji Idris [1976] 2 MLJ 116,
where his Lordship stated, "It is not the function of a judge to make law; that is the prerogative of Parliament.
The duty of a judge is to expound the law as it stands." This position explains the need to have legislative
intervention in incorporating the use of AI and ESG rather than relying on judicial innovation.
In addition to the court’s acknowledging the interests of creditors when the company is insolvent, section 346
of the Companies Act 2016 recognises the right creditors (debenture holders) to bring an action against the
company on the grounds that the affairs of the company have been conducted in a manner oppressive to
debenture holders. The right, however, does not involve direct enforcement of breach of duty owed to the
company and is predominantly used by minority shareholders. The law in Malaysia as it stands now is full of
contradictions and to date, the full implication of section 346 has not been worked out (Mansor, 2011).
Since the provision is derived from Canada, it may be useful if reference is made to case law that allows and
uses it. The Canadian Supreme Court in BCE Inc. v 1976 Debenture holders (2008) SCC 69. Debenture
holders, which concern the allegation by debenture holders that the directors had acted oppressively when they
approved the sale of the company, had to consider the duties of directors in circumstances where their decision
would benefit some but not all stakeholders. The court rejected the debenture holder’s claim and held that the
directors had considered the interests of the debenture holders and if they required better protection, they could
require it by contract. The judge stated that “There is no principle that one set of interests — for example the
interests of shareholders — should prevail over another set of interests. Everything depends on the particular
situation faced by the directors and whether, having regard to that situation, they exercised business judgment
in a responsible way”.
The decision seemed to suggest that the court is of the view that creditors can negotiate favourable contracts to
protect themselves. The right in section 346 is of course given to debenture holders who in theory may be in an
equal bargaining position with the company. In doing so, the rights of other creditors, particularly the
unsecured creditors, to a certain extent are ignored by both the courts and statutes.
In respect of other stakeholders, the Companies Act 2016 imposes a duty on directors to prepare a director’s
report under section 252, in which directors must include in their business review information regarding
environmental matters, employees, social and community issues. Under the section, directors who fail to take
reasonable steps to comply with the requirement commit an offence and shall on conviction be liable to a fine
not exceeding five hundred thousand ringgit or imprisonment not exceeding one year or both.
Section 253(3) provides that the directors’ report which is prepared under section 252 may include a business
review as set out in Part II of the fifth schedule or any other reporting as prescribed. The business review shall
include information on the ESG such as:
1. Environmental matters, including the impact of the company’s business on the environment;
2. The company’s employees; and
3. Social and community issues;
Including information about any policies of the company in relation to those matters and the effectiveness of
those policies;
Nevertheless, the extent of information included in the report is much to be desired where Phang (2021) stated
that in the research conducted by KPMG shows that the quality of sustainability reports by public listed
companies in Malaysia is unlikely to meet investors’ need to assess environmental, social, and governance
(ESG) risk. This is despite the evidence found by KPMG in 2020 that 99 of the top 100 public listed companies
in Malaysia publish sustainability reports which are on par with global standards.
Section 246 of the Companies Act 2016 requires the directors to set up an internal control system (ICS) to
safeguard the company’s assets and financial reporting. This requirement is closely linked to the directors’ duty
to consider the interests of the company because the aim of the provision is to safeguard the assets of the
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company. There is also a need for the company to establish a good risk management system. However, as
stated by Ajmal, Othman and Mansor (2021) there is no legal requirement for public and private companies in
Malaysia to have a proper Risk Management framework.
A business judgment rule introduced in the Companies Act 2016 to exonerate the directors of any breach of
duty under section 213(2) and equivalent duties under common law. The directors are deemed to be
discharging their care, skills and diligence duty if they make a business judgment rule under section 214. The
section provides that directors are protected if they fulfil the following conditions:
a) Made the judgment in good faith and for a proper purpose.
b) Had no material personal interest in the decision.
c) Made the judgment on an informed basis; and
d) Reasonably believed the decision is in the best interests of the company.
This section is similar to section 180(2) of the Australian Corporation Act 2001which provide a safe harbour
for directors from duty of good faith. However, the Australian provision applies to directors and other officers
of the company while in Malaysia it is only applicable to directors. Another difference with the Australian
provision is that section 180(2) Corporation Act 2001 states that directors or officers “rationally believe that the
judgment is in the best interests of the company” while in Malaysia section 214 in the Companies Act 2016
states reasonably believed is in the best interests of the company. Section 180(2) then continues and point out
that “…the judgment is in the best interests of the corporation is a rational one unless the belief is one that no
reasonable person in their position would hold.” Both provisions state similar definition of “business
judgment” section 214(2) defines it as “any decision on whether or not to take action in respect of a matter
relevant to the business of the company while section 180(2) provides the meaning of business judgment as
“any decision to take or not to take action in respect of a matter relevant to the business operations of the
corporations”.
The Australian section assumes that judgment is rational unless no reasonable person in the same position
would hold such a belief which could be interpreted in two ways (Austin & Ramsay, 2010), firstly by using the
common reasonable man test; whether a reasonable director in the same situation believes the judgment is in
the best interests of the company. Secondly, it could be interpreted as whether a reasonable director in the same
situation believes that the judgment is rational; hence it is in the interests of the company
Position in the United Kingdom
The UK Companies Act 2006 has incorporated this wider responsibility of directors who have a duty to
promote the success of the company using the enlightened shareholder value model. This duty has replaced the
duty to act bona fide in the interests of the company and when making decision, directors should balance
between the interests of shareholders and stakeholders. The duty, however, does not digress from the
paramount duty of a director to act for the benefit of its members. Directors are only required to consider the
interests of those listed in the Act, in furtherance of the success of the company for the benefit of the
shareholders, directors have to consider:
1. “The likely consequences of any decision in the long term.
2. the interests of the company’s employees;
3. fostering the company’s business with suppliers, customers and others
4. the impact of the company’s operations on the community and the environment.
5. the desirability of the company maintaining a reputation for high standards of business conduct; and
6. the need to act fairly as between members of the company."
Generally, the power to enforce the provision still lies with the company (and the minority shareholders under
the derivative action) and not with the stakeholders mentioned in the Act, which may present problems if the
company refuses to take action on their behalf (Mansor, 2011). Further, the Act does not clarify how the duty
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should be exercised if there are conflicts of interest between parties, and since the overriding duty is to the
shareholders, directors may overlook the other stakeholders in this situation (Keay, 2008).
Clarke (2020) commented that section 172 had limited practical impact for two key reasons, namely that based
on the established principle that the court will determine whether there is a breach of the director’s duty on
subjective rather than the objective test. Secondly, the section does not provide access to the stakeholders to
enforce against the directors (Williams, 2014). Bamford (2019) argued that one way section 172 could be
fulfilled by the company is by having suitable policies on environment. Smith (2021) proposed a slight
amendment to section 172 in order to have a transformative impact on company law, directors’ duties,
corporate governance, and businesses and, ultimately, the economy, society and the environment.
Position in Australia and Canada
In Australia, the provisions on directors’ duty adopts the shareholder primacy theory where the law remain
focus on shareholders’ interests which limits the need to incorporate ESG and AI unless it affects profits or
regulatory risks. This is embodied in section 181 of the Corporations Act 2001 which imposes a duty on
directors to act in good faith in the best interests of the corporations and for proper purpose. The courts
nevertheless have in certain circumstances acknowledged the need for wider considerations to maintain the
long-term sustainability of the company.
In Canada, section 122(1) of Canada Business Corporations Act codifies the fiduciary duty and requires
directors and officers of the company to act in good faith in the best interests of the company and to exercise
care diligence and skill which a reasonable prudent person would act in comparable situations. The Canadian
model adopted a favourable stakeholder approach and listed factors need to be considered when acting in the
best interests of the corporations similar to the UK provision in section 172. The Canadian Business
Corporations Act listed the interests of shareholders, employees, retirees and pensioners, creditors, consumers,
and governments. Other factors to be considered include the environment and the long-term interests of the
corporation. The section permit the considerations of factors if it aligns with the corporation interests which
may include the use of AI and ESG in decision making.
To draw actionable lessons for Malaysia, the comparative insights must move beyond descriptive parallels. The
UK's enlightened shareholder value model under Section 172 of the UK’s Companies Act 2006 could inspire
statutory reform in Malaysia by embedding a duty to consider long-term environmental and societal impacts.
Canada’s inclusive stakeholder model also offers a pragmatic blueprint, demonstrating how directors can be
legally obligated to consider a wider range of interests without compromising corporate focus. Malaysian
reform can draw from these models by codifying stakeholder considerations into Section 213 of the Companies
Act 2016 and introducing judicial review mechanisms for non-financial misconduct.
Comparative aspects of the law
The summary of these comparative aspects in Malaysia, UK, Australia and Canada are shown in Table 1
Table 1 Comparative aspects of the law
Jurisdiction
Statutory Provision
Model
Malaysia
Sections 213 & 214,
Companies Act 2016
Shareholder
Primacy
UK
Section 172,
Companies Act 2006
Enlightened
Shareholder
Value
Australia
Section 181,
Corporations Act
2001
Shareholder
Primacy
INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)
ISSN No. 2454-6186 | DOI: 10.47772/IJRISS | Volume IX Issue X October
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Canada
Section 122(1),
CBCA
Inclusive
Stakeholders
The comparative aspects on the criticisms of the law in Malaysia, UK, Australia and Canada are shown in
Table 2.
Table 2 Criticism of the law
Jurisdiction
Criticisms
Malaysia
No specific AI/ESG provisions; shareholder primacy prevails; Bursa guidelines lack
enforcement; courts reluctant to extend duties
UK
Ambiguous language ("have regard to"); lack of enforcement; limited stakeholder rights;
unclear conflict resolution.
Australia
ESG/AI duties reactive; no explicit ESG requirements; reliance on judicial interpretation.
Canada
Unclear alignment of stakeholder and corporate interests; evolving but uncertain standards
for AI/ESG liability.
CONCLUSION
The current framework under the Companies Act 2016 does not sufficiently address the unique challenges
posed by Artificial Intelligence (AI) and Environmental, Social, and Governance (ESG) considerations within
the sphere of corporate governance. Although Section 213 outlines directors’ fiduciary duties, its silence on AI
and ESG responsibilities creates interpretive ambiguity. This legal uncertainty leaves directors without a clear
statutory roadmap, raising serious questions about their obligations in managing emerging technological risks
and sustainability imperatives. As a result, Malaysian companies may face exposure to regulatory blind spots,
reputational damage, and erosion of investor confidence, particularly in an increasingly ESG-conscious and
digitally-driven global market.
To maintain Malaysia’s competitiveness and alignment with international standards, a proactive legislative
response is essential. Reform should begin with the explicit incorporation of AI and ESG responsibilities into
directors’ duties under the Companies Act. This includes introducing statutory obligations for transparent
sustainability disclosures, ethical oversight of AI use, and integration of long-term environmental and social
considerations into corporate decision-making. Mandatory ESG and AI governance frameworks would not
only clarify directors’ responsibilities but also enhance the resilience and credibility of Malaysian corporations.
Additionally, legal reforms must establish robust enforcement mechanisms. This includes creating avenues for
judicial review of non-financial misconduct, enabling stakeholders such as employees, consumers, or
environmental groups to seek redress where corporate decisions result in harm. Enhanced accountability
through regulatory oversight, penalties, and civil liability provisions will ensure that directors are not only
incentivized to comply, but also held accountable for failures in ESG or AI governance.
Ultimately, modernizing Malaysia’s corporate governance regime requires shifting from reactive compliance to
a principled, forward-looking approach that reflects evolving stakeholder expectations and global governance
norms. By embedding these changes into statutory law, Malaysia can foster responsible corporate leadership
equipped to navigate the complexities of AI and sustainability in the 21st century.
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