I whole heartedly agree with you, he was a favourite. Would have made an brilliant Expansion & Diplomacy councillor, and then we could have bumped of Ravage, I hate that guy! (I also think Malgus would have made a great Military Offense Councillor, don't you think its strange he wasn't on the Dark Council before?)
Apologies in advance if I'm mistaken in my lore here, I am not a Sith expert.
I think politics played a big part in why Malgus wasn't on the Dark Council (please correct me if I'm wrong and he actually was at one point). In the lore I've read, he went against the Council on more than one occasion. He was successful in what he did so it was overlooked in terms of punishment but it was something that wouldn't sit well with a lot of powerful Sith. He also was married to an alien, even if he did eventually kill her, and the Sith are racist enough to hold that against him.
So you have a very powerful and very skilled radical who had ignored your authority before and has widespread support among certain parts of the military. I think they took a look at that and assumed that the second he was on the Dark Council, it would be bloody coup d'etat time.
It might have been a smart move to put him on it though. Making him part of the system might have blunted his radical edge a bit and made him try to work within it, but I don't think the other Sith on the Council would be willing to take that risk.