THE CORPORATE GOVERNANCE STRUCTURES OF GLCs AND
NGLCs AND FIRM PERFORMANCE IN MALAYSIA
Submitted by
Azmi Abd. Hamid
to the
University of Exeter
as a thesis for the degree of
Doctor of Philosophy in Accounting
(Corporate Governance)
September 2008
1
Declaration
This thesis is available for Library use on the understanding that it is copyright material
and that no quotation from the thesis may be published without proper
acknowledgement.
I certify that all material in this thesis which is not my own work has been identified and
that no material has previously been submitted and approved for the award of a degree
by this or any other University.
(signature).........................................................................................
2
ABSTRACT
This study has examined the relationship between corporate governance structures and
the performance of a sample of companies listed on the Malaysian Stock Exchange in
the post-Asian financial crisis period beginning 2001 and ending in 2003. The sample
was selected to provide matched-pairs of government linked companies (GLCs) and
non-government linked companies (NGLCs), as it was anticipated that these groups
would have different governance structures and that these differences might impinge on
the association being studied.
The empirical results indicate that there were eight statistically significant differences
between the corporate governance structures of GLCs and NGLCs, thus supporting the
contention that it would be useful to examine the association between corporate
governance structures and performance for these two distinct groups separately.
Accordingly, univariate and multivariate tests were performed on three samples: (i)
GLCs; (ii) NGLCs and (iii) a combination of these referred to as All Companies. The
multivariate tests were performed both on the dataset collected from published sources
and this data transformed using the Van Der Waerden approach. Although tests for
conformity suggested no significant statistical problems with the original data-set for
multivariate analysis, it was hoped that the transformation would provide better models
for explaining the relationship between corporate governance variables and
performance.
The multivariate analyses on both the standard and transformed data-set found no
empirical evidence of a consistent relationship between corporate governance structures
and performance measured by return on assets and return on equity in GLCs, NGLCs or
3
the combined sample over the period. Statistically significant relationships were found
across the groupings and for different performance measures but were not sustained
across all years.
The implications for corporate governance research of these inconsistent results across
different measures of performance and different samples across the three year period is
that empirical research may reach conclusions based on statistically significant results at
a point in time that are only relevant for this historic context and may not persist. The
results also indicate that, despite the eight differences in governance structures of GLCs
and NGLCs, the observed differences in the performance could not be explained by
their governance structures. This finding supports the view that these structures provide
appropriate monitoring on company’s management rather than improving performance.
These findings are consistent with the ambivalent position on the relationship between
performance and corporate governance variables observed by the literature which
exhibits conflicting arguments about the direction of relationships and empirical results
that are extremely variable. This study also found that the relatively poor performance
of GLCs in Malaysia which has been associated with government influence on the
board structures such as the appointment of a bumiputra as director (BUM), a senior
government officer as director (SGO) and a politician as director (POL) were basically
unfounded because these variables have no statistically significant adverse impact on
performance.
4
LIST OF CONTENTS
Page number
1.0
1.1
1.2.
1.2.1
1.2.2
1.3
1.4
1.5
1.6
1.7
1.8
2.0
2.1
2.1.1
2.1.2
2.2
2.2.1
2.2.2
2.3
2.3.1
2.3.2
2.4
2.4.1
2.4.2
2.4.3
2.4.3.1
2.4.3.2
2.4.3.3
2.4.3.4
2.4.3.5
2.5
2.5.1
2.5.2
2.5.3
2.5.4
Title page
Declaration
Abstract
List of Contents
List of Tables
List of Figures
List of Abbreviations
Acknowledgement
1
2
3
5
10
12
13
16
Chapter 1 Area of Study
17
Background of study
Motivation of study
Statement of the problem
Performance of GLCs
Transformation of GLCs in Malaysia
Objectives and research questions
Significance and contribution of the study
Scope of the study
Research methodology
Organization of the thesis
Summary
17
18
19
22
23
24
25
26
27
28
31
Chapter 2 Corporate Governance Development in Malaysia
33
Introduction
Corporate governance in the context of the economic, political and social
influences in Malaysia
Formation of GLCs
The effects of the NEP on corporate governance
Development of the stock market (Bursa Malaysia) and corporate
governance during the pre-AFC period i.e. 1985 to 1996
Formation of Audit Committees (AC) in PLCs
Characteristics and effectiveness of AC
Development of corporate governance during the AFC i.e. 1997 to 1998
The causes of the AFC
Legislative framework of the Malaysian capital market
Corporate governance development after the AFC i.e. 1999 to 2005
Malaysian Code of Corporate Governance (MCCG, 2000)
The Revamped Listing Requirements of Bursa Malaysia (RLR)
Factors that shaped the corporate governance reforms in Malaysia
The Malaysian government’s effort
The development of the capital market
Shareholders have become more knowledgeable and conscious of their
rights
Increasing participation by institutional investors
Pressure from the accounting bodies both locally and internationally
Development of boards’ oversight in Malaysia
Board composition
Frequency of board meetings per annum
The separation of roles of the chairman and CEO
Cross directorship in PLCs
33
35
5
37
39
41
43
45
46
46
48
49
52
54
56
56
57
58
59
61
62
64
65
66
67
2.5.5
2.5.6
2.5.6.1
2.5.6.2
2.6
2.6.1
2.6.2
2.6.3
2.6.4
2.7
2.8
2.9
2.10
3.0
3.1
3.2
3.3
3.4
3.4.1
3.4.1.1
3.4.1.2
3.5
3.6
3.6.1
3.6.2
3.6.3
3.6.4
3.6.5
3.6.6
3.6.7
3.6.8
3.6.9
3.6.10
3.6.11
3.6.12
3.6.13
3.6.14
3.7
4.0
4.1
4.2
4.3
4.4
4.5
4.5.1
4.5.2
4.5.2.1
4.5.2.2
4.5.2.3
4.5.3
4.6
Substantial shareholders on board and management
Board committees in PLCs
Remuneration committees in PLCs
Nomination committees in PLCs
Ownership structures of PLCs
Cross-holdings/pyramidal control structure
Family Ownerships in PLCs
Bumiputra ownerships in PLCs
Institutional ownership in PLCs
Level of disclosure in the Annual Reports
Equitable treatment of shareholders and other stakeholders in Malaysia
Impact of corporate governance on board structures of Malaysian PLCs
Conclusion
68
69
70
72
74
76
77
78
80
81
83
85
87
Chapter 3 Literature Review
89
Introduction
Definition of corporate governance
Corporate governance framework
The linkages between corporate governance and firm performance
Performance measurement
Accounting-based performance measurement
Performance ratios
Stock market-based ratios
Previous research involving performance measurement
Corporate governance structures and firm performance
BSZ and firm performance
BMF and firm performance
RDU and firm performance
NEX and firm performance
IND and firm performance
DAF and firm performance
WOM and firm performance
BUM and firm performance
SGO and firm performance
POL and firm performance
FAM and firm performance
ACS and firm performance
ACM and firm performance
AUD and firm performance
Conclusion
89
89
93
95
100
101
101
102
103
105
106
108
110
112
114
116
117
119
121
123
125
127
129
131
133
Chapter 4 Research Design and Methodology
136
Introduction
Sample selection and data collection
Pilot Study
Research design and methodology
Operationalisation of the dependent, independent and control variables
Hypotheses testing and data analyses
Hypotheses Testing
Data analyses
Paired samples t-test
Univariate and multivariate analyses
Data analyses problems in regression
Issues concerning the number of variables in a regression models
Summary
136
136
138
140
141
144
144
144
144
145
146
147
147
6
5.0
5.1
5.1.1
5.1.2
5.1.3
5.1.4
5.1.5
5.2
5.2.1
5.2.2
5.2.3
5.2.4
5.2.5
5.2.6
5.2.7
5.2.8
5.2.9
5.2.10
2.2.11
5.2.12
5.2.13
5.2.14
5.3
5.3.1
5.3.2
5.4
6.1
6.2
6.2.1
6.2.1
6.2.2
6.2.3
6.2.4
6.2.5
6.2.6
6.2.7
6.2.8
6.2.9
6.2.10
6.2.11
6.2.12
6.2.13
6.2.14
6.3
6.4
6.5
6.5.1
Chapter 5 Theoretical Frameworks and Hypotheses Development
149
Introduction
Corporate governance theories
Agency Theory
Stewardship Theory
Resource dependence Theory
Stakeholder theory
Managerial Hegemony Theory
Hypotheses development
BSZ and firm performance
BMF and firm performance
RDU and firm performance
Percentage of NEX and firm performance
Percentage of IND and firm performance
Percentage of DAF and firm performance
Percentage of WOM and firm performance
Percentage of BUM and firm performance
Percentage of SGO and firm performance
Percentage of POL and firm performance
Percentage of FAM and firm performance.
ACS and firm performance
Frequency of ACM and firm performance
AUD and firm performance.
Control Variables
LSALE
INDUS
Summary
149
149
150
152
153
154
156
157
158
160
162
164
167
168
170
173
175
177
179
181
182
184
185
186
186
187
Chapter 6 Findings and Discussions- Univariate Analysis
189
Introduction
Descriptive statistics on corporate governance variables for All Companies,
GLCs and NGLCs
a) BSZ
b) Average minimum and maximum number of directors for All
Companies, GLCs and NGLCs
BMF
RDU
Percentage of NEX
Percentage of IND
Percentage of DAF
Percentage of WOM
Percentage of BUM
Percentage of SGO
Percentage of POL
Percentage of FAM
Percentage of ACS
Frequency of ACM
AUD
Comparison of corporate governance structures of GLCs and NGLCs for
2001, 2002 and 2003.
Characteristics of the performance measures of ROA and ROE for GLCs
and NGLCs.
Control Variables
LSALE of GLCs and NGLCs
189
189
7
190
190
191
192
193
193
194
195
195
196
197
198
199
199
200
201
203
205
206
6.5.2
6.6
6.6.1
6.6.1
6.6.2
6.6.2
6.6.3
6.6.3
6.6.4
6.6.4
6.6.5
6.6.5
6.6.6
6.6.6
6.6.7
6.6.7
6.6.8
6.6.8
6.6.9
6.6.9
6.6.10
6.6.10
6.6.11
6.6.11
6.6.12
6.6.12
6.6.13
6.6.13
6.6.14
6.6.14
6.7
6.7.1
6.7.2
6.7.3
6.8
7.0
7.1
7.2
7.2.1
7.2.2
7.2.3
7.2.4
7.3
7.4
7.4.1
7.4.2
7.5
7.5.1
7.5.2
7.5.3
7.5.4
7.5.5
7.5.6
INDUS of GLCs and NGLCs
Hypotheses
a) BSZ to ROA
b) BSZ to ROE
a) BMF to ROA
b) BMF to ROE
a) RDU to ROA
b) RDU to ROE
a) Percentage of NEX to ROA
b) Percentage of NEX to ROE
a) Percentage of IND to ROA
b) Percentage of IND to ROE
a) Percentage of DAF to ROA
b) Percentage of DAF to ROE
a) Percentage of WOM to ROA
b) Percentage of WOM to ROE
a) Percentage of BUM to ROA
b) Percentage of BUM to ROE
a) Percentage of SGO to ROA
b) Percentage of SGO to ROE
a) Percentage of POL to ROA
b) Percentage of POL to ROE
a) Percentage of FAM to ROA
b) Percentage of FAM to ROE
a) ACS to ROA
b) ACS to ROE
a) Frequency of ACM to ROA
b) Frequency of ACM to ROE
a) AUD to ROA
b) AUD to ROE
Summary on the relationship of independent variables to firm performance
(ROA and ROE)
Supported hypotheses
Partially supported hypotheses
Rejected hypotheses
Conclusion
207
207
209
210
210
211
212
213
213
214
215
215
216
217
217
218
219
220
220
221
222
222
223
223
224
225
227
227
228
228
229
Chapter 7 Multivariate Analysis
233
Introduction
Specification of regression models
Regression analysis assumption
Multicolinearity
Homocedascity
Independent or residual errors
Normally distributed errors
Multiple regression analysis: Untransformed and normal scores
Analysing and evaluating the constructed models
The F-value and P-value
R-Squared and Adjusted R-Squared
Comparison of results based on untransformed and normalised datasets
Models for All Companies (ROA)
Models for GLCs (ROA)
Models for NGLCs (ROA)
Models for All Companies (ROE)
Models for GLCs (ROE)
Models for NGLCs (ROE)
233
234
235
236
237
238
238
239
240
240
241
242
243
245
247
249
251
253
8
230
230
231
231
7.6
7.7
7.7.1
7.7.2
7.7.3
7.7.4
7.7.5
7.7.6
7.7.7
7.7.8
7.7.9.
7.7.10
7.8
8.0
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.8.1
8.8.2
8.8.3
8.9
8.10
8.11
8.12
8.13
8.14
Regression using untransformed and normalised models
Results of the tests on normalised datasets based on groupings and years.
BSZ to performance
BMF to performance
RDU to performance
NEX to performance
BUM to performance
SGO to performance
FAM to performance
POL to performance
LSALE to performance
INDUS to performance
Conclusion
255
255
256
257
258
258
260
261
262
262
263
264
265
Chapter 8 Conclusions, Limitations and Recommendations for Future
Research
268
Introduction
The research problem
Objectives of the study
The research questions
Differences between GLCs and NGLCs.
The division of All Companies into GLCs and NGLCs
Multivariate regression and data transformation
Untransformed versus transformed models
Multivariate regression
GLCs and NGLCs
ROA and ROE
Years 2001, 2002 and 2003
Major findings of the current study
Contribution of the current study on corporate governance knowledge
The relationships of governance variables and firm performance
Limitations of study
Recommendations for future research
Summary
BIBLIOGRAPHY
APPENDIXES
268
268
269
269
270
270
271
272
272
273
273
274
274
276
277
278
278
280
282
304
9
LIST OF TABLES
Table 1.1
Outline of the Research Methodology
Table 2.1
Legislative Framework for the Malaysian Capital Market
Table 2.2
Corporate governance reforms that took place after the 1997 financial crisis
Table 2.3
The Thirteen Basic Principles of Malaysian Code of Corporate Governance
Table 2.4
Bursa Malaysia Revamped Listing Requirements (2001)
Table 2.5
PwC Survey (2001) on Board Composition
Table 2.6
Representation of company’s significant shareholder(s)
Table 2.7
Ownership concentration in the Ten Largest Malaysian Companies
Table 4.1
Stages in arriving at the number of matched-pairs in the final sample
Table 4.2
Preliminary findings on differences between GLCs and NGLCs
Table 4.3
Operationalisation of the independent, dependent and control variables selected
and their source of information
Average BSZ for All Companies, GLCs and NGLCs
Table 6.1
Table 6.2
Table 6.3
Average minimum and maximum number of directors for All Companies, GLCs
and NGLCs
Average BMF for All Companies, GLCs and NGLCs
Table 6.4
Average percentage of RDU for All Companies, GLCs and NGLCs
Table 6.5
Average percentage of NEX for All Companies, GLCs and NGLCs
Table 6.6
Average percentage of IND for All Companies, GLCs and NGLCs
Table 6.7
Average percentage of DAF for All Companies, GLCs and NGLCs
Table 6.8
Average percentage of WOM for All Companies, GLCs and NGLCs
Table 6.9
Average percentage of BUM for All Companies, GLCs and NGLCs
Table 6.10
Average percentage of SGO as directors for All Companies, GLCs and NGLCs
Table 6.11
Average percentage of POL for All Companies, GLCs and NGLCs
Table 6.12
Average percentage of FAM for All Companies, GLCs and NGLCs
Table 6.13
Average ACS for All Companies, GLCs and NGLCs
Table 6.14
Average number of ACM for All Companies, GLCs and NGLCs.
Table 6.15
Average percentage of AUD engaged by All Companies, GLCs and NGLCs
Table 6.16
Table 6.17
Corporate governance structures of GLCs and NGLCs that was consistently
different for all the three periods and their level of statistical significance
Paired sample t-test of ROA(GLCs and NGLCs)
Table 6.18
Paired sample t-test of ROE (GLCs and NGLCs)
Table 6.19
Average LSALE of GLCs and NGLCs (in millions)
Table 6.20
Average paid-up capital of GLCs and NGLCs (in millions)
Table 6.21
INDUS of GLCs and NGLCs
Table 6.22
Correlation between average BSZ and ROA
Table 6.23
Correlation between average BSZ and ROE
10
Table 6.24
Correlation between average BMF and ROA
Table 6.25
Correlation between average BMF and ROE
Table 6.26
Correlation between the average percentage of RDU and ROA
Table 6.27
Correlation between the average percentage of RDU and ROE
Table 6.28
Correlation between the average percentage of NEX and ROA
Table 6.29
Correlation between the average percentage of NEX and ROE
Table 6.30
Correlation between the average percentage of IND and ROA
Table 6.31
Correlation between the average percentage of IND and ROE
Table 6.32
Correlation between the average percentage of DAF and ROA
Table 6.33
Correlation between the average percentage of DAF and ROE
Table 6.34
Correlation between the average percentage of WOM and ROA
Table 6.35
Correlation between the average percentage of WOM and ROE
Table 6.36
Correlation between the average percentage of BUM and ROA
Table 6.37
Correlation between the average percentage of BUM and ROE
Table 6.38
Correlation between the average percentage of SGO and ROA
Table 6.39
Correlation between the average percentage of SGO and ROE
Table 6.40
Correlation between the average percentage of POL and ROA
Table 6.41
Correlation between the average percentage of POL and ROA
Table 6.42
Correlation between the average percentage of FAM and ROA
Table 6.43
Correlation between the average percentage of FAM and ROE
Table 6.44
Correlation between ACS and ROA for All Companies, GLCs and NGLCs.
Table 6.45
Correlation between ACS and ROE
Table 6.46
Correlation between the average frequency of ACM and ROA
Table 6.47
Correlation between the average frequency of ACM and ROE
Table 6.48
Correlation between the average percentage of AUD and ROA
Table 6.49
Correlation between the average percentage of AUD and ROE
Table 6.50
Table 7.1
Summary on the findings of tests for a relationship between the independent
variables and performance
Models for All Companies (ROA)
Table 7.2
Models for GLCs (ROA)
Table 7.3
Models for NGLCs (ROA)
Table 7.4
Models for All Companies (ROE)
Table 7.5
Models for GLCs (ROE)
Table 7.6
Models for NGLCs (ROE)
Table 7.7
Multivariate analysis tests results on normalised datasets of All Companies,
GLCs and NGLCs based on groupings and years
11
LIST OF FIGURES
Fig. 2.1
Yearly listings statistics of companies on the Bursa Malaysia
Fig. 2.2
Formation of AC in PLCs
Fig. 2.3
Broad Structure of the Code
Fig. 2.4
Role Duality in PLCs
Fig. 2.5:
Formation of remuneration committees in Malaysian PLCs (%).
Fig. 2.6
Formation of nomination committees in Malaysian PLCs (%).
Fig. 2.7
Bumiputra Equity Ownership(1970-2004)
Fig. 2.8
Level of Disclosures in Annual Reports in Malaysian PLCs (%)
Fig. 2.9
Common Law and Statutory remedies
Fig. 3.1
Corporate governance framework
Fig. 3.2
PB of 100 largest GEM stocks by CG decile (2000)
Fig. 3.3
Fig. 5.1
Three and five-year share price performance of 100 largest GEM stocks by CG
quartile.
Percentage of studies using accounting and market-based performance
measurement.
Performance measurement used by previous researchers (frequency and
percentage)
A Stakeholder approach
Fig. 7.1
Specification of the Regression Model
Fig. 3.4
Fig. 3.5
12
LIST OF ABBREVIATIONS
AC- Audit Committees
ACM- Audit committee meetings
ACS- Audit Committee size
ADB-Asian Development Bank
AFC- Asian Financial Crisis
AUD- Auditors
BAFIA- Banking and Financial Institution Act
BCIC- Bumiputra Commercial and Industrial Community
BME - Board Meeting
BNM- Bank Negara Malaysia
BMLR- Bursa Malaysia Listing Requirements
BRC- Blue Ribbon Committee
BSZ- Board Size
BUM- Bumiputra as directors
CalPERS-California Public Employees’ Retirement System
CCM- Companies Commission of Malaysia
CEO- Chief Executive Officer
CGFRC- Corporate Governance Financial Reporting Centre
CLSA- Credit Lyonnais Securities Asia
CMP- Capital Market Master Plan
DAF- Directors with accounting or finance qualifications
ED- Executive directors
EPF- Employees Provident Fund
EPS- Earnings per share
FAM- Family members as directors
FCCG- Finance Committee on Corporate Governance
FIA- The Futures Industry Act
FRA-The Financial Reporting Act
FSMP- Financial Sector Master Plan
GDP-Gross Domestic Product
GEM-Growth Enterprise Market
GLCs- Government Linked Companies
13
IASC- International Accounting Standards Committee
ICA- Industrial Coordination Act
IND- Independent directors
INDUS- Industry type
INEX- independent non-executive directors
IPO- Initial Public Offer
KFC- Kentucky Fried Chicken Bhd.
KNB- Khazanah Nasional Berhad
KPI- Key Performance Indicators
KSE-Korean Stock Exchange
KWAP- Tabung Amanah Kumpulan Wang Pencen
LSALE- Sales
LTAT- Lembaga Tabung Angkatan Tentera
MARA- The Council for the Advancement of Bumiputra and Indigenous Races
MAS- Malaysian Airline System
MASB-Malaysian Accounting Standard Board
MCCG-Malaysia Code of Corporate Governance
MIA- The Malaysian Institute of Accountants
MICG- Malaysian Institute of Corporate Governance
MIM- Malaysia Institute of Management
MISC- Malaysian International Shipping Corporation
MOF- Ministry of Finance Incorporation
MSWG- Minority Shareholders Watchdog Group
NDP-National Development Policy
NEP- New Economic Policy
NEX- Non-executive directors
NGLCs- Non- Government Linked Companies
OECD- Organisation for Economic Co-operation and Development
PAC- Paid-up capital
PERNAS- Perbadanan Nasional
PLCs- Public listed companies
PN- Practice Notes
PNB- Perbadanan Nasional Berhad
POL- Politician as directors
14
PTSB- Perwaja Trengganu Sdn. Bhd
PwC- Price Waterhouse Coopers
RDU- Role duality
RLR- Revamped listing requirements
ROA- Return on Assets
ROE Return on Equity
SCM-Security Commission Malaysia
SCA- Securities Commission Act
SEDCs- State Economics Development Corporation
SGO- Senior government officers as directors
SIA- Securities Industry Act
SICDA-The Securities Industry (Central Depositories) Act
SMP- Second Malaysia Plan
SOA- Sarbanes-Oxley Act
TH-The Pilgrimage Fund
TMB- Telekom Malaysia Berhad
TNB-Tenaga Nasional Berhad
UDA- Urban Development Authority
UEM- United Engineers Malaysia
WOM- Women directors
15
ACKNOWLEDGEMENTS
I would like to thank my supervisors, Professor Dr. Paul Collier and Professor Dr. Terry
Cooke for their tireless support, encouragement, feedback, suggestions, constructive
criticism, and importantly endless patience towards me. They did much more than any
higher degree student could ever expect or hope for. I wish them all the very best for the
future.
I would also like to thank Mr Malcom MacMillen (Director of Postgraduate Research,
School of Business and Economics, Exeter University), Professor Dr. Ibrahim Kamal
Abdul Rahman (Dean, Faculty of Accountancy, UiTM), Associate Prof. Dr. Alya Sara
@Pok Wee Ching, my advisor in Malaysia ( Faculty of Accountancy, UiTM), Professor
Dr. Rashidah Abdul Rahman (Faculty of Accountancy, UiTM) and Associate Professor
Rajendra (Language Centre, UiTM). I should also like to thank all the faculty members,
staff and colleagues at University of Exeter for the help and support given to me,
especially Ms Jan Atkins, for her constant moral support that I cherish. I am also
grateful to Mara University of Technology, Malaysia, which provided the financial
assistance.
My great and sincere appreciation goes to my wife, Noorasiah Abdullah, for her
unconditional love, patience and understanding throughout this process and my children
Nurul Akmar, Anwar and Nurul Ezzati. My greatest devotion for my work goes to my
beloved late daughter, Nurashikin, who during my study period, became sick and
succumbed to her illness on 10 July 2007. May God blessed her and always be in His
companion.
16
CHAPTER ONE
AREA OF STUDY
1.0 Background of study
There has been much talk about corporate governance in East Asia, including Malaysia,
after the 1997/98 Asian Financial Crisis (AFC). The AFC established the importance of
having effective corporate governance structures for corporations, particularly PLCs
(Kim, 1998). The weak financial structure of many companies; lack of transparency;
lack of disclosure and accountability; existence of a complex system of family
controlled companies; little or ineffective laws to ensure that controlling shareholders
treat minority shareholders fairly were among the major issues that caused the AFC
(Boo, 2003).
Despite the harm done to the economy and investors’ confidence, the AFC provided the
impetus for better awareness and emphasized the importance of corporate governance in
Malaysia. The essence of good governance includes safeguarding the interests of
shareholders and stakeholders through transparency, accountability, trustworthiness and
responsibility (Arif, 1999). Inevitably, the crisis and criticisms of the poor corporate
governance standards in Malaysia led to the formation of the high level “Finance
Committee on Corporate Governance” (FCCG) in March 1998 (Ow-Yong and Cheah,
2000). The Committee’s main task was to comprehensively review the current corporate
governance environment and develop a new corporate governance code and standards
for Malaysian companies. The FCCG specified broad principles of good corporate
governance and proposed a detailed code of best practice for companies; this culminated
in the Malaysian Code on Corporate Governance (MCCG). Although the code was
17
voluntary in nature, it has been seen as pivotal in improving the corporate governance
practices of PLCs in the post-AFC period (Abdul Samad, 2002). Since the inception of
the FCCG in 1998, corporate governance has become an investment criterion in
Malaysia. Both foreign and domestic investors tend to shift from stocks and markets
with poor corporate governance to stocks and markets with better governance (Arif,
1999).
1.1 Motivation of study
As discussed in the previous section, Malaysia needed to improve corporate governance
standards and practices in order to restore investors’ confidence after the AFC. The
strengthening of governance standards and practices is believed to be crucial if the
country wants to attract foreign investments and ultimately attain its goal to be a
developed country by 2020. This is because the results from most studies agree that
investors are prepared to pay a premium for companies that are perceived to have good
governance practices. For example, McKinsey and Company found in their survey in
2000 that over 80% of investors indicate that they would be prepared to pay more for
the shares of well-governed companies than those of poorly-governed companies.
Similar findings were also reported in the Bursa Malaysia Price Waterhouse Coopers
Corporate Governance Survey 2002, which reveals that there is a growing perception
amongst market participants that well-governed companies may have higher firm
performance. Recent regulations focusing on corporate governance, such as those based
on the Sarbanes-Oxley Act 2002; also demonstrate that adopting good corporate
governance practices could lead to a better governed company. This would indirectly
enhance firm performance.
18
But why undertake a study that distinguishes between government linked companies
(GLCs) and non-government linked companies (NGLCs)? This is because Malaysia’s
GLCs account for a substantial element of the Malaysian economy in terms of revenue
and asset base. For example, all GLCs make-up 34% of the total market capitalisation
of the exchange and adds up to an enormous 232 billion ringgit1 in market value, which
is more than half of Malaysia’s G.D.P (Bursa Malaysia, 2003). As such, any
considerable improvement in the governance and performance of GLCs would bring
about huge benefits, not only to the stock exchange, but also to the income,
consumption and wealth of the nation. GLCs also make-up the backbone of the
country’s economy through the provision of ‘mission-critical services’ such as
transportation, energy, telecommunications and financial services. The impact of GLCs’
performance would also have a far-reaching effect on the performance of the economic
sector as a whole.
1.2. Statement of the problem
Although GLCs have undoubtedly been a major element in socio-economic
development of Malaysia, their performance has lagged behind that of the more
established NGLCs (Lemmon and Lins, 2003). Indeed, their performance is typically
much poorer than that of NGLCs and quite a number of them posted huge losses and
had to be bailed out by the government. Examples of these are Malaysian International
Shipping Corporation (MISC), Malaysian Airline System (MAS), United Engineers
Malaysia (UEM), and Renong, which were ‘too-big-to-fail’ cases with large socioeconomics implications (Lemmon and Lins, 2003). Many other GLCs appear to fall
short in their financial performance. As an indication, the total return to shareholders of
public listed GLCs actually trails behind overall market performance by 21 % over the
1
I GBP is equivalent to Malaysian Ringgit 6.92
19
last five years beginning1997 to 2002 (Bursa Malaysia, 2003). This is a significant loss
for the shareholders.
The relatively poor performance of GLCs has been associated with features of their
corporate governance structure and consequences arising from government influence
including:

First, GLCs are hybrid organizations in the sense that their structures and modes of
operation usually combine features that are associated with the state enterprises, on
the one hand, and the market entities, on the other. This serves to distinguish these
entities from NGLCs in significant and potentially quite diverse ways (Thynne,
1998).

Second, Malaysia’s GLCs are closely associated with government policies such as
wealth distribution and restructuring of society under the New Economic Policy
(NEP).2 As such, GLCs are often subjected to government interference, for example,
the appointment of chairman / Chief Executive Officer (CEOs) and directors have to
be approved by the Ministry of Finance. Furthermore, empirical study by Suto
(2003) suggests that social policy advocating the dispersion of corporate ownership
through the NEP weakened the corporate governance mechanism of GLCs.

Third, GLCs traditionally had boards of directors whose members had affiliations
with various political parties. As such, GLCs may be pressured to hire politically
connected people rather than those best qualified to perform desired tasks (Krueger,
1990). Boycko et al. (1996) argue that politicians cause GLCs to employ excess
2
The NEP was part of a series of measures that were intended to redress economic imbalance with the aim of enabling the
Bumiputras (sons of the soil) to own at least 30 % of the nation’s corporate share capital within a 20-year time-frame (Abdul Aziz,
1999). There were two broad objectives of NEP; fostering national unity and nation-building through eradicating of poverty and
active economic restructuring so as to eliminate the identification of ethnicity with economic function” (Malaysia, 1991, p.31).
20
labor inputs. This political interference would divert managerial objectives away
from profit maximization and towards such objectives as employment maximization
(Wang, 2003). The interference of politicians could also lead to distortion of
managerial investment decisions and result in sub-optimal investment by managers
(Latfont and Tirole, 1993).

Fourth, GLCs may forgo profit maximization in the pursuit of social and political
objectives such as through the pricing of its products and services at below the
market equilibrium level. Hart et al. (1996) suggests that governments are likely to
pay special attention to social and political goals such as low output prices. These
may be the reason for the low performance of GLCs.

Fifth, GLCs are created to implement government policy objectives, hence, most of
their top-level managers and directors are civil servants seconded to these entities.
Such directors often lack business acumen and their investment decisions may be
motivated by social rather than commercial benefits (Lemmon and Lins, 2003).

Lastly, agency problems might arise in GLCs due to the separation of ownership
and control. Agency theory (Jensen and Meckling, 1976; Fama and Jensen, 1983)
states that agency costs arise from the conflict of interest between a principal, who is
the owner, and the manager. This would eventually sidetrack managers’ and
shareholders’ interests and goals. Stiglitz (1994) argued that, the principal agent
problems might differ depending on whether ownership is public or private.
Although the agency problem is common for every company, GLCs have less
incentive to monitor top management than NGLCs (Wang, 2003). This is due to the
different degrees of principal-agent problems facing GLCs and the difficulties to
21
identify whom the principal or residual risk bearer is (Wang, 2003). This absence of
a principal or residual risk bearer causes the inefficiency of GLCs. The conflict of
interest in the GLCs’ equity ownership is more complicated because the government
is not the ultimate owner of a company but rather the agent of the ultimate owner;
that is the public (Abdul Rahman and Mohd. Ali, 2006).
These factors suggest that there might be differences in the corporate governance
structures of GLCs and NGLCs. As the performance of GLCs is constrained by the
above factors at the expense of corporate profitability, it is likely that the performance
of GLCs is lower than NGLCs.
1.2.1 Performance of GLCs
The majority of the previous theoretical and empirical studies suggest that the corporate
governance structures of GLCs have a detrimental effect on firm performance. Among
the empirical studies, Boardman and Vining (1989) analyzed the relative performance
of the 500 largest non-U.S. mining and manufacturing companies in 1983 to determine
whether privately owned firms outperform state-owned (SOEs), mixed state and
privately owned firms (MEs). Their findings showed that private corporations are both
more profitable and more efficient (measured as sales per employee and per asset) than
either SOEs or MEs. While a longitudinal study by Dewenteur and Malatesta (1997),
spanning a twenty-year period, found that when comparing the profitability of GLCs
and that of the NGLCs, the government firms display inferior profitability. Another
recent study comparing the performance of GLCs to NGLCs in China, found that GLCs
performed worse than NGLCs (Wang, 2003).
22
However, a study on Singapore’s GLCs by Zutshi and Gibbons (1996) shows that GLCs
are the major economic player in Singapore. By 1987, the government had majority and
minority shareholdings in 505 companies (Ministry of Finance, 1987). Zutshi and
Gibbons (1996) argued that what differentiates the success of GLCs in Singapore from
state enterprises in many other countries is the corporate governance structures adopted.
This indicates that GLCs could perform well if appropriate corporate governance
structures are employed.
1.2.2 Transformation of GLCs in Malaysia
The success of Singapore’s GLCs provides new incentives to Malaysia’s GLCs to
emulate the strategies taken by Temasek Holdings (the government investment arm of
Singapore’s GLCs). As a result, a major transformation of corporate governance on a
gradual basis was carried out beginning in 2001 to ensure that Malaysian GLCs are as
good if not better than Singapore’s GLCs. Steps taken to transform GLCs to achieve
higher performance were: reducing the involvement of politicians as board members of
GLCs; reducing the size of GLCs’ boards; introducing Key Performance Indicators
(KPIs) to gauge the performance of CEOs and managers of GLCs; and the linking of the
compensation of managers to their performance (Ministry of Finance, 2001).3 As part of
the transformation programme of GLCs in Malaysia and in its move to promote
transparency, 15 GLCs made their KPIs public in March 2006 (Ministry of Finance,
2006).
3
The KPIs are the GLCs’ major financial and operational targets or goals
23
1.3 Objectives and research questions
This study investigates whether or not there is a relationship between the corporate
governance structures and the performance of Malaysian PLCs in the post-AFC period.
As has been noted, the Bursa Malaysia (The Malaysian Stock Exchange) has two
distinct forms of companies listed, GLCs and NGLCs, which might be expected to have
very different corporate governance structures. To take account of this, the first part of
the research is to ascertain whether or not there are any significant differences between
the corporate governance structures of GLCs and NGLCs. In pursuing this question, the
study will explore whether the corporate governance structures of GLCs and NGLCs are
significantly different and, if so, will seek to establish whether the relationship between
corporate governance structures and performance of the two groups differs.
Therefore, the first research question of this study is:
Are there significant differences in the corporate governance structures of GLCs and
NGLCs in the post- AFC period from 2001 to 2003?
The second research question, assuming that there are significant differences between
the corporate governance structures of GLCs and NGLCs, is to ascertain whether the
impact of corporate governance structures on performance is the same or different for
All Companies (the complete sample), GLCs and NGLCs.
Thus, the second research question of this study is:
Is there any significant relationship between the corporate governance structures of All
Companies, GLCs and NGLCs and performance from 2001 to 2003?
24
1.4 Significance and contribution of the study
This study is new for the following reasons. First, there are only a few studies on the
performance of GLCs in either developed economies or emerging markets. To date, no
studies have been conducted comparing GLCs and NGLCs in Malaysia. As mentioned
in the previous section, this study would ascertain whether or not there are any
significant differences between the corporate governance structures of GLCs and
NGLCs and through the empirical results on the comparisons, whether or not these
differences were reflected in firm performance. Thus this study contributes by providing
insights into the link between corporate governance variables and performance in
Malaysian PLCs and further explores if this relationship depends on whether companies
are GLCs or NGLCs.
Second, the study examines the relationship between the corporate governance
structures of All Companies, GLCs and NGLCs and firm performance post-AFC period
from 2001 to 2003. The period chosen may indicate interesting results, as that was the
period when the economy and capital markets were stabilising after AFC. Third, as the
Malaysian Code of Corporate Governance (MCCG) was introduced in 2000, this study
provides observations on the changes of corporate governance structures and firm
performance over time between 2001 and 2003. This was a time when GLCs were also
undergoing structural transformation. The results of this study would provide useful
inputs on governance of GLCs.
Lastly, this study used a number of variables relating to governance structure that focus
specifically on features of the Malaysian environment. The variables were selected
based on previous literature on the Malaysian business environment and which were
25
also found to be different between GLCs and NGLCs in a pilot study conducted at the
beginning of the study.
1.5 Scope of the study
This study focuses on selected GLCs and NGLCs listed on the main board and second
board of Bursa Malaysia. The study is essentially a single-country study that looks at
and examines the differences of the corporate governance structures of GLCs and
NGLCs. This study also investigates the relationship between corporate governance
structures and firm performance of both groups of companies over a three-year period
post-AFC. The period was chosen, as that was the phase when the country’s economy
and capital market activities were recovering after the AFC.
The corporate governance variables engaged in the study were based on previous
literature and characteristics of the boards of directors identified in Malaysian PLCs.
Besides that, some variables thought to be significant in the Malaysian context were
identified and selected based on an interview with Ministry of Finance (MOF) officers
and as well as based from a pilot study conducted at the beginning of the research. The
data and information on corporate governance structures and firm performance were
obtained from financial information in corporate annual reports and accounts, interim
reports, annual companies handbooks, security commission handbooks and the official
website of Bursa Malaysia.
26
1.6 Research methodology
The research methodology was planned systematically to ensure that the data collected
clearly represented the population intended for the research. The research will be
approached in stages as shown in Table. 1.1.
Table 1.1 Outline of the research methodology
Stage
1
2
3
4
5
6
7
8
9
10
Objectives
To gain insights into the
state of current research on
the relationships between
corporate governance and
firm performance and to
develop testable hypotheses
and identify the data
required for the tests
To
ascertain
the
characteristics and definition
of GLCs
To select the sample GLCs
companies for this study in
line with the characteristics
and specification given by
Ministry of Finance officials.
To select sample NGLCs
companies that reflect a
matched- pair with GLCs.
To obtain Annual Reports
and company information.
Identify the variables which
are statistically different
between GLCs and NGLCs
Univariate tests on all
groupings of companies to
identify any significant
relationships.
To ensure that the datasets
used
conformed
to
regression
analysis
assumptions.
To ascertain whether or not
there was a statistically
significant
relationship
between any of the corporate
governance
structure
variables of GLCs and
NGLCs
and
firm
performance.
To decide whether to accept
or reject the hypotheses on
the relationships of corporate
governance structures and
performance
developed
earlier.
Tasks
The preliminary stage entails a review of the literature relating to corporate
governance and firm performance. Hypotheses will be developed from a
review of the literature on corporate governance and performance, a review
of corporate governance development in Malaysia and a review of various
corporate governance theories such as agency theory, stewardship theory
and resource dependence theory.
The second stage of the research involves formulating a definition for
GLCs through interviews with senior accountants and officers of the
Ministry of Finance, Malaysia.
The third stage of the research is to identify all GLCs that are listed on the
Bursa Malaysia which conform to the definition of GLCs developed above.
The sample of GLCs will be selected from listed companies in Bursa
Malaysia.
Matched- pair GLCs with NGLCs in terms of board listing, types of
industry and paid-up capital will be established. The basis of match will be:
(i) board listing; (ii) industry type; and (iii) paid-up capital.
Letters will be sent out to the selected GLCs sample and their matchedpaired NGLCs to obtain company information (Annual Reports of 2001,
2002 and 2003). Additional data relating to variables used to operationalize
the hypotheses will be collected mainly from the annual reports of
companies.
Perform univariate tests on 2001, 2002 and 2003 data to identify whether
there are statistically significant differences between GLCs and NGLCs.
Carry out further univariate tests on 2001, 2002 and 2003 data for All
companies, GLCs and NGLCs to establish whether there is a statistically
significant relationship between each independent variable and firm
performance measured by either ROA or ROE.
Prior to performing multivariate tests, the data will be tested to ensure that
the assumptions underlying regression analysis were met. The tests planned
are for multicolinearity, homoscedascity, independent errors and normally
distributed errors.
Undertake multiple regression analysis on the dataset. If problems arise
from the tests in 8 above, consideration will be given to running regressions
on both the original dataset and a dataset transformed by normalising both
the dependent and independent variables using the Van Der Waerden
method.
The final stage is to discuss the evidence obtained from the multivariate
tests on the existence and strength of any relationships between corporate
governance structures and the performance of GLCs and NGLCs based on
hypotheses developed.
27
1.7 Organization of the thesis
This thesis has an eight-chapter structure.
Chapter 1: Introduction
This chapter emphasizes the rationale for and significance of the thesis in terms of
contribution to knowledge with respect to corporate governance and performance in
Malaysia. The chapter discusses the basis for the thesis and briefly outlines the
characteristics and performance of GLCs and NGLCs in several countries and examines
some of the explanations for the poor performance of GLCs in Malaysia. The chapter
also discusses the research problem investigated, the research questions and objectives
of the study before ending with a summary of the research methodology and the general
organization of the thesis.
Chapter 2: Corporate Governance development in Malaysia
This chapter examines the development of corporate governance over the last thirty
years in Malaysia. The chapter is divided into five main sections. Each section discusses
a phase in a chronological order on the development of corporate governance in
Malaysia from 1970s to date. The chapter principally focuses on the post-AFC period,
as this is the period when the development of corporate governance was at its peak in
Malaysia. The purpose of the chapter is to gain insights into the evolution of corporate
governance in Malaysia and highlight any major events and circumstances that shaped
and structured corporate governance practices in Malaysia.
28
Chapter 3: Literature review
The objective of the chapter is to review and examine the existing theoretical and
empirical evidence on corporate governance structures and their relationship to firm
performance. The first section provides a general overview of the literature on the
relationship between governance and firm performance. The second section discusses
the evidence for an association between corporate governance and performance and
summarises the variables used by previous studies to measure firm performance. The
final section provides a summary of the evidence on the applicability of the literature
reviewed to the current study on corporate governance structures and performance of
GLCs and NGLCs listed on the Bursa Malaysia.
Chapter 4: Research design and methodology
The validity of any research findings rests on the use of appropriate methodological
procedures. Hence, this chapter explains the research methodology undertaken and the
rationale and reasons for the choice of statistical methods used. The chapter also
describes the organization plan of the research including the plan for data analysis.
Chapter 5: Theoretical framework and hypotheses development
This chapter discusses the theoretical framework underlying the study of corporate
governance. The main theories that will be discussed are agency, stewardship, resource
dependence, stakeholder and managerial hegemony theory. These theories are used to
develop hypotheses for the fourteen independent variables used in the study and a
discussion on the two control variables.
29
Chapter 6: Univariate analysis
The core of the chapter is the univariate tests conducted on the corporate governance
variables of GLCs and NGLCs. The univariate tests are undertaken on three samples
(All Companies, GLCs and NGLCs) for 2001, 2002 and 2003 to ascertain whether or
not statistically significant relationships exist between corporate governance variables
and performance. Paired-sampled T-tests were also conducted to examine whether
there is any significant differences between corporate governance structures of GLCs
and NGLCs. Apparently, the tests indicate that there are significant differences between
those two groups and these variables are then taken for modeling in the multivariate
analysis.
Chapter 7: Multivariate analysis
The chapter commences with the testing of the data to ensure that the assumptions
underlying regression analysis were met. Tests were conducted for multicollinearity,
homoscedascity, independent errors and normally distributed errors.
Tests on the
assumptions found no significant evidence of multicollinearity between the explanatory
variables or homoscedasticity. Further, error terms were independent and the data were
normally distributed. Therefore, the datasets conformed to the underlying assumptions
of regression analysis. Despite no significant problems of multicolinearity,
homoscedascity, independent errors and normally distributed errors being found,
regressions were run on both the original dataset and a dataset transformed by
normalising both the dependent and independent variables using the Van Der Waerden
method.
The chapter next compares and analyses the results of the regressions using
untransformed and transformed data to identify which dataset provides the best
30
modelling of the relationships between corporate governance variables and
performance. After comparing the results of both sets of multivariate tests, it was found
that transformation of datasets provides superior models for explaining the impact of the
independent variables on the dependent variables. Consequently, the discussion on the
multivariate equations is based on the normalised models and on the eight independent
variables. The chapter next examines the results of the regressions on normalised data
and discusses their implications for the hypothesised relationships between corporate
governance structures and performance in GLCs and NGLCs.
The last section
summarises the implications of the models developed in this chapter for the research
questions posed in Chapter five.
Chapter 8: Conclusions and suggestions for further research
This chapter discusses significant differences in corporate governance structures of All
Companies, GLCs and NGLCs and firm performance. It also discusses the impact of
corporate governance structures and performance for all groupings of companies with
respect to the hypotheses developed in chapter five. The differences between GLCs and
NGLCs in the relationship between the corporate governance structures and firm
performance will also be dealt with. The main findings are presented, limitations of the
study are discussed and, lastly suggestions for further research are outlined.
1.8 Summary
This chapter commences with a brief background of the AFC and the criticisms of poor
corporate governance standards in Malaysian PLCs. These events led to the formation
of the high level “Finance Committee on Corporate Governance” (FCCG, 1998) and
subsequently the introduction of the Malaysian Code on Corporate Governance
(MCCG, 2000). In the statement of the problem, the criticisms of GLCs are briefly
31
discussed. Next the objectives and research questions are outlined and the rationale and
importance of the study discussed. This is followed by a summarised outline of the
research methodology employed in the study. The chapter concludes by summarising
the contents of the chapters, which comprise the thesis.
32
CHAPTER TWO
CORPORATE GOVERNANCE DEVELOPMENT IN MALAYSIA
2.0 Introduction
This chapter examines the development of corporate governance over the last three
decades in Malaysia. The chapter is divided into five main sections. The first section
discusses corporate governance development in the context of the Malaysian economic,
social and political settings in the 1970s when the NEP was first introduced and
implemented by the government. This is important as it reflects the climate in which
corporate governance evolved in Malaysia. Later, in the early 1980s, a series of
privatization and corporatisation programmes, which led to the formation of GLCs, saw
rapid changes in the governance of companies.
The second section examines the development of corporate governance in the period
between 1985 and 1996 i.e. before the AFC. This section discusses the changes in
corporate governance particularly after the occurrence of numerous corporate scandals.
This section also discusses the characteristics and effectiveness of the audit committee
(AC) in Malaysian PLCs. The third section covers the AFC period i.e. from 1997 to
1998. This section discusses the events that led to the crisis in Malaysia. The reason is
to see whether the AFC was typically caused by poor corporate governance practices as
has been widely suggested by the literature. The period saw an intense debate on issues
and the call for reforms in corporate governance. This section also discusses the various
actions taken by the government to restore investors’ confidence in the stock market.
The fourth section discusses the development of corporate governance in the post-AFC
period from 1999 to date. This section discusses corporate governance reforms after the
33
AFC, the inception of the MCCG, the Revamped Listing Requirements (RLR) of Bursa
Malaysia and the factors that shaped corporate governance reforms and developments in
Malaysia. Much of the discussion of the chapter will be focused on the post crisis
period, as this is the period when the development of corporate governance was most
rigorous. The fifth section discusses the development of boards’ oversight in Malaysian
PLCs. The section generally describes changes in governance structures and board
characteristics in Malaysian companies that resulted from the post-AFC debate on
corporate governance. This includes matters pertaining to board composition, frequency
of board meetings, role duality, cross-directorships and formation of board committees
such as audit, remuneration and nomination committees. The sixth section discusses the
ownership structures of Malaysian PLCs. The discussion will be based on the type of
ownership such as; cross-holdings or pyramidal structure, family ownership structure,
bumiputra ownership and institutional ownership.
Finally, the last section discusses the overall development of corporate governance over
the years as well as the impact it has on changing the board structures of Malaysian
PLCs. The section focuses on the level of disclosure in the annual reports of PLCs,
equitable treatment of shareholders and the impact of MCCG on Malaysian PLCs. The
information on corporate governance structures among PLCs is largely based on
surveys carried out by Bursa Malaysia and Price Waterhouse Coopers’ Kuala Lumpur
office.4 The purpose of the chapter is to gain insights into the evolution of corporate
governance in Malaysia and highlight major events and circumstances that shaped and
structured corporate governance practices in Malaysia.
4
The year of comparison is 1998 and 2002. As the Malaysian Code of Corporate Governance was introduced in 2000, the
comparison will be based on before and after the inception of the Code.
34
The following section discusses the early development of corporate governance in the
context of economic, political and social factors after the establishment of the NEP in
the 1970s, which had a massive impact on the corporate governance practices of
Malaysian PLCs.
2.1
Corporate governance in the context of the economic, political and social
backgrounds in Malaysia
To provide an understanding of corporate governance development in Malaysia, it is
essential to have an overview of the historical background of the economic, political and
social circumstances as it has a profound impact on corporate governance practices.
Malaysia is made up of various races, religions, creeds, customs and languages, which
have come into being over the course of the last 150 years (Haniffa, 1999). All the races
are divided into two main groups; bumiputra and non-bumiputra. Bumiputra means
‘sons of the soil’, which consists of the Malays and indigenous people, while the
Chinese and Indians are grouped as non-bumiputra (Torii, 1997).
After independence in 1957, the economic state of the country was relatively poor.
Although the annual real growth in Gross Domestic Product (GDP) was at 6.3 % in the
period 1961-1970, ethnic inequality too had increased in the period. This was because;
economic activities were mainly monopolized by the non-bumiputra (Ministry of
Finance, 1970). The ratio of non-bumiputra to bumiputra median incomes rose from
1.99:1 in 1957/58 to 2.20:1 in 1967/68 (Gomez and Jomo, 1997). This worsening
situation coupled with frustration over the economic dominance of the Chinese (a nonbumiputra) amidst the poverty of the bumiputra resulted in ethnic violence in 1969
(Jayasankaran and Hiebert, 1997).
35
To alleviate the situation, the government embarked on an affirmative action plan
through the NEP. The programme was carried out under the Second Malaysia Plan
(SMP)5 in 1971. The launching of the NEP was a watershed in the history of the
Malaysian economic policy as the government played a significant role and was actively
involved in the establishment of a broad range of productive enterprises (Abdullah,
1992). The NEP had two major objectives: to eradicate poverty regardless of race and
restructure society by eliminating the identification of race with economic function.
Hence, the ultimate objective of the NEP is to redistribute wealth more equally among
the Malaysian society (Hensley et al 1993). In the restructuring of society, part of the
objectives was to provide the bumiputra a larger share of the economy dominated by the
Chinese (Jayasankaran and Hiebert, 1998).
When the NEP was first introduced, the government anticipated that in 20 years, the
bumiputra would manage and own at least 30% of the country’s commercial wealth
(Haniffa, 1999). The ultimate objective was to see that they would become partners with
the non-bumiputra in all aspects of trade and industry. On the other hand, the nonbumiputra and foreigners were expected to own 40% and 30 % of the economic wealth
respectively by 1990. Subsequently, to help attain the NEP’s objective, the government
decided to advance bumiputra businesses (public and private) by establishing public
enterprises and joint public-private companies (Bowie, 1988). Significant amounts of
public funds were allocated to government agencies such as The Council for the
Advancement of Indigenous Races (MARA), Perbadanan Nasional (PERNAS), the
Urban Development Authority (UDA) and the thirteen State Economic Development
Corporations (SEDCs). These organizations were to serve as prototypes for bumiputra
economic enterprise under the SMP (Bowie, 1988). Besides the NEP, the government
also introduced the Industrial Coordination Act (ICA) in 1975 which provides a
5
The Second Malaysia Plan was carried out in 1971-1975.
36
mechanism for the advancement of bumiputra equity ownership in Malaysian PLCs.
The Act requires all enterprises, with equity over a specific limit, to sell 30 % of their
shares to bumiputra. 6
Torii (1997) describes the NEP and the ICA as an ethnically oriented policy because it
deliberately laid out the plan to attain 30% in terms of corporate ownership and
management for bumiputra by 1990. The 30% stake was usually bought by government
institutional investors or other bumiputra trust funds on behalf of the bumiputra. These
agencies would then hold the shares until the bumiputra are ready to take them over
(Malaysia, 1976). Subsequently, by early 1980s, massive governmental intervention in
the corporate sector commenced when GLCs were formed through these bodies and
through wholly owned government enterprises and joint ventures with the private
sectors. The formation of GLCs was seen as a catalyst to achieve the objectives of the
NEP and as a vehicle to galvanize the country’s economic activities.
2.1.1
Formation of GLCs
GLCs are defined as a company in which the government owns at least 20% of the
issued and paid-up capital (Ministry of Finance, 1993). The formation of GLCs was
carried out progressively through the process of privatisation and corporatisation. Many
government departments were first privatised and later transformed into separate
wholly-owned government companies (Malaysia, 1986). The privatisation policy was
based on two major objectives. First, the policy would speedily achieve the NEP’s goal
of providing more avenues for bumiputra businessmen to participate in the economic
activities. Second, privatisation would reduce the government’s burden in providing
essential services to the public (for example road constructions, health services, energy
6
The limit is 2.5 million (Malaysia Ringgit)
37
and power). As such, these services were privatised to bumiputra private companies,
which had the right expertise and resources (Malaysia, 1986). This would allow the
government to have more time and funds to focus efforts on other much more important
tasks. Under the government patronage, these privatised companies thrived and became
very successful. Subsequently, many of them were corporatised through the issuing of a
portion of their shares on Bursa Malaysia. As the government maintained substantial
ownership in these companies, these corporatised entities have come to be known as
Government-Linked Companies or GLCs (Treasury Circular, Ministry of Finance,
1993).
Other than corporatisation exercises, the government also obtains substantial ownership
in many PLCs directly or indirectly through its investment holding companies such as
Ministry of Finance Incorporation (MOF Incorporation) and Khazanah Nasional Berhad
(KNB). The government also controls other major institutional funds such as
Perbadanan Nasional Berhad (PNB), Employees Provident Fund (EPF), Lembaga
Tabung Angkatan Tentera (LTAT), Pilgrimage Fund Board (TH) and Tabung Amanah
Kumpulan Wang Pencen (KWAP). A panel of supervisory boards manages all these
trust funds and all decisions on their investment strategies are under the authority and
jurisdiction of the government. They are collectively known as government investment
portfolios (Treasury Circular, Ministry of Finance, 1993). Besides that, all State
Economic and Development Corporation (SEDCs) and other state agencies that have at
least 20% shareholding in PLCs are also considered as GLCs (Treasury Circular, MOF,
1993). Examples of GLCs include Golden Hope Plantations Berhad, Kumpulan Guthrie
Berhad7, Telekom Malaysia Berhad (TMB), Malaysian Airline System (MAS), and
Tenaga Nasional Berhad (TNB).
7
Guthrie Berhad was bought over by the government via PNB on the London Stock Exchange in 1981.
38
With all these developments, the business environment and corporate governance
development in Malaysia has become somewhat unique. Many authors believe that the
formation of GLCs via NEP brought many significant changes to the governance of
companies in Malaysia (e.g. Thillainathan, 1999a). The next section will briefly discuss
the effects of the NEP on corporate governance.
2.1.2
The effects of the NEP on corporate governance
It was observed that the NEP has had profound effects on major aspects of the economy
as it brought about an enormous transformation of corporate ownership from a pattern
of European-Chinese capital ownership dominance to one of Chinese-bumiputra
dominance; also, private ownership was changed to ownership by state and quasi-public
bodies (Sieh, 1980). The change of ownership structure has altered the control and
management of many companies in Malaysia. Besides that, the distribution of
bumiputra ownership in PLCs through NEP had a critical impact on the governance of
companies due to the divergence between the control and cash flow rights of stateenterprise managers (Thillainathan, 1999).
La Porta et al (1999) argued that the intense governmental intervention through NEP
might have impaired the enforcement of law and order because ownership is distributed
to certain groups of investors rather than competitively achieved. While the bumiputra
investors’ rights are safeguarded under the umbrella of NEP, non-bumiputra are left to
struggle for their own survival in any feasible way, which includes concentrating
shareholdings, cross-shareholdings8 and pyramiding9 in their firms. These structures in
8
There is a high tendency for conglomerates in Malaysia to have many companies that are involved in various businesses within
the conglomerate rather than to focus on just one business (Singam, 2003). This is known as cross-shareholdings. The chairman of
the group will have ultimate power and control in the conglomerate despite not having any formal or legally recognised position
(Backman, 2001). Usually, the assets, inventory, and funds of companies in the conglomerates are passed among majority
shareholders without due regard to accepted principles of bookkeeping and accounting (Singam, 2003). As a consequence, poor
39
NGLCs combined with the NEP in GLCs undermine the efficiency of the corporate
sectors in Malaysia and lead to a deterioration of corporate governance systems in both
GLCs and NGLCs.
Suto (2003) held that the socio-economic policy aimed at ownership dispersion to
improve the social and economic status of bumiputra seems to have enhanced free-rider
problems in equity markets and has possibly increased information asymmetry between
managers and owners. As such, management entrenchment was rampant in GLCs and
NGLCs and the board of directors is often made to endorse any decisions made by the
management. Consequently, both GLCs and NGLCs have weak corporate governance
structures. This has led to many a scandal in GLCs and NGLCs (examples are the
Pilgrimage Fund Board (TH), United Engineers Malaysia (UEM), Malaysian Airline
System (MAS), Renong, Aokam Perdana and Kentucky Fried Chicken (KFC Holdings).
.
The weaknesses of the NEP have also been made more obvious by the AFC as most of
the companies that had been badly hit by the collapse in stock and currency values are
the NEP’s nurtured companies (Jayasankaran and Hiebert, 1998). The credibility of the
NEP received another blow when the government tried to bail out ailing companies
mostly owned by the government and bumiputra entrepreneurs by using public funds
such as the EPF (Jayasankaran, 1998). The bailing out had been possible because the
links between the government and government institutional investors (such as EPF)
facilitated political intervention (Thillainathan, 1999a). This shows that the corporate
structure creates minimal transparency within the conglomerate and therefore, cross-shareholding throws the entire governance
structure of conglomerates into disarray and prevents a good governance system in Malaysia.
9
A pyramid model is a complex and obscure structure, and is another strategy to perpetuate control in a conglomerate. Here, the
private holding company sits at the apex, a second tier holds the most-prized assets that are usually privately held, and a third tier
comprises the group’s publicly listed companies (Lee, 2001). These structures give an incentive for founding shareholders to
maximize their private benefits of control, and thus create higher probabilities for minority shareholders rights to be expropriated
(Thillainathan, 1999a).
40
governance system of Malaysia has been the result of the interaction of economic,
political and social factors (Torii, 1997; Haniffa, 1999).
Not surprisingly, there has been an increasing demand for reforms and good
governance, which means getting rid of corrupt corporate players both in GLCs and
NGLCs. This in turn may have strong implications on the best practices of corporate
governance in Malaysia. Hence, the NEP with its association to GLCs has a significant
impact on the corporate governance practices in Malaysia, in this case a sometimes
negative one. The next section will discuss the development of Bursa Malaysia and
corporate governance during the Pre-AFC i.e. from 1985 to 1996.
2.2
Development of the stock market (Bursa Malaysia) and corporate
governance during the pre-AFC period i.e. 1985 to 1996
Prior to the 1980s, the capital market was not vigorous because many of the familyowned domestic firms in Malaysia were reluctant to take active participation into the
markets for fear of losing control of their companies (Ow-Yong and Cheah, 2000).
However, two factors prompted the rapid growth of the capital market in the early
1980s: the introduction of a second tier market with less stringent listing requirements10
and the government’s privatisation and corporatisation programme. As a result, a total
of 216 companies were listed on the second board of Bursa Malaysia during the 1989 to
1996 period. Most of these were medium sized companies with potential for growth in
terms of size and profits (Bursa Malaysia Annual Reports, 1996). However, Claessens
10
Under the New Bursa Malaysia Listing Requirements (2001), a company must have at least RM 60
million to be listed on the Main Board, while RM 20 million is required for the Second Board. Besides
that, a good track record of 5 years and 3 years respectively for each of the board is also required (Bursa
Malaysia Annual Report, 2001).
41
et.al (2000b) argued that these PLCs are still being controlled by particular individuals
or are family-owned with minority shareholdings in the hands of the investing public.
By 1995, Bursa Malaysia was recognised as being amongst the top ten bourses in the
world and ranked the third largest market in Asia Pacific after Hong Kong and Sydney
(Ali, 1997). Foreign investors were attracted to the market because of the rapidly
growing economy and the recognition that it was an emerging market in the WestPacific region. In addition, the privatisation and corporatization of government entities
attracted huge domestic investors to the market due to the quick profits gained from
Initial Public Offering (IPOs) which more often than not, led to over subscription of
shares. This situation was clearly noticed especially after 1985 when the number of
companies listed on the main and second boards increased substantially. A total of 401
companies were listed between 1985 and 1996. The number of companies listed
increased significantly in 1996, wherein 92 companies were listed. Figure 2.1 shows the
listing statistics of companies on the main board and second board of the Bursa
Malaysia from 1985 to 1996.
Figure 2.1: Yearly listing statistics of companies on the Bursa Malaysia (1985 to 1996)
Yearly listing statistics of companies on the Bursa
Malaysia (1985 to 1996)
50
40
main board
30
second board
20
10
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
0
1985
No. of companies
60
Year
(Source: Kuala Lumpur Stock Exchange Annual Reports, 1996)
42
However, the favourable development of the Bursa Malaysia and the buoyant economic
growth has resulted in a state of complacency among PLCs. When the economy was at
its peak and profits were high, the perception was of continued growth that made
companies contented. As a result, there has been a notable increase in fraud, bribery,
asset stripping, favouritism and misuse of power in corporate dealings in the late 1980s
and the early 1990s (Ismail, 1991). Most of the major frauds in corporations were due to
breakdowns in internal controls (Syed Agil, 1994) and were related to the weaknesses in
corporate governance systems (Abdul Samad, 2002). For instance, internal control
system and audit departments were not taken seriously enough (Chin and Casey,
2004).11 This has led to scandals and mismanagement. As a result, the Security
Commission (SC) required all PLCs to set up audit committees (AC) to curb corporate
mismanagement. The following section will discuss the formation of AC in Malaysian
PLCs.
2.2.1
Formation of Audit Committees (ACs) in PLCs
Under the Bursa Malaysia Listing Requirements (BMLR), an AC should comprise a
majority of independent directors free from any relationship that would interfere with
the exercise of independent judgment as committee members (Bursa Malaysia Listing
Requirement, 1994). It is believed that the setting up of AC could improve the
credibility and objectivity of companies’ financial statements, resulting in greater
accountability as well as the restoration of confidence in financial reporting (Haniffa,
1999).
After the SC initiated the formation of ACs in 1993, the BMLR made it mandatory for
all PLCs to have AC. A grace period of one year was given to comply with the rules.
11
They noted that this is what happened in Australia in the 1980s, just before its economy went into a recession, and a spate of
corporate failures followed.
43
Non-compliance constitutes a breach of the listing requirements, and hence would be
subjected to penalties, which includes the possibility of fines under Section 11 of the
Securities Industry Act (SIA). The requirement to have AC was also influenced by the
Cadbury Report in the U.K. (Ismail, 1991) and the development of AC in Singapore at
the end of the 1980s. Fig. 2.2 shows the formation of AC in Malaysian PLCs.
Fig 2.2: Formation of ACs in PLCs
Formation of Audit committees in PLCs
No. of companies
200
150
main board
100
second board
50
0
91
92
93
94
95
96
97
98
Year
(Source: Zulkarnain et al 2001).
A study undertaken by Zulkarnain et al (2001) showed that the formation of ACs
reached a peak in 1994 when the deadline given had almost expired (Fig. 2.2). Their
study indicates that only 56 % of the sampled main board firms and 24% of the sampled
second board firms had formed AC by 1994. Although, Section 15(A) of the BMLR
requires all PLCs to have AC by August 1, 1994, it was not until 1998 that all 556 PLCs
had complied with the Listing Requirements (Zulkarnain et al 2001). The next section
will look into the characteristics and effectiveness of AC in Malaysia.
44
2.2.2 Characteristics and effectiveness of AC in Malaysia
In the wake of corporate scandals in Malaysia, AC has a vital role in discharging their
oversight responsibilities particularly in improving companies’ accountabilities and
governance. The integrity of the corporate reporting process requires AC members to
understand the various developments affecting financial reporting, internal controls and
assessment of the objectivity of external auditors. Collier (1992) concluded that AC
should have the following characteristics: they are a sub-committee of the board,
composed mainly of NEX and have the responsibility for reviewing the financial
statements and the external audit and control systems. Nevertheless, a report of the
FCCG (1999) shows that AC was ineffective in most Malaysian PLCs. This statement
was supported by the Malaysian Institute of Accountants (MIA), which felt that the AC
in most PLCs have not lived up to initial expectations (Akauntan Nasional, 1994). This
suggests that the formation of AC in PLCs was more inclined towards conforming to
regulation but not in substance to the spirit of good governance.
The ineffectiveness of the AC could possibly be the reason on the occurrence of
company scandals and failures in Malaysia. Some of the scandals that involved both
GLCs and NGLCs were Perwaja Trengganu Sdn. Bhd (PTSB), Renong Bhd, Aokam
Perdana Bhd, UEM and KFC Bhd. The failure of PTSB was caused by, among other
things, poor management and irregularities in payments and award of contracts
(Ibrahim, 1995). An internal audit report, which became public in December 1995,
disclosed that PTSB was insolvent, and was unable to pay any interest and principal on
its RM5.7 billion in domestic and foreign borrowings (Thomas, 2002). The Renong
Group, the biggest government conglomerate in Malaysia also ran into difficulty and
had to be rescued by the government. As a result, the awareness of corporate
governance heightened during this period.
45
To address the problems, the Companies Commission of Malaysia (CCM) issued
Voluntary Codes of Conduct for company directors and secretaries in 1996. The
issuance of the new Code was to check on the behaviours of directors and to curb
corporate scandals and failures. Apparently, the issues of corporate governance
continued to be highlighted through the AFC period. The following section discusses
the development of corporate governance during the AFC.
2.3
Development of corporate governance during the AFC i.e. 1997 to 1998
The AFC was initially caused by the prolonged recession in Japan in the early 1990s
(Thomas, 2002). The Thailand stock market began to collapse in June 1997 followed by
the stock markets of the Philippines, Indonesia, Malaysia, Singapore and South Korea in
1998 (Clarke, 2004). However, the collapse of Bursa Malaysia was the most severe in
the region. Between the first week of July 1997 and January 1998, the value of the
Ringgit (Malaysian Currency) dropped almost 50% against the U.S dollar.12 By
September 1998, Bursa Malaysia lost over 65% of the market capitalization, wiping
almost USD225 billion off the share values and the composite index fell up to 54%
from 1,230 to 570 points (Thomas, 2002).
2.3.1
The causes of the AFC
There were several opinions on the causes of the AFC. Krugman (1998) in “What
happened to Asia” and Corsetti et al (1998) in “What caused the Asian Currency and the
AFC” argued that the AFC was the result of structural weaknesses in the domestic
financial institutions supported by unstable macroeconomic policy and moral hazard.
12
In July 1997, the value of ringgit was at RM2.50=U.S $1.00; and by January 1998, the value dropped to RM4.88=US$1.00. This
indicates that the ringgit depreciated almost 50% against the U.S dollar.
46
The World Bank (1998) regarded the vulnerabilities in the banking sector as one of the
causes of the AFC. The weaknesses in the sector were attributed to poor risk
management and excessive lending. Poor risk management was caused by weak
corporate governance and limited risk management opportunities. The excessive lending
was caused mainly by extensive cross-ownership of banks and companies, weak
enforcement of bank regulations and government-directed lending (Thillainathan,
1999b). This argument was supported by Thomas (2002), who noted that the links
between the government and both the corporate and banking sectors in Malaysia
facilitated political intervention. This includes state-directed loan policies, lack of
competition and lack of prudential regulations. All these resulted in large amounts of
non-performing loans (NPLs), which aggravated the situation.
According to IMF (1999), the AFC was caused by domestic policy weaknesses. These
were manifested by the large current account deficits; concentration of bank loans in
real estate development and financing share purchases, weaknesses in domestic
financial system, and too much international borrowing in the corporate sector. OwYong and Cheah (2000) suggested that the AFC arose from common weaknesses in
Malaysian companies such as inadequate assessment of operational risks, insufficient
management oversight and weak accountability. In addition, a high concentration of
corporate ownership on corporate groups and families made Malaysian companies more
vulnerable during the AFC (Abdul Samad, 2002; Suto, 2003).
As can be observed, even though various factors were highlighted to explain the causes
of the AFC, weak corporate governance has repeatedly been cited as one of the causes
(Mitton, 2002). Kirkbride (2004) pointed out that the controversies surrounding
corporate governance have increased massively since the AFC. As such, like other
47
economies in East Asia, good practices of corporate governance have been actively
promoted to the Malaysian corporate sector. To accomplish good governance, various
measures have been taken to improve the aspects of fairness, transparencies,
accountabilities and responsibilities in the Malaysian capital market. Besides that, to
have a dynamic capital market, the legislative framework must be fundamentally strong.
The following section discusses the development of the legislative framework of the
Malaysian capital market, which is the core to the development of corporate
governance.
2.3.2
Legislative framework of the Malaysian capital market
Malaysia inherited a strong common law system together with a corporate law regime
from the British and has largely followed the developments of other commonwealth
jurisdictions with variations to suit local environment (Abdul Rahman and Mohd. Ali,
2006). Because of this strong heritage, the Malaysian capital market had a plethora of
provisions designed to create a sound corporate governance framework. Table 2.1
provides a snapshot of the legislative framework for the Malaysian capital market from
1965 until 1997.
Table 2.1: Legislative Framework for the Malaysian Capital Market
Year
Regulatory Acts
Functions
1965
The Companies Act (CA)
1973
The Securities Industries
Act (SIA)
1983
The Securities Industries
Act (SIA)
1987
Malaysian Code on Takeovers and mergers
Banking and Financial
Institution Act (BAFIA)
Governs all aspects of company law. Contains provisions on minimum levels
of disclosure to the public, rights and obligations of the directors and
shareholders.
This Act was subsequently repealed and replaced by a similar Act in 1983.
Among its provisions are the licensing of dealers, powers to curb excessive
speculation, insider trading and market manipulation, and enhancement of
supervision and control of the industry.
The Securities Industries Act (1973) was repealed and replaced by a similar
Act in 1983. The Act provides more specific regulations on the securities
industry and protects investor interests.
The code was enacted under the Companies Act to regulate corporate
takeovers and mergers.
The Act provides for the licensing and regulating of the activities of all types
of financials institutions including money broking services. Bank Negara
(BNM) is the custodian of this Act.
The Act governs the maintenance and operation of a central depository
system.
1989
1991
The Securities Industry
Central Depositories) Act
(SICDA)
48
1993
1993
1995
1997
Securities Commission
Act (SCA)
The Futures Industry Act
(FIA)
Securities Commission
Act (SCA)
The Financial Reporting
Act (FRA)
The Security Commission (SC) was established as a regulatory body for the
capital market.
Provides for the establishment of futures exchanges and regulation of the
trading of the futures contract.
Amendments were made which marked the first move of the regulatory regime
towards a disclosure-based regime.
The Act was to bring financial reporting in step with international standards
and provide for effective enforcement. The Financial Reporting Foundation
(FRF) and the Malaysian Accounting Standards Board were established to set
reporting and accounting standards.
(Source: Adapted from Securities Commission Malaysia, 2003)
Table 2.1 indicates that all corporate governance measures had actually been put in
place long before the crisis and the process started even as far back as 1965. In the
1960s and 1970s, there was only one piece of legislation each year as the capital market
was still in its infancy stage. As it progressed into the 1980s, the market became much
more vigorous and complicated with the introduction of new features such as investors’
protection, code on takeovers and mergers and banking and money broking services. In
the 1990s, more regulations were imposed to complement the matured stage of the
capital market and the dynamic increase in trading such as futures contract and the
convergence of financial reporting worldwide due to global business expansion. Various
new legislative frameworks were subsequently introduced after 1997. The next section
will examine corporate governance development after the AFC.
2.4 Corporate governance development after the AFC i.e. 1999 to 2005
As weaknesses in corporate governance were identified as one of the major causes of
the AFC, Malaysia unveiled a wide-ranging agenda for corporate governance reforms.
The major breakthrough in corporate governance development was the setting up of the
Finance Committee on Corporate Governance (FCCG) by the Ministry of Finance in
1998. The establishment of the MCCG (2000) was inspired from this Committee. The
main sources of the corporate governance reforms agenda were adopted from the
Capital Market Master Plan (CMP) by Securities Commission, Financial Sector Master
Plan (FSMP) by Bank Negara Malaysia and MCCG (2000). The Code provides
49
guidelines on the principles and best practices in corporate governance and the direction
for their implementation. Table 2.2 provides a brief summary of the corporate
governance reforms that took place after the 1997 crisis.
Table 2.2: Corporate governance reforms framework that took place after the 1997
financial crisis
Year
Corporate governance reforms framework
1998
1998
1998
1999
1999
1999
1999
1999
2000
2000
2001
2001
2001
2001
2001
2001
2001
2002
2003
2004
2005
The formation of the high-level finance committee by the government to conduct a detailed study on
corporate governance and to make recommendations for improvements.
Amendments were made to the Securities Industry (Central Depositories) Act (SICDA) by Securities
Commission Malaysia with a view to enhance transparency in share ownership.
The Malaysian Institute of Corporate Governance (MICG) was established to examine the implementation
and improvements for corporate governance practices in Malaysia.
A new Malaysian Code on Takeovers and Mergers was introduced to replace the Malaysian Code of 1987.
The new Code seeks to ensure that minority shareholders have a fair opportunity to consider the merits and
demerits of a takeover offer. It also imposes criminal liability on relevant parties for providing false or
misleading information.
Directors and CEOs were required to disclose their interests in PLCs (CCM, 1999).
Bursa Malaysia introduced quarterly disclosure of financial statements on all PLCs for more timely and upto date financial information as more frequent and regular financial information disclosure will enhance the
quality of financial reporting (Bursa Malaysia Annual Reports, 1999).
The Finance Committee established by the Ministry of Finance issued its first report on corporate
governance in 1999 (Finance Committee Report on Corporate Governance, 1999) and many of the
recommendations in the report were adopted in the preparation of the Malaysian Code on Corporate
Governance (FCCG, 1999).
Bursa Malaysia introduced limits on the number of directorships that may be held by a director of public
listed companies. The rule states that directors may only hold directorships in up to 25 companies of which
10 may be held in PLCs and another 15 in non-PLCs (Bursa Malaysia Annual Reports, 1999). The measures
were taken to ensure that directors have adequate time and resources for them to concentrate on their core
duties of overseeing companies under their directorships.
The establishment of the Malaysian Code on Corporate Governance (MCCG, 2000).
Amendments were made to the Security Commission Act (SCA) further streamlining the regulatory regime
by making Security Commission (SC) the sole regulator for fund raising activities and the corporate bond
market.
The Bursa Malaysia issued its revamped listing requirements (RLR), which included new sections on
corporate governance, provisions on related party transactions and continuing disclosure requirements.
The Taskforce on Internal Controls issues guidance for directors on Statement of Internal Controls.
Establishment of the Minority Shareholders Watchdog Group (MSWG) to further protect minority
shareholders’ interests and to promote shareholder activitism.
Directors of PLCs are required to undergo training in a mandatory accreditation program. They were
required to acquire 48 points of continuing professional education annually (Bursa Malaysia New Listing
Requirements, 2001).
The audit committee must have a member who is trained in financial accounting (Bursa Malaysia New
Listing Requirements, 2001).
The Malaysian Capital Market Master plan was launched to further streamline and regulate the capital
market and to chart the course for the capital market for the next ten years (Securities Commission
Malaysia, 2001).
The Financial Sector Master plan was launched to chart the future direction of the financial system over the
next ten years and outlined the strategies to achieve a diversified, effective, efficient and resilient financial
system (Bank Negara Malaysia, 2001).
Internal audit guidelines for PLCs were issued to assist the directors of PLCs (Bursa Malaysia Listing
Requirements, 2001).
SC introduces merit-demerit incentives in Guidelines on Issue/ Offer of Securities (Commission Malaysia,
Malaysia).
Amendments to securities laws to inter alia introduce provisions governing whistle blowing and enhance
enforcement/redress mechanisms for breaches of securities laws (Security Commission Malaysia,
Malaysia).
Amendments to Listing Requirements: New policy of enforcement for delays in issuance of financial
statements (Bursa Malaysia Listing Requirements, 2005).
Source: Adapted from Security Commission Malaysia (SC), Bursa Malaysia Listing Requirements and Companies
Commission Malaysia (CCM)
50
Table 2.2 shows that corporate governance’s framework has undergone a tremendous
change since the occurrence of the AFC. Among the significant changes are; quarterly
disclosure of financial statements, the establishment of the Malaysian Code on
Corporate Governance, the issuance of RLR and the establishment of the Minority
Shareholders Watchdog Group (MSWG) to further protect minority shareholders’
interests. Apparently, the most important governance framework that has been
introduced was the establishment of the MCCG in 2000. The issuance of the Code was
regarded as a remarkable corporate governance achievement in the Malaysian corporate
sector.
Most aspects of the corporate governance regulatory framework that were released from
1999 until 2005 involved measures to strengthen best practices. The efforts to
strengthen good governance practices, transparencies and accountabilities in the
corporate sectors were at their peak during this period. There is evidence for some
success, for example, the results of the Bursa Malaysia PwC Survey in 2002 found that
governance reforms in Malaysia are heading on the right track. The survey showed that
93% of investors felt that Malaysia’s standard of corporate governance has improved
since the introduction of MCCG. Hence, the inception of MCCG provides not only
guidelines on best practices but also fresh incentive for good governance in Malaysian
PLCs. The next section will discuss briefly on the MCCG.
51
2.4.1 Malaysian Code of Corporate Governance (MCCG, 2000)
The initiative to establish MCCG (2000) started with the establishment of Finance
Committee on Corporate Governance (FCCG) in 1998. MCCG was developed by The
Working Group on Best Practices in Corporate Governance. The Code was principally
an initiative of the private sector and issued as a guideline for enhancing corporate
governance practices among PLCs. Basically, the Code was modelled after the UK
Codes comprising of the Cadbury, Greenbury and Hampel Reports (Abdul Rahman,
2006). Companies in Malaysia should apply the broad principles of good corporate
governance set out by the code with flexibility in mind and with common sense to the
varying circumstances of individual companies. The recommendations in the Code were
also intended to increase the efficiency and accountability of boards to ensure that its
decision-making processes are not only independent but also seen to be independent
(Abdul Kadir, 2000).
52
Figure 2.3: Broad Structure of the Code
????????????????????????????????????????????????????????????????????
Part 1
Sets out the 13 broad
principles of good CG
Part 2
Details 33 best practices
for PLCs
Broad structure of
the Malaysian Code
of Corporate
Governance
Board of directors
Director’s remuneration
Shareholders
Accountability and audit
Board of directors
Accountability and audit
Relationship with
shareholders
Part 3
Exhortations to other
participants
Not addressed to PLCs but
to investors, especially to
institutional shareholders
and auditors. This is purely
voluntary.
Part 4
Explanatory notes and
‘mere best practice’
Provides explanatory notes
to Parts 1 to 3. It sets out
best practices in addition to
the 33 best practices in Part
2. Companies do not have to
explain circumstances
justifying departure from
these practices
Source: Corporate Governance Insight, KPMG (2001)
The broad structure of the Code is outlined as per Figure 2.3. Essentially the Code can
be divided into two contextual groupings: 13 Basic Principles (Part 1 of the Code) and
33 best Practices (Part 2 of the Code). The principles in Part 1 of the Code are directed
principally at boards of PLCs with the objectives of increasing their efficiency and
accountability. The principles are generic and applicable to all entities, with the
objective of allowing the companies to apply these principles according to their own
circumstances.
53
Table 2.3: The thirteen Basic Principles Malaysian Code of Corporate Governance
Director-related matters
Shareholders-related matters
Accountability and Audit
Director’s Remuneration













The Board
Board Balance
Supply of Information
Appointment to the Board
Re-election of the Board
Dialogue between Companies and Investors
The AGM
Internal Control
Financial Reporting
Relationship with the Auditors
Level and Makeup of Remuneration
Remuneration Procedure
Disclosure
Source: Malaysian Code on Corporate Governance (2000)
Part 2 of the Code lists down 33 best practices provisions. It is further divided into four
classifications namely, board of directors, shareholders, accountability and audit, and
directors remuneration as shown in Table 2.3. While Part 1 of the Code deals with the
issue of application, Part 2 attends to the issue of compliance. As mentioned earlier,
while compliance with best practices is voluntary, companies are required, under the
RLR to state in their annual reports the extent to which they have complied and to
explain any circumstances to warrant any deviations from such best practices.
2.4.2 The Revamped Listing Requirements of Bursa Malaysia (RLR)
A New Listing Requirements was implemented by Bursa Malaysia in an effort to
enhance good corporate governance practices in January 2001. The requirements
emphasized the importance of full disclosures to comply with the MCCG (2000). For
example Chapter 15 of the RLR addresses issues on corporate governance and one of
the paramount requirements is that PLCs must ensure that its board of directors make
the following statements in relation to its compliance with the MCCG (2000) in its
annual reports:
54
1. A narrative statement of how the PLCs has applied the principles set out in Part
1 of the MCCG (2000) to their particular circumstances; and
2. A statement on the extent of compliance with the Best Practices of Corporate
Governance set out in Part 2 of the MCCG (2000). The statement shall
specifically identify and give reasons for any areas of non-compliance with Part
2 and the alternatives to the Best Practices adopted by the PLCs, if any.
By virtue of paragraph 15.26 and 15.27 of the RLR, it is mandatory for all PLCs to
comply with the requirements of the MCCG (2000). However, compliance with the
disclosure provisions under the RLR is mandatory (RLR, 2001). As shown in Table
2.4, all PLCs are required to issue a Statement of Corporate Governance in their
Annual Reports. They have to disclose which of the Code’s principles have been
applied and the extent of compliance with its best practice prescriptions.
Table 2.4: Bursa Malaysia Revamped Listing Requirements, 2001
Effective Date
Disclosure Statement
Financial Year Ending
A narrative statement of how it has applied the 13 principles set out in Part 1 of the Code
(FYE) after 30 June 2001
[Paragraph 15.26(a)]
FYE after 30 June 2001
A statement on the extent of compliance in respect of the 33 best practices set out in Part
2 of the Code [Paragraph 15.26(b)]
From 1 June 2001
A Director’s Responsibility Statement in respect of the preparation of the annual audited
accounts [Paragraph 15.27(a)]
FYE after 31 December
A Statement on Internal Control pursuant to the Bursa’s Statement on Internal Control:
2001
Guidance for Directors of PLCs [Paragraph 15.27(b)]
Source: Bursa Malaysia Revamped Listing Requirements (2001)
Failure by a PLC to make the disclosures required under paragraph 15.26 and 15.27 of
the RLR as well as making false or misleading disclosure, are considered as noncompliance. Sanctions for non-compliance may result in the companies being
reprimanded, a suspension of trading in their securities, delisting the company or issue
other penalties/conditions, as the Bursa Malaysia deems appropriate (RLR, 2001).
55
As can be observed, the inception of MCCG (2000) and the new RLR by Bursa
Malaysia provide a complimentary efforts towards the achievement of good corporate
governance practices in Malaysia. Nevertheless, there were many factors that facilitate
the governance reforms to materialise. The following section will look into the factors
that shaped the corporate governance reforms in Malaysia.
2.4.3 Factors that shaped the corporate governance reforms in Malaysia
The following are among the many factors that shaped the corporate governance
reforms in Malaysia; the Malaysian government’s effort, the development of the capital
market, shareholders have become more knowledgeable and conscious of their rights,
increased participation by institutional investors in PLCs and pressure from the
accounting bodies both locally and internationally.
2.4.3.1 The Malaysian government’s effort
The Malaysian Government’s role in corporate governance reforms was enormous.
Early efforts can be seen in the selection and representation of members in the FCCG,
which was formed in March 1998. The chairman of FCCG is the Secretary General of
the Treasury, MOF. Most of the committee members were appointed from government
entities. They were Chairman of the Security Commission Malaysia (SC), Chairman of
the Companies Commission Malaysia (CCM), Chairman of Bursa Malaysia and
Governor of Bank Negara Malaysia (BNM). Other private bodies that were included in
the committee were the Financial Reporting Foundation (FRF), Malaysian Accounting
Standard Board (MASB) and the Federation of Malaysian Public Listed Companies
(FPLCs).
The representation of high profile government’s members indicates the
56
government’s commitment and efforts to ensure that corporate governance reforms
materialize in Malaysia.
A very good reason for the government to put its efforts in inculcating good governance
among its PLCs was to attract foreign investors to invest in Malaysia. This would
obviously enhanced the Bursa’s standing in the Asian region and subsequently boost the
economic activities (Bursa Malaysia Annual Reports, 2004). Johnson (2000) held that
best practices in corporate governance could be used as a measure to sustain the
currency value and check the stock market growth. With good governance, Malaysian
corporations could easily tap and penetrate the cheap foreign institutional investors
(such as CalPERS) for company’s expansion and growth. Besides that, Malaysian
corporations would be more ready to grow and develop competitively at international
levels to achieve their global business agenda (Bursa Malaysia Annual Reports, 2004).
2.4.3.2 The development of the capital market
The Malaysian capital market is huge with a total capitalization at RM553 billion or
185% of GDP as at December 1999. Although the growth was rapid as can be observed
from the number of companies listed in the Bursa Malaysia (See Fig 2.1), the market is
still under developed because it is mainly made-up of the financial and banking
institutions (Bank Negara Malaysia Annual Reports, 2000). As such, the equity
investors’ rights and protections are immature. In view of this, the Securities
Commission (SC) initiated the Capital Market Master Plan (CMP) in 2001 to chart the
strategic positioning and future directions of the Malaysian capital market for the next
ten years (Securities Commission, 2001).13 The visions outlined by the CMP are the
13
The CMP was initially announced by the Second Finance Minister and Chairman of Securities Commission in August 6, 1999 and
subsequently approved by the Minister of Finance in December 2000 before it’s launching in February 2001.
57
efficient mobilization and allocation of funds together with high degree of confidence to
market participants. Its formulation was driven by the need to provide market
participants with clear guidance as to the vision and objectives for the enhancement of
the Malaysian Capital Market (Abdul Samad, 2002).
La Porta et al (1999) demonstrate that, across countries, corporate governance is an
important factor in financial market development. Corporate governance is a key
strategic thrust of the CMP as good governance among PLCs is vital to achieve the
objective of promoting a more conducive environment in the capital market. One of the
recommendations by the CMP is a mandatory disclosure on the state of compliance with
the MCCG (2000), which were issued in the Revamped Listing Requirements to PLCs.
The development of the capital market is vital as it can reduce dependency of
companies on bank borrowings. By reducing bank borrowings and increasing the
issuance of equities through the capital market, ownership structure of companies could
be dispersed and this could possibly lead to good governance (Thillainathan, 1999b).
2.4.3.3 Shareholders have become more knowledgeable and conscious of their
rights
Another factor that shaped the corporate governance reforms is that the Malaysian
shareholders have become more knowledgeable in corporate governance issues and are
more conscious of their rights as shareholders (Bursa Malaysia and PwC Survey on
corporate governance, 2000). They have higher expectations of the board of directors
and their accountabilities in the management of companies. Thillainathan (1999b) held
that shareholders are aware of their rights in relation to the protection that they enjoy
58
against abuses and expropriation by insiders and they demand greater transparencies
(Bursa Malaysia PwC Survey on Corporate Governance, 2002).
Apparently, Malaysian PLCs now recognized that shareholders and investors
communication plays a significant role in enhancing investors’ confidence (Bursa
Malaysia PwC Survey on Corporate Governance, 2002). They also want the market to
be better enforced and minority investors to be protected (Abdul Kadir, 2000). Hence,
appropriate monitoring and enforcement are essential to enhance investors’ confidence
in the market. Minority investors would then be protected from being expropriated by
controlling shareholders. Besides that, boards of directors and management of
companies have to be more vigilant in their jurisdiction and decision-making. Issues
such as excessive perks and benefits and related party transactions that could diminish
investors’ confidence should be avoided. Furthermore, scandals that affect companies
are publicized more openly to curb unethical acts among management in squandering
company’s wealth. As such, the role of the boards of directors must be sustained and
improved. In addition, strict penalties on bad practices of PLCs by relevant authorities
could also enhance investors’ confidence in the market.
2.4.3.4 Increasing participation by institutional investors in PLCs
Domestic institutional investors have also contributed to shaping corporate governance
reforms in Malaysia and have emerged as a significant force in the equity market
(Thillianathan, 1999a). At the end of 1998, the size of provident and pension funds in
Malaysia was RM173 billion, of which 86 % was accounted for by the EPF. About 20%
of the provident and pension funds were invested in Bursa Malaysia, which accounted
for 9% of the market capitalization of the exchange. Furthermore, the corresponding
59
size of insurance funds was RM39.4 billion of which 20% would have been invested in
the Bursa Malaysia (2 % of market capitalization).
Although, most domestic institutional investors have opted to play only a passive role in
corporate governance (Thillianathan, 1999a), this does not apply to PNB and EPF,
which is often a sizeable minority shareholder. PNB is represented on boards and
therefore, is often an insider and tends to play a more active role in performance
monitoring and even in corporate governance. They have to ensure that the trust that
they enjoyed from their depositors is given back to them in the form of best security and
good returns on their investments. Apparently, with all the scandals and companies
failures, institutional investors are more cautious of where they placed their investment.
They have to be accountable and transparent and are willing to pay a premium for
investment in a properly governed firm, as they are more selective in their choice of
investments. Based on a survey conducted by Bursa Malaysia and PwC in 2002, nearly
half (44%) of institutional investors respondents were willing to pay between 10-20%
premium on a company with excellent corporate governance practices. Over one-quarter
of respondents (26%) were willing to offer a premium of 21-30%, whilst nearly a third
(29%) were willing to offer above 30% premium. Hence, to attract investments from
institutional investors, PLCs have to demonstrate that their governance practices are up
to the desired standards and companies are run efficiently.
In the U.S, pension funds exert much influence on corporate governance. Investment by
institutional investors especially those internationally recognized such as California
Public Employees Retirement System (CalPERS) strongly influences improvement in
corporate governance. This is because their decisions to invest depend to an extent on
their evaluation of the companies’ corporate governance practices (Smythe and McNeil,
60
2004). For example, CalPERS had forced governance changes in many big companies.
This suggests that companies with good governance practices could attract cheaper
capital from institutional investors for their business expansion. Participation by
reputable institutional investors would clearly enhanced shareholders’ confidence in
companies as investment made is after careful examination of the company’s future
prospects and potential positive returns to their shareholders.
2.4.3.5 Pressure from the accounting bodies both locally and internationally.
The corporate scandals of the 1980s and 1990s were followed by a series of committees
of enquiry into the financial aspects of corporate governance in most developed
countries. Examples of such committees include, among others, the Treadway
Commission (1987) in the U.S and the Cadbury Committee (1992) in the U.K. The
consensus view of these committees is that the credibility of the financial reporting
process is dependent upon specific corporate governance control mechanisms. Indeed
the most recent corporate governance Acts and reports, such as Sarbanes-Oxley Act
(2002) in the US, and the Higgs Report (2003), continue to emphasize the importance of
financial aspects of corporate governance control mechanisms.
Apparently, Malaysia’s standing is relatively high for the general quality of its auditing
and financial reporting even by international standards because it adopted accounting
standards that are consistent with those issued by the International Accounting
Standards Board (Investors Digest, Malaysia, 2002).14 All the 914 PLCs and the
500,000 private limited companies governed by the Companies Act 1965 use Malaysian
14
Indeed, Malaysian Accounting Standards Board (MASB) was the first independent accounting standard-setting body in Asia
61
Accounting Standards Board (MASB) that is consistent to IASB standards in financial
reporting (Investor Digest, Malaysia, 2002).
To enhance corporate governance in Malaysian companies, MASB has issued the
MASB Standard 26 that is effective for accounting periods beginning on or after July
2002. MASB 26 is aimed at ensuring that investors are continually updated on the
company’s financial performance and activities, including changes in circumstances
(MASB, 2002). The standard prescribes the minimum content of an interim financial
report, which includes a balance sheet, income statement, statement of changes in
equity, cash flow statement and selected explanatory notes. Compliance with this
standard will ensure conformity in all material respects with International Accounting
Standard 34 on Interim Financial Reporting. Following that, Bursa Malaysia introduced
quarterly disclosure of financial statements on all PLCs for a more timely and up-to date
financial information. It is believed that a more frequent and regular financial
information disclosure will enhance the quality of financial reporting and helps in better
practices in corporate governance (Bursa Malaysia Annual Reports, 2004). This would
definitely help investors in making informed investment decisions. The next section
discusses the development of corporate governance focusing on Malaysian company’s
board of directors; particularly board composition, frequency of board meetings, role
duality, cross-directorships and formation of board sub-committees.
2.5 Development of boards’ oversight in Malaysia
The board of directors is fundamental to the governance mechanism of companies. As
corporate scandals and failures erupted in Malaysia during the pre-AFC and AFC
periods, concerns have been expressed on the levels of responsibility, accountability and
62
transparency of PLCs’ boards (Boo, 2003). Most corporate governance reports; for
example Cadbury (1992)15, Greenbury (1995)16 and Hampel (1998)17; had called for a
greater transparency and accountability in areas such as board structure and process,
board independence, better role of independent directors and the establishment of board
monitoring committees. Keenan (2004) pointed out that the board’s key tasks can be
divided into three main areas: responsibility for determining the strategy of the business,
identifying and appointing senior management, in particular the CEO, and ensuring that
the company has appropriate, adequate and relevant information, control and audit
system in place. Hence, the basic function of the board is to oversee the performance of
senior management and to determine whether the business is being properly managed.
Enhancing the effectiveness of the board would improve performance as these
governance mechanisms will ensure that shareholder interests are being promoted (Boo,
2003). This is of particular importance as a large proportion of companies listed on
Bursa Malaysia are family or owner controlled in which there is more likelihood that
minority shareholders will be expropriated. This is because 85% of PLCs in Malaysia
companies in Malaysia are run by owner-managers where important posts such as CEOs
and chairman are held by family members (see section 2.6.2). The next section will look
into how corporate governance is being practiced in Malaysian PLCs. The discussion
will be based on board composition, frequency of board meetings, role duality, cross
directorships, substantial shareholders and board committees. Much of the information
on governance practices was gathered from corporate governance surveys conducted by
Bursa Malaysia and Price Waterhouse Coopers in 1998, 2001 and 2002.
15
Cadbury Committee, 1992, Report on the Financial Aspects of Corporate Governance, Gee, London
16
Greenbury, R, 1995, Directors’ Remuneration: Report of the Study Group, Gee Publishing, London
17
Hampel, R, 1998, Committee on Corporate Governance: Final Report, Gee, London
63
2.5.1 Board composition
The composition of the board of directors is a critical factor in establishing the
effectiveness of the board in monitoring the management (Fama and Jensen, 1983). The
MCCG (2000) acknowledges that to have an effective board, there must be a right
balance in the board composition comprising of independent non-executive (INEX),
non-executive (NEX) and executive directors (ED). Haniffa (1999) found that the board
composition in Malaysian PLCs comprises of INEX, NEX and ED, with the majority
being the first two groups. The Bursa Malaysia/PwC Survey in 2001 indicated that there
is a reasonably proportionate mix of INEX (average number is 2.7) and ED (average
number is 2.5). The findings are presented in Table 2.5.
Table 2.5: PwC Survey (2001) on Board Composition
Min
Median
Max
Mean
Total
4
7.57
13
7.5
ED
1
2.4
7
2.5
NEX
1
2.8
8
3
INEX
1
2.4
6
2.7
(ED is executive directors, NEX is non-executive directors, INEX is independent non-executive directors)
Source: Board of Directors: A Bursa Malaysia/PwC Survey of Remuneration and practices (2001)
Similarly, Abdul Rahman and Mohd Ali (2006) found that on average, the proportion of
INEX of the companies in their study is 39%. Based on the three studies, INEX
constitute about one-third of the board. These findings are in line with the Report on
Corporate Governance in Malaysia (1999) which suggested that the board should
include a balance of ED and NEX (including INEX) such that no individual or small
group of individuals can dominate the board’s decision making. The Bursa Malaysia
listing rules also stipulate that at least 2 directors or one third of the board whichever is
64
higher must be independent directors. Generally and from the survey results, this
requirement has been diligently complied with. Besides that, on average, board size was
found to be 8 persons. One of the reasons most board sizes are not too big is probably
because of the shortage of suitable INEX, as the larger the board size the more INEX
have to be appointed (Abdul Rahman, 2006).
2.5.2 Frequency of board meetings per annum
The FCCG (1999) recommended that the board of directors disclose the number of
board meetings held in a year and details of the attendance of each individual director at
these meetings. This is to ensure that shareholders would be able to evaluate each
director’s commitment by making reference to the number of meetings attended. The
PwC and Bursa Malaysia (1998) survey shows that boards of Malaysian PLCs did not
meet often, whether as a full board or at committee level. On average, the frequency of
meetings was low (at 4 meetings per year) and 5% of the companies held only one
meeting a year (PwC and Bursa Malaysia Survey, 1998). This makes it difficult for the
board to be able to discharge their responsibilities well and to monitor the continuing
disclosure and other reporting obligations. Therefore, in practical terms, these
obligations are largely left to ED. However, the PwC and Bursa Malaysia (2002) survey
showed an improvement in the number of full board meetings held as they rose by 50%
to an average of six meetings a year. This obviously indicates that MCCG (2000) has a
strong impact on boards’ behavior and indicates that corporate governance best
practices were taking root in Malaysian PLCs.
65
2.5.3
The separation of roles of the chairman and CEO
The separation of the chairman and CEO roles is progressively seen as an important
element of good governance because of the central role that the board chairman plays in
the effective functioning of the board and its oversight of management. Role duality has
been related to poor disclosure (Forker, 1992) and has negative impact on the operation
of corporate governance systems (Collier and Gregory, 1999). Although the Bursa
Malaysia Listing Requirements do not mandate the division of responsibilities between
chairman and CEO, the MCCG (2000) strongly recommends the separation of these
positions. Figure 2.4 shows the percentage of role dualities and non-role dualities in
three surveys carried out in an interval period of two years in Malaysia.
Figure 2.4: Role dualities in PLCs
No. of companies
Role dualities in PLCs
90
80
70
60
50
40
30
20
10
0
Non-role duality
Role duality
1998
2000
2002
Year
(Source: KLSE PriceWaterhouse Coopers Survey of 1998, 2000 and 2002)
The findings of the corporate governance survey in 1998 indicated that 60% of the
companies did separate these roles. However, the separation of the two roles gradually
increased to 74 % in 2000 and 85 % in 2002. Haniffa and Cooke (2002) observed that it
is not a common practice among Malaysian companies to have the two roles combined
as their study on role duality between 1996 and 2000 showed that on average, 74.3%
companies separated these roles.
66
These evidences suggest the absence of any dominant personality of the board of
directors in Malaysian PLCs. Further, companies having role duality are mostly found
among NGLCs and those that were used to be family owned-business. The reason for
them to have role duality could be possibly due to their substantive ownership
concentration and control of the business. The three survey results indicate that over
time, the Malaysian boards are moving towards separating the Chairman and CEO’s
roles in accordance with the recommendation in MCCG (2000). Hence, MCCG (2000)
has impacted on the role duality issues in Malaysia.
2.5.4
Cross directorship in PLCs
Cross directorship refers to individuals who are appointed as director in more than one
company and is a common phenomena in Malaysia (Ishak and Napier, 2003; Haniffa
and Cooke, 2002). However, in 1998, the SC put a limit on the number of directorships
that an individual could hold. The SC guidelines stated that, a director of a listed
company must not hold more than ten directorships in PLCs and not more than 15
directorships in non-PLCs. In March 1999, Bursa Malaysia also imposed the same
restrictions on the number of directorships in order to enhance the standard of corporate
governance (Bursa Malaysia RLR, 2001). The purpose of the restriction is primarily to
increase effectiveness of the board by ensuring that directors are able to focus more time
and energy on smaller number of companies.
A report in the Bursa Malaysia PwC 2002 Survey revealed that on average, independent
non-executive directors sit on 2 PLCs and 5 non-PLCs (Bursa Malaysia PwC Survey,
2002). In another survey on a sample of 100 PLCs for the period 1998 to 2002 by Abdul
Rahman and Wan Abdullah (2005), found that on average, NEX and ED hold 13 and 6
directorships at any one time respectively. This indicates that cross directorship is more
commonly practiced by NEX than ED. This phenomenon was also confirmed by a study
67
conducted by Haniffa in 1999. This could possibly be due to more time resources that
could be allocated by NEX, as they are not involved in the day-to-day management of
companies except to attend board meetings, which are often not held.
The two surveys on cross-directorships of ED and NEX indicate that cross-directorships
are widespread in Malaysian PLCs. The restrictions by SC and the Bursa Malaysia also
reflect the phenomena, although the number of directorships allowed is still high. This
indicates that there are not many different individuals appointed as directors in
Malaysia. This is perhaps due to the nomination and appointment of directors preferably
discussed among family members, close friends and influential people in the
government and private sectors before being finalized in the boardrooms. In addition,
the concentrated ownership and pyramidal structures of many PLCs in Malaysia further
advance this practice. The possible effect is that directors may not be able to devote
sufficient time to their core responsibilities due to multiple calls on their limited time
resources.
2.5.5 Substantial shareholders on board and management
In the 1998 Survey on Corporate Governance, almost all (97%) of PLCs had substantial
shareholders as members of the board, out of which over a third (39%) were involved in
management. This indicates a strong participation of substantial shareholders in the
management of companies where they have controlling interests. This phenomenon
could prompt major shareholders to pursue their own interest at the expense of minority
shareholders (ADB Studies, 2000). This was indicated by research findings that there
had been several instances of corporate abuse and minority shareholders expropriation
in Malaysian PLCs (Ow-Yong and Cheah, 2000). A Report on Corporate Governance
by the High Level Finance Committee (1998) also reported instances of corporate
abuses by controlling shareholders. The report indicates that abuses took the form of
68
related party transactions, asset shifting and poor financial management. Table 2.6
shows a representation of company’s significant shareholder(s) as boards’ member and
management.
Table 2.6: Representation of company’s significant shareholder(s) as boards’ member
and management.
Representation of company’s significant
shareholder(s)
Board
Management
Percentage representation
74
64
Source: Bursa Malaysia and PwC Corporate Governance Survey, 2002.
Table 2.6 shows that, significant shareholders were found to be well represented on
boards but slightly less in management. The representation of company’s significant
shareholders on the board and management was 74% and 64% respectively. These
findings indicate that the representation of substantial shareholder as boards’ member
and management is relatively high.
2.5.6
Board Committees in PLCs
Board Committees are important corporate governance mechanisms particularly for
PLCs. Examples of such committees are the audit committee, the nomination committee
and the remuneration committee. These committees could play an effective role for the
check and balance process in the best interests of all shareholders if properly structured
with a strong and truly independent element (Khas, 2002). As mentioned in the earlier
section, the Bursa Malaysia PwC Survey (2001) indicates that all PLCs in Malaysia
have AC, in line with the Bursa Malaysia Listing Requirement. However, two other
committees that were stipulated as Best Practices in the Code, remuneration and
nomination, are not common among PLCs in Malaysia. Similarly, the findings by the
69
Bursa PwC Survey (1998) and the Bursa PwC Survey (2001) found only 21% and 15%
respectively of companies set up the remuneration and nomination committees.
2.5.6.1 Remuneration Committees in PLCs
The pressure on companies to form remuneration committee arose in large part out of
the concern over the lack of transparency of remuneration, excessive salaries, and the
perceived poor linkage between remuneration and performance. Excessive remuneration
of senior management could create conflict of interest between owners and managers of
companies. Carson (2002) pointed out that remuneration committees are designed to
review the contracts in terms of the remuneration of senior management, as this is the
focus of shareholders’ interest.
To enhance corporate governance, the MCCG (2000) stresses the need for companies to
establish a formal and transparent procedure for developing policies on executive
remuneration. The remuneration policy must hold a balance between retention of
competent directors and at the same time converge with shareholders’ interest. The
survey by Bursa Malaysia and PwC in 1998 showed that the concept of remuneration
committee is relatively new in Malaysia. The survey found that only 20% of
respondents had a remuneration committee (KLSE PriceWaterhouse Coopers Survey,
1998). This is probably due to the lack of a regulatory requirement on the formation of
the committee as compared to audit committee (AC).
Among those that have
remuneration committees, over three-fifths (64%) had independent NEX as chairman.
The PwC Survey on Board of Directors Remuneration and Practices (2001), revealed
little improvement on the formation of remuneration committee in which only 21% of
70
respondents had such a committee. However, the formation of remuneration committees
increased rapidly to 75% in the Bursa Malaysia PwC Survey in 2002. This is largely
due to the recommendations in the MCCG (2000), and the benefits of having such
committees to enhance corporate governance best practices. Therefore, it can be seen
that the MCCG (2000), has a big impact on the establishment of remuneration
committees in Malaysian PLCs. Fig. 2.5 shows the formation of remuneration
committees in Malaysian PLCs.
Fig. 2.5: Formation of remuneration committees in Malaysian PLCs (%).
Formation of remuneration committees
80
No. of companies
70
60
50
1998
40
2001
30
2002
20
10
0
1
Year
Source: Bursa Malaysia and PwC Corporate Governance Survey (1998 and 2002) and PwC Survey on Board of
Directors Remuneration and Practices (2001)
However, further findings show that remuneration committees are less involved in
developing an overall remuneration or benefits strategy for the organisation (Bursa
Malaysia PwC Corporate Governance Survey, 2002). This is probably because such
committees are not fully utilized by board of directors and merely act as ‘rubber stamps’
to show the company’s adherence to the recommendations of best practice on corporate
governance.
71
2.5.6.2 Nomination committees in PLCs
The selection of directors is significant to the effectiveness of the corporate governance
mechanisms and should be free of influence and pressure from all parties (Boo, 2003).
This task rests with the nomination committees. As stressed in the MCCG (2000), the
board through the nomination committee will have to annually review its required mix
of skills, experience and core competencies of directors. The committee is responsible
for proposing any new appointments to the board. The MCCG (2000) recommended
that a nomination committee to be made up of exclusively of NEX, the majority of
whom should be independent. But the final decision is still the responsibility of the full
board after considering the recommendations of the committee.
However, the role and benefits of having a nomination committee was not widely
known in Malaysia. This could be due to the nature of corporate ownership of
Malaysian PLCs where most of them largely developed from concentrated ownership
structures based around controlling families. As such, the appointment of directors and
top management is decided among family members (Ishak and Napier, 2003). With
regards to GLCs, the government through MOF appointed the majority of the directors
in GLCs. Fig. 2.6 shows the formation of nomination committees in Malaysian PLCs.
72
Fig. 2.6: Formation of nomination committees in Malaysian PLCs (%).
Formation of nomination committees in Malaysian PLCs
No. of companies (%)
80
70
60
50
1998
40
2002
30
20
10
0
1
Year
Source: Bursa Malaysia and PwC Corporate Governance Survey (1998 and 2002)
The findings of the Bursa Malaysia PwC Survey (1998) indicate that nomination
committee has been set up in about 20% of PLCs. However, the 2002 Bursa Malaysia
PwC Survey found a dramatic increase in the formation of nomination committee with
almost three-quarters (71%) of PLC’s had formed nomination committees. While in
general, although PLCs have complied with the Code, whether the compliance is merely
to conform or in true substance, it will be very difficult to determine the real reason
behind the formation of this committee (Boo, 2003). Nevertheless, MCCG (2000)
definitely has a great impact on the awareness and benefits of having such committee.
This is considered as an achievement in corporate governance development in Malaysia
given that the roles and responsibilities of a nomination committee are slowly gaining
grounds in boards’ good practices in Malaysia (Bursa Malaysia PwC Survey, 2002).
The following sections will discuss the characteristics of the ownership structures of
Malaysian PLCs in relation to corporate governance. This is important as ownership
structures often determine the distribution of power and control between managers and
shareholders
73
2.6 Ownership structures of PLCs
Malaysia is characterized by an insider system of corporate governance, with high
ownership concentration and cross-holdings or pyramiding (OECD, 1999). The possible
earliest study documented with respect to corporate ownership in Malaysia is Lim
(1981), who showed that ownership concentration is strongly entrenched in Malaysian
PLCs. This type of ownership structure increases the actual control of a few individuals
or entities well beyond their level of ownership (Khatri et. al., 2002). A study by the
World Bank in 1998 showed that the five largest shareholders in Malaysia owned 60.4
% of the outstanding shares and more than half of the voting shares in a sample of
companies comprising over 50 % of Bursa Malaysia market capitalization (World Bank,
1999). The study also noted that some 67.2 % shares were in family hands, 37.4 % had
only one dominant shareholder and 13.4 % were state-controlled. A recent study by
Mohd Sehat and Abdul Rahman (2005) on ownership concentration in the top 100 PLCs
based on the five percent cut-off level, found that on average, shares held by block
holders in each company are 55.84 %. Half of the top companies have 57.11% shares
held by block holders. The highest ownership concentration accounted for is 89% whilst
the minimum ownership concentration is 5.9%. For illustration, Table 2.7 shows the
ownership structure of the ten largest listed companies in Malaysia, based on their
market capitalization, as at December 2003.
74
Table 2.7: Ownership concentration in the Ten Largest Malaysian Companies
Company
Mkt
Capitalization
(RM million)
Largest
Shareholder
Second Largest
Shareholder
Third Largest
Shareholder
Fourth
Largest
Shareholder
1
Maybank
35,462
Permodalan
Nasional Bhd.
(14.71%)
Employees
Provident Fund
Board (9.33 %)
Cimsecs
nominees Sdn.
Bhd. (3.44 %)
2
Tenaga
Nasional
Bhd.
28,010
Amanah Raya
Nominees Sdn.
Bhd. (Local)
(34.6 %)
Khazanah
Nasional Bhd.(37.04 %)
Bank Negara
Malaysia
(11.10%)
Employees
Provident Fund
Board (10.93
%)
3
26,412
Khazanah
Nasional Bhd(35.27 %)
Employees
Provident Fund
Board (12.46 %)
Bank Negara
Malaysia (7.45
%)
4
Telekom
Malaysia
Bhd.
MISC
RHB
Nominees Sdn.
Bhd. For
Petroleum
Nasional (9.29
%)
Cimsecs
nominees Sdn.
Bhd. (5.69 %)
20,831
RHB Nominees
Sdn Bhd. (Local)
For Petroleum
Nasional- (62.44
%)
Employees
Provident Fund
Board (5.86 %)
Perbadanan
Pembangunan
Pulau Pinang
(1.72 %)
5
Maxis
18,676
6
Public
Bank
16,167
Cartaban
NomineesSdn.Bhd
(Local) (6.81%)
Sekuriti Pejal Sdn.
Bhd. (3.59%)
7
Petronas
Gas Bhd.
14,346
Maxis Holdings
Sdn. Bhd. (16.18
%)
Employees
Provident Fund
Board (6.09 %)
RHB Nominees
Sdn Bhd. (Local)
For Petroleum
Nasional- (60.63
%)
Amanah Raya
Nominees
(Local) for
Amanah Saham
Bumiputra
(32.77 %)
United
Engineers
Malaysia Bhd.
(32.05%)
Kien Huat
Realty Sdn. Bhd.
(33.38%)
Lembaga
Kemajuan
Tanah
Persekutuan
(FELDA)
(2.29%)
Wilayah
Resources Sdn.
Bhd. (5.44%)
Sekuriti Pejal
Sdn.Bhd.
(3.38%)
Employees
Provident Fund
(13.33 %)
Employees
Provident Fund
(14.37 %)
Permodalan
Nasional Bhd.
(8.92 %)
Bumiputra
Commerce
Nominees Sdn
Bhd. (1.62 %)
Khazanah
Nasional Bhd(17.98 %)
Employees
Provident Fund
(9.31 %)
UOBM Nominees
Sdn. Bhd (foreign)
for United
Overseas (4.00 %)
Mayban
Nominees Sdn.
Bhd. (Local)
(14.08 %)
UOBM
Nominees Sdn.
Bhd (Foreign)
(3.46 %)
34.76 %
10.62 %
7.87 %
8
Sime
Darby
Bhd.
12,219
9
PLUS Bhd.
12,135
10
Genting
Bhd.
11,481
Mean
Pension Fund
(15.01 %)
Besitang Barat
Sdn. Bhd (5.44
%)
Kepunyaan
Cintamani Sdn.
Bhd (2.52 %)
Amanah Raya
Nominees
(2.39 %)
Cartaban
Nominees Sdn.
Bhd (Foreign)
For SSBT
Fund (6.81 %)
4.67 %
Source: Abdul Rahman and Haniffa (2005, p.59)
Abdul Samad (2002), who examined 731 PLCs in Malaysia, concluded that ownership
concentration had been found to lead to better firm performance. Mohd Sehat and Abdul
Rahman (2005) further confirmed the study and suggest that shares held by block
holders have the tendency to increase firm value. One implication of the positive effect
between ownership concentration and firm value is that large investors have an
incentive to monitor management, solve the free rider problem and positively affect
firm performance. This is because in a company with concentrated ownership, there is a
75
better matching of the control rights of the dominant shareholder with its cash flow
rights. However, companies with concentrated ownership structure could face
fundamental conflicts of interest between the majority and minority shareholders such
as the expropriation of minority wealth by the controlling shareholders (Abdul Rahman
and Mohd Ali, 2006).
2.6.1 Cross-holdings and pyramidal control structure
Another feature of corporate governance in Malaysia is cross-holdings or pyramidal
control structure. This is a situation in which the same entrepreneur, through a chain of
control relations, controls many other companies. This feature is common in Malaysia
because neither legislation nor double taxation is in existence to discourage the practice
(Abdul Rahman and Mohd Ali, 2006). Besides that, control of other firms can be
achieved with no massive financial outlays.18 This kind of arrangement, which may
comprise multiple layers, allows an artificial ownership concentration and control
strategy.
Claessens et al (2000b) argued that family ownership through pyramidal structures is a
dominant model in East Asia including Malaysia. Various reasons have been identified
for the adoption of pyramidal structures (Akoi, 1995). Firstly, a pyramidal group
minimizes the controlling shareholders’ stake and maximizes the dilution of outside
shareholdings by a reduction in the ratio of voting rights to cash flow rights. Secondly,
as Akoi (1995) suggested, the group is also used as a means of limiting liability. In
pyramid structures, the founding families and their allies usually exercise control over
For example Firm A controls 51% of Firm B’s outstanding equity and Firm B controls 51% of Firm C. Therefore Firm A controls
Firm C. Although the entrepreneur, through his indirect shareholdings, has complete control of all firms in the group, the amount of
18
equity provided is limited. In this case, only 26% of C pertains to A.
76
an extensive network of listed and non-listed companies and these families are often
shielded from risk by directly holding a limited number of shares. Thirdly, Khanna and
Palepu (2000) argued that the group might also represent an incentive structure, as
principals are not always fully informed of the actions of those under them.
Alternatively, a group structure may make it easier to share management functions
among the members of the controlling group.
However, the practice of cross-holdings could cause a major deviation between the
control and cash flow rights of insiders, because, the incentive is for the insiders in such
companies to maximize their private benefits of control and not necessarily that of
shareholder value (Thillainathan, 1999b). Thus, there is a higher probability that
minority shareholders run the risk of being expropriated the more prominent this
divergence. Besides that, cross-holding structures could create incentives for double
gearing, thus creating a multiplier effect in the sensitivity of corporate wealth to changes
in the equity market (Kochbar, 1999).
2.6.2 Family Ownerships in PLCs
Family ownership is a dominant shareholder-type of Malaysian PLCs with concentrated
shareholding. A study by the World Bank (1999) provided evidence that about 85% of
the PLCs in Malaysia had owner-managers; the post of CEO, chairman of the board or
vice-chairman belonged to a member of the controlling family or a nominee (Ishak and
Napier, 2003). In their study, at the benchmark of 20% cut-off level, 67.2% of the PLCs
were in family hands. The percentage of family-controlled PLCs was 45.6% at the 30%
cut-off level and 57.7% at the 10% cut-off level but it dropped to 14.7% at the 40% cutoff level. Claessens et al. (2000b) investigated 2,980 public companies in nine East
Asian countries and concluded that on average, 58.7 % of public companies were
classified as family-controlled. They found that older firms are more likely to be family77
controlled, as are smaller firms. A joint survey by Thornton and Malaysia Institute of
Management (MIM) in 2002, indicated that 59% of the businesses in Malaysia are run
by the founder, while 30% are run by the second generation, the majority of whom were
children of the founder. The survey also found that the main activity of family business
lays in manufacturing (35%), retailing (12.9%) and construction (10%).
In terms of governance, one advantage of a family-owned firm is that there is a better
matching of the control rights of the dominant shareholder with its cash flow rights,
resulting in a greater incentive for proper control to be exercised in maximizing
shareholder value. Thus, the incentive of the controlling shareholder is more likely to be
aligned to the interest of other shareholders (Abdul Rahman and Mohd Ali, 2006).
However, given an environment of concentrated shareholding, the board of directors
and the market for corporate control is likely to be weak; there is a high probability of
expropriation of minority shareholders. This expropriation might appear in many forms,
including consuming perks, setting excessive salaries and making inefficient
investment. These expropriation problems by controlling owners might be more severe
in firms where the controlling owners are also the managers (Wiwattanakantang, 2001).
2.6.3 Bumiputra ownerships in PLCs
Bumiputra ownership is prevalent in Malaysian PLCs due to the direct result of the NEP
and privatisation programme which has been pursued by requiring a quota of 30%
bumiputra ownership in primary offerings of shares to the public (Ministry of Finance,
1998). Before the NEP was in place, bumiputra owned only 2.4% of the corporate
wealth while non-bumiputra and foreigners own 34.3% and 63.3%, respectively. The
NEP had set a restructuring target of 20 years (1970-1990) for the holdings of the
bumiputra to reach 30%. However, after 20 years, the bumiputra share of equity
amounted to only 20.4% of total corporate equity share. Although the bumiputra have
78
not achieved the 30 percent equity ownership target, the progress made by them has
been substantial compared to the position in 1970.
Figure 2.7: Bumiputra equity ownership (1970-2004)
Bumiputra Equity Ownership (1970-2004)
Percentage Ownership
25
20
1970
1990
15
1995
10
1999
2004
5
0
1
Year
Source: Abdul Rahman (2005, p.59)
Figure 2.7 shows the distribution of bumiputra ownership in various years from 1970
until 2004. The NEP’s 30% target of bumiputra ownership has yet to be met even after
replacing the NEP with the National Development Policy (NDP) in 1991. Within 30
years (1970-2004) the bumiputra equity ownership rose significantly from 2.4 % in
1970 to 20.6% in 1995 but declined to 19.1% in 1999, due to the AFC (Mid-term
review of the Seventh Malaysia Plan, 1999). Suto (2003) who examined the association
between capital and governance structure among Malaysian listed firms during the
fiscal period 1995-1999, found that on average, bumiputra own 32% of the outstanding
shares of listed firms, followed by 19 % by foreigners and the remaining 49% by nonbumiputra. However, the increasing ownership by bumiputra is not significantly related
to the debt ratio (Abdul Rahman and Mohd Ali, 2006). The result indicates that
bumiputra shareholders have not played a significant role in disciplining corporate
management of the firms they invest in. Suto (2003) claimed that bumiputra would
79
remain silent shareholders and this would contribute to free rider problems. This is
possibly due to bumiputra owning the share through government initiative via the NEP.
The following section will discuss the characteristics of institutional investors in the
Malaysian capital market.
2.6.4 Institutional ownership in PLCs
Since the 1980s, the government has used their institutional investors as strategic
vehicles to hold equity issues arising from the privatization and corporatisation of
government enterprises and to support equity financing of growth sectors. Any new
equity issues in the stock market were apportioned to these institutions at favorably low
price (Suto, 2003). A survey by Bursa Malaysia and PwC (2002) found that institutional
investors owned an average of 12.79% of the total equity and that the top-five
institutional investors alone own on average of 12.59% of total shares. The significantly
low institutional ownership may be due in part to corporate governance issues (Abdul
Rahman and Mohd Ali, 2006). As highlighted by Thillainathan (1999a), although
institutional investors are making their presence felt in Malaysian corporate sector, they
are rarely active in monitoring management. Further analysis showed that although 28%
of Malaysian institutional investors indicated that the prevailing standards of corporate
governance were an incentive for investing in Malaysia, over half (56%) indicated that
further improvements needed to be made before they would contemplate increasing
their stake in Malaysian firms.
To sum up on issues of ownership structures of Malaysian PLCs, the typical ownership
structures of Malaysian PLCs with cross-holdings, family-owned companies and
Bumiputra ownership, all have resulted in vulnerabilities. These ownership
concentrations imposed a severe constraint on the market for corporate control as they
provide little or no role for hostile takeovers to play a disciplinary role on insiders who
80
are not working towards the maximisation of shareholder value (Thillainathan, 1999a).
The concentrated shareholding in PLCs has been attributed to weaknesses in
shareholder rights or the poor enforcement of these rights. In certain activities,
restriction on competition has led to higher returns or lower risk thus reducing the
incentive of the controlling shareholders to share these benefits with other shareholders
(Abdul Rahman, 2006).
Family-owned companies with cross-holdings might have problems with minority
shareholders expropriation as it could lead to poor governance. This is because a small
group of individuals could exercise control over a firm and pursue their objectives over
minority shareholders (Claessens, et. al., 1999).
With regards to bumiputra and
government institutional investors, as they have close link with the government and
public policies, they are not vigorous enough to monitor company’s management and
could lead to free-rider problems (Suto, 2003). This is because All these ownership
features of Malaysian PLCs reflect the circumstances of weak corporate governance
before and during the AFC in 1997/98. As a result, corporate governance in Malaysian
companies was fragile and vulnerable to the AFC and this phenomenon continues to the
period after the AFC. The following section will discuss the level of disclosure in the
Annual Reports. This is very important as the Annual Reports are used by investors to
judge firm’s performance.
2.7 Level of disclosure in the Annual Reports
The mandatory requirement of a disclosure statement on corporate governance in
Companies’ annual reports shows that Bursa Malaysia is serious in their task of
enhancing corporate governance practices. Full disclosures in annual reports were
considered as part of the strengthening of the corporate disclosure framework under the
new Bursa Malaysia RLR (2001). The enhanced disclosures include non-financial
81
information such as the chairman’s statement that must cover a brief description of the
industry trend and developments as well as the prospects of the PLCs and a corporate
governance statement (Bursa Malaysia RLR, 2001).
The 1998 and 2002 Corporate Governance Survey on level of disclosure in Annual
Reports found that the majority of respondents (75%) reported either that they exceeded
the minimum requirement (52%) or provided the fullest possible and detailed reporting
in their annual reports (23%). Only 25% did not disclose any more information from
that required. Fig. 2.8 provides the detailed percentages of 1998 and 2002 surveys on
disclosure in the Annual Reports.
Fig. 2.8: Level of disclosures in Annual Reports of Malaysian PLCs (%)
70
60
50
40
Providing the fullest
30
Exceeding the minimum
20
Meeting the minimum
10
0
1998
2002
(Source: Bursa Malaysia and PwC Survey of 1998 and 2002)
After the MCCG (2000) was in place, various initiatives by regulators and professional
bodies attempted to ensure that Malaysian PLCs met the growing market demand for a
more transparent reporting and greater disclosures. As a result, the 2002 Corporate
Governance Survey revealed improved levels of disclosure in which 88% reported
either that they exceeded minimum requirements (61%) or have provided the fullest
possible and transparent details (27%) compared to 75% in 1998. PLCs that meet the
minimum disclosures had reduced to 12%.
82
This is considered as an excellent improvement in governance as more disclosures in
the annual reports could enhance the quality of reporting to investors. Thus, it is no
doubt that full disclosure of material information is critical towards building and
maintaining corporate credibility and investors’ confidence. This indicates that the
MCCG (2000) has positively impacted on the level of disclosure in Annual Reports by
Malaysian PLCs.
2.8 Equitable treatment of shareholders and other stakeholders in Malaysia
The adequacy of investors’ protection in Malaysia can be examined in relation to the
rights of shareholders, the protection that shareholders enjoy against abuses and
expropriation by insiders as well as the quality of law enforcement. Ownership of shares
in a company confers on a shareholder several basic rights which include the following:
the right to a secure method of ownership registration; the right to convey or transfer
shares; the right to obtain relevant information on the corporation on a regular basis; the
right to participate and vote at general shareholders meetings on key corporate matters;
the right to elect members of the board and the right to share in the residual interest in
the profits of the corporation (Thillainathan, 1999b).
The principal right that shareholders have is the right to vote on the election of
directors, on amendments to the corporate charter as well as on key corporate matters
such as the sale of all or a substantial part of the company’s assets, mergers and
liquidations thus limiting the discretion of insiders on these key matters. With regards to
the equitable treatment of shareholders and other stakeholders in Malaysia, the common
law and statutory remedies are continuously enhanced. All these are being carried out to
protect investors in the long run. Fig. 2.9 shows common law and statutory remedies in
83
Malaysia. On the left-hand side is the existing common law and statutory protection in
Malaysian PLCs, while on the right hand side are the various enhancements that have
been implemented and considered.
Fig. 2.9: Common Law and Statutory remedies
Common Law and statutory remedies are continuously enhanced
Existing common law and statutory
protection

Related party and substantial
property transactionsenhanced disclosure and
approval requirements

Revamped takeovers and
merger codes
Shareholder
Proposed
activitismcodification of
formation
directors
of Minority
fiduciaryShareholder
duties
Watchdog Group

Directors fiduciary duties

One share one vote

Shareholder rights at AGM

Proposed best practices for
institutional investors

Related and substantial party
transactions

Cumulative voting-being
studied

Oppression remedies


Common law derivative actions
Investor compensation
programmeBeing studied
Source: Securities Commission (2003).
In determining how well Malaysia fares with regard to this principal right of
shareholders, we have to examine the voting rights attached to shares as well as the
rights that support the voting mechanism against interference by the insiders (dubbed
84
anti-director rights by La Porta et al, (1998).19 The one-share-one-vote rule with
dividend rights linked directly to voting rights is taken as a basic right in corporate
governance. This rule obtains when the law prohibits the existence of both multiplevoting and non-voting ordinary shares and does not allow firms to set a maximum
number of votes per shareholder irrespective of the number of shares owned. The idea
behind this basic right is that, when votes are tied to dividends, insiders are not able to
control a company to themselves by owning a small portion of the company’s share
capital but by maintaining a high share of voting control (Abdul Rahman and Mohd Ali,
2006). In addition, the formation of the Minority Shareholder Watchdog Group
(MSWG) adds to the monitoring of substantial shareholders’ expropriation on minority
shareholders. This is to ensure that minority shareholders have proper avenues to bring
up any oversight in governance related matters that have an effect on them.
2.9 Impact of corporate governance on board structures of Malaysian PLCs
The inception of MCCG in 2000 obviously changed the board structures and practices
of good governance in Malaysian PLCs. All PLCs were required to comply with various
regulations and best practices as recommended. Among the impact of MCCG (2000) on
board structures are:

Directors, who are the stewards of the companies, are required to account for
their stewardship and are made to comply with more obligations and stringent
requirements imposed by MCCG(2000), Bursa Malaysia Listing Requirements,
CCM and Security Commission Malaysia (SCM). As a result, directors would
In La Porta’s cross-country study, Malaysia was found to be one of only 11 countries out of the 49, which impose a genuine one
share- one-vote rule.
19
85
be more aware of their fiduciary duties and more committed to their duties
towards enhancing shareholders’ value.

As more independent NEX are represented on boards, executives and top
management will be closely monitored on their actions in managing companies.
This could reduce majority shareholders ability to oppress minority
shareholders.

Directors are not able to hold as many directorships due to their heavy
responsibilities as a result of the formation of board sub-committees such as
audit, remuneration and nomination committees. However, the current limit for a
director of a listed company of ten directorships in PLCs and fifteen in nonPLCs [Bursa Malaysia, para 15.06(1)] is not especially restrictive.

The results of the three surveys conducted by Bursa Malaysia and PwC indicate
that over time, the Malaysian boards are moving towards separating the
Chairman and CEO’s roles in accordance with the recommendation in MCCG
(2000).

Positions on audit committees involve heavy responsibilities. Committee
members could face the possibility of being held liable for any losses that the
companies may incur or any untoward affairs that may arise. Thus, not many
directors are willing to be appointed to the committee.

Conflicts of interest between board of directors, management and shareholders
will be less as a result of rulings of corporate governance guidelines and best
86
practices. Perhaps most worrying is the fact that there are some directors who
fallaciously believe, that if a particular shareholder is responsible for their
appointment, the director should represent the best interests of that shareholder
in his/her corporate decision-making. Directors must be meticulous in
identifying what they regard as the best interests of the company and its
shareholders.
2.10 Conclusion
The corporate governance structures of Malaysian PLCs were first moulded by the
various economic, social and political interventions of the government in the 1970s and
1980s. All the programmes created by the government such as the NEP, privatisation
and corporatisation, which led to the formation of GLCs, had a significant impact on the
corporate governance practices in Malaysia. As a result, the business environment and
corporate governance structures became somewhat unique. The second and most
significant change in regulatory frameworks and governance that took place after the
AFC was the establishment of MCCG (2000). Among the changes established are;
requirements of quarterly disclosure of financial statements, the issuance of RLR and
the establishment of MSWG to further protect minority shareholders’ interests.
The results of the corporate governance surveys conducted by Bursa Malaysia and PwC
in 1998 and 2002 indicated that governance structures such as formation of board
committees (such as audit, remuneration and nomination) and frequency of boards
meetings showed significant improvement between the two periods. The surveys also
indicate that over time, the Malaysian boards are moving towards separating the
Chairman and CEO’s roles in accordance with the recommendation in MCCG (2000).
Hence, MCCG (2000) has impacted on the corporate governance issues in Malaysia and
87
the changes that it instigated will provide a basis for identifying corporate governance
variables for the testing necessary to address the research questions posed.
88
CHAPTER THREE
LITERATURE REVIEW
3.0 Introduction
The objective of the chapter is to review and discuss the existing theoretical and
empirical evidence on corporate governance and its relationship to firm performance.
The chapter is structured as follows. The first two sections discuss the various
definitions of corporate governance and the related governance framework. The third
section examines the linkages between corporate governance and firm performance. The
fourth section discusses the performance measurement employed in previous studies,
which include performance ratios such as ROA, ROE and stock market ratios. The final
section reviews and discusses literature on specific corporate governance variables and
their relationship to firm performance. The governance variables considered are board
size (BSZ), board meeting frequency (BMF), role duality (RDU), non-executive
directors (NEX), independent directors (IND), woman directors (WOM), directors with
accounting and finance qualification (DAF), bumiputra directors (BUM), senior
government officers as directors (SGO), politicians as directors (POL), family members
as directors (FAM), audit committee size (ACS), audit committee meeting frequency
(ACM) and big-four auditors (AUD).
3.1 Definition of corporate governance
The major reason for having corporate governance structures is to reduce agency
problems that are caused by the separation of ownership and control (Berle and Means,
1932). This separation provides professional managers, who run corporations, with the
89
opportunity to pursue their own interests, which may not be congruent with the
shareholders’ objectives. Schleifer and Vishny (1997) suggest that exploitation of
shareholders by managers includes building empires, enjoying perks, insider trading,
inappropriate investments and management entrenchment. To alleviate such problems
corporations have developed corporate governance structures. For the purpose of this
study, there must be an understanding of the meaning of corporate governance and what
constitutes good governance structures in corporations.
There is no universally accepted definition of corporate governance because different
authors define it in different ways depending on their background and research
discipline. Efforts at identifying good governance structures are equally complicated as
there are many facets of corporate governance. Nevertheless, the following definition,
which was set out in the Principles of Corporate Governance developed by the
Organisation for Economic Co-operation and Development (OECD) in 1999, is widely
accepted:
1)
“Corporate governance is the system by which business corporations are
directed and controlled. The corporate governance structures specifies the
distribution of rights and responsibilities among different participants in the
corporation and spells out the rules and procedures for making decisions on
corporate affairs. By doing this, it provides the structure through which the
company objectives are set and the means of attaining those objectives and
monitoring performance”.
(OECD, 1999)
Other definitions of corporate governance include:
2) Turnbull (1997) describes corporate governance as,
“… all the influences affecting the institutional processes, including those for
appointing the controllers and/ or regulators, involved in organizing the
production and sales of goods and services.”
90
3) Shleifer and Vishny (1997) define corporate governance as,
“The ways in which suppliers of finance to corporations assure themselves of
getting a return on their investment.”
These definitions restrict corporate governance to the relationship between shareholders
and managers and do not clearly indicate other stakeholders that the firms should take
into consideration.
However, there are other interested parties and groups of constituents who have a
legitimate claim on the firm such as employees, creditors, suppliers, consumers and the
government (Hillman et al, 2000). In this respect corporate governance also includes
issues of social responsibility such as environmental matters, employment and social
education. Many examples of corporate downfall have shown the negative effects of
inadequate corporate governance not only for shareholders, but also for other
stakeholders and society at large.
Examples of definitions that are expanded to take account of a wider body of
stakeholders include;
4)
“Corporate governance is holding the balance between economic and
social goals and between individual and communal goals. The
governance framework is there to encourage the efficient use of
resources and equally to require accountability for the stewardship of
those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society. The incentive to corporations is
to achieve their corporate aims and to attract investment. The incentive
for states is to strengthen their economics and discourage fraud and
mismanagement.”
(Sir Adrian Cadbury, 1992)
5)
91
“Corporate governance is the process by which corporations are made
responsive to the rights and wishes of stakeholders.”
(Demb & Neubauer, 1992a)
6)
“… addresses the issues facing boards of directors, such as interaction
with top management, relationships with the owners and others
interested in the affairs of the company, including creditors, debt
financiers, analysts, auditors and corporate regulators.”
(Tricker, 1994)
A definition by the FCCG (Malaysia) in the Report on Corporate Governance (1999)
states that:
7)
“Corporate governance is the process and structure used to direct and manage
the business and affairs of the company towards enhancing business prosperity
and corporate accountability with the ultimate objective of realizing long term
shareholder value, whilst taking into account the interests of other
stakeholders.”
(FCCG, 1999)
As well as the many definitions of corporate governance, there are equally many
different systems of governance that can be identified according to the degree of
ownership and control and the characteristics of the controlling shareholders (Maher
and Anderson, 1999). There are some systems, which are characterized by a widely
dispersed ownership (for example the US and UK), and some by concentrated
ownership (for example Germany, Japan and South East Asia). In a widely dispersed
ownership system, the basic conflict of interest is between managers and the widely
dispersed and weak shareholders. However, in concentrated ownership structure, the
conflict is between the controlling shareholders and weak minority shareholders (Maher
and Anderson, 1999). The next section will briefly discuss the corporate governance
framework of business corporations.
92
3.2 Corporate governance framework
The Cadbury Report (1992) recommends that firms should adopt a governance
framework and stresses the importance of corporate governance mechanisms. These
mechanisms provide shareholders some assurance that directors and managers will
strive to achieve objectives that are in line with the shareholders’ interests of getting
adequate returns on their investments. Although the recommendations in the Report
were voluntary, firms were expected to comply with the governance mechanisms or
provide an explanation of the reasons for non-compliance.
Corporate governance framework can be divided into two models. They are the marketbased model and control model (Bai et al., 2002). The market-based model (also known
as the Anglo American model) has the characteristics of an independent board,
dispersed ownership, transparent disclosure, active takeover markets and welldeveloped legal infrastructure. On the other hand, the control model (also known as the
Franco-Germany model) emphasizes the importance of an insider board; concentrated
ownership structure; limited disclosure; and reliance on family finance and the banking
system. The subject of this thesis, Malaysia is perhaps most influenced by the control
model.
Since the inception of The Cadbury Report (1992), there has been widespread
acceptance of the Committee's recommendations, particularly in the appointment of
board sub-committees (Conyon and Mallin, 1997).They hold the view that compliance
to the Code has resulted in significant changes to board-related mechanisms For
example, UK quoted companies have increased their NEX representation, reduced the
incidence of RDU and increase the presence of board subcommittees, such as the audit
93
and remuneration committees. Figure 3.1 shows a corporate governance framework as
proposed by the Cadbury Committee.
Figure 3.1: Corporate Governance Framework
Regulatory framework
Self v. legal
Company Law
Merger/Takeover codes
Accountability
Supervision of
directors
Role of Auditors
Role and responsibility
of Audit committees
-Shareholders
-Debt providers
-Market for
corporate control
-Non-executive
directors
-Executive
remuneration
-Compensation
Remuneration
committees should
decide on executive
remuneration.
There must be proper
disclosure of executives’
remuneration
Executive
Directors and
Management
Source: After Keasey and Wright (1997, p.3)
The principal recommendations of the Cadbury Committee to improve corporate
governance as shown in Fig. 3.1 are:
i.
ii.
iii.
iv.
v.
vi.
vii.
All listed companies should establish an AC comprising at least three NEX.
There should be a remuneration committee, which determines executives’
pay. The committee should comprise of wholly or mainly of NEX.
Directors should not be appointed for more than three years without
shareholders’ approval.
The separation of the roles of chairman and CEO.
The emoluments of the chairman and the highest paid director should be
disclosed and the computation of performance-related pay should be
explained.
The need to produce statements on the effectiveness of internal financial
control and the business as a going concern.
Boards of directors should include a sufficient number of independent nonexecutives directors so as to maintain the independence of the board.
94
In summary, the framework stresses the need for improved information to shareholders,
continued self-regulation and strengthening of auditor’s independence. In terms of
board structures, there should be a separation of the board's two most powerful posts
(CEO and chairman). The Cadbury Report (1992) also identified two other structural
mechanisms as being of particular importance. First, the number of non-executive
directors, which should be sufficient to have a significant impact on board decisions and
second, the importance of board sub-committees. Both these mechanisms would
complement each other in enhancing boards’ effectiveness.
3.3 The linkages between corporate governance and firm performance
Many studies indicate that companies with good corporate governance have better longterm performance for shareholders (Shleifer and Vishny, 1997). The AFC in 1997 and
the recent global corporate scandals, such as those involving Enron, Worldcom and
Parmalat, have highlighted the importance of good governance for the long-term
survival of companies (Abdul Rahman and Mohd Ali, 2006). Good corporate
governance practice will reduce agency costs, improve meritocracy in boardrooms,
reduce fraud, and safeguard the interests of stakeholders. Hence, good governance
would eventually contribute to better performance.
Shleifer and Vishny (1997) assert that better governed-firms have better operating
performance because effective governance reduces ‘control rights’ shareholders and
creditors confer on managers. This would increase the probability that managers invest
in positive net present value projects, which leads to improved performance. Gregory
and Simms (1999) affirm that effective corporate governance is important as it helps in
attracting lower-cost investment capital through the improved confidence of investors.
95
They also suggest that effective governance helps in increasing the responsiveness of
firms to societal needs and expectations.
Indeed it is appealing to observe that the corporate governance debate in the US has
emphasised the need for better governance (Keasey and Wright, 1997). Recent
governance regulations in the U.S such as Sarbanes-Oxley Act (2002)20 are to improve
corporate governance in the U.S. The Act demonstrates that better corporate governance
is associated with better firm performance. Evidence for the U.S strongly suggests that
at firm’s level, better governance leads not only to improved rates of return on equity
and higher valuation, but also to higher profits and sales growth (Gompers et al, 2003).
In an attempt to shed light on how shareholders perceive and value corporate
governance, McKinsey and Company (2000) conducted three separate surveys
involving more than 200 institutional investors between 1999 and 2002. The surveys
covered three regions; Asia, the US and Europe, and Latin America. In the first survey,
three quarters of the respondents reported that board practices were ‘at least as
important as financial performance when they evaluate companies for investment’. Over
80% said they would ‘pay more for the shares of a well-governed company than for
those of a poorly governed one with a comparable financial performance’.
A second survey in 2000 involving companies listed on the Growth Enterprise Market
(GEM) stock. The GEM stock, which is based in Hong Kong, does not require growth
companies to have achieved a record of profitability as a condition of listing. This
removal of entry barrier enables growth enterprises to capitalise on the growth
20
The Sarbanes–Oxley Act (2002) also known as the Public Company Accounting Reform and Investor Protection Act of 2002 is a
controversial US federal law passed in response to a number of major corporate and accounting scandals including those affecting
Enron, Tyco International and Worldcom. The legislation is wide ranging and establishes new or enhanced standards for all U.S.
public company boards, management, and public accounting firms.
96
opportunities of the region by raising expansion capital under a well-established market
and regulatory infrastructure. Besides the listing of local and regional enterprises,
international growth enterprises can enhance their business presence and raised their
product profile in China and Asia by listing on GEM.21 The survey revealed that
companies with better corporate governance on the GEM stock had higher price-tobook ratios (PB).22 This possibly indicates that investors reward good governance by
paying a premium for the shares of those companies that are well governed. Companies
can expect a 10-12 % boost to their market valuation by going from worst to best on any
single aspect of governance (McKinsey and Company, 2000). Fig. 3.2 illustrates the PB
of 100 largest Growth Enterprise Market (GEM) stocks by CG decile.
Fig. 3.2: PB of 100 largest GEM stocks by CG decile (2000)
8
7
6
5
4
3
2
1
0
PB with better CG
1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th
decile decile decile decile decile decile decile decile decile decile
Note: CG decile from 1st decile to tenth.
Source: CLSA emerging markets
A subsequent survey by McKinsey in 2002, found that a significant majority of
respondents indicated that they would be willing to pay as much as 30% more for shares
in companies that demonstrate good governance practices. Survey respondents show
that, for corporations, timely and extensive disclosure is the highest priority, followed
by independent boards, effective board practices, and compensation based on
21
Hong Kong is strategically placed in a high growth region. Over the years, Hong Kong has developed into an international
recognised financial centre and has provided many Asian and multinational companies with fund-raising opportunities. Growth
enterprises particularly emerging ones may not always be able to take advantage of these opportunities. A great number of them do
not fulfil the profitability/track record requirements of the existing market of the Stock Exchange of Hong Kong and are therefore
unable to obtain a listing. Therefore the GEM stock is designed to bridge this gap.
22
The PB ratio of a company is calculated by dividing the market price of its stock by the company's per-share book value. PB ratio
essentially shows whether or not a stock price accurately reflects the value of the company.
97
performance. The survey also shows that priority areas for policymakers include
strengthening shareholder rights, improving accounting standards, more effective
disclosure, and stronger enforcement of law.
Another corporate governance study on emerging markets which was conducted by
Credit Lyonnais Securities Asia (CLSA) in 2001, found strong correlations between
corporate governance and stock price performance, valuations and financial
performance ratios, particularly among large capitalized companies. 23 The study shows
that, while the average return on capital employed (ROCE) for the largest 100 firms was
23.5 %, companies that were ranked in the top quarter of corporate governance yielded
an average ROCE of 33.8 % as compared to an average ROCE of 16 % for those in the
bottom half of the corporate governance rankings. Fig. 3.3 shows three and five-year
share price performance of 100 largest GEM stocks by CG quartile.
Fig. 3.3: Three and five-year share price performance of 100 largest GEM stocks by CG
quartile.
1000%
800%
600%
3 year
400%
5 year
200%
0%
1 st quartile
2 nd quartile
3 rd quartile
4 th quartile
Note: Stocks with higher CG scores have been massive out performers especially over three and five years
[Source: CLSA emerging markets (2001)]
In a study on a sample of 17 Russian public companies, Black et.al (2000) find that
good governance practices are strongly correlated to higher firm value measured by the
23
The study consists of fifty-seven questions classified into seven categories: discipline, transparencies, independence,
accountability, responsibility, fairness, and social awareness.
98
ratio of profitability to actual market capitalization.24 Similar results were obtained by
Black et al, (2002) who based their study on an overall corporate governance index
obtained from an extensive survey data set for 540 firms compiled by the Korean Stock
Exchange (KSE).
Using corporate governance rankings for 495 firms across 25 emerging markets
compiled by Credit Lyonnais Securities Asia (CLSA), Klapper and Love (2002) show
that better corporate governance is highly correlated with better operating performance
and market valuation. They also found that firm-level corporate governance provisions
matter more in countries with weak legal environments. Thus, good corporate
governance practices in these countries are more highly appreciated by investors.
Another study by Campos et al (2002), based on 188 companies from six emerging
markets (India, Republic of Korea, Malaysia, Mexico, China (including Taipei), and
Turkey) finds that good governance is rewarded with a higher market valuation even
after controlling for a company’s financial performance and other firm characteristics.
A recent survey on corporate governance and firm performance covering the Malaysian
market also seems to substantiate that there is a willingness by institutional investors25
to pay a premium of 10-50% for companies with excellent corporate governance
practices (Bursa Malaysia and PwC Survey, 2002). The survey found that 15% of the
respondents would pay more than 50% premium for excellent corporate governance
practices. Specifically, 45% are willing to pay 10- 20% premium while 40% would pay
21-50%.
24
The sample represented a large variation in corporate governance practices across firms, i.e some companies adopted a number of
good corporate governance practices while some do not .
25
The institutional investors include unit trust fund and asset managers, large private investment funds including insurers and
government funds.
99
Thus, there is a growing acceptance in the investment community that good corporate
governance is positively associated with firm performance as the mechanisms play a
role in ensuring that managers act in the best interests of shareholders and invest in
projects that maximize shareholder wealth. The following section will discuss on the
performance measures of corporate governance characteristics.
3.4 Performance measurement
The two most common types of performance measurement are accounting and stock
market-based performance measures. Accounting-based performance uses accounting
numbers taken from company’s annual report, which include income statements,
balance sheets and statements of changes in financial position. This approach remains
an important dimension in helping a company to determine how well it is performing in
the marketplace. It also helps managers to effectively plan, control, and achieve the
goals of the company (Reid and Myddelton, 1993).
However, accounting-based performance captures only the historical aspect of firm
performance and is therefore subject to biases from managerial manipulation and
differences in accounting procedures. For that reason, some researchers into firm
performance have used market-based measures. McGuire et al (1986) assert that
market-based measures have the advantage over accounting-based measures of being
less vulnerable to differential accounting procedures and managerial manipulation, and
of representing investors’ evaluation of a firm’s ability to generate future economic
earnings rather than past performance. However, problems also exist with the use of
market-based measures of performance. This is because, since firms face multiple
constituencies, sole concentration on investors’ evaluation may not be sufficient (Pfeffer
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and Selanchik, 1978). As such, both types of performance measurement have their
advantages and disadvantages.
The next two sections will discuss on the accounting and market-based performance
measurement.
3.4.1 Accounting-based performance measurement
Accounting ratios are the most common measurement used in gauging financial
performance of firms. They are known as performance ratios.
3.4.1.1 Performance ratios
Performance ratios are intended to show how well a business is being run. The two most
commonly used ratios are return on net assets (ROA) and return on shareholders’
funds/equities (ROE).
a) Return on net asset (ROA)
The ROA percentage shows how profitable a company’s assets are in generating
revenue. ROA can be computed as:
ROA= Net Income/ Total Assets
ROA tells ‘what the company can do with what it’s got’, i.e. how many dollars of
earnings they derive from each dollar of assets they control. It is an indicator of how
profitable a company is before leverage and is a practical method for comparing
competing businesses in the same industry. ROA deals with return (profit) before tax
101
and before financing charges and looks at total capital employed (net assets).26 ROA
gives an indication of the capital intensity of a company, which will depend on the
industry. Companies that require large initial investments will generally have lower
ROA.
b) Return on equity (ROE)
ROE measures the rate of return on the shareholders’ equity of the common stock
owners. It measures a firm’s efficiency at generating profits from every dollar of net
assets, and shows how well a company uses investment dollars to generate earnings
growth. ROE is the most comprehensive measure of the performance of a company and
its management. It takes into account all aspects of trading and financing, from the
viewpoint of the ordinary shareholder. ROE is equal to a fiscal year’s 27 net income
(after preferred stock dividends but before common stock dividends) divided by total
equity expressed as a percentage.
ROE= Net Income/ Average Shareholders’ equity
3.4.1.2 Stock market-based ratios
Stock market ratios relate earnings and dividends to the number of ordinary shares in
issue and to stock market prices. These ratios use accounting information combined
with market values to compute ratios deemed important to investors. Among the ratios
used are:
26
Net income is primarily an accounting term used in the U.S; in other countries (such as the UK) profit is the usual term. It is equal
to the residual income that a firm has after substracting costs and expenses from the total revenue.
27
A fiscal year is a 12-month period used for calculating annual financial reports in businesses and other organizations.
102
a. Earnings per share (EPS) =Profit after tax/Number of ordinary shares in issue.
EPS are the earnings returned on each share purchased.
b. Price earning ratio= Market price per share/ Earnings per share
The P/E ratio of a stock is a measure of the price paid for a share relative to the
income or profit earned by the firm per share. A higher P/E ratio means that
investors are paving more for each unit of income.
c. Dividend yield (net)= Dividend per share (net)/Market price per share (net)
The dividend yield on a company stock is the company’s annual dividend payments
divided by its market capital, or the dividend per share divided by the price per
share.
d. Dividend cover= Earnings per share/Dividend per share
This is the earnings per share divided by dividend per share
e. Tobin’s Q= Market value/ Asset value
Tobin’s Q28 compares the value of a company given by financial markets with the
value of a company's assets. It is calculated by dividing the market value of a
company by the replacement value of its assets.
3.5 Previous research involving performance measurement
Kamerschen (1968) did the earliest study on company’s performance in 1968. He used
ROE as the performance measurement (See Appendix A). From 1968 to 1978, all the
five researchers randomly identified in that period used accounting type measurements
in their studies. From 1978 to 1990, nine other researchers used both the accounting and
market-based ratios as their performance measures. From 1990 onwards, many
researchers combined their performance measures and they used multiple variables in
their study. Fig. 3.4 shows the percentage of studies done based on accounting, marketbased or both types of measurement for the period 1968 to 2003.
28
Tobin’s Q was developed by James Tobin (Tobin, 1969).
103
Fig. 3.4: Percentage of studies using accounting and market-based performance
measurement.
60
50
40
30
Percentage
20
10
0
Accounting
Market
Acctg. and
market
Source: Current Study
The figure indicates that 44.2 % of researchers used accounting based measurement
while 55.8 % used market-based measurement. Market-based measurement seems to be
more widely used because of the relevance of the figures in analysing performance as it
takes into account the value of the firm on a particular time. Accounting measures were
used mainly to provide uniform and easy comparisons between companies and also
between financial periods. More than a quarter (26.3 %) of researchers used both, as
they wanted to provide a more comprehensive insight and understanding of the
relationship between selected variables and performance.
104
Fig. 3.5: Performance measurement used by previous researchers (frequency and
percentage)
50
40
30
Frequency
20
Percentage
10
0
ROA
ROE
Tobin's Q Share price P.E Ratio
Sales
ROI
Source: Current Study
Fig. 3.5 shows the types of performance measures used by previous researchers
(frequency and percentage) covering over a period of thirty-five years. Almost one half
of researchers used ROA as their performance measure, followed by ROE at 44%.
Nearly one third of researchers used Tobin’s Q as their performance measure. Share
price and Price Earning Ratio (PE Ratio) were also used by about one fifth of
researchers. However, Sales and Return on Investment (ROI) were seldom used as a
measurement as the usage was less than 10%.
The following section discusses corporate governance structures and their link to firm
performance.
3.6 Corporate governance structures and firm performance
This section addresses and examines various corporate governance structures and
evidence on their relationship to performance. Basically, a good corporate governance
structure should provide shareholders with more effective monitoring of the board and
the decision-making process. This should eventually improve performance as the
monitoring mechanisms would ensure that shareholders’ interests were being promoted
(Weir and Laing, 2002).
105
The discussion of corporate governance structures and performance in the following
sections will be based on a number of variables that have been identified in the
discussion in Chapter 2 as being of special importance in the Malaysian context. This is
because they represent major characteristics of board composition and reflect the
diversity in the mix of directors appointed to the boards of Malaysian PLCs. The
variables are; BSZ, BMF, RDU, NEX, IND, WOM, DAF, BUM, SGO, POL, FAM,
ACS, ACM and AUD. A further justification of each variable and evidence on its
relationship to firm performance is contained in the following sections.
3.6.1 Board size (BSZ) and firm performance
One monitoring mechanism that may impede the tendency of managers in pursuing
their self-interested initiatives is oversight by the board of directors. This is often
described as the most critical of directors’ roles (Zahra and Pearce, 1989). In order for
this role to be optimized, besides independence, the size of boards is important because
bigger boards are able to provide wider monitoring on management. Pearce and Zahra
(1992) and Dalton et al (1998) predict that board size is positively associated with firm
performance. In 1997, the California Public Employees’ Retirement System (Calpers)
released a blueprint describing its view of the basic requirements for the structure of
corporate boards. Among other things, Calpers proposed the size of boards to be nine or
ten members.
Previous research has shown that there are both advantages and disadvantages of having
larger and smaller boards. Chaganti et al (1985), who studied the relationship between
board size and bankruptcy, found that non-failed firms in their sample tended to have
larger boards than the failed firms. Finkelstein (1994) argued that the main advantage of
a larger board is that it has more problem-solving capabilities as the burden of directors
106
are equally shared among them. Goodstein et al (1994) assert that board size might be a
measure of an organization's ability to form environmental links to secure critical
resources.
On the other hand, Jensen (1983) argue that small boards are more effective and
suggested that when boards get beyond seven or eight people; they are less likely to
function effectively. Another study by Jensen (1993), whose research was based on
sample of US firms, asserts that the ability to process problems competently reduces as
board size becomes larger. This is known as the ‘board size effect’. Hermalin and
Weisbach (2001) affirm that larger board size might also make it difficult for the
members to use their knowledge and skills effectively due to problems of coordinating
their contributions and this might inhibit performance.
Zahra and Pearce (1989) argue that there might be a threshold where board size may
negatively affect performance. This was reaffirmed by Lipton and Lorsch (1992) who
pointed out that board size might have an inverse correlation with the degree of
effective monitoring provided by the board of directors. This means that effective
monitoring on management would decrease for larger board sizes and this could affect
firm’s performance. They further recommended limiting the board size to fewer than
seven or eight members. Chin and Casey (2004), who investigated the effect of board
size on firm performance for a sample of firms over a five-year period between 1997
and 2001, found that the performance of firms fluctuates between three and nine
members and then waivers downward once the board size reaches ten members. The
level of board size likely to provide effective monitoring appears to be optimal at
around nine members, which is when performance is the highest.
107
With regards to board size requirements in Malaysia, the MCCG (2000) argued that
board effectiveness depends on the board size. However no specified numbers of
directors for the board are recommended. The current study shows that the board size of
Malaysian PLCs is between seven to nine members. Therefore, it is in line with the
above-mentioned arguments that a board should not be too big or too small to be
effective.
3.6.2 Board meeting frequency (BMF) and firm performance
As mentioned in the previous section, the main roles of boards of directors are to
monitor management. This is due to the assumption that managers are self-interested
and prone to moral hazard. A higher BMF might efficiently observe managerial
behaviour so that it is in accordance with shareholders’ goals. This would probably
reduce agency problems and enhance firm performance. Conger et al (1998) assert that
the time spent on board meeting is an important resource in improving the effectiveness
of a board. A sufficient and well-organized period of time together between boards of
directors and management would enhance the degree of cooperation and coordination.
This would certainly improve the effectiveness of a board. Hence, the regularity with
which boards meet is often used as a proxy in monitoring management and measuring
board activity (Evans et al 2002).
The importance of BMF is reflected in the Listing Requirements of Bursa Malaysia
(Para 7.29), which stated that, “a director is automatically disqualified as a director if
he/she is absent from more than 50% of the total board meetings held in a year” (Bursa
Malaysia Listing Requirements, 2001). Although attendance at board meetings is only
one indicator of a director’s contribution to the company and does not show whether a
director actually contributes actively to board discussion, international best practice
108
suggests that this should be a standard feature in assessing the effectiveness with which
management is monitored (Standard and Poor’s, 2003).
However, Jensen (1983) asserts that higher board activity, such as more meetings is a
likely corporate response to poor performance. He argues that boards of a wellfunctioning firm should be relatively inactive and exhibit few conflicts. This is because
frequently scheduled meetings generate costs including managerial time, travel
expenses, administrative support and directors' meeting fees. All these expenses would
eventually reduce profits and thus firm performance.
In the Malaysian context, the MCCG (2000) recommends that boards should meet
regularly. Even though there is no stipulation on the number of meetings, it is difficult
to positively explain the board monitoring of a company, which has less than four
meetings a year. As such, the Bursa Malaysia listing rules indirectly fixes the minimum
number of board meeting to four times in a year by requiring a board meeting to
approve the quarterly results.
A survey conducted by Bursa Malaysia and
PriceWaterhouse Coopers in 2002 indicates that 91% of the respondents have board
meetings more than four times a year and 36% have six to seven board meetings a year.
This is an improvement compared to an earlier survey done by the same group in 1998
in which only 63% held four board meetings and 37% held three or less board meetings
a year.29 The figures indicate that there is an increase on the awareness of having more
boards meetings. The emphasize on BMF indicates that more meetings could increase
performance.
29
Finance Committee on Corporate Governance, “ Report on Corporate Governance”, February 1999, p 260
109
3.6.3 Role duality (RDU) and firm performance
RDU occurs when one individual holds the two most dominant posts in corporation,
namely those of Chief Executive Officer (CEO) and chairman.30 A CEO is a full-time
post and is responsible for the day-to-day running of the company as well as setting, and
implementing corporate strategy. In contrast, the key role of the chairman is to monitor
and evaluate the performance of executive directors, including the CEO. An individual
who holds the two positions is more likely to advance personal interests to the
disadvantage of the firm (Jensen, 1986). Besides that, the board’s effectiveness in
performing its governance function may be compromised because the CEO will be able
to control board meetings, select agenda items, and unduly influence the selection of
board members (Haniffa and Cooke, 2002)
Theoretically, there are two contrasting views with regards to the issue of RDU based
on agency and stewardship theories. Proponents of agency theory argue that the
chairman has to be independent in order to monitor the behavior of the CEO and
management. The theory therefore supports the separation of the two roles. The
separation is indispensable so as to provide the essential check and balances over
management’s performance (Stiles and Taylor, 1993). This is in line with The Cadbury
Report (1992), which recommended that there should be a clearly accepted division of
responsibilities at the head of the company to ensure a balance of power. The separation
of the roles dilutes the power of the CEO and increases the board's ability to
appropriately execute its oversight role.
30
Combining the CEO and chairman roles was common in UK corporations and US. Coles et al. (2001) found 80 % cases of role
duality for US boards while O’ Sullivan (2002) found role duality to be present in 33 % of UK boards. Only about 10-20 % of
Japanese, Italian and Belgium companies combine the roles of CEO and Chairman (Dalton and Kessner, 1987).
110
On the other hand, stewardship theory asserts that separation of the two roles is not
crucial since many companies are well run with combined roles and have strong boards
fully capable of providing adequate checks. Muth and Donaldson (1998), point out that
the theory recognizes a range of non-financial motives of managers, for example need
for improvement, recognition and intrinsic job satisfaction. Stewart (1991) asserts that
RDU enhances decision making to permit a sharper focus on company’s objectives and
promote more rapid implementation of operational decisions.
Similarly, Dahya et al, (1996) believe that RDU allows the CEO with strategic vision to
shape the destiny of the firm with minimum board interference. This is because role
duality offers a clear direction of a single leader, and delivers a faster response to any
external events (Boyd, 1995). Furthermore, a CEO-chair would be expected to have a
greater knowledge of the firm and its industry and have a greater commitment to the
organization. Efficiency in monitoring management could be enhanced through CEOChairman duality because less contracting is needed and information asymmetry is
reduced (Haniffa and Cooke, 2002). There was some evidence that companies that
practice RDU perform better than those with separate leadership (Donaldson and Davis,
1991).
Overall, there are both advantages and disadvantages associated with RDU. Some
companies perform well under this structure, but others do not. Eventually, it comes
back to the question of integrity, responsibility and trustworthiness of the board of
directors. However, many countries that developed their own Code of Corporate
Governance including Malaysia recommended that the role be separated for the reason
that the separation could avoid conflict of interests in managing companies. As such,
111
separating the two roles would lead to better monitoring of management and enhance
firm performance.
3.6.4 Non-executive directors (NEX) and firm performance
Board composition is defined as the proportion of NEX to the total number of directors
(Shamser and Annuar, 1993).31 Board composition is an important mechanism of
corporate governance because the presence of NEX represents a means of monitoring
the management and of ensuring that they are pursuing policies that are consistent to
shareholders' interests (Fama, 1980). NEX possesses two characteristics that enable
them to fulfill their monitoring function. First, they are concerned to maintain their
reputation in the external labour market (Fama and Jensen, 1983) and second their
independence (Cadbury, 1992). Since shareholders elect the board of directors, the
directors have a duty to represent them in monitoring the management’s activity. As
executive directors are directly involved in managing the company, the monitoring role
falls on NEX (Fama and Jensen, 1983).
The importance of NEX has been evidently established by the various number of
corporate governance reports in the U.K. The Cadbury Report (1992) suggested that at
least three board members should be NEX. Six years later, the Hampel Report (1998)
recommended that one-third of board seats should be reserved for NEX. The Higgs
Report (2003) then required that a majority of the board, excluding the chairman, should
be independent NEX. These changes suggest that the influence of NEX, in terms of
number and proportion on the board, has increased over the past decade.
31
Non-executive directors include independent non-executive directors and other directors who are not a full-time employee of a
firm.
112
Mace (1986) asserts that NEX is needed on the boards, as they are perceived to be more
independent than executive directors. Brickley and James (1987) affirm that NEX are
able to reduce managerial utilization of perks such as remuneration and expenditure of
the Chief Executive Director (CEO) and top management. This could eventually help
firms to lower their costs and consequently enhance firm performance. Kesner and
Johnson (1990) and Grace et al (1995) state that NEX on boards are essential as their
appointment are able to reduce environmental uncertainties by bringing in specialized
skills. Therefore, they are often appointed to board committees such as audit,
remuneration and nomination (Stiles and Taylor, 1993). Their participation enhances
the board’s effectiveness and contributes to the attainment of higher performance
(Haniffa and Cooke, 2002).
However, large number of NEX with diverse interests might reduce the economic
flexibility of a firm (Sethi, 1979). This is because, more NEX could stifle strategic
actions as the CEO spends unproductive time explaining management’s decisions and
persuading NEX to support them (Goodstein et al., 1994). Baysinger and Butler (1985)
suggest that NEX impose excessive monitoring on management and thus create
uncomfortable working environments. These could result in conflicts between them
and render the board ineffective (Demb and Neubauer, 1992). Patton and Baker (1987)
affirm that NEX lacks the business knowledge to carry out their duties. This is possibly
due to their difficulties in understanding the complexities of monitoring company’s
operations and therefore they depend much on the CEO and executive directors for
updates on company’s information and operations. As a result, it is difficult for them to
be totally effective. Overall, the relationship between NEX and firm performance were
inconsistent and may be vague because the linkage depends on other numerous factors
(Daily and Dalton, 1993). Thus there are firms that perform well with less NEX and
others that perform well with majority NEX. Although both have arguments for and
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against them, most authors are in favor of NEX dominated boards. Nevertheless, in the
long run, firm performance depends on the quality of directors, the specialized skills
that they brought into the firm and how the boards galvanize these ingredients to attain
firm performance.
3.6.5 Independent directors (IND) and firm performance
An "independent" director is one who is independent of management and free from any
business or other relationships, which could significantly interfere with the director's
ability to act in the best interests of the company (Bursa Malaysia Listing Requirements,
2001). Their importance in establishing boards’ independence and enhancing
performance can be traced from the new rules on IND, which were introduced
throughout Asia in the aftermath of the AFC. IND is important in mitigating conflicts
between shareholder groups and implies that the interests of minority investors are best
protected (Anderson and Reeb, 2004).
Theoretically, the monitoring role of IND can be largely derived from agency theory
(Fama and Jensen, 1983; Jensen and Meckling, 1976). The theory argues that the board
can reduce agency costs and maximize shareholder value by being actively involved in
the monitoring of managerial and firm performance (Fama and Jensen, 1983). All
corporate governance codes and guidelines, including Cadbury Report (1992), Higgs
Report (2003) and Sarbanes-Oxley Act (2002), insist that IND should play an important
role in boards’ independence. The MCCG (2000) also emphasises the importance role
of IND in monitoring management and to ensure shareholders’ wealth maximisation.
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Empirically, Byrd and Hickman (1992) assert that on average tenders offered to bidders
with majority IND earn roughly zero stock price returns. However, bidders without such
boards suffer statistically significant losses of 1.8 per cent on average. This result
suggests that companies with relatively more IND tend to be more profitable than those
with fewer IND. This may be due to IND acting to hold back the tendency of CEOs to
build untenable financial empires. Dennis and Sarin (1997) claim that firms that
substantially increase the proportion of IND have above-average stock price returns.
This indicates that the presence of more IND could most probably add value to the firm.
Conversely, several studies suggest that firms with more IND perform worse than those
with relatively fewer IND. For example, Agrawal and Knoeber (1996) find a negative
correlation between the proportion of IND and Tobin’s Q index. Yermack (1996) report
a significant negative correlation between the proportion of IND and Tobin’s Q.32 This
is consistent with evidence established by Bhagat and Black (1997), that a high
proportion of independent directors are strongly correlated with slower past growth.
Klein (1998) finds a significant negative correlation between a measure of change in
market value of equity and the proportion of IND.
Overall, there are mixed results on the relationship of IND and performance. This could
be due to inadequate roles of IND and they may not be truly independent (Baysinger
and Butler, 1985). Despite that, all corporate governance codes and guidelines prefer
more IND to monitor management because they are seen to be more independent than
inside directors.
Tobin’s Q is the ratio of the market value of a firm’s assets to the book value of its assets. It is often approximated by the ratio of
the market value of a firm’s long-term debt and equity to the book value of its long term debt and equity. Tobin’s Q is used as a
measure of good management because high Tobin’s Q suggests that a firm’s managers have produced greater market value from the
same assets.
32
115
3.6.6 Directors with accounting or finance qualification (DAF) and firm
performance
The Blue Ribbon Committee (1999), the Ramsay Report (2001) and the Smith
Committee (2003) all proposed that company’s boards should have members consisted
of various expertise to steer companies and enhance performance. They should be
knowledgeable of their company’s business and operating environment. Although the
areas of expertise were not mentioned deliberately, all of those reports suggested that
directors should have accounting or finance related qualification in order to be
appointed as audit committee members. The underlying basis of this recommendation is
that knowledgeable board members are in a better position to understand their main role
of monitoring management. McMullen and Raghunandan (1996) assert that the
qualifications of board’s members have been found to be crucial in determining their
effectiveness in carrying out their duties. Hence, the appointment of DAF is considered
as indispensable especially when dealing with the external auditor and to carry out their
other board’s task such as checking on financial statements and reports.
Empirically, there were no studies that directly relate DAF with performance. However,
there are studies that examine the relationship between audit committee members with
accounting or finance qualifications and performance. These may provide some insight
into the likely relationship for boards’ member with the same qualification.33 For
example, McMullen and Raghunandan (1996) found that problem companies, who had
either been subjected to enforcement actions by the authorities and/or with material
restatements of quarterly earnings were much less likely to have an accountant on the
boards and audit committee.
33
This will be discussed as hypothesis development for audit committee members with accounting or finance qualifications and
performance in Chapter 5.
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The implication of the above discussion is that DAF provide additional support for
external auditors when discussing board’s related issues during meetings with
management. Hence, boards with more DAF are more likely to contribute to the
monitoring role of the board. More directors with such qualifications would definitely
be an advantage to the company and this could enhance performance.
3.6.7 Women directors (WOM) and firm performance
Burke (1997) asserts that increasing the number of qualified women serving on
corporate boards is likely to have effect on board effectiveness, which could then
enhance firm performance. This is because there are not enough qualified men to fill
available board seats and men currently serving on boards do not have enough time to
serve on all the boards they are invited to join. They also argued that the presence of
WOM helps a board execute its strategic function because their experience is often
closely aligned with company needs.34 Bilimoria and Wheeler (2000) assert that WOM
help foster competitive advantage by dealing effectively with diversity in labour and
product markets.
However, the percentage of board directorships held by WOM is relatively small
compared to a traditional board. In an earlier study by Catalyst (1993), 82% of the 50
most valuable Fortune 500 firms were found to include at least one-woman director on
the board. Two years later, Catalyst (1995) reports that of the top 100 US companies in
terms of revenue, 97 had at least one-woman board member. Based on the 1993
Ashridge survey of the Top 200 UK companies, it was found that 49 companies (25%)
have women on their boards: an increase from 21 companies (11%) in 1989. The results
34
For example, she noted that women might have a slight edge over men in strategic planning.
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also indicate that WOM are much more likely to be non-executive directors.35 Conyon
and Mallin (1997), using data on the top 350 UK companies, find that there is ample
evidence of serious under representation of women in boardroom positions for the
leading United Kingdom companies.36 Furthermore, whilst the percentage of WOM on
the board is less than 5%, they are far less likely to be executive directors in these
companies than are their male counterparts.37 Several reasons have been offered to
explain this, including conflicting director selection process, which places too much
dependence on the ``old boy network'' and difficulties in finding qualified women
(Conyon and Mallin, 1997). Due to the under representation of WOM, there has been
relatively little research conducted on women directors to performance (Burke, 1997).
Shrader et al. (1997) who examined firm financial performance with gender diversity at
the middle-and upper-management, and at the board of director levels for large firms,
find in general, a positive link between WOM in management positions with firm
financial performance. They explained the positive performance relationship by
suggesting that these companies were recruiting from a relatively larger talent pool, and
subsequently recruited more qualified applicants regardless of gender. Burke (1997)
finds significant correlation coefficients between the number of WOM and revenue,
assets, number of employees and profit margins for Canadian firms. This study
indirectly shows that big firms are appointing more WOM due to their bigger board
size. In a recent study of board diversity by Erhardt (2003), the results supported the
hypothesis stating that executive board of director diversity was positively associated
35
Only 11 (or about 18%) of the women on the board were executive directors in 1993.
By market capitalisation (referred to as the FT-SE 350) to examine the incidence of female representation in the boardroom, In
our analysis we divide this sample into the top 100 companies (the FT-SE 100) and the next 250 companies (the mid-250).
37
For the FT-SE 350 companies it turns out that only 2.49% of the board is women. The figure is slightly higher in the FT-SE 100
companies, which stands at 3.65%. Again, this conceals the important fact that women are more likely to be non executive, rather
than executive, directors.
36
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with both ROA and ROE. Thus, diversity with boards of directors appeared to have an
impact on overall organizational performance.
3.6.8 Bumiputra as directors (BUM) and firm performance
The current study includes the percentage of BUM as an aspect of examination due to
the enactment of NEP in 1971, which has induced and promoted the growth of
bumiputra professionals in the Malaysian corporate sector. One of the objectives of the
NEP was to raise the economic status of bumiputra, which despite constituting the
largest population group in Malaysia, still lacking in the business and corporate sectors.
As a result of the policy, companies with a substantial proportion of shares owned by
government agencies and GLCs have the tendencies to appoint qualified bumiputra to
hold positions as managers and board of directors.38
The NEP mandated that at least 30 percent of any new shares on offer by any company
seeking listing on Bursa Malaysia should be sold to the bumiputra or to mutual funds
owned by them. The objective was to increase their portion of equities in the corporate
sectors, thus giving them control over more corporations (Yeboah-Duah, 1993). As a
result, many qualified bumiputra professionals were employed in government
companies and agencies. Eventually, when they had acquired the appropriate skills and
experience, some of them were appointed as chairmen, CEOs or directors in GLCs.
Besides that, NGLCs also appointed them as a chairman or director because their
appointment was seen as fulfilling the aspirations of the NEP. Due to the favourable
terms offered exclusively for bumiputra outlined under the NEP, appointing BUM
38
As mentioned in section 2.1, the establishment of the NEP in 1971 has promoted the growth of bumiputra corporate leaders,
entrepreneurs and professionals in the Malaysian corporate sectors. With the assistance of the government, they have become an
important group within Malaysian industry and commerce.
119
would be seen as supporting the government’s efforts in the redistribution of corporate
wealth.
Theoretically, based on cultural and societal values as suggested by Hofstede (1991),
BUM are classified as having high power distance and are low on masculinity and
individualism. They were also often perceived as focusing on the short-term. Abdullah
(1992) who compared bumiputra and non-bumiputra managers, find that the former
have high uncertainty avoidance which is reflected in their values of non-assertiveness,
conflict avoidance and uneasiness in dealing with ambiguities and uncertainties.
Haniffa (1999) assert that bumiputra managers might be expected to be relatively
secretive compared to their Chinese counterparts. High secrecy implies an
individualistic way of running companies and this might affect performance. A more
recent study by Abdul Rahman and Mohamed Ali (2006) find that BUM have no effect
in mitigating earnings management in Malaysia, possibly due to less exposure and their
individualistic behaviour.
Thillainathan (2001) argue that the presence of BUM in the Malaysian corporate sectors
could most significantly be felt through political and business networks. As politics in
Malaysia is dominated by bumiputra, non-bumiputra could protect and enhance their
interests in the corporate sectors by collaborating and joining ventures with bumiputra.
By appointing and accepting them as directors, they paved the way to access outside
resources and funds, which they could not otherwise approach. On the other hand, as
latecomers, BUM could be a liability to firm performance as they have less knowledge
and experience in the corporate sector
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However, the appointment of BUM especially in GLCs is very much related to resource
dependence theory. This theory sees organizations as being entrenched in networks of
interdependencies and communal relationships (Pfeffer, 2003). The fundamental
argument of this theory is that firms attempt to exert control over their environment by
co-opting the resources needed to survive. In this context, BUM would provide the
networks and resources needed, exchanging vital information and establishing
legitimacy with the government. Their close relationships to government entity and
policy-makers provide that extra advantage and their presence as directors could
enhance company’s performance.
3.6.9 Senior government officers as directors (SGO) and firm performance
In Malaysia, many SGO were appointed as directors or chairman in GLCs. As
mentioned in Chapter 1, GLCs were established as a result of privatisation and
corporatisation exercises of government entities that were carried out in the early
eighties. As a result, many government enterprises were eventually listed on the Bursa
Malaysia.39 Inadvertently, boards of GLCs are considered as being situated between the
government and other external stakeholders on one side, and the company's
management and state on the other. In this context, as the majority shares are held by
the government, it is difficult for the board to exercise their decision and judgement on
corporate matters without consulting the government (Ramirez and Tan, 2004).
However, the good part is, the board can serve as a communication bridge between the
management and the government in relation to matters of policy and related issues. This
would indeed save the firm on costs of getting external resources.
39
However, the government through its investment arms (Khazanah Nasional Berhad) still holds substantial number of shares in
each of the companies to ensure that the policies of privatised government firms remain in line with the original objectives of
NEP.Among corporate giant created were Telekom Malaysia Berhad, Tenaga Nasional Berhad, Malaysian Airline Systems, Sistem
Television Malaysia Berhad, etc.
121
However, being a director of GLCs creates a dilemma for these officers because their
decisions might have been dictated in accordance with government policies. Hence,
complacency might seep in and this could hamper their efficiency and thus firm
performance. Nevertheless, this is not always the case. There are GLCs that show good
performance with them as directors. In Singapore, for example, SGO on boards of
GLCs have shown high levels of efficiency and profitability of the enterprises
concerned (Ramirez and Tan, 2004). This indicates that, although GLCs are controlled
by the government, they could perform well if they practice good governance.
Williamson (1984) demonstrates that having a director who possesses a regulatory
expertise may not only reduce uncertainty, but may also reduce the transaction costs.
This is because, information supplied by these directors about the bidding process for
government contracts or influence over proposed regulation may actually reduce the
costs of transactions between regulators and the firm. Firms with experienced SGO
directors would obviously gain more benefits with their knowledge of government
procedures and insights in predicting government actions (Agrawal and Knoeber, 2001).
NGLCs also appoint SGO as a means to acquire outside resources. Theoretically, their
appointment as directors is associated to resource dependence theory. Individuals with
community influence and highly regarded are appointed to be board members as they
are considered to be an important resources to the firm (Hillman, 2003). Their existence
might actually tie up these companies into vital networks and sources of information
within government that it would otherwise be largely cut off from, and this could well
serve to support its efficiency and thus performance. They not only provide information
and potential access, but also contribute legitimacy to the organization (Hillman et al,
2000). SGO appointed as boards members of GLCs and NGLCs are obviously be an
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advantage to the firms as they are themselves part of the government’s policy makers.
However, their presence on boards as directors would not guarantee that firm
performance would be enhanced. Thus, this study will investigate whether there is any
relationship between senior government officers as directors and firm performance both
in GLCs and NGLCs.
3.6.10 Politicians as directors (POL) and firm performance
As discussed in many literatures, government regulation creates uncertainty and many
firms have sought to “co-opt” government by creating linkages (Hillman, 2005). This
co-optation often comes in the form of politicians and other individuals appointed to the
firm’s board of directors. Watts and Zimmerman (1983), state that corporate political
strategies40 recognize the interdependence between business and government in which
business is partly dependent on government for the environment in which it operates
and government on business for taxes and employment. Politicians are often the linking
bridge between the government and business entities.
Watts and Zimmerman (1983) argue that larger firms face more intensive political
oversight and so politics is important to the firm. They suggest that firms with
politicians as directors will have more advantages than firms that are without. This is
because their prior participation in government and association with important decision
makers enables them to make significant contribution to firms. Schuler et al (2002) in
their study of political connection of firms to the policymakers, find that politically
40
Corporate political strategies are those proactive actions taken by firms to create a public policy environment by which firms
create exchange with political decision makers in government that are favourable to them (Baysinger, 1984).
123
active firms combine tactics41 to create connections with the government. This
phenomenon could be linked to resource dependence theory in which the appointment
of directors is based on their valuable contacts with the policymakers.
Agrawal and Knoeber (2001) who studied a sample of large US manufacturing firms
using both general and specific measures of political involvement found that the
presence of POL is positively related to direct measures of firm performance. They
argue that politics might affect firm performance if there are greater government
purchases, trade policy and environmental regulation issues affecting the firm. Hillman
(2005), who compared the boards of two groups of firms-those from heavily and less
regulated industries found the former group, had more POL as directors. This indicates
that heavily regulated industries need more POL to ease their relationship with policymakers.
However, Ramirez and Tan (2004) asserts that appointing POL could hamper firm
performance as most of them do not possess appropriate expertise and skills in strategic
goals, firm’s operations and products. Since they were typically appointed as NEX, they
have limited access to management except during board meetings. As such, their
contribution to firm performance raises reservations. Furthermore, it has been widely
known that POL in GLCs have incentives to control GLCs to achieve economically
efficient objectives for political purposes, such as avoiding ‘social instability’ that may
arise as a result of high unemployment (Shleifer and Vishny, 1994). In other words,
POL tends to promote over employment in firms. An example of this in the Malaysian
context is MAS, which has a significant number of political appointments on its board
and hires more workers than are needed at the expense of firm performance.
41
The three most prevalent and visible ones are; political contributions, using staff lobbyists and hiring outside lobbyists. The study
used new estimation techniques, alternating logistical regression, which combined all the three political tactics into a single
multivariate phenomenon.
124
In the context of Malaysia, politicians in office and ex-politicians are appointed as
directors to facilitate the relationship between firms and the government. The two most
notable policies implemented by the Malaysian government that gave rise to a need for
political acquaintances were the NEP (1971) and the Industrial Coordination Act
(1975). The ICA (1975) requires a company engaging in any manufacturing activity to
obtain a manufacturing license.42 However, to secure a license, specific requirement has
to be fulfilled under the NEP. This is where politicians as directors would play their
roles in mitigating the situation with the government. As there were more politicians
appointed as directors in Malaysian GLCs compared to NGLCs, observably their
corporate governance structures might differ. However, the degree of dissimilarity is yet
to be investigated.
3.6.11 Family members as directors (FAM) and firm performance
Claessens et al (2000a) affirm that a large proportion of listed companies in East Asia
are still under family ownership. They argue that a single shareholder has control in
more than two-thirds of listed firms in East Asian countries and that 60% of managers
in these companies’ are members of the controlling family. As such, family members
are often represented on a firm’s board and there is generally less separation between
those who own and those who manage capital (Nicholls and Ahmed, 1995). This
phenomena has led to a number of problems associated with family control such as the
increased likelihood of the abuse of managerial power and could eventually lead to a
moral hazard conflict between the controlling family and outside shareholders
(Claessens et al, 2000b).
Manufacturing companies with shareholders’ funds of RM 2.5 million and above or engaging 75 or more full-time employees
need to apply for a manufacturing license under the ICA (1975).
42
125
The appointment of FAM could involve a possible misuse of managerial power by
building on entrenchment (Gomes-Mejia, 2003). This appointment could create a new
set of agency costs, including mutual monitoring, minimum supervision on managers,
excessive compensation, related party transactions and special dividends. Research from
North America (Morck et al, 1988) provides evidence of the negative effect of a
controlling family on firms’ performance.
However, Demsetz and Lehn (1985) argue that family controlled firms represent a
special class of large shareholders that may have a unique incentive structure and
powerful motivation for effective management. This is because, the family’s wealth is
so closely linked to firm’s welfare and thus family members may have strong incentives
to monitor managers and minimize the free-riding problem inherent with diffused
shareholders. Anderson et al, (2003) suggest that these characteristics can improve
agency conflicts between the firms’ debt and equity claimants and reduce the agency
costs of debt. A number of more recent empirical studies in Hong Kong and South
Korea provide evidence that FAM is associated with better performance (Chang et al,
2003). Barontini and Caprio (2006), who investigated the relationship between
ownership structure and firm performance in Continental Europe using data from 675
publicly traded corporations in 11 countries, report that family control is positively
related to firm value and operating performance.
Anderson and Reeb (2003) argue that family members as directors have several
incentives to reduce agency costs and enhanced firm performance. First, free rider
problem could be minimized, as there is a greater degree to which the benefits and costs
of monitoring the firm are borne by the same owner. Second, a family’s special
technical knowledge concerning a firm’s operations may put it in a better position to
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monitor the firm more effectively. Lastly, it is maintained that family firms make
decisions on a much longer time horizons than non-family firms. This is because they
view the firm as an asset to be passed on to subsequent generations (Chami, 1999). As
such, they are more likely to maximize the overall value of the company.
In the context of Malaysian firms, FAM is more obvious in NGLCs than GLCs because
these companies were family-owned companies before being listed on the Bursa
Malaysia. Subsequently, after being listed, as majority shareholders, they appoint family
members as managers and executive directors. This is to ensure that they won’t lose
control of these companies. As such, this study will examine whether the percentage of
family members as directors affects performance.
3.6.12 Audit committee size (ACS) and firm performance
The report of the Cadbury Committee on Financial Aspects of Corporate Governance
(Cadbury, 1992) lays great emphasis on the role of AC in the attainment of sound
corporate governance with regard to financial reporting and accountability. Collier
(1992) asserts that the reasons for establishment of an audit committee are to assist the
auditors in the reporting of serious deficiencies in the control setting or management
weaknesses, assist management to discharge its responsibilities for the prevention of
fraud and examine other irregularities and errors.
The recent regulations put forward by major stock exchanges stipulating that audit
committees should comprise of at least three members implies that governing bodies
believe that ACS is an essential governance mechanism in monitoring the internal
control and overseeing the accounting process. This suggests that more members could
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provide effective monitoring on audit matters more efficiently and potential problems in
the financial reporting process will be revealed and resolved.
Pincuss et. al. (1989), suggests that audit committees are an expensive monitoring
mechanism and that firms with greater agency costs are potentially more willing to bear
these expenses. In this context, firms with larger audit committees are willing to devote
greater resources to oversee the financial accounting process. A firm with an audit
committee composed of only a couple of members would on average have less time to
devote to overseeing the hiring of auditors, inquiring management and meeting with
internal control system personnel. Although both the BRC (1999) and the Smith
Committee (2003) recommended a minimum ACS of three NEX, companies may
choose to have more than three members. Therefore, it is expected that firms that
commit more director resources to their audit committees to be more serious in the
monitoring of the financial reporting process and internal control which would leads to
firm performance (Anderson, et.al., (2004).
Although there was no prior empirical evidence indicating that ACS is associated with
performance, by having a bigger ACS, serious deficiencies in internal control could be
uncovered. In addition, bigger audit committee size would provide members with more
time and resources in prevention of fraud and corrects management weaknesses. These
would lead to less mistakes and mismanagement and would eventually enhanced firms’
performance (De Zoort et. al., 2002).
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3.6.13 Frequency of audit committee meetings (ACM) and firm performance
The importance of audit committee as a corporate governance mechanism has been
emphasized in recent years (Verschoor, 2002). It provides on behalf of the board of
directors oversight responsibility for the firm’s financial reporting process. According to
the Blue Ribbon Committee Report (BRC), the audit committee is the ‘ultimate mirror’
of the financial accounting reporting system (NYSE and NASD, 1999). The audit
committee also questions management, internal and external auditors and overseeing the
audit process and ensuring the integrity of financial reporting (Menon and Williams,
1994). As such, a higher frequency of audit committee meetings would help in the
process of monitoring management and thus enhancing firm performance.
However, there were no empirical studies that directly examined the link between the
number of ACM with performance except studies that investigated the relationship
between frequency of ACM with other variables such as firm size, outside directors,
material restatements of quarterly earnings, dominant CEOs and ‘big-four audit firms’.
Menon and Williams (1994) found that frequency of ACM has been found to increase
with firm size and with increases in the proportion of outsiders on the board. This show
that bigger firms needs higher frequency of ACM to deal with more diverse and
complicated business transactions. The increase in proportion of outsiders on the board
indicates that more NEX are likely to be appointed as audit committee members and
this possibly increases the frequency of ACM.
Collier and Gregory (1999) found that the number and duration of ACM to be
negatively related to the presence of a dominant CEO and positively related to ‘big 5
audit firms’. The findings show that a dominant CEO place less priority on audit
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committee meetings while the positive relationship indicates that audit committee
members would frequently meet to discuss audit matters if their external auditors are the
‘big 5 audit firms’. Abbott and Parker (2000), find a positive association between
independence of audit committee members and the number of ACM held. This shows
that the frequency of ACM is correlated to the independence of the members. An audit
committee member is considered as independent if he/she has no relationship to the
corporation that may interfere with the exercise of their independence from
management and the firm. Hence, all the above findings demonstrate that higher
frequency of audit committee meetings is associated to higher firm performance.
Turley and Zaman, (2004) affirm that the number of audit committee meetings may
depend not only on the size and nature of the company’s business, but also on the job
scope of audit committee. This indicates that more meetings allow a thorough
examination on audit matters and the job scope could be covered comprehensively.
Gendron et. al. (2004), conducted a field study research on key aspect of the work
carried out by audit committee members at three large public corporations listed on the
Toronto Stock Exchange (TSX), found out that key matters that audit committee
members emphasized during audit committee meetings include accuracy of financial
statements, the quality of work performed by auditors and the effectiveness of internal
control. As all of these job scope need considerable time, more ACM would allow extra
attention be given to reducing fraud and cutting company’s losses, thus enhancing
firms’ performance.
It has been recommended in many Codes of best practices that there should be not fewer
than three ACM per annum because audit committees should regularly receive and
130
review reports on internal control and other audit matters.43 In Malaysia, the Bursa
Malaysia Listing Requirements has in Para 15.18(d) stipulated that the audit committee
has the right to have direct communication channels with the external auditors,
excluding the attendance of the executive members of the committee, whenever deemed
necessary. These rules indirectly suggest that extra meetings can be arranged with the
external auditors. As such, there should be sufficient number of meetings as the audit
committee’s role and responsibilities require.
3.6.14 Big-four auditors (AUD) and firm performance.
Auditing is an important form of monitoring used by firms to reduce agency costs and
information asymmetries that exist between managers and shareholders by allowing
outsiders to verify the validity of financial statements (Watts and Zimmerman, 1983).
The effectiveness of auditing is expected to vary with the quality of the auditor. Audit
quality is defined as the joint probability of detecting and reporting financial statement
errors, which will partially depend on the auditor's independence.
Theoretically, the three interrelated sources of demand for quality-differentiated audits
are agency demand, information demand and insurance demand (Beattie and Fearnley,
1995). Agency demand explains the demand for an audit in terms of a bonding
mechanism that reduces the agency costs. The information demand addresses the
circumstances when management might seek to use the selection of a particularly
creditable auditor in order to signal their integrity (Dopuch and Simunic, 1980). The
insurance demand for an audit refers to the avenue an audit opens up for investors and
On matters to be discussed, audit committee should be able to review and report on: the external auditor’s audit plan, evaluation
of the internal control system, auditor’s audit report and any assistance given by the employees to the external auditors.
43
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creditors to seek redress from the auditor for any losses they might suffer as a result of
audit failures, with higher quality auditors having more insurance capacity.
The supply of quality-differentiated audits can be motivated by the theory of product
differentiation (Simunic and Stein, 1987), where greater expertise implies greater
credibility and audit quality. Audit quality is likely to be judged on the basis of
observable supplier characteristics, such as the firm’s size and name. Reputable firms
will produce high quality audits because consumers recognize and reward the
investment they have made in developing a reputation for quality (Palmrose, 1986a).
Reputable firms have more incentive to produce quality audits and maintain
independence because they have large market shares (Craswell and Taylor, 1991),
Several studies have investigated the notion that AUD provide higher-quality audits
than non-Big Four auditors (example Simunic and Stein 1987; Palmrose 1988); have
found that the quality of audit work is associated with the AUD.44 This is because AUD
are the largest audit firms, and theory suggests that audit firm size is a proxy for audit
quality (Dopuch and Simunic, 1980). Their larger client base means AUD have more to
lose in the event of a loss of reputation. This larger potential loss results in a relatively
greater incentive to be independent compared to non-AUD that have a much smaller
client base. Hence, audit work by AUD is associated with firm performance.
Hirst (1994) finds that auditors are sensitive to eamings management and tend to
concentrate on managerial incentives to overstate eamings. The higher quality and
credibility of AUD will tend to reduce incidence of earnings management. Kinney and
44
Accounting firms are codified in the present paper by their name at the time of audit. There were eight international UK firms in
1985(Arthur Anderson, Arthur Young, Coopers and Lybrand, Ernst and Whitney, Delloite Haskins and Sells, Peat Marwick, Price
Waterhouse and Touche Ross). The UK mergers in 1989 between Ernst and Whitney and Arthur Young and in 1990 between
Coopers and Lybrand and Delloite, Haskins and Sells reduced the number of large firms from eight to six. The merger between
Price Waterhouse and Coopers and Lybrand cut this number to five. Following the Enron debacle, four firms dominate the
profession.
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Martin (1994) who analyze the errors and irregularities detected and corrected in more
than 1,500 audits, find that audit-related adjustments are overwhelmingly negative (i.e.,
the adjustments required by the auditor reduce pre-audited eamings). Thus, high-quality
auditing acts as an effective deterrent to earnings management because management's
reputation is likely to be damaged and firm value reduced if misreporting is detected
and revealed. As such, high quality auditing is associated with firm performance.
3.7 Conclusion
The implementation of proper governance structures is essential as many reports argue
that companies with good governance achieve better long-term performance. For
example, the Sarbanes-Oxley Act (2002) in the US and the Combined Code (2003) in
the UK were based on best practices and to an extent an assertion that better corporate
governance is associated with better firm performance. In addition, there is a body of
evidence to the effect that the market is prepared to pay a premium for companies with
good standards of corporate governance presumably in anticipation of a better long-term
performance.
In the context of governance structures, previous researches have shown that there is
inconclusive evidence on whether larger or smaller boards are correlated to
performance. Although larger board seems to create a free-rider problem among
directors, nevertheless the wider pool of expertise and talents could enhance firm
performance. With regards to frequency of board meetings, most of the literature shows
that it would enhance the degree of cooperation and coordination between board
members and management. This would certainly improve board’s effectiveness and
firm performance. On the issue of role duality, since all corporate governance codes
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recommended that the two roles be separated, it is believed that role duality is not
associated to performance. However, there are some companies that thrive under one
leadership structure.
The importance of board composition such as NEX and independent directors has been
evidently established by the various number of corporate governance reports in the U.K
as they are perceived to be more independent than inside directors. Many studies also
established that more NEX and independent directors could enhance firm performance.
Similarly, directors with accounting and finance qualifications are an advantage to the
boards. Their skills on the subject add up to the competency and efficiency of board’s
monitoring capabilities. As for variables on WOM, the literature show that a higher
percentage of WOM are likely to have effect on board performance because gender
diversity on boards influences the “questioning culture” of a board.
However, other governance variables discussed in the chapter (BUM, SGO, and POL),
have insufficient research to draw sound conclusions on the subject in Malaysia. Their
presence in the Malaysian corporate sectors could most significantly be associated with
resource dependence theory due to the unique pattern of social and political
circumstances in Malaysia. Family members as directors may enhance performance if
they have the expertise and skills but if they possess none, and are appointed based on
purely blood relationships, it could create uncertainties on firm performance.
A further three variables (ACS, ACM and AUD) have shown that there are possibilities
that they have some association to firm performance. This is because, bigger ACS and
higher ACM could possibly enhance board monitoring on the financial reporting
process and internal controls of the firm. Similarly, AUD audit firms are associated to
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performance because they could provide better quality of service to their clients.
Besides that, their reputation in delivering appropriate advice and consultations could
enhance firm performance.
However, all the studies done in Malaysia on corporate governance and performance
with regards to all of the above variables have not specifically differentiated the
governance structures between GLCs and NGLCs. Thus, it is not known if there are any
differences in their governance practices.
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CHAPTER FOUR
RESEARCH DESIGN AND METHODOLOGY
4.0 Introduction
This chapter outlines and discusses the research design and methodology used to
conduct this study. The chapter starts with a section, which covers the identification of
the population for study, before proceeding to discuss sample selection and data
collection. The second section reports on the preliminary findings of a pilot study
undertaken at the beginning of this research. The third section describes the research
design and methodology of the study. The fourth section details the operationalisation
of the independent, dependent and control variables and their sources of information.
The section also reports on the fourteen independent variables, two dependent variables
and two control variables. The last section discusses the hypotheses testing, data
analysis and data analysis problems in regression.
4.1 Sample selection and data collection
The sample selection and data collection were planned systematically to ensure that the
data collected clearly represented the population intended for the research.
The
population chosen for the study was companies listed on the Bursa Malaysia for the
years 2001, 2002 and 2003, which were in one of seven sectors of the economy
(constructions,
consumer
products,
industrial
products,
plantations,
property,
trading/services and technology). Companies in the banking and finance sector were
excluded from the study as they have their own guidelines and governance systems
(Haniffa, 1999).
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As detailed in the first chapter, after identifying the GLCs’ population on the Bursa
Malaysia, they were paired with NGLCs. Therefore the sample companies used in this
study included an equal number of GLCs and NGLCs listed on Bursa Malaysia for the
years 2001, 2002 and 2003. This approach mirrors the matched-pair design used by
Kesner and Johnson (1990) and Daily and Dalton (1997). Table 4.1 details the process
of selection of the final sample.
Table 4.1: Stages in arriving at the number of matched-pairs in the final sample
Descriptions
Listed GLCs identified on Bursa Malaysia including banks
and Financial Institutions, PN4 Companies and companies
still under restructuring.
2001
111
2002
111
2003
111
89
89
89
Letters sent to paired GLCs and NGLCs (89 * 2)
89*2= 178
89*2= 178
89*2= 178
Annual Reports received (53 * 2) [Hard and soft-copies]
53*2= 106
53*2= 106
53*2= 106
After deduction of companies with extremely high
profitability or losses (outliers)
49*2= 98
49*2= 98
49*2= 98
After deduction of companies with negative assets (outliers)
46*2= 92
(* denotes multiplied by)
46*2= 92
44*2= 88
After deduction of Financial Institution, PN4 Companies and
companies under restructuring
One hundred and eleven GLCs were identified, which reduced to eighty-nine GLCs
after the deduction of Banks, Financial Institutions, PN445 companies and companies
which were still under government restructuring (after they were hit by the Asian
Financial Crisis). Letters of enquiries were sent out to all the identified GLCs and
matching NGLCs. By the end of April 2004, fifty-three pairs (one hundred and six
companies) had responded (including e-mail responses).
45
PN4 companies are subjected to suspension by Bursa Malaysia under the Criteria and Obligations Pursuant to Paragraph 8.14 of
the Listing Requirements. Listed companies with unsatisfactory financial condition and level of operations (other than Cash
Companies) will have 8 months to submit their regularisation plans to the relevant authorities for approval. If they fail to do so, their
securities will automatically be suspended on the 5th market day after expiry of the 8-month period and de-listing procedures
undertaken against such companies.
137
The fifty-three pairs were examined for evidence of outliers. An outlier is a case that
differs substantially from the main trend of the data. Outliers can cause a model to be
biased because they affect the values of the estimated regression coefficients (Field,
2001). For this purpose, an outlier is defined as a company with abnormally high
profitability or losses, or negative net assets. As detailed in Table 4.1, four companies in
all the years were found to have extremely high profits or losses and were thus
classified as outliers and excluded, as were three companies with negative assets. This
resulted in seven pairs (fourteen companies) being excluded. If a company from a pair is
excluded; the matched company also has to be taken out.
After considering all these outliers, there were forty-six pairs (ninety-two companies) in
the final sample for 2001 and 2002. In 2003, the number of sample companies reduced
to forty-four pairs (eighty-eight companies) because two of the GLCs were delisted
from the Stock Exchange in 2003. Although they were later replaced with the listing of
their subsidiaries, it was considered as a new listing and therefore the two original
GLCs together with their pairs were rejected.
The final sample of ninety-two
companies (eighty-eight companies in 2003) is comparable to those used in other
studies in Malaysia. For example: Mat-Nor et al (1991) sampled 79 listed companies;
Ruhani and Sanda (2001) used 112 listed companies covering the period 1992 to 1997;
Yap (2001) studied 69 listed companies covering the period 1995 to 1999; and Chang
(2004) used 77 listed companies.
4.2 Pilot Study
Before a full research process was conducted, a pilot study was carried out to
investigate typical characteristics of GLCs and NGLCs and to gain preliminary ideas on
their corporate governance structures. However, this pilot study was not detailed in the
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research and methodology section as it was carried out separately from the main study.
The aim of the pilot study was to determine whether there were any significant
differences between their corporate governance structures. Ten GLCs and ten NGLCs
listed on Bursa Malaysia for the year 2001 were selected at random. Data and
information were gathered from Annual Companies Handbook (Vol. 26, Book 1 and 2)
published by Bursa Malaysia and Annual Reports of listed companies on the Bursa
Malaysia website. The findings indicate that there were several differences in the
corporate governance structures between GLCs and NGLCs (see Table 4.2).
Table 4.2 Preliminary findings on differences between GLCs and NGLCs
Variables
GLCs
NGLCs
1. Average board size (BSZ).
8.8
7.3
2. Average frequency of board meetings per annum (BMF).
6.23
5.24
3. Percentage of role duality (RDU).
12.1 %
32.8 %
4. Percentage of non-executive directors (NEX).
76.5 %
61.4 %
5. Percentage of bumiputera directors (BUM).
76.3 %
43.8 %
6. Percentage of politician as directors (POL).
7.8 %
2.1 %
7. Percentage of senior government officers as directors
(SGO).
55.6 %
22.3 %
8. Percentage of family members as directors (FAM).
4.56 %
18.5 %
The preliminary findings of the pilot study demonstrate that, although average board
size and the average frequency of board meetings per annum were broadly similar, there
were considerable differences in the six other variables that relate to the composition of
the board. With regards to role duality, the percentage is much higher in NGLCs
because before being listed, NGLCs were basically family owned-companies. The
percentage of NEX is fairly comparable in GLCs, but there were significantly higher
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percentages of BUM, POL and SGO in GLCs. Unsurprisingly, as GLCs are government
companies, there were less FAM than for NGLCs.
4.3 Research design and methodology
As mentioned in the first chapter, the current study involved conducting a review of the
literature relating to corporate governance and firm performance. The objectives are to
investigate the state of existing research on the relationship, to develop testable
hypotheses and identify the data required for the tests. Hypotheses were then developed
in relation to corporate governance and firm performance. The second stage of the study
involves formulating a definition for GLCs through interviews with senior accountants
and officers of the Ministry of Finance (MOF), Malaysia. The Treasury Circular
(Ministry of Finance, 1993) defined a GLC as one in which the Government of
Malaysia controls more than 20 % of equity shares of a company through the Khazanah
Nasional Berhad (KHN), the Minister of Finance Incorporation (MOF), and other
federal and state government-linked agencies.46
All data relating to variables used to operationalize the hypotheses was gathered from
the annual reports of individual PLCs and the Bursa Malaysia Companies Handbooks.
The major advantage in scrutinizing companies’ annual reports is that the annual
accounts and reports are accredited documents that proclaim a company’s financial
situation and corporate information. The data is supposed to be authoritative and
credible because it has certainly passed the scrutiny of the audit process. Examination of
the annual reports also allows further analysis of board composition, board committees
46
For example, Permodalan Nasional Berhad (PNB), Kumpulan Wang Amanah Pencen (KWAP), Bank Negara Malaysia (BNM),
Lembaga Tabung Haji (TH), Lembaga Tabung Angkatan Tentera (LTAT).
140
and leadership structures of companies in each year of study. All the data were then
keyed-in into an SPSS program.
To meet the first research objective (Section 1.3), the first task was to identify whether
there were any statistically significant differences for governance variables between
GLCs and NGLCs. To carry out the tests, univariate analyses and paired sample-t-tests
were done on GLCs and NGLCs for 2001, 2002 and 2003. In line with the second
research objective (Section 1.3), subsequently further univariate tests were conducted
for All companies, GLCs and NGLCs to establish whether there is a statistically
significant relationship between each independent variable and firm performance
measured by either ROA or ROE.
Finally, the second research question was
additionally addressed by multivariate tests to ascertain whether or not there was a
statistically significant relationship between any of the corporate governance structures
of All Companies, GLCs and NGLCs and firm performance if the effect of the
interrelationship between explanatory variables was allowed for.
4.4 Operationalisation of the dependent, independent and control variables
This study utilises the two accounting measures (ROA and ROE) as the dependent
variables, which are employed as proxies for firm performance. As mentioned in
Chapter Three (Section 3.4.1), ROA is the average annual realised rate of return
measured by dividing earnings after tax by total assets and ROE is the average annual
realised rate of return measured by dividing earnings after tax by shareholders equity. A
high score for the variables signifies favourable firm performance. These performance
measures are consistent with other studies on firm performance and are frequently used
141
by market and financial analysts in assessing a company’s performance (Shrader et al,
1997).
The fourteen independent variables selected for the current study are features of the
internal corporate governance system related to the board structure and composition.
The fourteen variables are BSZ, BMF, RDU, NEX, IND, DAF, WOM, BUM, SGO,
POL, FAM, ACS, ACM and AUD. These variables were selected based on the
preliminary findings of the pilot study and on literature on corporate governance
structures in the Malaysian business environment. Previous researchers on corporate
governance study in Malaysia such as Abdullah (1992), Haniffa (1999), Boo (2003),
Chang (2004), and Abdul Rahman and Mohd Ali (2006), had used one or more of these
variables in their studies.
Two control variables; sales and industry-type were also included. The inclusion of
these variables in the model avoids firm performance being influenced by other factors.
The natural logarithm of annual sales (LSALE) is used as the proxy for size and it is
expected to be positively related to performance because on average, larger firms are
more profitable than smaller firms as they benefit from economies of scale and are able
to spread their risk (Ghosh, 1998). Variations in performance based on industry type
were addressed by the creation of dummy variables for each of the seven-industry
classifications used by the Bursa Malaysia (constructions, consumer products, industrial
products, plantations, property, trading/services and technology). Table 4.3 shows the
operationalisation of the independent, dependent and control variables selected and their
source of information.
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Table 4.3: Operationalisation of the independent, dependent and control variables selected
and their source of information
No
1
Variables
Board Size
Acronyms
2
Board Meeting
BMF
Frequency of board meetings per
annum
3
Role duality
RDU
Dichotomous; 1 with role duality
and 0 otherwise
4
Non-executive
directors
NEX
Percentage of non-executive
directors in relation to the total
number of directors on the board.
5
Independent
directors
IND
6
Directors with
accounting or
finance
qualifications
Women directors
DAF
Percentage of independent directors
in relation to the total number of
directors on the board.
Percentage of directors with
accounting or finance qualifications
to total number of directors on the
board.
Percentage of women directors in
relation to the total number of
directors on the board.
Percentage of bumiputra directors in
relation to the total number of
directors on the board.
Percentage of senior government
officer as directors in relation to the
total number of directors on the
board.
7
BSZ
WOM
Operationalisation
Total number of directors
8
Bumiputra as
directors
BUM
9
Senior government
officers as
directors
SGO
10
Politicians as
directors
POL
Percentage of politicians as directors
in relation to the total number of
directors on the board.
11
Family members
as directors
FAM
Percentage of family members as
directors in relation to the total
number of directors on the board.
12
Audit Committee
size
ACS
The number of members of the audit
committee.
13
Audit committee
meetings
ACM
The frequency of audit committee
meetings per annum.
14
Auditors
AUD
The choice of auditors either big 4
or non-big four
15
Return on Equity
ROE
16
Return on Assets
ROA
Earnings after tax divided by
shareholders’ equity
Earnings after tax divided by total
assets
17
Sales
LSALE
Sales for the current year (in
millions)
18
Industry type
INDUS
Type of industry based on Bursa
Malaysia classification
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Source of information
Company annual reports for
financial years ending 20012003.
Company annual reports for
financial years ending 20012003.
Bursa Malaysia Annual
Companies Handbook financial
years 2001-2003 and company
annual reports for financial years
ending 2001-2003.
Bursa Malaysia Annual
Companies Handbook financial
years 2001-2003 and company
annual reports for financial years
ending 2001-2003.
Company annual reports for
financial years ending 20012003.
Company annual reports for
financial years ending 20012003.
Company annual reports for
financial years ending 20012003.
Company annual reports for
financial years ending 20012003.
Bursa Malaysia Annual
Companies Handbook
finan2001-2003 and company
annual reports for financial years
ending 2001-2003.
Bursa Malaysia Annual
Companies Handbook
finan2001-2003 and company
annual reports for financial years
ending 2001-2003.
Company annual reports for
financial years ending 2001-2003
and Who’s who in Malaysia
(2001-2003).
Company annual reports for
financial years ending 20012003.
Company annual reports for
financial years ending 20012003.
Company annual reports for
financial years ending 20012003.
Company annual reports for
financial years ending 2001-2003
Company annual reports for
financial years ending 20012003.
Company annual reports for
financial years ending 20012003.
Company annual reports for
financial years ending 2001-2003
and Bursa Malaysia Handbooks
(2003)
The next section lays out the four main hypotheses that will be tested in the current
study.
4.5 Hypotheses testing and data analyses
4.5.1 Hypotheses Testing
This study develops the following four main hypotheses for the two research objectives
as laid out in Section 1.3.
H1
Corporate governance structures of GLCs are significantly different from those of
NGLCs.
H2
There is a significant relationship between corporate governance structures and the
performance of Malaysian companies (All Companies) in the post- AFC period from
2001 to 2003.
H3
There is a significant relationship between corporate governance structures and the
performance of GLCs in the post-AFC period from 2001 to 2003.
H4
There is a significant relationship between corporate governance structures and the
performance of NGLCs in the post-AFC period from 2001 to 2003.
The operationalisation of these hypotheses will be discussed in Chapter 5.
4.5.2 Data analyses
4.5.2.1 Paired samples t-test
The first hypothesis related to the existence of significant differences between the
corporate governance structures of GLCs and NGLCs and will be conducted using
paired samples t-test on the entire dependent and independent variables. The mean,
standard deviation and t-value of variables will be recorded.
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4.5.2.2 Univariate and multivariate analyses
Tests on the hypotheses related to an association between performance and corporate
governance characteristics in GLCs, NGLCs and All companies would be executed
using both univariate and multivariate statistics. The reason for undertaking both types
of analysis is to ensure that not only the relationship of a particular dependent variable
and each of the independent variables is known but also that the relationship of a
particular independent variable to both the dependent and other independent variables is
established (Norusis, 1995). In the univariate analysis, correlation between dependent
and independent variables will be analysed to see whether corporate governance
structures employed could explain differences in performance in All Companies, GLCs
and NGLCs. The strength of correlations and their significance at 1, 5 and 10 %
confidence levels will be identified. Correlations test will also determine the direction of
relationship among the independent variables.
Prior to performing the multivariate tests, the data will be tested to ensure that the
assumptions underlying regression analysis are met. The data will be tested for
multicollinearity, homoscedascity, independent errors and normally distributed errors.
These tests ensure that the datasets used conformed to regression analysis assumptions.
Multicollinearity exists when the independent variables are highly correlated (Field,
2001). Two multicollinearity tests will be conducted in this study. The first will involve
examining the correlation matrix to determine whether the explanatory variables are
sufficiently correlated to indicate a significant causal relationship (Haniffa, 1999).
Gujarati (1995) stated that if the correlation is greater than 0.800, multicollinearity
exists. The second test for multicollinearity is by computing the variance inflation factor
(VIF), in which a VIF exceeding 10 indicates a potential problem of multicollinearity.
145
Since the choice of statistical method depends on the nature of the data and its
distribution, it is important to undertake a normality test of the data. Hence, in this
study, normality tests based on skewness and kurtosis will be conducted for all the
dependent and independent variables. As a rule of thumb, skewness of + 1.96 or – 1.96
and kurtosis of + 2 and – 2 indicate normality. Multivariate analyses will be used to
examine the relationships between firm performance and all the independent variables
that are found to be significantly different between GLCs and NGLCs. The purpose of
this analysis is to investigate whether corporate governance structures are related to
performance in All companies and in the sub-sets of GLCs and NGLCs.
4.5.2.3 Data analyses problems in regression
One of the problems that may be encountered in research is that the theoretically correct
form of the relationship between the dependent and independent variables is not known.
As such, ‘while theory may specify a functional form of the construct, it may not hold
for empirical proxies’ (Cooke, 1998; p: 209). To alleviate this problem, the data has to
be transformed. There are several options available for transforming the data, for
example; logging, ranking and normalising (Haniffa, 1999). For the current study, the
data sets will be transformed by normalising both the dependent and independent
variables using the Van Der Waerden method. One of the advantages of transforming
data to normal scores is the ability to utilise it in any succeeding tests so that the
significance levels can be determined, and the F-tests and t-tests are more meaningful
(Cooke, 1998). In addition, better results on the relationships between corporate
governance variables and performance might be established if the data were
transformed (Cooke, 1998).
146
4.5.3 Issues concerning the number of variables in a regression models
Another issue that needs clarification is the use of large number of independent
variables in the regression model (Haniffa, 1999). It may be argued that having too
many independent variables in the multiple regression models may give rise to
problems of multicollinearity, autocorrelation, heteroscedascity and specification error.
However, Curwin and Slater (1994, p: 288) concluded that it is “…prudent to built a
model with too many variables rather than too few, since the problem of increased
variance may be easier to deal with than problem of biased predictions”. Johnson et al
(1987) concurred and observed that as long as the decision to include the specific
variable is made on the basis of theory, insight, experience, and intuition and with the
availability of advanced computer programs, the inclusion of many variables should not
be a major problem.
4.6 Summary
This chapter discussed the research design and methodology for the systematic conduct
of this study. The GLCs in the sample, which were identified from positive responses
to a request for information, were matched-paired with NGLCs in appropriate sequence
of board listing, types of industry and paid-up capital. Univariate and multivariate tests
are then conducted on the data. Prior to performing the tests, the data will be tested for
multicollinearity, homoscedascity, independent errors and normally distributed errors to
ensure that the assumptions underlying regression analysis are met.
The next chapter discusses the theoretical framework underlying the study of corporate
governance. The main theories that will be discussed are agency, stewardship, resource
dependence, stakeholder and managerial hegemony. These theories are used to develop
147
hypotheses for the fourteen independent variables used in the current study and a
discussion on the two control variables.
148
CHAPTER FIVE
THEORETICAL FRAMEWORKS AND HYPOTHESES DEVELOPMENT
5.0 Introduction
This chapter has two distinct sections. The first section will discuss the major theories
applied in relation to corporate governance. The second section will discuss the
hypothesis development for the fourteen independent variables adopted in the study.
The choice of these variables was based on existing literature and a pilot study carried
out at the beginning of the study. All of these variables will be tested using univariate
analysis in Chapter Six.
5.1 Corporate governance theories
There are five major theoretical frameworks that can be identified from the corporate
governance literature: agency, stewardship, resource dependence, stakeholder and
managerial-hegemony (Stiles and Taylor, 1993). These theories have evolved from
many disciplines such as finance, economics, accounting, law, management and
organizational behavior. For example, agency theory arises from the field of finance and
economics and stakeholder theory from a more social-oriented perspective on corporate
governance. All these disciplines have contributed to the development of theoretical
aspects of corporate governance (Abdul Rahman and Mohd Ali, 2006). Two of the
theories; agency and stewardship were generally associated with several previous
corporate governance researches in Malaysia and East Asia.
149
Nevertheless, a number of characteristics of the five governance theories are embedded
in Malaysia’s business and corporations. This is because, Malaysia has the business
culture and environment of a developing country combined with a unique socio-political
background. Haniffa et al (1999) summarised the position by noting that multi-faceted
theories exist in Malaysia. The next section will discuss the five governance theories.
5.1.1 Agency theory
The agency relationship is seen as a contractual link between the shareholders (the
principals) that provide capital to the company and the management (agent) who runs
the company (Shankman, 1999). The principals engage the agent to perform some
services on their behalf and would normally delegate some decision-making authority.
However, as the number of shareholders and the complexity of operations grew,
management, who had the expertise and essential knowledge to operate the company,
increasingly gained effective control and put them in a position where they were prone
to pursue their own interests (Mizruchi, 1983).
The literature on agency theory addresses three types of problems that could transpire
from the separation of ownership and management, which might consequently affect
firm value (Byrd et al, 1998). They are the effort problem, the assets’ use problem and
differential risk preferences problem. The effort problem concerns whether or not
managers apply proper effort in managing corporations so as to maximize shareholders’
wealth (Jensen and Meckling, 1976). Problems arise because principals are not able to
determine if the managers are performing their work appropriately. Managers may not
exert the same high effort levels required for firm value maximization as they would if
they owned the firm.
150
The use of assets problem concerned the insiders who control corporate assets (Jensen,
1986). They might abuse these assets for purposes that are harmful to the interests of
shareholders such as diverting corporate assets, claiming excessive salaries and
manipulating transfer prices of assets with other entities they control (Shleifer and
Vishny, 1997). The differential risk preferences problem arises because the principal
and managers have different views on risk taking (Arnold and de Lange, 2004).
Managers may not act in the best interest of shareholders and may have different
interests and risks preferences. For example, managers have a wider range of economic
and psychological needs (such as to maximize compensation, security, status and to
boost their own reputation), which may be adversely affected by a project that increases
a firm’s total risk or has rewards in the longer-term. This may result in managers being
too cautious in making investments and thus failing to maximise shareholders’ wealth.
Hence, agency theorists recommended that corporate governance mechanisms are
needed to reduce these agency conflicts and to align the interests of the agent with those
of the principal (Fama and Jensen, 1983).
These mechanisms include incentive
schemes for managers which reward them financially for maximising shareholder
interests. Such schemes typically include strategies whereby senior executives acquire
shares, conceivably at a bargain price, thus aligning financial interests of executives
with those of shareholders (Jensen and Meckling 1976). Other mechanisms include
fixing executive compensation and levels of benefits to shareholders returns and having
part of executive compensation deferred to the future to reward long-run value
maximisation of the corporation. Besides that, appointing more NEX on the boards to
check on managers’ behaviour could also reduce agency costs (Baysinger and
Hoskinson, 1990).
151
5.1.2 Stewardship theory
Unlike agency theory, stewardship theory assumes that managers are stewards whose
behaviors are aligned with the objectives of their principals. The theory argues and
looks at a different form of motivation for managers drawn from organizational theory
(Donaldson and Davis, 1991). Managers are viewed as loyal to the company and
interested in achieving high performance. The dominant motive, which directs managers
to accomplish their job, is their desire to perform excellently (Davis et al, 1997).
Specifically, managers are conceived as being motivated by a need to achieve, to gain
intrinsic satisfaction through successfully performing inherently challenging work, to
exercise responsibility and authority, and thereby to gain recognition from peers and
bosses (McClelland, 1961). Therefore, there are non-financial motivators for managers.
The theory also argues that an organization requires a structure that allows
harmonization to be achieved most efficiently between managers and owners (Davis et
al, 1997). In the context of firm’s leadership, this situation is attained more readily if the
CEO is also the chairman of the board. This leadership structure will assist them to
attain superior performance to the extent that the CEO exercises complete authority over
the corporation and that their role is unambiguous and unchallenged. In this situation,
power and authority are concentrated in a single person. Hence, the expectations about
corporate leadership will be clearer and more consistent both for subordinate managers
and for other members of the corporate board (Donaldson and Davis, 1991). Thus, there
is no room for uncertainty as to who has authority or responsibility over a particular
matter. The organisation will enjoy the benefits of unity of direction and of strong
command and control.
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With this benign view of management, stewardship theory favors boards having a
majority of ‘specialist’ executive director rather than a majority of ‘non-specialist’
independent directors. This is because ‘specialist’ directors would have a greater depth
of knowledge, access to current operating information and possesses the right technical
expertise. Therefore, as can be observed, stewardship theory is a complete contrast to
agency theory.
5.1.3 Resource dependence theory
The basic proposition of resource dependence theory is the need for environmental
linkages between the firm and outside resources. In this perspective, directors serve to
connect the firm with external factors by co-opting the resources needed to survive
(Pfeffer and Salancik, 1978). This means that boards of directors are an important
mechanism for absorbing critical elements of environmental uncertainty into the firm.
Williamson (1984) held that environmental linkages could reduce transaction costs
associated with environmental interdependency. In seeking essential resources,
organizations engage in transaction with diverse organizations in their explicit and
general environments (Scott, 1992). The organization’s need to require resources leads
to the development of exchange relationships between organizations. Further, the
uneven distribution of needed resources results in inter-dependent organizational
relationships. Several factors would appear to intensify the character of this dependence,
e.g. the importance of the resource(s), the relative shortage of the resource(s) and the
extent to which the resource(s) is concentrated in the environment (Donaldson and
Davis, 1991).
In this context, many of the resources are directly and indirectly controlled by the
government. Hence, appointing directors that have influence and access to key policy153
makers and government is seen as an important strategy for survival because of
directors’ knowledge and prestige in their professions and communities, firms are able
to extract useful resources. This could enhance the firm's legitimacy in society and to
help it achieve their goals and improve performance (Provan, 1980). Gales and Kesner
(1994) suggest that in the resource dependence role, directors may also bring resources
such as specialized skills and expertise.47 This concept has important implications for
the role of the board and its structure, which in turn affects performance. Hillman
(2003) held that if the need for external linkages increases, more outsiders would be
needed on the board as directors. In summary, resource dependence theory provides a
convincing justification for the creation of linkages between the firm and its external
environment through boards as firms that create linkages could improve their survival
and performance
5.1.4 Stakeholder Theory
The basic proposition of stakeholder theory is that the success of a firm is dependent
upon the successful management of all the relationships that a firm has with its
stakeholders. Stakeholder is a term originally introduced by the Stanford Research
Institute (SRI) refering to “those groups without whose support the organization would
cease to exist” (Freeman, 1983, p.33). The conventional view that the success of the
firm is dependent solely upon maximizing shareholders’ wealth is not sufficient because
the entity is perceived to be a nexus of explicit and implicit contracts between the firm
and its various stakeholders (Jensen and Meckling, 1976). Fig. 5.1 shows how a firm
interacts and depends on various stakeholders in order to exist.
47
Key constituents to a firm include suppliers, buyers, public policy decision makers, social groups and legitimacy.
154
Fig. 5.1: A Stakeholder approach
GOVERNMENTS
INVESTORS
POLITICAL GROUPS
FIRM
SUPPLIERS
COMMUNITY
TRADE
ASSOCIATIONS
EMPLOYEES
CUSTOMERS
Source: Donaldson and Preston (1995)
The potential stakeholders may be divided into two groups: (1) the primary stakeholders
which includes the shareholders/investors, creditors, customers, suppliers and
employees; (2) secondary stakeholders which consists of the government, trade
associations, political groups and the community. Stakeholder theory claims that
whatever the ultimate aim of the corporation, managers and entrepreneurs must take
into account the legitimate interests of those groups and individuals who can affect (or
be affected by) their activities (Donaldson and Preston 1995).
The government can be viewed as a powerful stakeholder, which the management of a
firm needs to satisfy. The power of the government is manifested in its enforcement
mechanisms. Watts and Zimmerman (1983) argue that corporations use socially
responsible activities to reduce the risk of governmental intrusions that may affect firm
value. It is conceivable that companies belonging to highly sensitive industries will face
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more stringent government regulation as these firms are the ones more likely to damage
the environment through the use of hazardous substances and/or discharge hazardous
wastes and effluents (Watts and Zimmerman, 1983). In Malaysia, stakeholder theory is
commonly associated with GLCs because many government policies such as the NEP
(1971) and ICA (1975) are directly concerned with the redistributing of corporate
wealth among bumiputra and non-bumiputra. For example, bumiputra equities are
pooled together by government agencies such as PNB to be invested in GLCs, NGLCs.
5.1.5 Managerial Hegemony Theory
Managerial hegemony theory asserts that CEOs and management dominate the boards
of directors and hence, board of directors “….act merely as ceremonial rubberstamps”
(Mallete and Fowler, 1992, p. 1014). This is because CEOs dominate the director
selection process and therefore control the board (Mace, 1986). Vancil (1987) are also
skeptical about the ability of outside directors to make independent judgments on firm
performance due to the dominant role played by CEOs in selecting outside directors.
The dominant role of CEOs could also be observed when NEX failed to remove
members of the top management following the firm’s poor performance (Conyon and
Peck, 1998). This could be due to their insignificant shares in the firm and their low
compensation compared to the CEOs. In addition the views of the CEOs could
determine their re-appointment as NEX (Conyon and Peck, 1998). An analysis of the
1991 Director/Corporate Registry in the UK by Nash (1991) showed that about 4% of
directors went to Eton College, which could suggest the “old boy network” exists. Stiles
and Taylor (1993) cited Sir Adrian Cadbury who claimed “up to 80 % of outside
appointments to the boards of large British companies are still made on the old boy
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network.” This evidence supports the concern on hegemony theory
raised by Mace
(1986).
Nevertheless, evidence supporting the managerial hegemony theory is also documented
where the concern has been on the issue of NEX, who may not be truly independent
(Bhagat and Black, 1997). This is because the inclusion of NEX may negatively
influence the board cohesiveness since they are involved in the decision-making process
of the firm and, at the same time, act as monitors of management. This could lead to a
conflict of interest. This argument could perhaps lead to the performance of the firm not
being improved even though the board is dominated by outside directors. As a result,
managerial hegemony rules.
The following sections will discuss hypotheses development for all the fourteen
variables used in the study with reference as appropriate to the theoretical frameworks
outlined in 5.1.
5.2 Hypotheses development
This study is specifically testing for any association between corporate governance
structures and firm performance. A total of fourteen aspects of governance structures
were considered and hypotheses developed as to their probable effect on firm
performance. They are board size (BSZ), board meeting frequency (BMF), role duality
(RDU), non-executive directors (NEX), independent directors (IND), directors with
accounting or finance qualifications (DAF), women directors (WOM), bumiputra as
directors (BUM), senior government officers as directors (SGO), politicians as directors
(POL), family members as directors (FAM), audit committee size (ACS), frequency of
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audit committee meetings (ACM), and big-four auditors (AUD). All the variables
except three (BUM, POL and SGO) had been commonly employed as independent
variables that might be associated with performance in previous studies. The three new
variables are included because they are important aspects of corporate governance in the
Malaysian context following the NEP (1971) and ICA (1975). Such directors are
implicitly believed to have valuable contacts with the government and their
appointments are consistent with the resource dependence theory discussed in the earlier
section. The next section will discuss the hypotheses development on each of the
variables mentioned.
5.2.1 BSZ and firm performance
Prior literature suggests that BSZ is an important aspect of corporate governance (e.g.,
Pearce and Zahra, 1992; Yermack, 1996) and is related to firm performance. As today's
business environments are so complex, it is almost impossible for small group of
individuals to understand all the issues that come before a board. Such complexity
argues for assembling a group of members whose skills and backgrounds are diverse
and complement one another (Conger et al., (1998). As such, a larger board with a
greater range of expertise is perhaps more competent to handle various issues and to
monitor the actions of management effectively (Beasley, 1996). In addition, bigger
boards are able to secure critical resources for business survival (Pearce and Zahra,
1992). Conversely, free riders could seep in and this may imply that larger boards could
also be less effective in monitoring management.
Empirically, the evidence on the correlation of BSZ to firm performance is mixed and
inconclusive. In a meta-analysis of 131 different study-samples with a combined sample
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size of 20,620 observations, Dalton et al. (1998) found a positive and significant
relationship between BSZ and financial performance. Kiel and Nicholson (2003) who
examined the relationship between board demographics and firm performance in 348 of
Australia's largest publicly listed companies found that, after controlling for firm size,
BSZ is positively correlated with firm value.
However, empirical evidence has also shown that a small board is more effective. Based
on a meta-analysis study, Lipton and Lorsch (1992) reported a negative association
between BSZ and performance. They argue that large boards may be less cohesive and
slow in making decisions. Goodstein et al, (1994) found a negative relationship between
BSZ and firm performance. They concluded that bigger boards could significantly
inhibit a board's ability to initiate strategic actions. Further, Yermack (1996) using a
sample of 452 large US publicly traded corporations from 1984 to 1991 found that there
is a significant negative correlation between BSZ and firm value (Tobin’s Q). This
means that the bigger the size of the board the lower is the firm value.
Eisenberg et al (1998), who analyzed the BSZ effect in a sample of almost 900 small
and medium-sized closely held corporations in Finland, found that there is a significant
negative BSZ effect for boards in the range of 2 to 7 members.48 Mangena (2005), who
studied on the relationship between BSZ and the performance of 157 companies listed
on the Zimbabwean Stock Exchange (ZSE) for the period 2001-2003, found that board
size is negatively associated to firm performance. More recently, Vikalpa (2007), who
conducted a study in India using lagged performance as an instrument for current
performance, finds that there is a negative association between BSZ and firm
48
According to their preferred estimate, increasing the size of the board e.g. from 3 to 4 members would lower the returns on assets
(ROA) by approximately 2 percentage points.
159
performance. He further suggested that BSZ limit of six as ideal.All these studies
indicate that bigger boards are associated with lower performance.
Haniffa and Hudaib (2006) had mixed results. When they used Tobin’s Q a negative
association was found between BSZ and performance. However, when they employed
ROA, a positive association was reported. Overall, Haniffa and Hudaib (2000) argue
that whilst the market may perceive large boards as ineffective, they are beneficial to
the company as they provide the variety of knowledge that is necessary for directing the
operations of the company.
On balance, previous findings suggest that there were some relationship between BSZ
and performance but the contradictory evidence suggests that the direction and extent of
the relationship is uncertain. Therefore it is hypothesized that
H1: There is a significant relationship between BSZ and firm performance.
5.2.2 BMF and firm performance
Board-meeting time is an important resource for better firm performance because during
board meetings, the board of directors and management are able to analyse, discuss and
reach for consensus on a board’s agenda (Lipton and Lorsch, 1992). Vafeas (1999)
asserts that BMF is a proxy for the time directors spend monitoring managerial
performance. During the meeting, boards of directors are able to check and supervise
managers with regards to firm performance. Thus boards that meet more frequently
allow directors more time to confer, set strategy and to execute their monitoring role
more effectively (Conger et al. 1998).
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De Zoort et al. (2002) suggest that BMF can be a proxy of boards’ diligence because a
longer time the board spends with management; the greater the meticulousness of
directors on board’s tasks. Furthermore, when boards hold regular meetings, they are
more likely to remain informed and knowledgeable about relevant updates and
performance of the company. This would lead them to analyse and take appropriate
action to address any upcoming issue more objectively (Abbott et al., 2003). On the
other hand, some boards meet more frequently after crises, and thus in another way
trying to improve the company’s performance. In this context, when firm’s performance
declines, boards are likely to become more actively scrutinized by shareholders and are
likely to meet more often (Evans et al, 2002).
Empirically, the evidence of the relationship between BMF and performance is
inconclusive. Mangena (2005) in his study on the performance of 157 companies listed
on the Zimbabwean Stock Exchange (ZSE) for the period 2001-2003 finds that BMF is
positively associated with performance. But Vafeas (1999) in a study which involved
307 firms over the 1990-1994 periods found that BMF is negatively related to firm
performance in a manner that is consistent with agency theory. The study asserts that
boards that meet more frequently have lower Tobin’s Q ratio. This indicates that they
are valued less by the market and suggests that the market may perceive more board
meetings as expensive in terms of managerial time, travel expenses and directors’
meeting fees.
The discussions show that the relationship between the BMF and firm performance is
complex and its direction uncertain. However, previous research and conjecture
suggests that there are some relationships between BMF and performance. Hence, it is
hypothesized that,
H2: There is a significant relationship between BMF and firm performance.
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5.2.3 RDU and firm performance
The main reason for the separation of chairman and CEOs’ posts is that when the two
posts are vested in a single person; the monitoring roles of the board will be severely
impaired (OECD, 1999). Rechner and Dalton (1991) argues that the weakest corporate
governance is one where the board is dominated by insider directors and the CEO holds
the chairmanship of the board. When the corporate governance is weak, it would affect
firm performance. Nevertheless, Baliga et al. (1996) concluded that a change in status
from RDU to non-RDU might be only a symbolic move by the board to signal that they
are exercising their governance role, rather than a substantive move that can affect
performance. As such, RDU or non-RDU is not an issue and does not affect firm
performance.
There have been several studies, which have analysed the relationship between RDU
and performance. Rechner and Dalton (1989), who examined the issue of RDU in terms
of accounting based measures of ROE, ROI and profit margin, found that the
performance of non-RDU firms outperformed that of RDU firms. The results support
agency theory expectations about inferior shareholder returns from CEO duality.49
Rhoades et al (2001), using dummy variables50 and organizational performance51, found
a significant negative relationship between RDU and firm performance.
However, Berg and Smith (1978) found that there was no significant difference in
various financial indicators between firms, which experience CEO duality, and firms,
which did not. Chaganti et al (1985) also documented evidence similar to that found by
49
They studied a random sample of corporations from the Fortune 500. Rechner and Dalton (1991) identified corporations, which
had remained as either dual or independent chair- CEO structures for each year of a six-year period (1978–1983).
50
The coding scheme uses 1 to represent dual-title holders and 0 to represent all other structure.
51
Performance measures were coded by market based categories or accounting categories with Return on Assets (ROA) and Return
on Equity (ROE).
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Berg and Smith (1978) involving firms that experienced bankruptcy and survival. In
another study, Baliga et al. (1996) investigated the announcement effect of changes in
the leadership structure. Using accounting measures of operating performance and longterm measures of performance, their findings suggest that: the market was indifferent to
changes in the leadership structure. There were no significant effects on either the firm’s
operating performance or the firm’s long-term performance.
Similarly, Davidson et al (1996) who studied the influence of RDU on performance of a
sample of 1000 largest US firms using a two-sample t-test, found that the results to be
mixed in sign and statistically insignificant. Brickley et al (1997) also found no
systematic link between RDU and organizational performance or market value. In
addition, they found that changes in leadership structure have no systematic effects on
company share prices. Again, Dalton et al (1998), who carried out meta-analysis study
identified 31 empirical researches on RDU involving 12,915 organizations, decided that
there is little consistency in the findings and no substantive relationship between RDU
and performance. UK studies tend to support this with Vafeas and Theodorou (1998)
and Weir and Laing (1999) findings that duality did not harm performance; although
neither did it improve it.
RDU is not common in Malaysian corporations (PwC, 1998), but the MCCG (2000)
recommends companies to separate the two roles to ensure proper checks and balances
on the top leadership of the corporation. Abdullah (1992) found that there is no
significant difference in performance (measured by ROE, ROA and EPS) between firms
with RDU and firms with non-RDU.52 However, using a regression analysis, the study
by Abdul Rahman and Haniffa (2005) indicates that companies with role duality
52
Abdullah (1992) employed the t-test to determine the mean scores between the highest and the lowest sub-groups of all companies
listed on the main board of Bursa Malaysia.
163
seemed not to perform as well as their counterparts with separate board leadership based
on accounting performance measurements, ROA and ROE.
Given the evidence from Abdul Rahman and Haniffa (2005) in the Malaysia context, it
seems reasonable, in spite of the mixed results on the relationships between RDU and
performance, to hypothesize that:
H3: There is a significant relationship between RDU and firm performance.
5.2.4 Percentage of NEX and firm performance
It has been suggested that boards dominated by NEX may help to alleviate the agency
problem by monitoring and controlling the opportunistic behaviour of management
(Williamson, 1985). Such boards may also help in reducing management consumption
of perquisites (Brickley and James, 1987) and removing non-performing CEOs
(Weisbach, 1988). Pearce and Zahra (1992) believe that boards dominated by NEX may
influence the quality of directors’ deliberations and decisions. NEX also provides
additional windows on the world due to their expertise, prestige and contacts (Tricker,
1984). In contrast, having a high proportion of NEX may be detrimental to companies
as they may stifle strategic actions (Goodstein et al., 1994), engulf the company in
excessive monitoring (Baysinger and Butler, 1985), and lack the business knowledge to
be truly effective (Patton and Baker, 1987).
The extant literature on NEX shows that there are mixed results of positive, negative
and no association from investigations of the relationship between of the percentage of
NEX and performance. There are a number of examples of empirical evidence that are
consistent with a favourable effect of NEX on firm performance. Rosenstein and Wyatt
164
(1990) noted that when companies appoint additional outside directors, shareholders’
wealth increased significantly.53 Byrd and Hickman (1992) showed that, on average,
tenders offered to bidders with majority NEX earn roughly zero stock price returns.
However, bidders without such boards suffer statistically significant losses of 1.8 per
cent on average.
Ezzamel and Watson (1993) found a positive relationship between the proportion of
NEX and performance. Denis and Sarin (1997) reported that firms that substantially
increased the proportion of NEX had above-average stock price returns in the previous
year. Research done in China54 by Liang and Li (1999) reported that the presence of
NEX is positively associated with higher return on investment. A more recent study by
Mangena (2006), who studied the performance of 157 companies listed on the ZSE for
the period 2001-2003, indicated that the proportion of NEX is positively associated with
performance. All these findings suggest that companies that have relatively higher
percentage of NEX were associated with better performance.
In contrast, Agrawal and Knoeber (1996) reported a negative correlation between NEX
and Tobin’s Q index.55 Bhagat and Black (1997) supported these findings by showing
that a high proportion of NEXs is strongly correlated with slower past growth.56 They
confirmed that the direct relationship between NEX and firm performance, if it exists at
all, is weak and perhaps varies over time (Bhagat and Black (1997). They further noted
that, overall there is no convincing evidence that firms with majority of NEX performs
better. In the UK, Weir and Laing (1999) reported a negative relationship between NEX
representation and performance. Klein (1998) also reported a significant negative
53
The increase is about 0.2 % on average. The increase is statistically significant but economically small.
The sample consists of 228 small private firms in Shanghai.
Tobin’s Q is a measure of growth prospects of assets, defined by the future profitability of the asset in relation to its replacement
cost).
56
They conclude that the relationship between NEXs and firm performance in the American Public Company Board pointed out that
board of directors that have a majority of NEXs behave differently in diverse environment. Some of these differences appear to
increase firm value, others may decrease it.
54
55
165
correlation between the proportion of NEX and a measure of change in market value of
equity, but insignificant results for ROA and stock market returns.
Other studies such as, MacAvoy et al (1983) found no meaningful link between the
percentage of NEX and firm performance and their findings were reaffirmed by Gautchi
and Jones (1987). Similarly studies by Hermalin and Weisbach (1991), Mehran (1995),
Daily and Dalton (1998) and Bhagat and Black (2000) also failed to detect any
relationship between the proportion of NEX and performance. Weir et al, (2002) found
no significant relationship between proportion of NEX and performance based on
Tobin’s Q in the U.K. Further, a meta-analysis study by Daily and Dalton (1998) found
that there were no substantive relationships between NEX and firm performance
irrespective of the type of performance indicators used, the size of the firm or the
manner in which board composition is measured.57 A multiple country study by Ho and
William (2003), who investigated the link between NEX and firm performance on a
sample of 286 publicly traded firms from South Africa (84 firms), Sweden (94 firms),
and the UK (108 firms), found that there is no significant link between NEX and
performance across the three nations.
Similar to the UK, the Malaysian Code of Corporate Governance (2000) recommends
that a third of the directors should be NEX. This recommendation has been incorporated
by Bursa Malaysia in its New Listing Requirements (2001). However, the issue of
whether a higher proportion of NEX in Malaysian PLCs leads to better performance is
still a matter to be investigated.
Though the findings are mixed, evidence generally supports the view that there is a
relationship between NEX and firm performance. Thus, it is hypothesised that:
57
The study was based on 159 samples.
166
H4: There is a significant relationship between the percentage of NEX on boards and
firm performance.
5.2.5 Percentage of IND and firm performance
The importance of IND as a governance mechanism to protect shareholders’ interests is
recognized universally. Early work by Fama and Jensen (1983) contends that IND
offers a means to supervise management activities to enhance firm performance. The
OECD Principles of Corporate Governance (1999) suggests that company’s board
should provide independent and objective judgements on corporate issues. The
Combined Code and the Higgs Report (2003) believe that IND are essential for
protecting minority shareholders and can make significant contribution to firm’s
decision-making. They indeed recommend that half of the board members, excluding
the chairman, should be independent (Combined Code, 2003; Higgs, 2003). Others have
argued differently. Rosenstein and Wyatt (1990) argued that insiders are more effective
because they have better knowledge of the firm and its industry than outside directors,
and they are just as meticulous as outside directors. Similarly, Bhagat and Black (1999)
also state there is no convincing evidence suggesting that greater IND results in better
performance.
The empirical evidence also supports this contrary view. Existing research shows that
IND does have a positive relationship on firm’s performance. Baysinger and Butler
(1985) compared firm performance to board composition using a three scale
classification system (insider, grey and outsider) found that corporations with high
proportions of IND achieved relatively higher returns on investment, over a period of
ten years. Lee et al. (1992) also reported that boards dominated by IND are associated
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with higher returns than those dominated by inside directors. Similarly, Pearce and
Zahra (1992) found that there is a positive correlation between the proportion of IND
and firm performance.
However, Yermack (1996) reported a significant negative correlation between
proportion of IND and Tobin's q and a meta-analysis conducted by Daily and Dalton
(1998), which includes 159 studies covering 40,160 companies, concluded that
‘empirical work in the area does not provide consistent guidance on the relationship
between board independence and firm performance’ (Daily and Dalton, 1998,
p.7). From these discussions, it is obvious that researchers have not reached a consensus
view of the effect of IND on firm performance.
Although the empirical evidence is not conclusive, a higher proportion of IND may
influence firm performance. Hence, it is hypothesized that:
H5: There is a significant relationship between the percentage of IND on boards and
firm performance.
5.2.6 Percentage of DAF and firm performance
Educational background of directors can be an important determinant of firm
performance. Hambrick and Mason (1984) assert that the more educated the manager,
the more likely he/she is to adopt innovative activities and accept ambiguity. Gray
(1988) identified education as one of the institutional consequences affecting
accounting values and practices. Cooke and Wallace (1990, p.84) hypothesize that ‘...an
increase in the level of education in a country may increase the demand for corporate
accountability.’ Grace et al. (1995) believe that the level of education should be
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examined as a crude measure for professional eminence. Therefore, if the board of
directors consists of individuals having an academic background especially in
accounting or finance, they may exercise their skills in providing accountability to their
management team and thus boost firm performance. Demb and Neubauer (1992) argued
that the presence of a professional accountant on the board of directors increased the
likelihood that an earnings forecast would be included in the corporate report.
Although, there were no studies that directly relate DAF with performance,
theoretically, DAF in relation to firm performance can be explained by agency and
managerial hegemony theory. The separation of ownership from control increased the
power of professional managers and left them free to pursue their own aims as they
were “the only ones with the specialised knowledge necessary to operate the company”
(Mizruchi, 1983). Due to domination of management, the board becomes passive and
does not provide much input into decision making that would help strengthened
performance (Haniffa et al, 2002). As a result, the board of directors is treated as a
rubber stamp whose basic task is to approve any decisions made by the management.
However, if boards of directors possess accounting or finance qualifications, they are
able to participate actively in decision-making processes or at least question
management on any decisions reached and seek reasonable answers. They would
certainly be able to appreciate and comprehend accounting and financial issues much
better than directors without those qualifications. Their opinions and thoughts would be
beneficial and highly regarded by management. This would reduce CEOs dominance on
boards of directors and thus enable boards to efficiently monitor the management.
McMullen and Raghunandan (1996), who studied companies either subject to SEC
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enforcement actions and/or with material restatements of quarterly earnings, supports
this view as such companies, were much less likely to have an accountant on the board.
The significance of DAF could be attributed to the fact that the primary responsibility
for preparing annual reports rests with the principal accounting officer of the company
A study by Ahmed and Nicholls (1994) in Bangladesh, indicates that although
accountants as members of a board of directors may be more cautious and poor
identifiers of business opportunities, their ability to advise the board on accounting
matters and scrutinise budgets and other management information compensate for these
weaknesses. Therefore the presence of more directors with such qualifications on the
board would definitely be an advantage to the company and this could enhance
performance. Hence, it is hypothesised that;
H6: There is a significant relationship between the percentage of DAF and firm
performance.
5.2.7 Percentage of WOM and firm performance
Carter et al. (2003) believe that a greater representation of WOM on the board would
increase diversity and influence the board independence. This is because a more diverse
board could possibly enhance the monitoring of management and thereby reduce the
likelihood that management could subvert the interests of shareholders. Likewise,
diversity increases board independence because people with a different gender might
ask questions that would not come from directors with more traditional backgrounds. In
a similar way, Ezzamel and Watson (1993) suggested that diversity leads to a greater
knowledge base, creativity and innovation, and therefore provides a source of a
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competitive advantage. Bilimoria and Wheeler (2000) held that WOM are generally
younger than their male counterparts and are consequently open to relatively newer
ideas and approaches to doing business. WOM may therefore represent champions for
change.
In contrast, Blau (1977) suggested that firms with different levels of cultural diversity
experience dissimilar dynamics and organizational outcomes. This is because, as
cultural diversity increases, social comparisons occur, creating barriers to social
interaction. Therefore, as heterogeneity in management groups reaches moderate levels,
the psychological processes associated with social identity theory may be more likely to
occur (Blau, 1977). These processes generate individual behaviors such as solidarity
with others in a race or gender-based group, conformity to the norms of one’s group,
and discrimination against out-groups. All these behaviors could adversely influence
group interaction and subsequently lower firm performance. Pelled et al., (1999), guided
by social identity and related self-categorization theories, have suggested that diversity
is associated with negative performance outcomes.
Empirically, Shrader et al. (1997), who examined firm performance with gender
diversity at the board of director level for large firms, found a positive link between
WOM in management positions and firm performance. This is probably because these
companies were recruiting from a relatively larger talent pool, and consequently
recruited more qualified applicants regardless of gender. A study of board diversity by
Erhardt (2003) found that gender diversity was positively associated with both return on
investment (ROI) and ROA. Another study entitled “The Bottom Line: Connecting
Corporate Performance and Gender Diversity” released in early 2004 by Catalyst,
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found that diversity has a positive impact on the bottom line (Collins, 2004).58 The
study reported that companies with the highest percentage of WOM saw returns on
equity that were 53 percent higher than those companies with the fewest number of
women on their boards. On average, companies with the highest percentages of WOM
outperformed those with the lowest; by 66% return on invested capital (ROI), 53% ROE
and 42% ROS (Collins, 2004).
On the other hand, empirical research has also suggested that diverse decision-making
groups are slower to reach consensus than homogeneous groups. A study has indicated
that high levels of diversity reduce agreement-seeking behaviors and social cohesion in
the context of strategic decision making (Ferrier, 2001). Consequently, decisionmaking speed, as well as a firm’s ability to effect strategic change, are often impeded
(Hambrick et al, 1996). These potentially negative consequences suggest that a highly
diverse management might have difficulty operating successfully in a context
characterized by an emphasis on risk taking and proactiveness.
With all the various theories discussed and considering the link of WOM to firm
performance, it is suggested that there may be a relationship between WOM and firm
performance. Thus, it is hypothesized that,
H7: There is a significant relationship between the percentage of WOM and firm
performance.
58
The study examined Fortune 500 companies over a span of four years. The study examined four critical financial measures: ROA,
ROE, Return on sales (ROS), and return on invested capital.
172
5.2.8 Percentage of BUM and firm performance
The Malaysian capital market exhibits unique cultural differences and ethnicity in its
corporate environment practices because there are clearly identifiable capital and
management segments divided along ethnic lines (Jesudason, 1989). This is due to the
government initiated NEP (1971) and ICA (1975), which gradually added distinct
components of an ethnic group, namely the BUM and shareholders, to the Malaysian
capital market.59 The effects of cultural differences and ethnicity have been shown to
influence business practices and corporate governance of organizations (Hofstede,
1991).
The presence of BUM is likely to provide evidence of possible corporate governance
differences in Malaysian PLCs. This is because BUM dominates much of the economic
activities of GLCs and frequently involved in policy making decisions. Che-Ahmad and
Houghton (2001) suggest that an element of ethnicity or ethnic favouritism can be
considered as another dimension of inherent risk that is likely to create a poor
governance environment which could adversely affect firm performance. Johnson and
Mitton (2003) and Gomez and Jomo (1997) argue that BUM are perceived to practice
poor corporate governance and thus greater agency problems because, they are not
appointed on their merits but on the basis of ethnicity and connections.
Empirically, Eichenseher (1995) and Che Ahmad and Houghton (2001) in their study on
corporate governance reported that firms which have a high proportion of BUM pay
higher external audit fees than their non-bumiputera counterparts (i.e. ethnic Chinesecontrolled firms). The higher fee paid might indicate that there is greater weakness in
59
There are 205 firms in the Malaysian PLCs whose directors are predominantly bumiputera and some 135 firms whose outstanding
shares are substantially held by bumiputera shareholders (Yatim et al, 2006).
173
the internal control and corporate governance among such firms (Eichenseher, 1995).
This reflects a view that bumiputra were appointed as directors in Malaysian PLCs
merely to fulfil the implementation of NEP (1971) and the exercising of ICA (1975).
Bumiputra that were close to political and corporate figures were often appointed as
directors and chairman of GLCs and NGLCs. As a result, less able bumiputra, but with
good connections were given the opportunity to run companies as chairman, directors or
managers. Since these bumiputra in many cases had little knowledge and experience in
the corporate sector, they were probably a burden in achieving optimum firm
performance.
However in a later study, Yatim et al (2006) contradicts Eichenseher (1995) and CheAhmad and Houghton (2001) by reporting that firms dominated by BUM pay lower
audit fees than firms with non-BUM. This suggests that firms with predominantly BUM
practice more favorable corporate governance practices compared to their nonbumiputera counterparts. Yatim et al (2006) suggest that there are two possible
explanations for this difference in findings: the changes in the regulatory environment
during late 1990s and in 2001, which were disproportionately adopted by high BUM
firms, and an increased focus on board and audit committee oversight responsibilities in
high BUM firms since the earlier studies.
Alternatively, NGLCs have also appointed BUM for the purpose of acquiring external
resources such as a link to policy-makers in order to have access to government tenders
and contracts. Their appointment is seen to provide boards with their contacts as
mentioned in the resource dependency theory. Due to the favourable terms exclusively
for bumiputra outlined in the NEP, it is worthwhile to examine the impact of the
174
presence of BUM on firm performance. Thus it is hypothesised that there is a significant
relationship between BUM and firm performance.
H8: There is a significant relationship between the percentage of BUM and firm
performance.
5.2.9 Percentage of SGO and firm performance
This variable is included in the current study because about 50 to 60 % of GLCs’
directors are SGO (see section 6.29).
As mentioned in Chapter One, GLCs are
significant in the economic development of Malaysia because the fifty largest GLCs
have a combined market value of 295 billion ringgit ($80.4 billion), or 36 percent of the
market's total value. Since the federal government and state agencies are the biggest
shareholders in these GLCs, many SGO are appointed as directors. They have either
retired or currently serving as senior officers of government departments and
subsequently seconded to GLCs. The presence of SGO as directors could, in line with
resource dependency theory, bring government resources, favourable contracts and
business opportunities into firms. However, their contribution to GLCs may not be
positive as government officers do not have the appropriate business acumen compared
to their counterpart in the private sectors.
There were no studies that specifically relate SGO and performance except those
conducted on Singapore’s GLCs. Singapore is a useful comparator as it was once part of
Malaysia before the two countries split in 1965 (Thillainathan, 1999a). Although both
countries share common social pattern in which there are three main races (Chinese,
Bumiputra and Indians), Singapore is dominated by the Chinese. Their GLCs are also
175
similar to Malaysia’s GLCs which include a representation of SGO. Unlike Malaysia,
Singapore’s SGOs are dominated by the Chinese. Empirically, there were two studies
that examine the link between SGO and firm performance in Singapore. First, Feng et al
(2004), who examined 30 Singaporean GLCs covering the period 1964 to 1998 reported
that GLCs showed a better performance compared to NGLCs.60 This is because
Singapore’s GLCs bear a close resemblance to private enterprises (Ramirez and Tan,
2004). They are run on a commercial basis, with a focus on bottom-line performance.
Although many SGO were appointed as directors, they have proved to be as competent
as NGLCs’s directors.
Another study by Ang and Ding (2006), analysed 25 GLCs and 204 NGLCs listed on
the Singapore Exchange’s main board. They found that Singapore’s GLCs are actually
outperforming or at least equalling NGLCs in the areas of profitability, efficiency and
financial returns over an 11-year period from 1990 to 2000. The empirical study also
concluded that GLCs are relatively more transparent in corporate governance practices
and this adds to their higher valuations. Unlike Malaysia’s GLCs, Singapore’s GLCs
have not been used for social or employment-generation purposes. In fact, they compete
with private firms and multinational companies and, in some cases, with each other. As
a result, Singapore’s GLCs are able to perform well. However, the possibility of a
relationship between SGO and performance has not been tested yet in Malaysia. Hence,
it is interesting to examine their relationship to performance. Therefore, it is
hypothesised that the percentage of SGO is significantly related to firm performance.
Singapore’s GLCs are a key contributor to the Singapore economy and they account for some 33 per cent of the total market
capitalisation of the Singapore Exchange. Some of the companies surveyed in the study include Singapore Airlines, SembCorp
Industries, Singapore Telecoms, DBS Bank and Neptune Orient Lines.
60
176
H9: There is a significant relationship between the percentage of SGO and firm
performance.
5.2.10 Percentage of POL and firm performance
POL is included in the current study because there is a significant government
ownership in PLCs and quite a number of politicians are appointed as directors (Shleifer
and Vishny, 1997; Claessens et al., 2000a). This variable is of interest because the
presence of politician directors might have effects on the performance of firms. At the
corporate level, these directors may influence how the managers and other board
members govern their firms. Baysinger (1984) noted that appointing politicians to a
board can be viewed as part of a firm’s corporate political strategy and firms
presumably see benefits from such an action.
In line with the general arguments by resource dependence theorists, adding politicians
to a board may provide unique information about the public policy process, which is
often very expensive or difficult for a firm to obtain (Hillman et al., 2000). Politicians
on board also provide potential access to political decision makers that may result in
influence over political decisions and legitimacy (Pfeffer, 1972). Hilman (2005) held
that directors with political experience (i.e., ex-politicians) represent tenets of the
“relationship-based” perspective on boards. This relationship factor and benefit may
perhaps improve firm performance.
The notion of capitalism has been linked to the multi-faceted relation between business
and politics in East Asia including Malaysia (Gomez and Jomo, 1997). This
relationship, which has been referred to as political connections, is more obvious when
the government through GLCs for example, plays the role of political patron to selected
177
firms (Perkins and Woo, 2000; Johnson and Mitton, 2003). As a result, politicians were
appointed as directors in GLCs to act as a link between the government and company’s
management. Besides that, NGLCs also appoint POL because directors adept at politics
can aid in the political dealings of a firm by using their skill to predict (or perhaps to
effect) government actions (Klein, 1998). On the other hand, appointing POL in GLCs
and NGLCs in Malaysia could hamper firm performance, as they do not possess the
appropriate expertise and skills in the firm’s strategic goals, operations and products.
Several prior studies predominantly using data from Malaysia have investigated the
association between POL and firm performance. A study on the relationship between
political connections and effective tax rates (ETR) on a group of Malaysian firms over a
10-year period by Adhikari and Tondkar (1992) found that firms with political
connections pay tax at significantly lower rates compared to firms with no political
connections. Their study shows that there is a statistically significant negative link
between ETR and political connections.61 This is because, as part of the public policy
in relationship-based economies, government privileges are provided to selected firms
for overlapping policy and personal reasons. Government support results in explicit and
implicit subsidies, which can include special tax deductions and tax-free government
bailouts (e.g., Jayasankaran and Hiebert, 1998), all of which result in a lower ETR.
However, Dong et al (2004) stated that the performance of firms in China that are run
by POL is poor in terms of accounting and stock return compared to their politically
unconnected counterparts. The difference in performance is evident in IPO pricing and
61
For the time period covered (1990–1999), all listed firms were included in the original sample. There were 474 firms in the
original sample.
11 After controlling for other factors that influence firm performance, we find that long-term post-IPO stock returns are
significantly worse when a firm's CEO is politically connected. This difference in stock return performance is noticeable soon after
the initial listing and becomes statistically significant around 40 days after the new issue.
178
in stock returns shortly after the initial trading day.62 The overall evidence is consistent
with the “grabbing hand” argument (Shleifer and Vishny, 1998) that politicians extract
resources from listed GLCs under their control to fulfil objectives that are not
consistent with firm value maximization. Gul (2003) found a positive association
between audit fees and agency costs of political affiliations using a sample of
Malaysian listed firms. Gul argues that auditors perceive politically affiliated firms as
having greater audit risks, thus charging them higher fees. As a result, the performance
of GLCs in Malaysia and elsewhere suffers from both political costs (i.e., the costs
associated with control of firms by politicians who have political goals that differ from
economic efficiency) and agency costs (Shleifer and Vishny, 1994; Qian, 1996).
Given the importance of the participation of POL to business in the Malaysian context,
the appointment of POL might be related to firm performance. As such, it is
hypothesized that
H10: There is a significant relationship between the percentage of POL and firm
performance.
5.2.11 Percentage of FAM and firm performance.
As there are tendencies among capital owners to appoint directors among family
members, FAM are prominent in family-owned firms (Nicholls and Ahmed, 1995). La
Porta et al (1999) noted that the popularity of the family controlled company results
from inadequacies in the protection of investors’ rights by national institutions.63
Claessens et al (2000b) in a study of East Asian countries indicate that controlling
63
In a survey of large corporations in 27 high per capita income countries, only those with high levels of investor rights protection
exerted adequate monitoring of the few firms that were controlled by single shareholders or a dominant family
179
families generally use pyramidal ownership structures to ensure a disproportionately
high level of controlling rights as well as cash flow rights in firms. In the case of
Malaysia, FAM were appointed to sit on the boards both as executive and NEX of listed
companies with substantial family shareholdings (Haniffa and Cooke, 2002).
Theoretically, agency problems would occur if FAM were appointed as directors. The
main problem is the increased possibility of the misuse of managerial power as a result
of management entrenchment. Furthermore, FAM could affect the minority
shareholders because family control tends to shield a firm from the disciplinary pressure
of the market for corporate control since their substantial share ownership reduces the
probability of a hostile take-over (Gomez-Mejia, 2003). Although a large proportion of
listed companies are still under family control in a number of countries in East Asia,
including Malaysia, there have been few empirical studies on their performance
directly. Research from North America, (e.g. Morck et al, 1988) provides evidence of
the negative effect of a controlling family on corporate performance. Filatotchov et al
(2005) in their study using a multi-industry dataset of 228 family firms listed on the
Taiwan Stock Exchange (TSE) found that family control is not associated with
performance measured in terms of accounting ratios, sales per issued capital, earnings
per share and market-to-book value.
However, a number of more recent empirical studies in South Korea (Chang et al, 2003;
Joh, 2003) and Hong Kong (Carney and Gedajlovic, 2002) provide evidence that
controlling family ownership is associated with better performance. Barontini and
Caprio (2005), who investigated the relationship between ownership structure and firm
performance in Continental Europe using data from 675 publicly traded corporations in
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11 countries, reported
that family control firms in which the directors are family
members is positively related to firm value and operating performance.
Based on these arguments and past research, FAM could either enhanced or decrease
firm performance. Therefore, it is hypothesised that,
H11: There is a significant relationship of FAM and firm performance.
5.2.12 ACS and firm performance
The Cadbury Committee (1992), the BRC (1999), the Smith Committee (2003) and the
requirement set out in the Bursa Malaysia Listing Requirements all recommended a
minimum audit committee membership of three NEX. The BRC (1999) further noted
that the impediment of the accounting and financial reporting matters reviewed by audit
committees require extensive director resources, both in terms of number of directors
committed to the committee and the time each director devotes to committee matters.
This seems to advocate that large audit committees are required for effective
monitoring.
The main function of an audit committee is to assist the board to provide an independent
review of the effectiveness of the financial reporting process and the internal control
and risk management systems of the company (McMullen and Ragunanthan, 1996). A
properly functioning audit committee serves as a means to increase board effectiveness,
accountability, transparency and objectivity. To operate effectively, an audit committee
requires the cooperation and support of the executive management in providing
information and resources, and more importantly, sufficient members to fulfill their
tasks and obligations. Turley and Zaman (2004) discussed the evidence of audit
committee effectiveness with regards to perceived incentives associated with their
181
adoption, effects on the audit function, effects on the financial reporting quality and
effects on corporate performance. They held that audit committees are perceived as
effective mechanisms for reducing agency costs and directors’ legal liability.
Although there is no direct study done on the relationship between ACS and firm
performance, bigger ACS is important because additional members would provide more
appropriate skills, expertise and resources to monitor management’s decision and
protect stakeholder interests (DeZoort, 2002). By having a bigger ACS, audit committee
members would have more time and resources to monitor management in the aspect of
the audit function, on financial reporting quality and on corporate performance. A
larger audit committee may make it more probable that impending problems in the
financial reporting process will be made known and resolved. Therefore, ACS is linked
to improved performance. Hence, it is hypothesized that:
H12: There is a significant relationship between ACS and firm performance.
5.2.13 Frequency of ACM and firm performance
The importance of the audit committee as a corporate governance mechanism has been
emphasized in recent years. More frequent ACM would have an impact on its
effectiveness as audit committee members and provide more time for member to discuss
various issues concerning audits and financial matters (Verschoor, 2002). Additional
meetings would also ensure that the financial reporting processes, including quarterly
reporting and internal control, are functioning properly. More frequent meetings would
keep the audit committee remain informed and knowledgeable and subsequently
improve the quality of the internal audit function. This would consequently impact on
the firm performance.
182
A 1994 study of audit committees by Coopers and Lybrand, Audit Committee Guide,
suggested that to be effective, audit committees should meet three or four times a year.
Such frequent meetings convey a signal that the committee intends to remain informed
and vigilant. The ACM would indicate whether an audit committee is active or not
(FCCG, 1999). Menon and Williams (1994) pointed out that an active audit committee
would contribute to their effectiveness. Kalbers and Forgarty (1993) supported this
argument and indicated that audit committee’s effectiveness would only materialize if
the members were committed to pursue their roles and duties. Indeed, the frequency of
ACM indicates how active the committees are in pursuing good corporate governance
objectives (Muhammad Sori and Abdul Hamid, 2001) and it is probable that this good
governance practice will improve the firm’s long-run performance.
Although there are no empirical studies that investigate directly the link between the
frequency of ACM with performance, there have been studies that investigated the link
with other variables such as quality of financial reporting, firm size, independence
(outside directors), and material restatements of quarterly earnings (Menon and
Williams, 1984). Nevertheless, all these studies indirectly associated ACM with firm
performance. Empirically, a study by McMullen and Raghunathan (1996) of the
meeting habits of audit committees of companies with and without financial reporting
problems in U.S showed that audit committees of problem companies were less likely to
have frequent meetings. Only 23% of audit committees of problem companies had
regularly scheduled meetings three or more times a year. Forty percent of audit
committees of companies without financial reporting problems met at least three times
annually (McMullen and Raghunathan, 1996). Beasley et al. (1999) found that the audit
committees of companies experiencing financial fraud generally met only once a year.
183
Abbott et al. (2000) found that the presence of an audit committee that meets at least
twice a year will be associated with a decreased likelihood of both fraud and nonfraudulent misstatement. Farber (2005) who used a sample of 87 firms identified by the
SEC as fraudulently manipulating their financial statements found that they have fewer
audit committee meetings. This indirectly indicates that fewer audit committee meetings
would lead to lower firm performance.64
In general, since effective monitoring of internal control on a continuous basis needs a
more frequent ACM to be held, it is hypothesized that,
H13: There is a significant relationship between the frequency of ACM and firm
performance.
5.2.14 AUD and firm performance.
The AUD accounting firms are PricewaterhouseCoopers (PWC), KPMG, Ernst &
Young and Deloitte Touche. “Big Four” firms (this used to be Big Eight, Big Six and
later Big Five) are usually identified as high-quality auditors in the literature (Gul and
Tsui, 1997). As there is no study that directly relates AUD and firm performance, this
section discusses the relationships between AUD and audit quality, conservative
accounting and earnings management. This is because the AUD are generally related to
higher quality auditors, more ready to practice conservative accounting and
characteristically understate earnings compared to non “Big Four” auditors.
64
This is the first study of its kind that provides evidence on the link between the credibility of the financial reporting system and
the quality of governance mechanisms by investigating changes in these mechanisms subsequent to fraud detection and the
corresponding economic consequences of such changes.
184
Empirically, Becker et. al. (1998) found that clients of non-AUD report discretionary
accruals that increase income relatively more than the discretionary accruals reported by
clients of AUD.65 Also consistent with earnings management, they found that the mean
and median of the absolute value of discretionary accruals are greater for firms with
non-AUD. This result indicates that lower audit quality is associated with more
“accounting flexibility”. Basu et. al. (2002), and Chung, et. al. (2003), find that AUD
firms are more conservative than non-AUD firms. Conservative accounting concept
stated that when in doubt over recording a transaction, the accountant should choose a
solution that will be least likely to overstate assets and income (Kieso and Weygandt,
1995). Thus, AUD relates to a lower reported earnings or income in the financial
statements. As a result, companies that based their performance on reported earnings
find their performance reduced.
The discussions above indicate that AUD have the tendencies to report lower earnings
based on conservative accounting and earnings management. These lower reported
earnings thus contributed to lower firm performance. On the other hand, based on
agency theory, knowing that a company engaged an AUD and
uses conservative
accounting practices might provide some safeguard for investors and creditors and this
may induce them to invest in or to lend to the company. Therefore, shareholders and
creditors may not restrict the equity and debt financing they provide and /or they may
make financing and credit costs less expensive for the company. These lower costs may
enhance firm performance. On balance, it is hypothesized that;
H14: There is a significant relationship between AUD and firm performance.
5.3 Control Variables
65
It was supported by evidence from a sample of 10,379 Big Six and 2,179 non Big Six firm years.
185
There are two control variables for this study; LSALE and INDUS. This section
examines the two control variables.
5.3.1 LSALE
In this study, LSALE is used as proxies for firm size. Since firm size effects have been
the focus of many previous studies on corporate governance, the benefits of firm size
may accrue to the financial performance of the firm. The size of a firm has a major
bearing on performance as it is usually a good indication of its existing financial and
human resources and management experience. Larger firms are able to generate
stronger competitive capability than smaller firms probably as a result of their superior
access to resources, greater market power and larger economies of scale (Baum, 1996).
However, empirical works on firm size effects are mixed, for example, Berman et. al
(1999) confirmed a positive correlation, while others found either mixed effects or no
effects at all (O Neill, et. al., 1989 or Meng, 2006). Larger firms tend to make hefty
investments and often receive preferential treatment which may enhance firm
performance (Boeker, 1997). In contrast, smaller firms tend to be trade oriented and,
although they may lack the strategic resources to compete in the international
marketplace, their lower transaction costs might give them more opportunities to
enhance financial performance (Westphall, 1998).
5.3.2 INDUS
186
Whittred and Zimmer (1990) proposed that the sensitivity of the industry in which a
firm belongs might have some influence on the level of corporate governance practised.
For example the oil and gas industry in the U.S and the oil and mining industry in
Australia are considered as a politically sensitive industry. In a study of listed
companies in Singapore, Ng and Koh (1994) believe that companies in different
industrial sectors are subject to different degrees of regulation and suggest that
companies in highly regulated industries are more likely to practise better governance.
This is because they are subjected to scrutiny from government agencies and other
interest groups.
Besides that, the market recognises that an industry is under pressure with respect to
some political cost, for example, pollution, deforestation and potentially harmful
chemical excretion (Dye and Sridhar, 1995). Therefore, there were arguments that
different industries may provide additional governance practices in line with the
peculiarities of their industries. Firms within an industry may emphasise governance
practices, which may seem trivial in another industry (Dye and Sridhar, 1995). On a
similar note, Cooke (1991) suggested that the existence of a nationally dominant firm
with a high level of corporate governance practices within a particular industry might
lead to a bandwagon effect on the levels of governance adopted by other firms in that
industry. This is because companies in the same industry may have certain incentives to
practice good governance to compete for the awards for best governance practices. In
the case of Malaysia, some industries are also politically sensitive, especially when
there is substantial government ownership (e.g. oil, heavy industries and utilities).
Therefore industry type will be included as a control variable.
5.4 Summary
187
This chapter has discussed the theoretical frameworks which might be relevant to
developing hypotheses on possible relationships between corporate governance
variables and firm performance. The chapter also advances fourteen independent
variables together with their hypothesised relationship and two control variables for
testing. The theoretical frameworks examined were agency theory, stewardship theory,
resource dependence theory, stakeholder theory and managerial hegemony theory. Since
the current study is exclusively in a developing country with a unique socio-political
background, there is some degree of overlap between the various theories but the
majority of hypotheses derive from agency, stewardship or resource dependency theory.
Fourteen hypotheses were formulated in relation to the theoretical framework discussed.
Although variables such as BUM, SGO and POL are seldom used in corporate
governance studies, they were employed as variables in this study due to its relevance to
the Malaysian business environment. Moreover, these variables were found to be
significantly different on comparison between GLCs and NGLCs in the pilot study. The
next chapter will discuss the descriptive analyses and univariate findings of all the
fourteen corporate governance variables hypothesised in this chapter for All Companies,
GLCs and NGLCs.
188
CHAPTER 6
FINDINGS AND DISCUSSIONS
UNIVARIATE ANALYSIS
6.1 Introduction
This chapter details and discusses the results of a univariate analysis of corporate
governance structures of a matched sample of companies listed on the Bursa Malaysia
in 2001, 2002 and 2003. The matched sample consists of two sub-sets; GLCs and
NGLCs. Hence, the analysis covers three groups of companies; All Companies, GLCs
and NGLCs. The chapter starts by presenting the descriptive statistics for the variables
identified in Chapter 5 over the period between 2001 and 2003. In the second section,
the study compares and analyses the corporate governance structures of GLCs and
NGLCs over the same period to determine whether the first hypothesis that there are
significant differences in their corporate governance characteristics is supported. The
third section discusses the characteristics of the performance measures, ROA and ROE,
used in the study in all groupings of companies over the period. The fourth section
explains and discusses the two control variables; LSALE, and INDUS. The last section
presents the findings of univariate tests on each of the fourteen independent variables in
relation to the two performance measures. The relationship revealed between the
dependent and independent variables is examined and the findings and conclusions as
regards to the second and third hypotheses are discussed.
189
6.2 Descriptive statistics on corporate governance variables for All Companies,
GLCs and NGLCs
This section examines descriptive statistics for the corporate governance variables that
were used to operationalise the hypotheses developed in Chapter 5. All the variables are
written in their respective acronyms as detailed in Chapter four. The first variable is
BSZ.
6.2.1
a) BSZ
BSZ is the number of persons appointed to hold the position of director in companies as
reported in the annual financial statement. The average BSZ is the total number of all
directors divided by the number of companies. Table 6.1 shows the average BSZ for All
companies, GLCs and NGLCs in the period.
Table 6.1: Average BSZ for All Companies, GLCs and NGLCs
2001
2002
2003
All Companies
7.87
8.27
8.11
GLCs
8.50
8.94
8.51
NGLCs
7.20
7.69
7.80
For All Companies, the average BSZ increased moderately in 2002, but then dropped
slightly in 2003. Although BSZ of GLCs was larger than NGLCs in all the years, the
gap reduces from 1.3 directors in 2001 to 0.71 in 2003. The convergence perhaps results
from moves to conform to best practice as detailed in the Malaysian Code of Corporate
Governance (2000). Overall results indicate that there was not much difference in the
average number of board members among All Companies, GLCs and NGLCs in the
periods.
190
6.2.1 b) Minimum and maximum number of directors for All Companies, GLCs
and NGLCs
Table 6.2 shows the minimum and maximum number of directors for All Companies,
GLCs and NGLCs.
Table 6.2: Minimum and maximum number of directors for All Companies, GLCs and
NGLCs
2001
All
Companies
GLCs
NGLCs
2002
2003
Min
4
Max
14
Min
5
Max
14
Min
5
Max
14
5
14
5
14
5
14
4
11
5
11
5
12
The minimum number of directors for all the three groups of companies was
approximately the same at between four and five throughout the periods. The maximum
number of directors for GLCs was fourteen in all the years, but NGLCs showed a lower
maximum number of directors. Overall, the results indicate that the minimum size of
all the three groups was approximately similar, but the maximum size was greater for
GLCs than NGLCs.
6.2.2
BMF
BMF is the number of board meetings held in a year. Table 6.3 shows the average BMF
for All Companies, GLCs and NGLCs for 2001 to 2003.
Table 6.3: Average BMF for All Companies, GLCs and NGLCs
2001
2002
2003
All Companies
5.57
5.97
5.75
GLCs
6.01
6.43
6.20
NGLCs
5.12
5.33
5.28
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The three groups of companies showed the same pattern of a modest increase in BMF in
2002, but a slight decrease in 2003. However, the range is very small. The highest
average BMF for all types of companies was in 2002 and the lowest in 2001. Overall
results indicate that although GLCs showed a higher BMF than NGLCs in all the years,
the difference between all groupings of companies is only around one meeting per
annum.
6.2.3
RDU
RDU occurs when the CEO or managing director is also the chairman or executive
chairman of the board. The MCCG (2000) recommends these two roles should be
separated to maintain board independence. Table 6.4 shows extent of RDU for All
Companies, GLCs and NGLCs throughout the period
Table 6.4: Average percentage of RDU for All Companies, GLCs and NGLCs
2001 (%)
2002 (%)
2003 (%)
All Companies
24.0
23.0
25.0
GLCs
13.7
13.0
9.0
NGLCs
33.0
31.0
40.0
Despite this recommendation, RDU was practiced in around a quarter of All Companies
consistently throughout the period. However, if a comparison is made between GLCs
and NGLCs, RDU is observed to be considerably more dominant in NGLCs especially
after a sharp rise in 2003. This perhaps arises because many NGLCs were family-owned
companies before going public and have attempted to retain a degree of family control
over their activities through practising RDU.
192
6.2.4
Percentage of NEX
The average percentage of NEX is the total number of non-executive directors in a year
divided by the total number of directors. Table 6.5 shows the average percentage of
NEX for All Companies, GLCs and NGLCs.
Table 6.5: Average percentage of NEX for All Companies, GLCs and NGLCs
2001 (%)
2002 (%)
2003 (%)
All Companies
71.65
73.39
74.04
GLCs
79.79
83.18
84.18
NGLCs
63.51
63.81
63.89
All groupings of companies showed a negligible increase in the average percentage of
NEX for all years. In NGLCs, it is quite stable at around 63 % in all the years. There
is a higher average percentage of NEX in GLCs than in NGLCs. Overall results show
that all groupings of companies have exceeded the recommendations made in the
MCCG (2000) which suggests that in order to create a balanced board, NEX need to
make up at least one-third of the membership of the board. This is especially true for
GLCs, possibly due to a higher number of SGO appointed as NEX (see section 6.2.9).66
6.2.5
Percentage of IND
66
Senior government officers appointed in GLCs were well above 50 % while in NGLCs, the percentage is around 20 %. As some
of these officers were still in office, they were seconded to GLCs as non-executive directors.
193
The average percentage of IND is the total number of independent directors in a year
divided by the total number of directors. Table 6.6 shows the average percentage of IND
for All companies, GLCs and NGLCs.
Table 6.6: Average percentage of IND for All Companies, GLCs and NGLCs
2001 (%)
2002 (%)
2003 (%)
All Companies
36.43
39.59
40.89
GLCs
37.66
38.79
40.74
NGLCs
35.21
40.38
41.05
The average percentages of IND for all groupings of company’s show that in both
GLCs and NGLCs there is a gradual increase in the percentage especially for NGLCs
that grew 16.6% throughout the period. This shows that, as with NEX, the MCCG
(2000) has impacted on the corporate governance structures of companies by appointing
more IND.
6.2.6
Percentage of DAF
For the purpose of this study, accounting or finance qualifications are defined as those
qualifications that are recognised by Malaysian Institute of Accountants (MIA) and the
government of Malaysia.
Table 6.7 shows the mean percentage of DAF in All
Companies, GLCs and NGLCs.
Table 6.7: Average percentage of DAF for All Companies, GLCs and NGLCs
2001 (%)
2002 (%)
2003 (%)
All Companies
21.26
22.62
22.20
GLCs
21.40
22.12
20.87
NGLCs
21.12
23.13
23.54
194
The table shows that there are no significant differences between all groupings of
companies. DAF were consistently around one-fifth of total board members from 2001
to 2003.
6.2.7 Percentage of WOM
Table 6.8 shows the percentage of WOM in All Companies, GLCs and NGLCs.
Table 6.8: Average percentage of WOM for All Companies, GLCs and NGLCs
2001 (%)
2002 (%)
2003 (%)
All Companies
7.15
6.12
6.31
GLCs
9.05
8.28
6.39
NGLCs
5.25
3.96
6.23
In All Companies, the percentage was highest in 2001. The position for GLCs and
NGLCs is fairly volatile with a fall of 29% between 2001 and 2003 for GLCs against a
modest increase in NGLCs over the same period. There was a higher percentage of
WOM in GLCs compared to NGLCs in all the years.
6.2.8
Percentage of BUM
Bumiputra (sons of the soil) are ethnic Malays whose interests are protected under the
Constitution of Malaysia. The NEP, which was established in 1970, advanced their
participation in businesses and economic growth of the country. Table 6.9 shows the
percentage of BUM in All Companies, GLCs and NGLCs.
Table 6.9: Average percentage of BUM for All Companies, GLCs and NGLCs
2001 (%)
2002 (%)
195
2003 (%)
All Companies
57.37
58.85
58.01
GLCs
72.22
72.50
75.53
NGLCs
42.98
44.46
40.65
For All Companies, the percentage range of BUM remained static at just under 60 %. If
a comparison is made between GLCs and NGLCs, it can be observed that GLCs have
almost double the percentage. There are two possible reasons for these differences.
First, the difference may have arisen from the bumiputra first policy, which is in line
with the NEP’s objective of appointing more bumiputra to the boards of GLCs. Second,
GLCs are backed by government institutions in which most of the senior managers are
bumiputra and it might be expected that members of this cohort would be appointed to
the boards of these companies to monitor the government’s investments.
6.2.9
Percentage of SGO
SGO in this study were either senior officers still in office or had officially retired.
However, only retired officers were allowed to serve the NGLCs. Table 6.10 shows the
percentage of SGO appointed onto the boards in All Companies, GLCs and NGLCs.
Table 6.10: Average percentage of SGO as directors for All Companies, GLCs and
NGLCs
2001 (%)
2002 (%)
2003 (%)
All Companies
41.16
36.71
35.77
GLCs
58.48
53.09
51.28
NGLCs
23.83
20.33
20.27
The Table shows a gradual decrease in the percentage of SGO appointed as directors in
all groupings in all the years. As would be expected, GLCs showed a higher percentage
of SGO appointed as directors than NGLCs. Overall; it is observed that the
appointments of SGO have reduced marginally over the years. In GLCs, where the
change is most marked, this is probably due to the shift in government policy of
196
gradually replacing them with qualified and experienced professional managers and
directors (Ministry of Finance, 2003).67
6.2.10 Percentage of POL
In Malaysia, politicians are often appointed as board of directors especially in
government enterprises and GLCs. They are either still serving the government or have
retired. However, their appointment as directors across the three groups of companies is
very minimal. Table 6.11 shows the average percentage of POL for All Companies,
GLCs and NGLCs.
Table 6.11: Average percentage of POL for All Companies, GLCs and NGLCs
2001 (%)
2002 (%)
2003 (%)
All Companies
4.57
5.02
3.95
GLCs
7.31
7.73
4.50
NGLCs
1.83
2.31
3.39
All Companies showed a modest increase in the percentage in 2002, but this dropped to
its lowest level in 2003. GLCs showed a consistent percentage of POL in 2001 and
2002, but the figure dropped by 41.8 % in 2003. NGLCs showed a significant
percentage increase in politicians appointed as directors with an 85.2 % increase from a
very low level between 2001 and 2003. Overall results suggest that GLCs were
marginally reducing the participation of politicians on their boards, while NGLCs were
increasing the percentage. GLCs were reducing the appointment of POL for two main
reasons. First, the government wanted to reduce their involvement in the management
and monitoring of GLCs as these could hamper companies’ growth and expansion. The
67
The framework for change in Khazanah and GLCs was announced by the Prime Minister and the most important task is on
improving national competitiveness and total factor productivity. This is especially pertinent in view of the increasing pressures of
liberalisation and globalisation (Mokhtar, 2003).
197
second reason is that the investment arm of the government (Khazanah Nasional
Berhad) wanted to see more professional directors and managers running GLCs as they
have better business acumen that would help these companies to generate more income
thus bringing more benefits to the economy.
On the other hand, NGLCs were
increasing the participation of politicians on the basis that these politicians with their
connections to government would lessen the environmental risks faced by NGLCs in
running their companies. However, overall politicians were not significantly represented
on boards of Malaysian companies in this period.
6.2.11 Percentage of FAM
For the purpose of this study, family members are defined as parents, children, in-laws,
uncles /aunts, cousins, and other close relatives of the founding family. Table 6.12
shows the mean percentage of FAM in All Companies, GLCs and NGLCs for 2001,
2002 and 2003.
Table 6.12: Average percentage of FAM for All Companies, GLCs and NGLCs
2001 (%)
2002 (%)
2003 (%)
All Companies
9.95
8.63
10.16
GLCs
3.17
3.97
3.52
NGLCs
16.73
13.28
16.80
All companies’ results suggest that there is a consistent percentage of between 8% and
10% of FAM. In the GLCs, the percentage is less than 4 % throughout the period. On
the other hand as would be expected, NGLCs showed a much higher percentage of
between 13% to 17% family members appointed as directors. This is possibly due to a
higher family shareholding structures in NGLCs before being listed on the stock
exchange compared to GLCs.
198
6.2.12 ACS
ACS is the number of directors appointed as members of the audit committee, including
the chairman.
Table 6.13 shows the average ACS in All Companies, GLCs and
NGLCs.
Table 6.13: Average ACS for All Companies, GLCs and NGLCs
2001
2002
2003
All Companies
3.51
3.77
3.69
GLCs
3.59
3.84
3.84
NGLCs
3.42
3.69
3.54
There was a small increase in the ACS between 2001 and 2002, which was reversed for
All Companies and NGLCs in 2003. In GLCs, the mean ACS was slightly higher than
for NGLCs throughout the period. Overall results showed that there was not much
difference in mean ACS in all groupings of companies. These results reflect conformity
with the MCCG (2000), which says, “a board should establish an audit committee of at
least three directors a majority of whom are independent”.
6.2.13 Frequency of ACM
The average number of ACM is the number of audit committee meetings held in a year
for the groups. Table 6.14 shows the mean frequency of ACM held by all groupings of
companies in all years.
199
Table 6.14: Average number of ACM for All Companies, GLCs and NGLCs.
2001
2002
2003
All Companies
4.35
5.07
5.17
GLCs
4.33
5.16
5.14
NGLCs
4.37
4.98
5.20
There has been a gradual and moderate increase in the number of ACM for all
groupings of companies. Overall results showed that the average number of ACM for
all groupings of companies is roughly the same at four or five times a year. This
suggests that there is a convergence as a result of Section 4.62(5) of MCCG (2000),
which stated that the audit committee should meet regularly and the number of meetings
required in a year is between three and four and must be planned to coincide with the
audit cycle and the timing of the published financial statements (Section 4.63, MCCG,
2000).68
6.2.14 AUD
AUD denotes companies that engaged one of the big four audit firms to perform audit
work. Table 6.15 shows the percentage of all groupings of companies that engaged the
‘big four audit’ firms.
Table 6.15: Average percentage of AUD engaged by All Companies, GLCs and NGLCs
2001 (%)
2002 (%)
2003 (%)
All Companies
82.61
83.70
88.63
GLCs
84.80
87.70
88.63
NGLCs
80.40
80.40
88.63
The suggested timings are between the end of one year’s audit and the beginning of the next, before the issue of the Interim
Statements, after the Interim Results and after the year-end but before the accounts are finalized.
68
200
The Table shows that there has been convergence between GLCs and NGLCs in the
percentage of companies with big four auditors and an increase in the proportion of
companies in the sample employing big four auditors. This indicates that both groups of
companies believed that there were advantages to employing big four audit firms.
6.3 Comparison of corporate governance structures of GLCs and NGLCs for 2001,
2002 and 2003.
This section will establish whether there are statistically significant differences between
corporate governance structures of GLCs and NGLCs in Malaysia in the post AFC
period from 2001 to 2003. At this juncture, it is worthwhile reiterating the first research
question and hypothesis:
a) Are there significant differences in corporate governance structures of GLCs and
NGLCs in the post-AFC period from 2001 to 2003?
To answer the research question, the research hypothesis is stated as:
H 1: Corporate governance structures of GLCs are significantly different from those of
NGLCs.
As GLCs were paired and accurately matched in terms of board listing, industry type
and paid-up capital, analyses were done using a paired samples t-test to ascertain
whether or not the differences between the two groups of companies were statistically
significant. Appendix B shows for each of the fourteen independent variables the mean,
201
standard deviation, t-value and significance of the differences for the three-year periods
under examination.
The results showed that there were statistically significant differences for seven
corporate governance structures between GLCs and NGLCs for 2001, 2002 and 2003.
Therefore the first hypothesis of significant differences between the corporate
governance structures of GLCs and NGLCs is supported. Indeed, the majority of
differences in the means for these seven variables were statistically significant at the 1%
level in the entire three periods shown (see Table 6.16).
Table 6.16: Corporate governance structures of GLCs and NGLCs that are consistently
different for all the three periods and their level of statistical significance
Variables
2001
2002
2003
1. BSZ
5%
1%
5%
2. BME
5%
5%
5%
3. RDU
5%
5%
1%
4. NEX
1%
1%
1%
5. BUM
1%
1%
1%
6. SGO
1%
1%
1%
7. FAM
1%
1%
1%
In addition, POL was statistically significant in two periods (2001 and 2002). The six
other variables did not conform to hypothesis 1. The absence of any significant
differences in these variables was probably due to two reasons. The first is a
convergence in practices caused by compliance with the regulations of the Security
Commission Malaysia (Security Commission Malaysia, 2000), New Bursa Malaysia
Listing Requirements (New Bursa Malaysia Listing Requirements, 2001) and best
practice as recommended by MCCG (2000). Both GLCs and NGLCs were subjected to
202
the same regulations and monitoring regimes and hence, we would expect convergence
in aspects of corporate governance where consistent or prescriptive guidance was
provided such as number of IND
69
, ACS70, and the need to have DAF appointed as
audit committee members. The second reason is the establishment of corporate norms
in certain areas of corporate governance, for example with respect to the need for a
proportion of WOM, use of AUD and the number of ACM.
Since the eight independent variables were found to have significant differences
between GLCs and NGLCs, they will be tested against firm performance in the
multivariate analyses in chapter seven. The reason being, since those variables have
significant differences, it provides unique governance characteristics between GLCs and
NGLCs. These characteristics may have some impact on firm performance between the
two groups of companies. The next section will look into the characteristics of the
performance measures that will be used in testing the remaining hypotheses, ROA and
ROE. These two measurements of performance are used in the current study as the
dependent variables for all groupings of companies.
6.4 Characteristics of the performance measures of ROA and ROE for GLCs and
NGLCs.
ROA and ROE are used as proxies for performance measurement in this study. ROA
uses accounting figures and is measured by dividing earnings after tax by the total
assets of the company. ROE is obtained by dividing earnings after tax by shareholders
equity and thereby combines an accounting figure for earnings with a market valuation
of the company. ROE is considered to be the ultimate measure of how well companies
69
To have an effective board balance, independent non-executive directors need to make-up at least one-third of the membership of
the board (MCCG, 2000)
70
The board should establish an audit committee of at least three directors, a majority of whom are independent (MCCG, 2000)
203
serve their shareholders’ economic interests. These performance indicators have been
frequently used in previous studies on firm performance (e.g. McConnell and Servaes,
1990; Dalton et al, 1998; Rhoades, et. al., 2001).
6.4.1 a) ROA
Table 6.17 shows the result of paired sample t-test of ROA on GLCs and NGLCs in all
the years.
Table 6.17: Paired Sample t-test of ROA of GLCs and NGLCs
ROA
Companies
2001
2002
2003
t-value
Mean
1.8847
t-value
Mean
6.3451
t-value
GLCs
Mean
4.9755
NGLCs
4.0982
0.478
1.9235
-0.009
6.2943
-0.586
GLCs showed a higher ROA, compared to NGLCs, for two of the three years (2002 was
the exception). The differences were small except in 2001 when there was nearly a 1%
difference in return and none were statistically significant. The fall in the ROA for
GLCs and NGLCs in 2002 was probably due to the uncertain direction of the U.S.
markets and economy and the escalating tension in the Middle East. Consequently, the
Bursa Malaysia Composite Index closed at 646.32 points on 31st December 2002,
posting a loss of 49.77 points, or 7.15% compared to 696.09 on 31st December 2001
(Bank Negara Malaysia, 2002). However, there was a marked improvement in
performance for both groups of companies in 2003 when the ROA for both groups of
companies was more than triple the 2002 results.
204
6.4.2
b) ROE
Table 6.18 shows a paired sample t-test of ROE on GLCs and NGLCs in all the years.
Table 6.18: Paired sample t-test of ROE of GLCs and NGLCs in all the years
ROE
Companies
2001
2002
2003
t-value
Mean
3.2725
t-value
GLCs
Mean
7.0192
Mean
7.0793
NGLCs
4.8491
1.221
2.7888
0.087
6.9705
t-value
-0.706
GLCs showed a higher ROE compared to NGLCs for all three periods but the
difference narrowed during the period from 2.17% in 2001 to only 0.1088% in 2002.
However, none of the differences were statistically significant. For probably similar
reasons, ROE performance for both groups of companies dropped in 2002, but rose
again in 2003. Overall results showed that although there was a marked difference in the
ROE percentage between GLCs and NGLCs in 2001, the returns were similar in 2002
and 2003.
6.5 Control Variables
To avoid firm performance being influenced by other factors, two control variables
were included in this study. They are LSALE, and INDUS. The natural log of LSALE
was obtained as possible proxy for size as firm performance may be a function of this
205
(larger firms are more profitable than smaller firms) and a failure to control for this may
bias the result (Ghosh, 1998). INDUS is used as a control variable because certain
industries might be expected to perform differently to others perhaps due to differences
in their level of efficiency and government priorities on selected industries (Haniffa,
1999).
6.5.1
LSALE of GLCs and NGLCs
Table 6.19 shows the average annual sales of GLCs and NGLCs. The average annual
LSALE are the total annual sales of all samples in each category divided by the number
of samples.
Table 6.19: Average LSALE of GLCs and NGLCs (in millions)
2001
2002
2003
GLCs
RM 733.5 71
RM 825.15
RM 1201.63
NGLCs
RM 615.85
RM 683.19
RM 800.36
The table shows that mean sales per annum of GLCs is higher than NGLCs in all years
particularly in 2003. Both groups show an increase of sales during the period under
study. However, the percentage increases in LSALE of GLCs between 2001 to 2003 are
much higher at 63.82 % compared to 29.96 % in NGLCs. 72
71
1 U.S Dollar is approximately RM 3.80
The Malaysian economy maintained its momentum growing 5.2% in 2003, after expanding 4.1% in 2002. In 2001, real GDP grew
an anemic 0.3% due to global uncertainties. The better than expected expansion in 2003 was fuelled primarily by the manufacturing
sector, particularly the electronics and chemical industries. The recovery of the global electronics sector boosted Malaysian exports
to the U.S., Malaysia’s principal trade and investment partner.
71
206
6.5.2
INDUS of GLCs and NGLCs
Table 6.21 shows the INDUS of all companies in each of the two groups of companies.
Table 6.21: INDUS of GLCs and NGLCs
Industries
2001
2002
2003
1. Construction
1
1
0
2. Consumer products
3
3
3
3. Industrial products
7
7
7
4. Plantations
7
7
6
5. Property
9
9
9
6. Trading and Services
18
18
18
7. Technology
1
1
1
46
46
44
Total
In total, there are thirteen sectors or classifications of industries on the Bursa Malaysia.
They are construction, consumer products, industries, plantations, property, trading and
services, technology, finance, hotel, mining, property trusts, closed end fund and
infrastructure projects. However, sectors such as finance, property trusts and closed-end
funds were not included in the study as their governance regulations were different from
those of companies incorporated under the Companies Act, 1965. Hence, the sample in
this study consist of only seven sectors as shown in Table 6.21.
6.6 Hypotheses
207
Other than the earlier hypothesis on the differences between corporate governance
structures of GLCs and NGLCs as discussed in section 6.3, three other hypotheses on
the relationships between the fourteen independent variables and the dependent
variables (ROA and ROE) as mentioned will be tested and the results will be discussed
in this section. The three main hypotheses developed are:
H2
There is a significant relationship between corporate governance structures and the
performance of Malaysian companies (All Companies) in the post-AFC period from 2001 to
2003.
H3
There is a significant relationship between corporate governance structures and the
performance of Malaysian GLCs in the post-AFC period from 2001 to 2003.
H4
There is a significant relationship between corporate governance structures and the
performance of Malaysian NGLCs in the post-AFC period from 2001 to 2003.
The sub-hypotheses at variable level are as follows:
H1
There is a significant relationship between the BSZ and firm performance.
H2
There is a significant relationship between the BMF and firm performance.
H3
There is a significant relationship between RDU and firm performance.
H4
There is a significant relationship between the percentage of NEX and firm performance.
H5
There is a significant relationship between the percentage IND and firm performance.
H6
There is a significant relationship between the percentage of WOM and firm performance.
H7
There is a significant relationship between the percentage of DAF and firm performance.
H8
There is a significant relationship between the percentage of BUM and firm performance.
H9
There is a significant relationship between the percentage of SGO and firm performance.
H10
There is a significant relationship between the percentage of POL and firm performance.
H11
There is a significant relationship between the percentage of FAM and firm performance.
H12
There is a significant relationship between the ACS and firm performance.
H13
There is a significant relationship between the frequency of ACM and firm performance.
H14
There is a significant relationship between AUD and firm performance.
208
Correlation tests between dependent and independent variables involved in all the
hypotheses as expressed above were carried out to see whether or not there was support
for an association between corporate governance variables, which identified various
aspects of the corporate governance structures, and performance measured by ROE and
ROA in All Companies, GLCs and NGLCs.
All the correlations were tested using the Spearman’s Rho two-tailed tests. A two-tailed
test was used because the nature of the relationship between all the dependent variables
and independent variables cannot be predicted beforehand. The tests results can either
go in positive or negative directions (Field, 2001). One-tailed and two-tailed tests differ
in the location (but not the size) of the region of rejection. That is, in a one-tailed test,
the region of rejection is entirely at one end (or tail) of the sampling distribution, but in
a two-tailed test, the region of rejection is located at both ends of the sampling
distribution (Siegel and Castellan, 1988).
6.6.1 a) BSZ to ROA
Table 6.22 shows the correlation between average BSZ and firm performance measured by
ROA.
Table 6.22: Correlation between average BSZ and ROA
2001
2002
2003
All Companies
0.214**
0.199*
0.122
GLCs
0.385***
0.347**
0.289*
NGLCs
0.041
0.130
0.006
*= 10%, **= 5% and ***= 1%
For all the groupings of companies and the years, there is a positive correlation between
BSZ and ROA, in accordance with our hypothesis. For All Companies, the years 2001
and 2002 show statistically significant results at 5% and 10% confidence levels
209
respectively. This probably derived from the position of the GLCs, which also showed
statistically significant results in all the years.
However, NGLCs’ results are not
statistically significant in any of the years. Overall results indicate that, for GLCs, the
bigger the BSZ, the better the ROA performance.
6.6.1 b) BSZ to ROE
Table 6.23 shows the correlation between average BSZ and ROE in All Companies,
GLCs and NGLCs.
Table 6.23: Correlation between average BSZ and ROE
2001
2002
2003
All Companies
0.410***
0.149
0.120
GLCs
0.532***
0.328**
0.405***
NGLCs
0.358**
0.044
-0.081
(*= 10%, **= 5% and ***= 1%)
For all the groupings of companies and the years (except for NGLCs in 2003, when
there was a very low negative correlation) there is a positive correlation between BSZ
and ROE. For GLCs, there are highly significant correlations in all years, but for
NGLCs there is only a significant correlation in 2001. This indicates that, as with ROA,
BSZ is significantly correlated with ROE for GLCs, but not for NGLCs. Overall, the
results based on ROA and ROE showed that BSZ was generally positively correlated
with performance and this relationship is stronger for GLCs than NGLCs.
6.6.2
a) BMF to ROA
Table 6.24 shows the correlation between average BMF and ROA in All companies,
GLCs and NGLCs.
210
Table 6.24: Correlation between average BMF and ROA
2001
2002
2003
All Companies
0.208**
0.102
0.203*
GLCs
0.159
-0.026
0.334**
NGLCs
0.226
0.196
0.054
*= 10%, **= 5% and ***= 1%
For all the groupings of companies and years (except for GLCs in 2002, when the
correlation was low and negative) there is a positive correlation between BMF and
ROA. For All Companies, a statistically significant positive correlation (5%) can be
observed in 2001 and a statistically significant result (10 %) in 2003. In the subcategories of GLCs and NGLCs, there is a statistically significant correlation (5%) for
GLCs in 2003. However, for NGLCs there is no relationship between BMF and ROA.
This indicates that there is no link between BMF and performance in NGLCs. Overall
findings indicate inconsistent results on the significance of correlations between BMF
and performance measured by ROA.
6.6.2
b) BMF to ROE
Table 6.25 shows the correlation between the average BMF and ROE in All Companies,
GLCs and NGLCs.
Table 6.25: Correlation between average BMF and ROE
2001
2002
2003
All Companies
0.368***
0.114
0.192*
GLCs
0.354**
-0.055
0.324**
NGLCs
0.386***
0.262*
0.087
*= 10%, **= 5% and ***= 1%
For all the groupings of companies and for all years (except for GLCs in 2002, when the
correlation is low and negative) a positive correlation between BMF and ROE is
211
observed. The correlation is statistically significant (1%) to ROE for All Companies,
GLCs and NGLCs in 2001, but in 2002, only the NGLCs show a marginally significant
positive correlation at 10%. In 2003, All companies and GLCs show a marginally
significant (10%) and statistically significant positive correlation (5%) but NGLCs do
not.Overall, the pattern of correlations between BMF and ROA and ROE, although
strong in 2001, were not consistent in 2002 and 2003. The relationship is more
noticeable in GLCs than NGLCs.
6.6.3 a) RDU to ROA
Table 6.26 shows the correlation between the average percentage of RDU and ROA in
All Companies, GLCs and NGLCs.
Table 6.26: Correlation between the average percentage of RDU and ROA
2001
2002
2003
All Companies
0.054
-0.126
-0.029
GLCs
-0.223
-0.204
-0.006
NGLCs
0.215
-0.089
-0.084
(*= 10%, **= 5% and ***= 1%)
For all the groupings of companies and the years (except for All Companies and
NGLCs in 2001), there is a negative correlation between RDU and ROA. The negative
direction suggests that increased RDU impairs company performance. None of the
correlations is statistically significant. Hence, the findings do not support the
hypothesis.
212
6.6.3 b) RDU to ROE
Table 6.27 shows the correlation between the average percentage of RDU and ROE in
All Companies, GLCs and NGLCs.
Table 6.27: Correlation between the average percentage of RDU and ROE
2001
2002
2003
All Companies
0.044
-0.073
0.066
GLCs
-0.099
-0.224
0.075
NGLCs
0.155
0.009
0.000
(*= 10%, **= 5% and ***= 1%)
All Companies and GLCs show mixed results of negative and positive correlations for
all the years. NGLCs show positive correlations for all the years, although it was very
low in 2003. No statistically significant relationship was found in all groupings of
companies and all years.
This indicates that there is no clear indication of any
relationship between RDU and performance measured by ROE in all groupings of
companies. Overall, it may be concluded that RDU does not have a significant impact
on performance measured by either ROA or ROE, although the direction is more
frequently negative. Hence, the findings suggest that the hypothesis is not supported.
6.6.4 a) Percentage of NEX to ROA
Table 6.28 shows the correlation between the average percentage of NEX to ROA in
All Companies, GLCs and NGLCs.
Table 6.28: Correlation between the average percentage of NEX and ROA
2001
2002
2003
All Companies
-0.002
0.044
0.028
GLCs
0.047
-0.151
-0.202
NGLCs
-0.030
0.090
0.215
213
(*= 10%, **= 5% and ***= 1%)
All groupings show mix of positive and negative correlations of NEX to ROA. There is
a negative relationship for All Companies and NGLCs in 2001 and GLCs in 2002 and
2003. All correlations are not statistically significant for all groupings in all years. This
indicates that there is no statistically significant relationship between NEX and ROA.
Hence, the hypothesis of the link is not supported.
6.6.4 b) Percentage of NEX to ROE
Table 6.29 shows the correlation between the average percentage of NEX and ROE for
All Companies, GLCs and NGLCs.
Table 6.29: Correlation between the average percentage of NEX and ROE
2001
2002
2003
All Companies
0.045
0.005
-0.003
GLCs
0.100
-0.180
-0.200
NGLCs
-0.026
0.040
0.235
(*= 10%, **= 5% and ***= 1%)
The results are similar to those for ROA. All groupings showed a mix of positive and
negative correlations of NEX to ROE. There is a negative relationship for All
companies in 2003, GLCs both in 2002 and 2003 and NGLCs in 2001. All other
correlations are positive. None of the correlations are significant. This shows that there
is no link between NEX and ROE. Hence, the hypothesis is not supported. Overall, it
may be concluded that NEX does not have a statistically significant or consistent impact
on performance.
214
6.6.5 a) Percentage of IND to ROA
Table 6.30 shows the correlation between the average percentage of IND and ROA in
All Companies, GLCs and NGLCs
Table 6.30: Correlation between the average percentage of IND and ROA
2001
2002
2003
All Companies
-0.163
-0.173*
-0.002
GLCs
-0.079
-0.095
0.132
NGLCs
-0.221
-0.235
-0.158
(*= 10%, **= 5% and ***= 1%)
For all the groupings of companies and in all years, except for GLCs in 2003, there is a
negative correlation between percentage of IND and ROA. All companies showed a
statistically significant negative correlation (10%) in 2002. GLCs and NGLCs show no
statistically significant correlation in all the years. The negative correlation indicates
that the variable, although not statistically significant, is generally associated with a
weaker ROA performance, which suggests that improved monitoring of management by
independent directors does not improve performance. The findings randomly support
the hypothesis that there is a relationship between percentage of IND and firm
performance in All Companies in 2002.
random
6.6.5
b) Percentage of IND to ROE
Table 6.31 shows the correlation between the average percentage of IND and ROE in
All Companies, GLCs and NGLCs.
215
Table 6.31: Correlation between the average percentage of IND and ROE
2001
2002
2003
All Companies
-0.120
-0.139
0.033
GLCs
-0.026
-0.005
0.096
NGLCs
-0.195
-0.251
-0.040
(*= 10%, **= 5% and ***= 1%)
For all the groupings of companies and the years (except for All companies and GLCs
in 2003), there is a negative correlation between percentage of IND and ROE. The
pattern of the relationship is almost identical to correlation with ROA discussed in the
earlier table. There is no statistically significant correlation for all the groupings of
companies and the years. Overall results of ROA and ROE indicate that the
hypothesised relationship between percentage of IND and performance is not supported
in all groupings in all years except for All Companies in 2002 (ROA).
6.6.6 a) Percentage of DAF to ROA
Table 6.32 shows the correlation between the average percentage of DAF and ROA.
Table 6.32: Correlation between the average percentage of DAF and ROA
2001
2002
2003
All Companies
-0.013
0.128
0.068
GLCs
0.074
0.235
0.235
NGLCs
-0.086
0.000
-0.132
(*= 10%, **= 5% and ***= 1%)
All Companies and NGLCs show inconsistencies in the direction of correlation between
average percentage of DAF and ROA.
However, GLCs show consistent positive
correlations in all the years. These indicate that a higher percentage of DAF in GLCs are
216
associated with enhanced performance.
None of the correlations are statistically
significant. These results indicate that the hypothesis of a link between percentage of
DAF and ROA in all groupings of companies is not supported.
6.6.6 b) Percentage of DAF to ROE
Table 6.33 shows the correlation between the average percentage of DAF and ROE for
All Companies, GLCs and NGLCs for all the years.
Table 6.33: Correlation between the average percentage of DAF and ROE
2001
2002
2003
All Companies
-0.130
0.081
0.071
GLCs
-0.076
0.132
0.138
NGLCs
-0.155
0.038
-0.034
(*= 10%, **= 5% and ***= 1%)
All groupings of companies show negative correlations in 2001. There is also a negative
correlation in NGLCs in 2003 but other findings show positive correlations. There are
no statistically significant correlations for all groupings of companies in all the years.
This suggests that the percentage of DAF has no statistically significant effect on the
performance of companies. Hence, the results show that the hypothesis is not supported.
Overall, the hypothesis of a relationship between DAF and performance measured by
either ROA or ROE is rejected.
6.6.7
a) Percentage of WOM to ROA
Table 6.34 shows the correlation between the average percentage of WOM and ROA in
All companies, GLCs and NGLCs.
217
Table 6.34: Correlation between the average percentage of WOM and ROA
2001
2002
2003
All Companies
-0.071
-0.147
-0.259**
GLCs
-0.060
-0.105
-0.167
NGLCs
-0.106
-0.291**
-0.351**
(*= 10%, **= 5% and ***= 1%)
For all the groupings of companies and all years, there is negative correlation between
percentage of WOM and ROA. All Companies show a statistically significant result (at
5%) level in 2003. GLCs show no statistically significant result for all the years.
NGLCs show significant results in 2002 and 2003. Since all the significant correlations
are negative, a higher percentage of WOM are associated with lower firm performance.
The hypothesis is rejected for GLCs but is supported in a negative direction for NGLCs
in two out of the three years.
6.6.7 b) Percentage of WOM to ROE
Table 6.35 shows the correlation between the average percentage of WOM and ROE in
All Companies, GLCs and NGLCs.
Table 6.35: Correlation between the average percentage of WOM and ROE
2001
2002
2003
All Companies
-0.062
-0.231**
-0.248**
GLCs
-0.024
-0.233
-0.158
NGLCs
-0.145
-0.314**
-0.303**
(*= 10%, **= 5% and ***= 1%)
For all groupings of companies throughout the period, there are negative correlations
between percentage of WOM and ROE. All Companies and NGLCs show negative
218
significant correlation at 5 % level in 2002 and 2003. However, GLCs show no
significant correlation for all the years. The relationship between the percentage of
WOM and performance is closely allied to ROA (Table 6.34). Since the correlations in
all groupings of companies are negative, it clearly indicates that a higher percentage of
WOM lowers the performance especially in NGLCs where there was a statistically
significant association in 2002 and 2003.
In general, both ROA and ROE correlations show that the hypothesis as regards a
relationship between WOM and performance is supported in NGLCs in 2002 and 2003
but rejected for GLCs.
The consistent negative associations in all groupings of
companies in all years suggest that the appointment of WOM reflects external pressures
rather than their ability to add value.
6.6.8 a) Percentage of BUM to ROA
Table 6.36 shows the correlation between the average percentage of BUM and ROA in
All Companies, GLCs and NGLCs.
Table 6.36: Correlation between the average percentage of BUM and ROA
2001
2002
2003
All Companies
0.093
0.003
-0.049
GLCs
0.140
-0.131
-0.129
NGLCs
0.031
0.007
-0.035
(*= 10%, **= 5% and ***= 1%)
All groupings of companies show mixed results as to the direction of correlations.
GLCs show positive direction in 2001 but negative in 2002 and 2003. NGLCs show a
positive direction in 2001 and 2002 but negative in 2003. All the correlations are weak
with no statistically significant results in all groupings of companies and all years.
219
These findings indicate that the hypothesis that there is a significant relationship
between BUM and firm performance (ROA) is not supported.
6.6.8 b) Percentage of BUM to ROE
Table 6.37 shows the correlation between the average percentage of BUM’s correlation
and ROA in All Companies, GLCs and NGLCs.
Table 6.37: Correlation between the average percentage of BUM and ROE
2001
2002
2003
All Companies
0.091
0.076
-0.087
GLCs
0.069
-0.019
-0.133
NGLCs
-0.015
0.086
-0.065
(*= 10%, **= 5% and ***= 1%)
Bumiputra directors’ correlations to ROE also show more or less similar results as in
correlation with ROA. All the groupings show an inconsistant direction of correlation in
all the years. None of the observations show any statistically significant results and the
correlations are very weak. This indicates that there is no consistent relationship
between percentage of BUM and ROE. Hence, the hypothesis is not supported.
Overall, it may be concluded that percentage of BUM does not have an impact on
performance measured by either ROA or ROE, and hence the hypothesis is not
supported.
6.6.9 a) Percentage of SGO as directors to ROA
Table 6.38 shows the correlation between the average percentage of SGO and ROA in
All Companies, GLCs and NGLCs.
Table 6.38: Correlation between the average percentage of SGO and ROA
2001
2002
2003
All Companies
0.024
0.047
0.149
GLCs
-0.030
-0.076
0.069
220
NGLCs
0.090
0.149
0.322**
(*= 10%, **= 5% and ***= 1%)
All groupings of companies show positive correlations in all the years except for GLCs
in 2001 and 2002. The direction of relationship in GLCs is inconsistant while in
NGLCs, it is positive in all the years.
All correlations showed weak relationships
between the variable and ROA except for NGLCs in 2003. These results demonstrated
that the hypothesis only has support in NGLCs in 2003.
6.6.9 b) Percentage of SGO to ROE
Table 6.39 shows the correlation between the percentage of SGO and ROE in All
Companies, GLCs and NGLCs.
Table 6.39: Correlation between the average percentage of SGO and ROE
2001
2002
2003
All Companies
-0.026
0.056
0.074
GLCs
-0.117
-0.087
0.007
NGLCs
-0.018
0.213
0.288*
(*= 10%, **= 5% and ***= 1%)
All Companies show mixed results of negative and positive correlation to ROE. GLCs
show a consistently negative correlation in 2001 and 2002 and a very low positive
correlation in 2003. On the other hand, NGLCs show positive correlation results in all
the years except a very low negative correlation in 2001. However, all the correlations
are weak except for NGLCs in 2003 in which the correlation is statistically significant
at 5 % level. This shows that the hypothesis has support only in NGLCs in 2003.
Overall, the results for ROA and ROE, with the exception of NGLCs in 2003, indicate
that the hypothesis of an association between SGO and performance is rejected.
221
6.6.10 a) Percentage of POL to ROA
Table 6.40 shows the correlation between the average percentage of POL and ROA in
All companies, GLCs and NGLCs.
Table 6.40: Correlation between the average percentage of POL and ROA
2001
2002
2003
All Companies
0.113
0.002
0.103
GLCs
0.060
-0.131
0.068
NGLCs
0.194
0.208
0.326**
(*= 10%, **= 5% and ***= 1%)
All groupings of companies and in all years show a positive correlation between POL
and ROA except for GLCs in 2002. All Companies and GLCs show no statistically
significant correlation in all years. NGLCs show a statistically significant correlation at
the 5% level in 2003. Hence, the hypothesis has support only in NGLCs in 2003 but not
GLCs.
6.6.10 b) Percentage of POL to ROE
Table 6.41 shows correlation between the average percentage of POL and ROE
Table 6.41: Correlation between the average percentage of POL and ROE
2001
2002
2003
All Companies
0.134
0.171
0.136
GLCs
0.153
0.054
0.055
NGLCs
0.129
0.394***
0.285*
(*= 10%, **= 5% and ***= 1%)
All groupings of companies show positive correlation in all the years. All Companies
and GLCs show no statistically significant correlation for all the years but NGLCs show
a statistically significant correlation (1% level) in 2002 and (10% level) in 2003. This
222
indicates that there is clear evidence of an association between POL and the
performance of NGLCs. On the other hand, the correlation between POL and
performance in GLCs are weak for all the years. Hence, the hypothesis has support in
NGLCs both for 2002 and 2003 but is rejected in GLCs. Overall, both ROA and ROE
reveal that the performance of NGLCs is higher with politicians as board members in
2002 and 2003 but that POL are not statistically significant in explaining the
performance of GLCs.
6.6.11 a) Percentage of FAM to ROA
Table 6.42 shows the correlation between the average percentage of FAM and ROA.
Table 6.42: Correlation between the average percentage of FAM and ROA
2001
2002
2003
All Companies
-0.096
-0.019
-0.104
GLCs
-0.099
0.087
-0.061
NGLCs
-0.120
-0.095
-0.171
(*= 10%, **= 5% and ***= 1%)
There are consistent negative correlations in All Companies and NGLCs in all the years.
GLCs however show a positive correlation in 2002 and negative correlations in 2001
and 2003. None of the correlations are statistically significant. This indicates that the
percentage of FAM generally has a negative effect on ROA, but the relationship is not
statistically significant and therefore the hypothesis is rejected.
6.6.11 b) Percentage of FAM to ROE
Table 6.43 shows the correlation between the average percentage of FAM and ROE.
223
Table 6.43: Correlation between the average percentage of FAM and ROE
2001
2002
2003
All Companies
0.007
-0.008
-0.077
GLCs
-0.033
-0.011
-0.107
NGLCs
0.024
-0.021
-0.129
(*= 10%, **= 5% and ***= 1%)
All Companies and NGLCs have the same pattern of correlations with positive
correlations in 2001 and negative correlations in 2002 and 2003. GLCs show
consistently negative correlations in all the years. All correlations are not statistically
significant in all the years. This indicates that the percentage of FAM, although
generally negative, does not have a statistically significant relationship to ROE. Hence,
the hypothesis is rejected for ROE. Overall, the hypothesised relationship between the
percentages of FAM is rejected for both ROA and ROE.
6.6.12 a) ACS to ROA
Table 6.44 shows the correlation between ACS and ROA of All Companies, GLCs and
NGLCs.
Table 6.44 shows the correlation between ACS and ROA for All companies, GLCs and
NGLCs.
2001
2002
2003
All Companies
0.299***
0.067
0.081
GLCs
0.312**
0.065
0.025
NGLCs
0.308**
0.060
-0.127
(*= 10%, **= 5% and ***= 1%)
All groupings of companies in all years show positive correlation between audit
committee size and ROA except NGLCs in 2003. However, correlations are statistically
224
significant for all groupings in 2001 only. Results for 2002 and 2003 for all groupings
of companies are not statistically significant. Hence, the hypothesis has support only in
2001 for all groupings of companies.
6.6.12 b) ACS to ROE
Table 6.45 shows the correlation between the ACS and ROE of All Companies, GLCs
and NGLCs.
Table 6.45: Correlation between ACS and ROE
2001
2002
2003
All Companies
0.209**
0.046
0.113
GLCs
0.151
0.015
0.097
NGLCs
0.262*
0.076
0.110
(*= 10%, **= 5% and ***= 1%)
All groupings of companies in all years show positive correlation of ACS to ROE.
However, the correlation is statistically significant for All Companies and NGLCs in
2001 only. Results for 2002 and 2003 for all groupings of companies are not statistically
significant. Hence, the hypothesis has support only in All companies and NGLCs in
2001.
Overall results for ROA and ROE indicate that all groupings in all years show positive
correlation of ACS to performance but only the results in 2001 for All Companies and
NGLCs are statistically significant. Therefore with this exception the hypothesis is
rejected. Results for 2002 and 2003 are not statistically significant most probably due to
companies conforming to a norm in 2002 and 2003.
The significant result is possibly due to the New Listing requirements of KLSE on listed
companies, which came into force in June 2001. The new listing has expanded the
regulations on audit committee (Kang, 2001). The New Listing Requirements cover
225
several important sections on composition of audit committees, terms of reference, the
functions of audit committees, rights to discharge duties, quorums for meetings and
reporting to the Exchange on the non-compliance with Bursa Malaysia requirements. At
the end of each financial year, the audit committees are required to prepare a report,
which must be incorporated in the annual report of the company.
The New Listing Requirements stated that, an audit committee report must cover
compliance with five core requirements and the extent of compliance should be
disclosed in the report. They are audit committee composition, written terms of
reference, audit committee meeting, a summary of audit committee activities and the
summary of internal audit activities. With regards to the composition of an audit
committee, it must comprise at least there directors and a majority should be
independent directors. At least one director must be a member of the Malaysian Institute
of Accountant (MIA). The chairman of the audit committee should be an independent
director and no alternate director is to be appointed.
One of the important functions of audit committee, specified in the terms of reference is
to report to the Bursa Malaysia any conflict of interest or any unsatisfactorily resolved
matters. As for audit committee meeting, even though the regulations did no stipulate a
minimum number of meetings, Kang (2001) suggest that at least five meetings annually
are required to gain sufficient insight into the firm’s financial situation. Apart from its
duties as set out in its terms of reference, the audit committee is required to prepare a
summary of activities in carrying out its functions and duties for the financial year.
Audit committees are also required to prepare a summary of the principal internal audit
activities and functions, which will include audit of financial management and
operations, human resource operations and security controls.
226
6.6.13 a) Frequency of ACM to ROA
Table 6.46 shows the correlation between the average frequency of ACM of All
Companies, GLCs and NGLCs and ROA.
Table 6.46: Correlation between the average frequency of ACM and ROA
2001
2002
2003
All Companies
0.009
0.028
0.044
GLCs
0.086
-0.053
0.120
NGLCs
-0.059
0.113
-0.069
(*= 10%, **= 5% and ***= 1%)
All groupings of companies show positive correlations between the frequency of ACM
in all the years and performance, except GLCs in 2002 and NGLCs in 2001 and 2003,
which are weak and negatively correlated. There is no significant correlation for all
groupings of companies throughout the period. This indicates that frequency of ACM
has no significant impact on performance measured by ROA and therefore the
hypothesis is rejected.
6.6.13 b) Frequency of ACM to ROE
Table 6.47 shows the correlation between the average frequency of ACM of the three
groups of companies and ROE.
Table 6.47: Correlation between the average frequency of ACM and ROE
2001
2002
2003
All Companies
0.078
0.040
0.038
GLCs
0.082
-0.077
0.064
NGLCs
0.085
0.150
-0.020
(*= 10%, **= 5% and ***= 1%)
227
All groupings of companies show positive correlation in all the years except GLCs in
2002 and NGLCs in 2003. There is no significant correlation for all groupings of
companies in all the years. This indicates that frequency of ACM has no link to ROE.
Overall, there is no statistically significant relationship between the frequency of ACM
and performance measured either by ROA or ROE. Hence the hypothesis that the
frequency of ACM impacts on performance is rejected.
6.6.14 a) AUD to ROA
Table 6.48 shows the percentage of AUD to ROA.
Table 6.48: Correlation between the percentage of AUD and ROA
2001
2002
2003
All Companies
-0.140
-0.151
-0.297***
GLCs
-0.058
-0.156
-0.381**
NGLCs
-0.195
-0.149
-0.245
(*= 10%, **= 5% and ***= 1%)
All groupings of companies show a consistent negative correlation in all the years. The
relationship is not statistically significant for any grouping in 2001 and 2002 but All
Companies and GLCs show a statistically significant correlation at 1 % and 5 % level
respectively in 2003 but NGLCs do not. The hypothesis is therefore only accepted for
the All Companies and GLCs in 2003.
6.6.14 b) AUD to ROE
Table 6.49 shows the correlation between the average percentage of AUD and to ROE.
Table 6.49: Correlation between the percentage of AUD and ROE
2001
All Companies
-0.051
2002
-0.129
228
2003
-0.227**
GLCs
-0.082
-0.190
-0.324**
NGLCs
-0.013
-0.089
-0.127
(*= 10%, **= 5% and ***= 1%)
All groupings of companies show a consistent negative correlation in all the years. As
with ROA there is no statistically significant relationship in 2001 or 2002 but All
Companies and GLCs show a statistically significant correlation at 5 % level in 2003.
Hence support for the hypothesis is limited to All Companies and GLCs in 2003.
Overall results show that the choice of AUD as auditors is generally associated with
lower performance both for the ROA and ROE but that the relationship is only
significant in All Companies and GLCs in 2003. The lower performance is probably
due to the reputation of ‘big four auditors’ which has been linked to various attributes
such as lower occurrence of accounting errors (Defond and Jiambalvo, 1991) and fewer
instances of auditor litigation (Palmrose, 1988).
6.7 Summary on the relationship of independent variables to firm performance
(ROA and ROE)
This section highlights the significant relationships between the independent variables
and performance. Table 6.50 shows the summary on the relationships of independent
variables to ROA and ROE respectively.
Table 6.50: Summary on the findings of tests for a relationship between the independent
variables and performance
All
VAR
1. BSZ(A)
1. BSZ (E)
2. BMF(A)
2. BMF (E)
3. RDU(A)
3. RDU(E)
2001
+ **
+ ***
+ **
+ ***
+
+
2002
+ *
+
+
+
---
GLCs
2003
+
+
+ *
+*
-+
2001
+ ***
+ ***
+
+ **
---
2002
+ **
+ **
-----
229
NGLCs
2003
+ *
+ ***
+ **
+ **
-+
2001
+
+ **
+
+ ***
+
+
2002
+
+
+
+*
-+
2003
+
-+
+
-+
4. NEX (A)
4. NEX (E)
5. IND (A)
5. IND (E)
6. DAF (A)
6. DAF (E)
7.WOM(A)
7.WOM(E)
8. BUM (A)
8. BUM (E)
9. SGO(A)
9. SGO(E)
10. POL(A)
10. POL(E)
11.FAM(A)
11.FAM(E)
12. ACS(A)
12. ACS(E)
13.ACM(A)
13.ACM(E)
14.AUD(A)
14.AUD(E)
-+
------+
+
+
-+
+
-+
+ ***
+ **
+
+
---
+
+
-- *
-+
+
--- **
+
+
+
+
+
+
--+
+
+
+
---
+
--+
+
+
-- **
-- **
--+
+
+
+
--+
+
+
+
-- ***
-- **
+
+
--+
---+
+
--+
+
--+ **
+
+
+
---
----+
+
-------+
+
-+
+
-----
--+
+
+
+
----+
+
+
+
--+
+
+
+
-- **
-- **
--------+
-+
-+
+
-+
+ **
+*
-+
---
+
+
--+
+
-- **
-- **
+
+
+
+
+
+ ***
--+
+
+
+
---
+
+
------ **
-- **
-+ **
+*
+ **
+*
---+
-----
(Note: (A) denotes ROA while (E) denotes ROE)
(Significant at 1%= ***, 5 %= ** and 10 %= *)
The Table shows that there are hypotheses that are supported (significant correlation in
all the three years), partly supported (significant correlation in one and two years) and
rejected (not significant in all the years).
6.8 Supported hypotheses
Board size (BSZ) is the only consistently supported variable with statistically significant
results for one or more of the three groupings in all years. In GLCs the hypothesis is
fully supported in all the three years for both ROA and ROE, while for All Companies,
the hypothesis is partly supported in two years for ROA and one year in ROE. In
NGLCs, the hypothesis is only supported in one year (ROE).
6.9 Partially supported hypotheses
The BMF hypothesis is also reasonably well supported. There is a significant
relationship to firm performance (both for ROA and ROE) in two years for All
companies. For GLCs, the hypothesis is partly supported in two years for ROE and a
year for ROA. In NGLCs, the hypothesis is supported in two years for ROE.
230
As regards board composition, the findings are less consistent. For IND, the hypothesis
is supported in only a year for All Companies (ROA). For WOM, the hypothesis is
supported in two years for ROE and a year in ROA in All Companies. In NGLCs, the
hypothesis is supported in two out of the three years both for ROA and ROE. For SGO,
the hypothesis is partly supported in NGLCs in 2003 both for ROA and ROE. But for
POL, the hypothesis is supported in two years out of the three years
The hypotheses with respect to audit committees and auditors are also inconsistently
supported. For ACS, a statistically significant relationship is found in All Companies
and NGLCs in one period (ROA and ROE). But in GLCs, the hypothesis is supported in
only a year for ROA. As for AUD, the hypothesis is supported in 2003 for All
Companies and GLCs (both ROA and ROE).
6.10 Rejected hypotheses
The findings indicate that there are six variables (RDU, NEX, DAF, BUM, FAM and
ACM) in which the hypotheses of a significant relationship to performance are rejected.
6.11 Conclusion
Comparison of GLCs and NGLCs using paired-samples t-tests shows that there are
statistically significant differences in seven variables out of the fourteen governance
variables examined. Four of these aspects (NEX, BUM, SGO and FAM) are statistically
significant at a 1% confidence level in all the years while the other three aspects are
significant at a 5% confidence level (except BSZ in 2002 and RDU in 2003 at 1%
confidence levels). Analyses on the differences show that there are bigger boards and
231
higher frequency of boards meetings in GLCs than NGLCs. The analyses also show that
there is a higher representation of NEX, BUM, and SGO in GLCs compared to NGLCs.
On the other hand, there is a lower representation of FAM and less prevalence of RDU
in GLCs than NGLCs (see Table 6.16 and Appendix B). Hence, the first hypothesis on
the differences between GLCs and NGLCs is clearly supported.
For the univariate analysis, all the fourteen independent variables were analysed using
Spearmans’ Rho (two–tailed tests) to examine whether there is any significant
relationship between corporate governance structures and the performance of All
Companies, GLCs and NGLCs in the post-AFC period from 2001 to 2003. Results of
correlations revealed that some hypotheses were supported, some partly supported and
some rejected. The next chapter will test the hypotheses using multivariate analysis.
232
CHAPTER SEVEN
MULTIVARIATE ANALYSIS
7.0 Introduction
This chapter reports and discusses the results of a multivariate analysis of the
relationship between corporate governance structures and performance in a matched
sample of GLCs and NGLCs listed on Bursa Malaysia for 2001, 2002 and 2003. The
study also examines the overall relationship between corporate governance structures
and performance of the All Companies sample for all the years mentioned. The chapter
also uses the division into GLCs and NGLCs to ascertain whether or not there are
significant differences in the relationship between corporate governance structures and
performance between the two samples and also the All Companies sample.
The first section discusses the specification of regression models that will be tested in
the chapter. As mentioned in the previous chapter, the models will be developed from
the eight independent variables that were found to be significantly different between
GLCs and NGLCs (see section 6.3) The second section will discuss the regression
analyses assumptions which were used as procedures and guidelines in developing the
models. The assumptions include; multicollinearity, homoscedascity, independent errors
and normally distributed errors. The third section discusses the choice of multivariate
regression for testing the hypotheses and considers whether the regression should be
based on untransformed or normalised data. The fourth section discusses the statistical
233
criteria for evaluating the constructed models such as R-Squared, Adjusted R-Squared,
F-value and P-value. This is followed by the main section of the chapter in which the
independent and control variables will be tested and examined based on the
untransformed and normalised data. This section will analyse and compare the results in
terms of which datasets provide the best modelling of the relationships between
corporate governance structures and firm performance. The chapter will finally discuss
the results of the multivariate regression and their implications for the hypothesised
relationships between corporate governance structures and performance in All
Companies, GLCs and NGLCs.
7.1 Specification of regression models
The tests results in Chapter Six clearly demonstrated that there were statistically
significant differences for seven variables representing aspects of the corporate
governance structures of GLCs and NGLCs. Other than the seven variables, POL was
also statistically significant in two of the periods. Although fourteen is a large number
of variables for a regression model, this is not necessarily a problem given the sample
size. However, it was noted that six hypothesised variables were not significant in
explaining performance in any of the groupings of the sample or time periods and
therefore for clarity in reporting the results it was decided to limit the multivariate
analysis to the eight variables that showed any significant relationship to performance in
the univariate tests and that are significantly different between GLCs and NGLCs.
Therefore, eight independent variables and two control variables will be adopted in the
multivariate regression. Let i represent each firm, for i= 1, 2, n, and the full regression
model is shown in Figure 7.1.
234
Figure 7.1: Specification of the Regression Model
Yi = Bo + B1X1i + B2 X2i + B3X3i +B4X4i + B5X5i +B6X6i +B7X7i +B8X8i +B9X9i +B10X10 i + Ei
where Yi = the dependent variables: Return on Asset (ROA) and Return on Equity
(ROE)
Independent variables:
X1= board size
X2= frequency of board meetings
X3= role duality
X4 = percentage of non- executive directors
X5= percentage of bumiputra directors
X6= percentage of government officers as directors
X7= percentage of family members as directors
X8= percentage of politicians as directors
Bo=constant
Ei=error term
Control variables
X9 = sales (in millions)
X10=industry-type
Multiple linear regression analyses in the above form were run on datasets for the years
2001, 2002 and 2003 for All Companies sample, GLCs and NGLCs using SPSS for
Windows.
7.2 Regression analysis assumptions
For a regression model to be generalisable, certain underlying assumptions must be met.
Hamilton (1992) states that for reliable results, regression analysis requires the
fulfilment of the following assumptions: no significant multicollinearity between the
explanatory variables; homoscedasticity; independent errors; and normality of the error
235
terms. The next four sub-sections outline the results for tests on the applicability of
these assumptions which were earlier gathered for univariate testing (see section 6.6)
7.2.1 Multicollinearity
Multicollinearity refers to a situation in which two or more independent variables in a
multiple regression model are highly correlated. Multicollinearity does not reduce the
predictive power or reliability of the model as a whole; it only affects calculations
regarding individual predictors. That is, a multiple regression model with correlated
independent variables can indicate how well the entire bundle of predictors predicts the
outcome variable, but it may not give valid results about any individual predictor, or
about which predictors are redundant with others (Dirk and Bart, 2004).
Two types of multicollinearity tests were conducted in this study. The first involved
examining the correlation matrix to determine whether the independent variables are
sufficiently correlated to indicate a significant causal relationship (Haniffa, 1999).
Gujarati (1995) states that the rule of thumb for checking the problem of
multicollinearity is that no correlation between independent variables is greater than
0.78. Tests on the correlation between independent variables in the current study
revealed that none of the correlations exceeds this threshold. As an additional test,
variance inflation factors (VIFs) tests were also conducted (see Appendix C). The VIF
indicates whether an independent variable has a strong linear relationship with the other
independent variable and as none were above the threshold of a VIF of 10, and the
tolerance statistics were more than 0.2, the results provide additional comfort over the
absence of multicollinearity (Field, 2001).
236
.
7.2.2 Homoscedasticity
In simple linear regression analysis, one assumption of the fitted model is that the
standard deviation of the error terms is constant and does not depend on the x-value.
Consequently, each probability distribution for each y (response variable) has the same
standard deviation regardless of the x-value (predictor). This assumption is known as
homoscedasticity. In a scatter plot of data, homoscedasticity looks like an oval (most x
values are concentrated around the mean of y, with fewer and fewer x values as y
becomes more extreme in either direction). If a scatter plot looks like any geometric
shape other than an oval, the rules of homoscedasticity may have been violated (Dirk
and Bart, 2004).
As regards the assumption of homoscedasticity, an analysis of residuals73 was
conducted. This involved visual inspection of the scatterplot of residuals (ZRESID)
against the predicted values. If the residuals appear to be randomly scattered around a
horizontal line through 0, then the equal variance assumption is satisfied (Norusis,
1995; p: 454). If results indicate otherwise, this may be corrected by transforming the
data. The importance of fulfilling the assumption is because heteroscedasticity (unequal
variance) may result in loss of efficiency and the standard errors may be biased (Doran,
1989; p: 179). Appendix D shows the test results of all the datasets used in the study.
The points appear randomly and evenly dispersed throughout the plot. This pattern is
73
Residuals are the difference between the observed value of the dependent variable and the value predicted by the regression line
(Norusis, 1995;p: 447)
237
indicative of a situation in which the assumptions of linearity and homoscedascity have
been met.
7.2.3 Independent or residuals errors
Another assumption underlying regression is that the errors or residuals are
independent. To test for this assumption, we use the Durbin-Watson test. This is to
ensure that the assumption of independent errors is tenable by testing whether adjacent
residuals are correlated. The test statistic can vary between 0 and 4 with a value of 2
meaning that the residuals are uncorrelated. A value greater than 2 indicates a negative
correlation between adjacent residuals whereas a value below 2 indicates a positive
correlation.
The size of the Durbin-Watson statistic depends upon the number of
predictors and observations in the model. As a very conservative rule of thumb, values
less than 1 or greater than 3 are definitely causes for concern (Field, 2001). Appendix E
shows the results of Durbin-Watson tests on the datasets. It shows that the lowest and
the highest figures are 1.826 and 2.327 respectively which indicates that the assumption
of independent errors holds.
7.2.4 Normally distributed errors
It is assumed that residuals in a model are randomly and normally distributed with a
mean of zero. In other words, the differences between the model and the observed data
are most frequently zero or very close to zero and that differences much greater than
zero happen only occasionally. A normal probability plot, which plots the values that
are expected if the distribution were normal (expected values) against the value actually
seen in the data set (observed values), is used to test the normality of the residuals. The
expected values are a straight diagonal line, whereas the observed values are plotted as
individual points. If the residuals are normally distributed, then the observed values
238
should fall exactly along the straight line. Any deviation of the dots from the line
represents a deviation from normality. Appendix F shows the tests results for all
models. It can be observed that all models show that residuals are quite normally
distributed.
7.3 Multiple regression analysis: Untransformed and normal scores
Initially, the original datasets (untransformed data) were used in the univariate and
multiple regression analysis. Although the previous sections have shown that
untransformed data conformed to the assumptions of multiple regression analysis, better
results on the relationships between corporate governance variables and performance
might be established if the data were transformed (Cooke, 1998). As such, the
untransformed data were normalised by dividing the distribution into the number of
observations plus one region on the basis that each region has equal probability (Cooke,
1998). This method of normalising the data is referred to as the Van Der Waerden
approach.74 Both the dependent and independent variables were normalised using this
method.
The main advantage of transforming data to normal scores is the ability to utilise it in
any subsequent tests requiring the normality of data which means: the significance
levels can be determined with more confidence; the F-and t-tests may be more
meaningful; and the power of the F-and t-tests may be used (Cooke, 1998).
Furthermore, the regression coefficients derived using the normal scores approach are
able to preserve monotonocity in the relationships of independent and dependent
variables and in the case of non-linearity with data concentration, this approach may
help to disperse that concentration.
74
The Van Der Waerden approach may be summarised as = r/ (n + 1) and may be calculated using SPSS.
239
7.4 Analysing and evaluating the constructed models
The explanatory power of the regression models is analysed and evaluated by reference
to the F-value, P-value, R-squared and Adjusted R-Squared. This is also referred to as
an analysis of the model summary and variance or ANOVA.
7.4.1 The F-value and P-value
The F-value and P-value is also referred to as an analysis of the variance (ANOVA). It
tests whether the model is significantly better at predicting the outcome than using the
mean. F-value is the ratio of the Model Mean Square to the Error Mean Square. The Fvalue is the test statistic used to decide whether the model as a whole has statistically
significant predictive capability, that is, whether the regression SS (sum of squares) is
big enough, considering the number of variables needed to achieve it. It is calculated
by dividing the average improvement in prediction in the model by the average
difference between the model and the observed data. Specifically, the F-value
represents the ratio of the improvement in prediction as a result of fitting the model
relative to the inaccuracy that still exists in the model.
The P-value measures the level of significance of a model. Any P-value greater than
0.10, indicates that the estimated model is weak as the independent variables do not
reliably predict the dependent variable. The degrees of freedom used to calculate the Pvalue are given by the Error DF (degrees of freedom) from the ANOVA table. The Pvalue also indicates whether a variable has statistically significant predictive capability
in the presence of the other variables, that is, whether it adds something to the equation.
240
Thus, a non-significant P-value might be used to determine whether or not to remove a
variable from a model without significantly reducing the model's predictive capability.
P-values should not be used to eliminate more than one variable at a time as a variable
that does not have predictive capability in the presence of the other predictors may have
predictive capability when some of those predictors are removed from the model.
7.4.2 R-Squared and Adjusted R-Squared
R-squared is the relative predictive power of a model and the descriptive measure is
between 0 and 1. The closer it is to one, the better the model is in explaining the
variability of the dependent variable. It compares the variability of the residuals in the
model (SS error) to the variability of the dependent measure (SS total). If the variability
of the residuals is small then the model has good predictive power. R-squared can be
used as an indicator of the reliability of a relationship identified by regression analysis.
The closer its R-squared value is to one, the greater the ability of that model to predict a
trend. For example, an R-squared of 0.8 indicates that 80% of the change in one variable
is explained by a change in the related variable.
The formula for R squared is;
R-squared = 1- SS error / SS total
Adjusted R-squared is a statistic that adjusts for the degrees of freedom in the model and
measures how well the independent, or predictor, variables predict the dependent
variable. A higher Adjusted R-square indicates a better model and is calculated based on
241
the R-square, which denotes the percentage of variation in the dependent variable that
can be explained by the independent variables.
The formula is;
Adjusted R-Squared = 1- SS error / df error divided by SS total / df total
Adjusted R-squared is useful when there are multiple Xs. It adjusts the R-square based
on the number of Xs in the model and gives a more realistic measure of relationship.
The adjusted R-squared statistic serves the same purpose but adjusts for the number of
degrees of freedom in the model and explains how much of the variance in the outcome
would be accounted for if the model has been derived from the population from which
the sample was taken. When the number of observations is small and the number of
independent variables is large, there will be a greater difference between R-squared and
Adjusted R-squared.75 A model would continue to improve the ability to explain the
dependent variable if the value of R-Squared and Adjusted R-Squared is high and close
to each other.
7.5 Comparison of results based on untransformed and normalised datasets
75
(Because the ratio of (N-1 / N - k - 1) will be much less than 1. This means that as predictors are added to the model, each
predictor will explain some of the variance in the dependent variable simply due to chance.
242
Not withstanding, the absence of any significant problems with the datasets as regards
the assumptions underlying regression analysis (section 7.2), it was decided for the
reasons discussed in section 7.3 to run multiple regression models on both the
untransformed and a normalised version of the datasets. Consequently, thirty-six
different regression models were run; eighteen models are based on untransformed
datasets and another eighteen on normalised datasets using the dependent and
independent variables listed in Figure 7.1. A summary of the results is provided in
Tables 7.1 to 7.6.
7.5.1 Models for All Companies (ROA)
Table 7.1 shows the results for untransformed and normalised data for All Companies using
ROA for 2001-2003.
Table 7.1: Models for All Companies (ROA)
Variables
BSZ
BMF
RDU
NEX
BUM
SGO
FAM
POL
LSALE
INDUS
Constant
Std. Error
F-value
P-value
R-squared
Adjusted
R-squared
2001
Model 1
Untransformed
0.724
(1.597)
0.323
(0.770)
1.405
(0.704)
0.001
(0.015)
0.023
(0.639)
-0.023
(-0.600)
-0.017
(-0.328)
-0.021
(-0.226)
1.061
(1.872)*
0.398
(0.696)
-10.333
(-1.665)
Model 2
Normalised
0.125
(1.013)
0.129
(1.123)
0.033
(0.187)
-0.004
(-0.033)
-0.021
(-0.169)
-0.056
(-0.396)
-0.023
(-0.140)
0.136
(0.792)
0.277
(2.479)**
0.143
(1.141)
-0.009
(-0.097)
2002
Model 3
Untransformed
0.285
(0.598)
0.143
(0.455)
-2.359
(-1.139)
0.001
(0.024)
0.051
(1.277)
-0.054
(-1.350)
-0.018
(-0.323)
-0.194
(-2.749)***
2.568
(4.339)***
0.018
(0.032)
-11.889
(-1.860)*
Model 4
Normalised
0.090
(0.837)
0.094
(0.919)
-0.188
(-1.144)
0.016
(0.135)
0.029
(0.216)
-0.102
(-0.814)
0.056
(0.364)
-0.138
(-0.954)
0.501
(5.018)***
0.067
(0.634)
0.016
(0.179)
2003
Model 5
Untransformed
0.211
(0.499)
0.197
(0.506)
-0.739
(-0.361)
0.025
(0.429)
-0.051
(-1.451)
0.043
(1.030)
0.003
(0.051)
0.100
(1.016)
0.001
(1.360)
0.566
(1.079)
-0.463
(-0.077)
Model 6
Normalised
0.068
(0.633)
0.082
(0.717)
-0.172
(-0.933)
-0.006
(-0.040)
-0.306
(-2.432)**
0.210
(1.427)
0.057
(0.341)
0.196
(1.371)
0.196
(1.774)*
0.108
(0.918)
-0.049
(-0.508)
7.2585
1.383
0.203
0.146
0.040
0.9196
1.671
0.102
0.171
0.069
7.3086
3.695
.000***
0.313
0.228
0.8462
3.690
.000***
0.313
0.228
6.6227
0.890
0.546
0.104
-0.013
0.8854
1.801
0.074*
0.190
0.084
243
(Key: ***= statistically significant at 1%, **= statistically significant at 5%, *= statistically significant at 10%)
The models in Table 7.1 are of variable quality. In models 1 and 2 the F-value is very
low for both of the models. This indicates that the models are weak as they do not have
significant predictive capability. The poor results are also reflected in the P-value in
which both models are not statistically significant. The R-Squared and Adjusted RSquared are also low. None of the independent variables for the untransformed and
normalised models are significant. Only the control variable (LSALE) is significant at a
10% and 5% confidence levels respectively.
For 2002, models 3 and 4 have a high F-value and thus have significant predictive
capability in explaining the variability of the models. Similar results are also observed
in the P-value in which both models are statistically significant at a 1% confidence
level. The R-Squared and Adjusted R-Squared are noticeably better than models 1 and 2
for both the untransformed and normalised models. Model 3 shows that one
independent variable, POL and one control variable, LSALE, are statistically significant
at a 1% confidence level in the untransformed model and IND at the 10% confidence
level. However, only the control variable, LSALE, is statistically significant at a 1%
confidence level in the normalised model.
In models 5 and 6 covering the 2003 data, the F-value, P-value, R-Squared and
Adjusted R-Squared values are very low for the untransformed model. On the other
hand, the normalised model is more satisfactory with a significant P value at the 10%
confidence level and considerably improved R-Squared and Adjusted R-Squared.
Models 5 and 6 shows that in the untransformed model, none of the variables is
statistically significant. But for the normalised model, BUM and one control variable,
LSALE, are statistically significant at a 5% and 10% confidence levels respectively.
244
Overall results indicate that there are reasonably good models in 2002 and for
transformed data in 2003. At the level of individual variables, there are only two cases
of a statistically significant relationship between the variable and performance (POL in
model 3 and BUM in model 6). However, the control variable LSALE is consistently
and significantly related to performance in all but model 5 and IND is statistically
significant in model 3. These results generally undermine any hypothesis of an
association between corporate governance structures and performance.
7.5.2 Models for GLCs (ROA)
Table 7.2 shows the results for untransformed and normalised data for GLCs using
ROA for 2001-2003.
Table 7.2: Models for GLCs (ROA)
2001
Variables
BSZ
BMF
RDU
NEX
BUM
SGO
FAM
POL
LSALE
INDUS
Constant
Std. Error
F-value
P-value
Rsquared
Adjusted
Rsquared
2002
2003
Model 7
Untransformed
Model 8
Normalised
Model 9
Untransformed
Model 10
Normalised
Model 11
Untransformed
Model 12
Normalised
0.658
0.194
1.173
0.274
1.210
0.299
(1.203)
(1.177)
(1.612)
(1.526)
(1.608)
(1.541)
0.088
0.069
-0.132
-0.022
0.284
0.234
(0.210)
(0.537)
(-0.383)
(-0.177)
(0.515)
(1.358)
-2.855
-0.342
0.573
-0.165
-0.876
-0.385
(-1.343)
(-1.639)
(0.168)
(-0.601)
(-0.197)
(-0.987)
-0.017
0.009
0.042
-0.036
-0.069
-0.379
(-0.338)
(0.069)
(0.529)
(-0.236)
(-0.575)
(-1.723)*
-0.005
-0.087
0.095
0.114
0.016
-0.078
(-0.123)
(-0.600)
(1.392)
(0.508)
(0.232)
(-0.282)
-0.070
-0.345
-0.064
-0.246
0.010
-0.060
(-1.864)*
(-2.023)*
(-0.954)
(-1.133)
(0.175)
(-0.269)
-0.017
-0.080
0.116
0.195
-0.026
-0.259
(-0.226)
(-0.305)
(0.984)
(0.623)
(-0.179)
(-0.600)
-0.045
-0.061
-0.228
-0.354
-0.032
-0.059
(-0.661)
(-0.344)
(-2.628)**
(-1.961)*
(-0.217)
(-0.275)
1.473
0.388
1.775
0.323
0.000
0.094
(2.793)***
(3.310)***
(2.253)**
(2.361)**
(0.854)
(0.651)
1.945
0.482
1.232
0.392
0.415
0.264
(2.818)***
(3.180)***
(1.591)
(2.715)***
(0.425)
(1.309)
-10.906
0.146
-25.922
0.146
-3.826
-0.002
(-1.727)*
(0.932)
(-2.127)**
(0.697)
(-0.269)
(-0.008)
4.7051
3.948
0.000***
0.530
0.6552
4.466
0.000***
0.561
6.3072
3.976
0.001***
0.532
0.7399
3.726
0.002***
0.516
6.9134
0.725
0.696
0.180
0.8781
1.333
0.254
0.288
0.396
0.435
0.398
0.377
-0.068
0.072
(Key: ***= statistically significant at 1%, **= statistically significant at 5%, *= statistically significant at 10%)
245
For 2001, Models 7 and 8 shows that one independent variable, SGO and two control
variables, LSALE and INDUS are statistically significant for both the untransformed
and normalised models. The F-values are high for both models and therefore have
significant predictive capability on the dependent variable. The P-value shows that both
models are statistically significant at 1% confidence levels. The R-Squared and
Adjusted R-Squared are also high for both models. However, the normalised model is a
better model as the values of the R-Squared and Adjusted-R Squared are higher and the
differences between the two values are lesser.
In 2002, Models 9 and 10 shows that one independent variable, POL, and one control
variable, LSALE, are statistically significant at a 5% confidence levels in the
untransformed model. In the normalised model, one independent variable, POL is
statistically significant at a 10 % confidence level. Two control variables, LSALE and
INDUS are also statistically significant at a 5% and 1% confidence levels respectively.
The F-values are high for both models and therefore the variables have significant
predictive capability in explaining the variability of the models. The P-values indicate
that both models are statistically significant at a 1% confidence levels and the RSquared and Adjusted R-Squared are also satisfactory.
For the year 2003, Models 11 and 12, none of the variables in the untransformed model
are significant. However, in the normalised model, NEX is significant. The F-values for
both models are very low, and the P-value indicates that both models are not statistically
significant. The R-Squared and Adjusted R-Squared are also low for both models.
Overall results indicate that both the untransformed and normalised models for 2001
and 2002 are considered as good models. In contrast for 2003, the models are
unsatisfactory in terms of their ability to explain performance in terms of the
independent variables.
246
7.5.3 Models for NGLCs (ROA)
Table 7.3 shows the results for untransformed and normalised data for NGLCs using
ROA for 2001-2003.
Table 7. 3: Models for NGLCs (ROA)
2001
Variables
BSZ
BMF
RDU
NEX
BUM
SGO
FAM
POL
LSALE
INDUS
Constant
Std. Error
F-value
P-value
Rsquared
Adjusted
Rsquared
2002
2003
Model 13
Untransformed
Model 14
Normalised
Model 15
Untransformed
Model 16
Normalised
Model 17
Untransformed
Model 18
Normalised
0.392
0.031
0.291
0.090
-0.629
-0.107
(0.518)
(0.164)
(0.387)
(0.569)
(-1.053)
(-0.758)
0.781
0.160
0.224
0.131
-0.235
-0.098
(1.007)
(0.837)
(0.344)
(0.750)
(-0.322)
(-0.630)
3.574
0.325
-5.185
-0.310
0.416
-0.025
(0.988)
(1.087)
(-1.678)
(-1.323)
(0.178)
(-0.125)
-0.006
-0.005
-0.034
0.123
0.416
(-0.055)
(-0.022)
(-0.404)
(1.621)
(2.214)**
0.023
-0.026
-0.001
0.011
(0.053)
-0.109
-0.074
-0.361
(0.352)
(-0.124)
(-0.019)
(-0.603)
(-1.448)
(-2.291)**
0.028
0.084
-0.067
-0.105
0.447
(0.351)
(0.328)
(-0.969)
(-0.504)
-0.041
-0.124
-0.074
-0.065
0.154
(1.981)*
0.027
(-0.523)
(-0.548)
(-1.000)
(-0.328)
(0.493)
(1.123)
0.295
0.504
0.116
0.346
0.231
0.365
(1.030)
(1.322)
(0.647)
(1.123)
(1.606)
(1.862)*
0.103
0.062
3.106
0.553
0.001
0.333
(0.082)
(0.294)
(3.171)***
(3.505)***
(0.644)
(1.807)*
-0.540
-0.106
-1.759
-0.267
0.575
-0.026
(-0.522)
(-0.492)
(-1.968)*
(-1.652)
(0.844)
(-0.175)
-2.245
0.082
-1.336
0.033
-0.189
0.174
(-0.195)
(0.350)
(-0.129)
(0.168)
(-0.024)
(0.950)
8.8955
0.727
0.694
0.172
1.0618
0.797
0.632
0.185
7.9030
1.823
0.093*
0.342
0.8917
2.139
0.047**
0.379
6.4113
1.186
0.335
0.264
0.8105
2.599
0.019**
0.441
-0.064
-0.047
0.155
0.202
0.042
0.271
(1.951)*
0.195
(Key: ***= statistically significant at 1%, **= statistically significant at 5%, *= statistically significant at 10%)
For 2001, Models 13 and 14 shows that none of the independent and control variables
for the untransformed and normalised models are statistically significant. The poor
explanatory value of the models is reflected in the F-values, insignificant P-values and
the R-Squared and Adjusted R-Squared outcomes.
247
In 2002, Models 15 and 16 shows that none of the independent variable is statistically
significant in both the models. However, two control variables, LSALE and INDUS are
statistically significant at a 1% and 10% confidence levels respectively in the
untransformed model. For the normalised model, LSALE is statistically significant at a
1% confidence level. The F-values are fairly good for both models although it is slightly
higher for the normalised model. The P-values indicate that the untransformed and
normalised models are statistically significant at a 10% and 5% confidence levels
respectively. The R-Squared and Adjusted R-Squared are satisfactory for both the
untransformed and normalised models.
In 2003, Models 17 and 18 shows that one independent variable, SGO, is statistically
significant at a 10 % confidence level in the untransformed model. In the normalised
model, NGLCs showed remarkably better results compared to the two previous years.
For the normalised model, four independent variables; NEX, BUM, SGO and POL are
statistically significant at a 5% and 10% confidence levels respectively. One control
variable, LSALE is also statistically significant at a 10 % confidence level. The F-value
for the untransformed model is fairly low, but for the normalised model, is relatively
high. This indicates that the normalised model is a better model as the variables have
significant predictive capability in explaining the variability of the dependent variable.
The P-value which is statistically significant at a 5% confidence level indicates that this
model is a good model. The R-Squared and Adjusted R-Squared are satisfactory for the
normalised model.
248
Overall results indicate that, although the 2001 model is unsatisfactory in explaining
ROA, the untransformed and normalised models for 2002 and the normalised model for
2003 have statistically significant predictive capability.
7.5.4 Models for All Companies (ROE)
Table 7.4 shows the results for untransformed and normalised data, for All Companies
using ROE for 2001-2003.
Table 7.4: Models for All Companies (ROE)
2001
Variables
BSZ
BMF
RDU
NEX
BUM
SGO
FAM
POL
LSALE
INDUS
Constant
Std. Error
F-value
P-value
Rsquared
Adjusted
Rsquared
2002
2003
Model 19
Untransformed
Model 20
Normalised
Model 21
Untransformed
Model 22
Normalised
Model 23
Untransformed
Model 24
Normalised
1.796
0.406
-0.023
0.013
-0.169
0.043
(4.015)***
(3.860)***
(-0.042)
(0.131)
(-0.257)
(0.395)
1.089
0.269
0.256
0.099
0.264
0.086
(2.632)***
(2.755)***
(0.714)
(1.036)
(0.436)
(0.748)
1.544
0.094
-2.000
-0.177
0.009
-0.011
(0.784)
(0.623)
(-0.849)
(-1.149)
(0.003)
(-0.061)
0.042
0.060
0.013
-0.021
0.167
0.089
(0.768)
(0.542)
(0.211)
(-0.195)
(1.816)*
(0.646)
-0.001
-0.002
0.064
0.080
-0.093
-0.300
(-0.024)
(-0.022)
(1.405)
(0.631)
(-1.683)*
(-2.367)**
-0.057
-0.155
-0.060
-0.099
0.043
0.102
(-1.521)
(-1.287)
(-1.318)
(-0.838)
(0.655)
(0.688)
-0.004
0.053
0.033
0.160
0.028
0.029
(-0.082)
(0.378)
(0.510)
(1.107)
(0.359)
(0.173)
-0.072
-0.091
-0.088
0.126
0.160
0.192
(-0.913)
(-0.625)
(-1.094)
(0.930)
(1.040)
(1.337)
0.624
0.091
3.336
0.600
0.000
0.240
(1.116)
(0.958)
(4.954)***
(6.415)***
(-0.155)
(2.150)**
0.215
0.031
0.448
0.103
0.808
0.090
(0.382)
(0.295)
(0.696)
(1.037)
(0.991)
(0.761)
-19.512
-0.046
-17.130
-0.009
-6.369
-0.049
(-3.187)***
(-0.555)
(-2.358)**
(-0.108)
(-0.684)
(-0.506)
7.1628
3.745
0.000***
0.316
0.78178
3.758
0.000***
0.317
8.3134
3.387
0.001***
0.295
0.7935
5.306
0.000***
0.396
10.2990
0.775
0.652
0.091
0.8932
1.752
0.084*
0.185
0.232
0.233
0.208
0.321
-0.027
0.080
(Key: ***= statistically significant at 1%, **= statistically significant at 5%, *= statistically significant at 10%)
249
For 2001, Models 19 and 20, two independent variables, BSZ and BMF are statistically
significant for both the untransformed and normalised models. The F-values are high for
both models and the P-values shows that both models are statistically significant at a 1
% confidence level. The R-Squared and Adjusted R-Squared are satisfactory.
In 2002, Models 21 and 22 shows that all of the independent variables are not
statistically significant in both the untransformed and normalised models. However, one
control variable, LSALE is statistically significant at a 1% confidence level in both
models. The F-values, P-value, R-Squared and Adjusted R-Squared are satisfactory for
both the untransformed and normalised models and indicate that both models are
adequate for explaining the variability of ROE.
In 2003, Models 23 and 24 shows that two independent variables, NEX and BUM are
statistically significant at a 10% confidence levels in the untransformed model but the
F-value and other statistics suggest that it is a poor model. In contrast, the normalised
model has one independent variable, BUM and one control variable, LSALE, with
statistically significant results at a 5% confidence levels. The F-value, P value, RSquared and Adjusted R-Squared are an improvement on the untransformed model.
Overall results indicate that both the untransformed and normalised models for 2001
and 2002 and normalised model for 2003 are considered as good models and have
statistically significant predictive capability. In all cases the model with normalised data
outperforms that untransformed model.
250
7.5.5 Models for GLCs (ROE)
Table 7.5 shows the results for untransformed and normalised data, for GLCs using
ROE for 2001-2003.
Table 7. 5: Models for GLCs (ROE)
2001
Variables
BSZ
BMF
RDU
NEX
BUM
SGO
FAM
POL
LSALE
INDUS
Constant
Std. Error
F-value
P-value
Rsquared
Adjusted
Rsquared
2002
2003
Model 25
Untransformed
Model 26
Normalised
Model 27
Untransformed
Model 28
Normalised
Model 29
Untransformed
Model 30
Normalised
1.631
0.535
1.164
0.213
1.496
0.383
(2.725)***
(3.127)***
(1.316)
(1.157)
(1.882)*
(2.309)**
0.460
0.123
-0.090
-0.017
0.448
0.170
(1.003)
(0.917)
(-0.214)
(-0.135)
(0.769)
(1.152)
-1.441
-0.083
0.945
-0.200
0.435
-0.209
(-0.619)
(-0.381)
(0.228)
(-0.709)
(0.093)
(-0.626)
0.046
0.100
0.080
-0.058
-0.051
-0.306
(0.830)
(0.761)
(0.830)
(-0.371)
(-0.400)
(-1.624)
0.014
0.075
0.102
0.193
-0.008
-0.104
(0.335)
(0.501)
(1.232)
(0.835)
(-0.105)
(-0.442)
-0.077
-0.349
-0.053
-0.257
-0.009
-0.166
(-1.883)*
(-1.966)*
(-0.649)
(-1.151)
(-0.146)
(-0.868)
-0.059
-0.232
0.158
0.156
-0.089
-0.501
(-0.708)
(-0.856)
(1.105)
(0.485)
(-0.585)
(-1.354)
-0.074
-0.242
-0.138
-0.150
-0.008
-0.035
(-0.985)
(-1.317)
(-1.310)
(-0.806)
(-0.050)
(-0.194)
0.395
0.031
2.282
0.392
0.000
0.124
(0.685)
(0.259)
(2.384)**
(2.795)***
(0.765)
(1.011)
0.164
-0.015
1.628
0.317
0.455
0.226
(0.217)
(-0.092)
(1.730)*
(2.136)**
(0.440)
(1.310)
-12.218
-0.052
-34.729
0.055
-5.471
-0.055
(-1.769)*
(-0.322)
(-2.344)**
(0.256)
(-0.364)
(-0.311)
5.1459
2.504
0.022**
0.417
0.6811
2.527
0.021**
0.419
7.6667
2.998
0.008***
0.461
0.7599
3.114
0.006***
0.471
7.3030
0.991
0.470
0.231
0.7517
1.954
0.072*
0.372
0.250
0.253
0.307
0.320
-0.002
0.182
(Key: ***= statistically significant at 1%, **= statistically significant at 5%, *= statistically significant at 10%)
251
For 2001, Models 25 and 26, two independent variables, BSZ and SGO are statistically
significant at a 1% and 10% respectively for both the untransformed and normalised
models. The F-values for both models are almost similar and fairly high for both
models. This indicates that they are adequately good models as the variables have
significant predictive capability on the dependent variable. The P-value shows that both
models are statistically significant at a 5% confidence levels. The R-Squared and
Adjusted R-Squared are reasonably high for both models.
In 2002, none of the independent variables in models 27 and 28 is statistically
significant in both the untransformed and normalised models. However, two control
variables, LSALE and INDUS are statistically significant at a 5% and 10% confidence
levels for the untransformed model and a 1% and 5% confidence levels for the
normalised model. The F-values for both models are fairly good although the value for
the normalised model is slightly higher than the untransformed model. This indicates
that they are good models as the variables have significant predictive capability in
explaining the variability of the models. Based on the P-value, both models are
statistically significant at a 1% confidence levels. The R-Squared and Adjusted RSquared are reasonably high for both the untransformed and normalised models.
In 2003, shows that only one independent variable, BSZ, in models 29 and 30 is
statistically significant at a 1% and 5% confidence levels for the untransformed and
normalised models respectively. The untransformed model has a poor F-value, P-value,
R-Squared and Adjusted R-Squared and is a poor model. However, the normalised
model is a better model as the variables have significant predictive capability in
explaining the variability of the dependent variable.
252
Overall results indicate that both the untransformed and normalised models for 2001
and 2002 and normalised model for 2003 are good models.
7.5.6 Models for NGLCs (ROE)
Table 7.6 shows the results for untransformed and normalised data, for NGLCs using
ROE for 2001-2003.
Table 7.6: Models for NGLCs (ROE)
2001
Variables
BSZ
BMF
RDU
NEX
BUM
SGO
FAM
POL
LSALE
INDUS
Constant
Std. Error
F-value
P-value
Rsquared
Adjusted
Rsquared
2002
2003
Model 31
Untransformed
Model 32
Normalised
Model 33
Untransformed
Model 34
Normalised
Model 35
Untransformed
Model 36
Normalised
2.064
0.374
0.095
0.030
-1.756
-0.230
(2.698)**
(2.281)**
(0.118)
(0.209)
(-1.625)
(-1.499)
1.822
0.374
0.415
0.138
0.427
-0.073
(2.322)**
(2.278)**
(0.590)
(0.886)
(0.324)
(-0.432)
3.158
0.183
-5.043
-0.288
2.437
0.170
(0.863)
(0.710)
(-1.512)
(-1.374)
(0.577)
(0.772)
-0.021
-0.076
-0.011
0.018
0.310
0.612
(-0.197)
(-0.374)
(-0.123)
(0.101)
(2.260)**
(3.005)***
-0.039
-0.115
0.015
-0.034
-0.128
-0.299
(-0.602)
(-0.632)
(0.250)
(-0.208)
(-1.379)
(-1.746)*
-0.012
0.071
-0.043
-0.002
0.258
0.366
(-0.146)
(0.320)
(-0.580)
(-0.008)
(1.827)*
(1.473)
0.028
0.122
-0.024
0.105
0.078
0.191
(0.355)
(0.624)
(-0.296)
(0.597)
(0.803)
(1.017)
-0.244
-0.230
0.347
0.661
0.319
0.292
(-0.841)
(-0.699)
(1.786)*
(2.399)**
(1.226)
(1.371)
-0.107
0.004
3.700
0.645
-0.003
0.394
(-0.085)
(0.021)
(3.500)***
(4.577)***
(-1.498)
(1.971)*
0.747
0.121
-1.361
-0.119
1.327
0.005
(0.715)
(0.652)
(-1.412)
(-0.823)
(1.075)
(0.031)
-20.195
-0.070
-8.018
0.131
-9.073
0.265
(-1.734)*
(-0.347)
(-0.715)
(0.740)
(-0.629)
(1.333)
9.000
1.948
0.071*
0.358
0.9146
1.774
0.103
0.336
8.5279
2.161
0.045**
0.382
0.7963
3.785
0.002***
0.520
11.6083
1.673
0.129
0.336
0.8789
2.552
0.021**
0.436
0.174
0.147
0.205
0.382
0.135
0.265
253
(Key: ***= statistically significant at 1%, **= statistically significant at 5%, *= statistically significant at 10%)
In 2001, Models 31 and 32 shows that two independent variables, BSZ and BMF are
statistically significant at a 5% confidence levels for both the untransformed and
normalised models. However, only the F-value for the untransformed model is fairly
high. The F-value for the normalised model is low and the P-value is not significant.
Nevertheless, the P-value for the untransformed model is significant at a 10%
confidence level. This indicates that the model is fairly good and the variables have
significant predictive capability in explaining the variability of the dependent variable.
The R-Squared and Adjusted R-Squared are moderately high for both the untransformed
and normalised models and indicate that the untransformed model is adequately good in
explaining the variability of the dependent variable.
For 2002, Models 33 and 34 shows that one independent variable, POL, is statistically
significant in both the untransformed (10%) and normalised models (5%). A control
variable, LSALE, is statistically significant at a 1% confidence level for both of the
models. The F-values, significant P-values, R-Squared and Adjusted R-Squared are
satisfactory and better for the normalised compared to the untransformed model. These
indicate that this model is good in explaining the variability of the dependent variable.
In 2003, Models 35 and 36 shows that two independent variables, NEX and SGO are
statistically significant at a 5% and 10% confidence levels respectively for the
untransformed model. As for the normalised model, two independent variables, NEX
and BUM are statistically significant at a 1% and 10% confidence levels respectively.
Besides that, one control variable, LSALE is statistically significant at a 10%
confidence level. As for F-value, the value is low for the untransformed model but
reasonably high for the normalised model. The P-value, R-Squared and Adjusted R254
Squared also favour the normalised model, which is clearly superior in explaining the
variability of the dependent variable.
Overall, all three normalised models but only one untransformed model is statistically
significant.
7.6 Regression using untransformed and normalised models
The multivariate regression analyses have shown that 15 out of 18 pairs of models
indicate that the normalised models are more successful in explaining the variability in
the performance (ROA and ROE) than the untransformed models. The significance of
the models or P-value for all groups of companies and all years show that six out of nine
normalised ROA models were statistically significant (P-value < 0.10) compared to
only four out of nine for untransformed models. Similarly, the R-squared and Adjusted
R- squared using normalised models are better in explaining the variability of the
dependent variable than the untransformed models in seven out of the nine models. For
ROE, the summary shows that the P-value for the normalised models are statistically
significant (P-value < 0.10) and
better in eight out of the nine models. Likewise, the
Adjusted R- squared using normalised models are better than using the untransformed
models in eight out of the nine models.
Overall, the results show that the transformation using Van Der Waerden approach
provides superior models for explaining the impact of the independent variables on the
dependent variables. The findings are consistent with Haniffa (1999) who found that
transformation using Van Der Waerden method produced slightly better results than the
255
untransformed model. Therefore, the discussion on the multivariate equations in the
following section will be based on the normalised models only.
7.7 Results of the tests on normalised datasets based on groupings and years.
Table 7.1 to 7.6 discussed the tests on the untransformed and normalised datasets. This
section will summarise the results of the tests on normalised datasets based on
groupings and years. Table 7.7 presents the results of the significance tests on
independent variables for all groupings and years.
Table 7.7: Multivariate analysis tests results on normalised datasets of All Companies,
GLCs and NGLCs based on groupings and years
No
Variables
1
BSZ
2
BMF
3
RDU
4
NEX
5
BUM
6
SGO
7
FAM
8
POL
9
LSALE
10
INDUS
Performance
ROA
ROE
ROA
ROE
ROA
ROE
ROA
ROE
ROA
ROE
ROA
ROE
ROA
ROE
ROA
ROE
ROA
ROE
ROA
ROE
ALL
2001
+
+ ***
+
+***
+
+
-+
-----+
+
-+**
+
+
+
2002
+
+
+
+
--+
-+
+
--+
+
-+
+***
+***
+
+
2003
+
+
+
+
--_-+
--**
--**
+
+
+
+
+
+
+*
+**
+
+
GLCs
2001
+
+ ***
+
+
--+
+
_
+
--*
-----+***
+
+***
--
2002
+
+
------+
+
--+
+
_*
-+**
+***
+***
+**
2003
+
+ **
+
+
----*
---------+
+
+
+
NGLCs
2001
+
+ **
+
+ **
+
+
----+
+
-+
+
-+
+
-+
2002
+
+
+
+
--+
+
-----+
+
+**
+***
+***
---
(Key: ***= statistically significant at 1%, **= statistically significant at 5%, *= statistically significant at 10%)
7.7.1 BSZ to performance
For All Companies, there is a positive link between BSZ and firm performance
measured by ROA and ROE in all the years. However, statistically significant
relationship is only supported for ROE in 2001. For GLCs, there is also consistently
256
2003
-----+
+**
+***
--**
--*
+*
+
+
+
+*
+
+*
+*
-+
positive links between BSZ and performance in all the years. The relationships are
statistically significant for ROE in 2001 and 2003 at a 1% and 5% confidence levels
respectively. Therefore, the hypothesis of a significant relationship between BSZ and
firm performance in GLCs is supported in two of the years. However, for NGLCs, the
relationship is positive for 2001 and 2002 but negative in 2003 both for ROE and ROA.
The link between BSZ and performance measured by ROE is statistically significant in
2001 (5 % level). This indicates that the hypothesis of a significant relationship between
BSZ and firm performance in NGLCs has support in only one year and that the
direction of any relationship is unstable between years.
Overall the results are broadly consistent with a positive relationship between BSZ and
firm performance. The relationship is not statistically significant for any years for ROA.
For ROE, the relationship is statistically significant for one period for All Companies
and NGLCs and for two out of three years for NGLCs. This result is consistent with
studies done by Chaganti et. al., (1985), Pearce & Zahra (1992), Dalton et al., (1998),
and Kiel and Nicholson (2003), who found that BSZ was positively associated with firm
performance. Hence, it can be concluded that the hypothesis of a significant relationship
between BSZ and performance has limited support for ROE but is rejected for ROA.
These variable results between years and groupings are consistent with lack of
agreement on the extent and direction of any association between BSZ and performance
in the extant literature.
7.7.2 BMF to performance
For all groupings of companies and in all years, there are consistently positive
association of BMF and firm performance for ROA and ROE except GLCs in 2002 and
257
NGLCs in 2003. For All Companies, the hypothesis of a significant relationship
between BMF and firm performance is only supported for ROE in 2001. However, for
GLCs, there is no statistically significant relationship and therefore the hypothesis of a
significant relationship between BMF and performance is rejected in GLCs. For
NGLCs, the relationship is only statistically significant for ROE in 2001. This
demonstrates that for NGLCs, the hypothesis of a significant relationship between BMF
and performance has limited support.
Overall results suggest that in most years across the three samples there is a positive
association between BMF and firm performance. However, the relationship is rarely
statistically significant and therefore the support for the hypothesis is limited. The
findings are consistent with the extant literature suggesting that the relationship between
BMF and firm performance is complex and its direction uncertain (see, for example,
Evans et. al., 2002).
7.7.3 RDU to performance
The multiple regression results show that, there is a mix of positive and negative
relationship between RDU and firm performance (ROA and ROE) in All Companies
and NGLCs. As for GLCs, there are consistently negative links. However, none of the
relationships is statistically significant.
As such, the hypothesis of a significant
relationship between RDU and firm performance in All Companies, GLCs and NGLCs
is rejected. The overall findings are consistent with the literature, for example, Davidson
et al. (1996) and Dalton et al., (1998) found the relationship to be mixed in sign and not
statistically significant.
7.7.4 NEX to performance
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There is a mix of positive and negative relationships of NEX to firm performance in all
groupings of companies in all years. For All Companies, none of the links is statistically
significant. For GLCs, the link for ROA in 2003 is statistically significant at a 10%
confidence level. This shows that there is a limited support of the hypothesis of a
significant relationship between NEX and firm performance in GLCs. The result for
NGLCs show that the only significant relationship is in 2003 (ROA and ROE) in which
the confidence level are at 5% and 1% confidence levels respectively. The hypothesis
of a significant relationship can therefore be accepted for NGLCs in 2003. The
hypothesis of a relationship between NEX and performance is rejected in All
Companies in all years and for GLCs and NGLCs for 2001 and 2002. The hypothesis is
partly supported in GLCs and NGLCs in 2003.
Overall, the findings show that there is limited evidence on either the direction or
significance of changes in NEX on performance measured by ROA and ROE. The
inconsistencies of relationships of NEX to performance suggest that their presence on
Malaysian boards does not correlate to performance. The results indicate that, although
NEX are a majority on the board (see section 6.2.3), they have not significantly
influenced firm performance. This is probably due to their lack of business skills and
acquaintances to carry out their duties because they are not fully involved in
management of companies (Patton and Baker, 1987). As a result, they are not effective
and capable in discharging their duties to enhance performance and this may indicate
that their presence on the board of directors merely provides checks and balances rather
than business expertise.
The results is consistent with a study by Goodstein et al., (1994), which suggested that
large numbers of NEX could stifle strategic actions and entail unnecessary monitoring
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on management with a consequent reduction in firm performance. The findings are also
consistent with Hermalin and Weisbach (1991), and Mehran (1995), which found that
there were no significant relationships between NEX and firm performance. However,
the significant positive correlations between NEX and performance in 2003 for NGLCs
is consistent with the findings from the U.S (Rosenstein and Wyatt, 1990, and Lee, et
al., 1992, Pearce and Zahra, 1992, and Ezzamel and Watson, 1993), who reported a
positive relationship between the proportion of NEX on the board and performance.
7.7.5 BUM to performance
For All Companies, there is a mix of negative (2001 and 2003) and positive links (2002)
of BUM to performance except for NGLCs where the relationship was consistently
negative. The only statistically significant relationships are negative relationships
between ROE and ROA for All Companies and NGLCs in 2003. These relationships are
significant in All Companies at a 5% level for both ROE and ROA and at a 5 % level
for ROA and 1 % level for ROE in NGLC. Therefore the hypothesis of a significant
relationship between BUM and firm performance in All Companies and NGLCs is
supported only in 2003 and the hypothesis of a significant relationship between BUM
and firm performance is rejected in GLCs.
Overall results provide little support for the hypothesis of a significant relationship
between BUM and firm performance. The results, with most of the directions being
negative suggest that this variable has a depressing impact on performance. This could
possibly be due to bumiputra directors focusing on the short-term (Hofstede, 1991) or
exhibiting high uncertainty avoidance, which is reflected in their values of nonassertiveness, conflict avoidance and uneasiness in dealing with ambiguities and
uncertainties (Abdullah, 1992). As such, their presence on boards might just be window
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dressing to maintain good relationship with the government (Gomez and Jomo, 1997).
This finding
is consistent with previous Malaysian studies on the subject of BUM
(Haniffa, 1999).
7.7.6 SGO to performance
For All Companies, there is a mix of negative (2001 and 2002) and positive links (2003)
between SGO and firm performance. As none of the relationships are significant, the
hypothesis of a significant relationship between SGO and firm performance in All
Companies is rejected. In GLCs, there is a consistent negative relationship between
SGO and performance (both ROA and ROE) in all the three years. However, the
relationship is only statistically significant (10%) in 2001 for ROA. For NGLCs, there is
a mix of positive (2001 and 2003) and negative links (2002) for ROA and ROE.
However, only the 2003 link for ROA shows a statistically significant relationship.
Therefore, the hypothesis of a significant relationship between SGO and performance in
NGLCs is only supported in 2003(ROA).
Overall results show that SGO has a very limited impact on firm performance. Only
ROA has a statistically significant relationship in certain groupings and the relationship
is not consistent in all years. Other groupings and years showed no relationships
between SGO and performance. The negative and positive relationships in GLCs and
NGLCs respectively, indicate that SGO in GLCs lowers firm performance, while in
NGLCs, performance increases. This suggests that in GLCs, as they are representing
shareholders (in this context; the government), their decision making might have been
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dictated in accordance with government policies in which profits might not be a priority
and hence firm performance would be weaker. However, in NGLCs, their role as
board’s members might give the company access to vital networks and sources of
information within government, which might enhance performance.
7.7.7 FAM to performance
For all groupings of companies, there is a mix of negative and positive associations
between FAM and ROA and ROE. None of the links are statistically significant. This
indicates that the hypothesis of a significant relationship between FAM to performance
in All Companies, GLCs and NGLCs are rejected.
Although not statistically significant, the relationship between FAM and firm
performance is more noticeable in NGLCs (four out of six instances compared to two
out of six instances). This is consistent with a number of more recent empirical studies
in South Korea (Chang et al, 2003; Joh, 2003) and Hong Kong (Carney and Gedajlovic,
2002) which show that a controlling family ownership is associated with better
performance and a study by
Barontini and Caprio (2005), that family control is
positively related to firm value and operating performance. However, overall the results
are consistent with Filatotchov et al (2005), who found that publicly traded firms that
are controlled by a family do not outperform other companies and therefore the
hypothesis that FAM is a strong determinant of firm performance in Malaysian firms is
rejected.
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7.7.8 POL to performance
For All Companies, there is a mix of positive (2001 and 2003) and negative links (2002)
between POL and firm performance for ROA. Similarly, ROE also has a mix of
negative (2001) and positive links (2002 and 2003). None of the associations are
statistically significant. This indicates that the hypothesis of a significant relationship of
POL and firm performance in All Companies is rejected. In GLCs, a consistent negative
association is observed in all years between POL and performance (ROA and ROE). All
the links are insignificant except for ROA in 2002 (10% level). This indicates that the
hypothesis of a significant relationship between POL and firm performance in GLCs is
only supported in ROA for 2002. For NGLCs, there is a consistent positive relationship
between POL and performance (ROA) in NGLCs. For ROE, there is a mix of negative
(2001) and positive (2002 and 2003) associations. Two of the links (ROA in 2003 and
ROE in 2002) are statistically significant at a 10% and 5 % confidence level. Hence,
the hypothesis is supported for the two periods.
Overall, there are some differences between the results of GLCs and NGLCs. This is
because, there is a consistent negative link for GLCs but positive link for NGLCs in five
out of the six tests. These differences are consistent with resource dependence theory as
politicians are valuable to NGLCs as they provide access to the resources and the
networks within government (Gomez and Jomo, 1997). However, since there are no
consistent statistically significant results, the hypothesis of a significant relationship
between POL and firm performance proved largely unfounded across all groups and
years.
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7.7.9 LSALE to performance
There is a consistently positive association between company size (proxied by LSALE)
and firm performance in all groups of companies for all years. For All Companies, the
links are statistically significant for ROA in all the years under study. While for ROE,
the links for 2002 and 2003 are statistically significant at a 1% and 5% confidence
levels respectively. These results indicate that in All Companies, company size is
statistically significant to performance in five out of six tests. In GLCs, three of the
links (ROA 2001 and 2002) and ROE (2002) have a statistically significant relationship
at a 1%, 5% and 1% respectively. These results indicate that in GLCs, company size is
statistically significant to performance in three out of six tests. NGLCs also demonstrate
a good association as four of the links (ROA and ROE for 2002 and 2003) have a
statistically significant relationship at 1% and 10% respectively. These results indicate
that in NGLCs, company size is statistically significant to performance in four out of six
tests.
Overall results show that a statistically significant relationship was observed in twelve
out of eighteen tests. All the statistically significant results had company size positively
linked to performance. Specifically the results show that seven out of nine tests are
statistically significant for ROA and five out of nine tests for ROE. Therefore, it can be
concluded that company’s size is a strong determinant of firm performance in
Malaysian firms.
7.7.10 INDUS to performance
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There is a consistently positive association between INDUS and firm performance in
All Companies and in all years both for ROA and ROE. However, none of the links is
statistically significant. As for GLCs, there is a consistently positive link between
INDUS and ROA. Two of the links are statistically significant in 2001 and 2002 (both
at 1% levels). For ROE, there is a mix of negative (2001) and positive (2002 and 2003)
relationships. The relationship is statistically significant in 2002 (5% level). The
positive and statistically significant links show that INDUS is associated to performance
in GLCs for the period. These results indicate that in GLCs, INDUS is statistically
significant to firm performance. However, for NGLCs, there is a consistently negative
association of INDUS to ROA in all the years and for ROE, a mix of positive (2001 and
2003) and negative (2002) association. But none of the links is statistically significant.
The results indicate that INDUS is not statistically significant to performance for
NGLCs in all years.
Overall results show that INDUS is a stronger determinant of firm performance in
GLCs compared to NGLCs.
7.8 Conclusion
This chapter discussed the results of a multiple linear regression analyses of the
relationship between corporate governance structures of All Companies, GLCs and
NGLCs and firm performance. Testing showed that the original datasets (untransformed
data) used in the multiple regression analysis conformed to the underlying assumptions
of regression analysis. Nevertheless regressions were carried out using both the original
datasets and normalised datasets using the Van Der Waerden approach. A comparison
of the regression models showed that improved results were obtained from the
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normalised datasets. Consequently, the normalised models were used for testing the
hypothesised relationships between corporate governance variables and performance
(ROA and ROE).
For All Companies, the hypotheses on three independent variables (BSZ, BMF and
BUM) are supported in only one year for ROA, ROE or both. Another five variables
(RDU, NEX, SGO, FAM and POL) did not show any statistically significant
relationship and are therefore rejected. Therefore, the hypothesis of a significant
relationship between corporate governance structures and the performance of All
Companies in the post- AFC period from 2001 to 2003 is rejected. This is because the
relationship of a significant link is inconsistent and has limited support throughout the
years.
For GLCs, there is quite a strong support for the hypothesis on the significant
relationship between BSZ and firm performance (ROE). Another three variables (NEX,
SGO and POL) have limited support on the hypothesis. Hypotheses on the other four
independent variables (BME, RDU, BUM and FAM) are rejected. Therefore, the
hypothesis of a significant relationship between corporate governance structures and the
performance of GLCs in the post-AFC period from 2001 to 2003 is rejected except BSZ
(ROE).
For NGLCs, hypotheses on the six independent variables (BSZ, BME, NEX, BUM,
SGO and POL) showed limited support as they are statistically significant for only a
single year. For NEX and BUM, the hypothesis is supported in both ROA and ROE in
2003. The hypotheses for another two variables; RDU and FAM are rejected. Hence,
the hypothesis of a significant relationship between corporate governance structures and
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the performance of NGLCs in the post-AFC period from 2001 to 2003 is rejected. This
is because the relationship of a significant link is inconsistent throughout the years.
The multivariate regression results also shown that it was worthwhile to distinguished
GLCs and NGLCs into separate groups. The multivariate results of the two groups show
some significant differences between the governance structures of GLCs and NGLCs. It
also provides insights over and above looking at the All Companies position. The
findings indicate that models produced based on this segregation results in better
prediction of the independent variables to firm performance. This is shown by a much
enhanced results of F-value, P-value, R-squared and Adjusted R-squared of GLCs and
NGLCs models compared to All Companies models.
In conclusion, the findings indicate that corporate governance structures of Malaysian
corporations are not statistically significant to firm performance. The findings indicate
that there are certain variables being relevant in certain years for certain sample but not
the following year.76 The study indicates that all the corporate governance practices that
were put into place are just to monitor management and to inculcate good practices of
corporate governance but not to enhance firm performance.
76
These inconsistent results mirror those in the literature. For example, Rahman (2006) found that role duality was statistically
significant in two out of the five year period studied for ROA and ROE, and Haniffa (2006), who studied on corporate governance
structures and performance of Malaysian listed companies found that the independent variables were statistically significant in
some years of the study but not others.
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CHAPTER 8
CONCLUSIONS, LIMITATIONS AND RECOMMENDATIONS FOR FUTURE
RESEARCH
8.0 Introduction
This chapter reviews the empirical findings presented in Chapter 6 and 7 with respect to
the research questions and hypotheses stated in Chapter 5. The first, second and third
sections of the chapter reiterate the research problem, objectives of the study and the
research questions. This is followed by the fourth and fifth sections which will highlight
and discuss the findings on the differences between the governance structures of GLCs
and NGLCs; and the discussion on the efficacy of the division between the two groups
of companies. The sixth, seventh and eighth sections on multivariate regression analyses
discuss, for both GLCs and NGLCs, the performance measures used and the years
studied. Further sections highlight the major findings of this study and its contribution
to corporate governance literature. Lastly, the limitations of the research and some
areas for further research are also identified.
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8.1 The research problem
The relatively poor performance of GLCs in Malaysia has been associated with the
consequences arising from government influence including political interference. This
influence would divert managerial objectives away from profit maximization and could
also lead to distortion of managerial investment decisions (Latfont and Tirole, 1993).
GLCs in Malaysia are also closely associated with government policies such as wealth
distribution and restructuring of corporate ownership through NEP (1970) and ICA
(1975). These influences on GLCs mean that they may well have different corporate
governance structures to NGLCs. Given that the literature suggests a possible link
between performance and corporate governance structures, the failure of previous
studies into corporate governance structures and performance to take this possibility
into account may have distorted their results. The research problem is to establish
whether these differences exist and their effect.
8.2 Objectives of the study
As mentioned in the first chapter, the main objective of this study is to investigate
whether or not there is a relationship between the corporate governance structures and
performance in Malaysian quoted companies. The research seeks to discover whether
the division of quoted companies into GLCs and NGLCs might assist with addressing
this objective. As a first step, the research first seeks to establish whether or not there
are any significant differences between the corporate governance structures of GLCs
and NGLCs. Differences were found and therefore the second objective of the study
was to establish whether the relationship between corporate governance structures and
performance of the two groups differs in the post-AFC period from 2001 to 2003.
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8.3 The research questions
The research objectives were translated into the following questions:
1. Are there any significant differences in the corporate governance structures of GLCs
and NGLCs in the post- AFC period from 2001 to 2003?
2. Are there any significant relationships between the corporate governance structures of
All Companies, GLCs and NGLCs and performance in the post-AFC from 2001 to
2003?
Given the unique circumstances in the Malaysian corporate sector, this study could
provide new insights into how corporate governance structures of GLCs and NGLCs
differ and subsequently affect firm performance. Results from the empirical analysis
will be discussed and implications for the relationship between governance structures
and performance of All Companies, GLCs and NGLCs in the post-AFC period
explored.
8.4 Differences between GLCs and NGLCs.
As mentioned in chapter six, there are fourteen independent variables used in the current
study. However, the findings show that there are statistically significant differences in
all three years for seven corporate governance variables between GLCs and NGLCs.
They are BSZ, BMF, RDU, NEX, BUM, SGO and FAM. POL is also statistically
significant in two years. Since no previous studies have examined the differences
between the corporate governance structures of GLCs and NGLCs in Malaysia, these
findings contribute significantly to the corporate governance literature. The findings
also demonstrate the viability of the second stage of the research, which seeks to
examine whether observed differences in the performance of GLCs and NGLCs can be
explained in terms of corporate governance structures.
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8.5 The division of All Companies into GLCs and NGLCs
The sub-division of the sample termed All Companies into GLCs and NGLCs provided
enhanced results. If a comparison is made between All Companies and the individual
groupings of GLCs and NGLCs, the multivariate regression results show that the RSquared values of All Companies are very much lower (both for ROA and ROE)
throughout the three year study compared to GLCs and NGLCs. The lowest and highest
R-Squared values for All Companies is 0.171 and 0.396 respectively. On the other hand,
the lowest and highest R-Squared values for GLCs and NGLCs are 0.185 and 0.561
respectively. These indicate that the variables in GLCs and NGLCs are better able to
explain the relationship of governance structures and performance compared to All
Companies. Similar results can also be observed in the Adjusted R-Squared values in
which the highest value for All Companies is 0.321 while in GLCs and NGLCs the
Adjusted R-Squared value is 0.396. Therefore, the division of Malaysian PLCs into
GLCs and NGLCs is constructive in understanding the relationship between corporate
governance structures to performance in Malaysia.
8.6 Multivariate regression and data transformation
The multivariate regression was carried out using an untransformed and transformed
data set. Although it has been shown that the untransformed data conformed to the
assumptions of multiple regression analysis, better results on the relationships between
corporate governance variables and performance might be established if the data were
transformed. The main benefit of transforming data to normal scores is the ability to
employ it in any subsequent tests requiring the normality of data which means: the
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significance levels can be determined with more confidence; the F-value and P-value
may be more meaningful (Cooke, 1998). Furthermore, the regression coefficients
derived using the normal scores approach are able to preserve monotonocity in the
relationships of independent and dependent variables. As such, the untransformed data
which include both the dependent and independent variables were transformed using the
Van Der Waerden approach. Consistent with the literature the transformed dataset
consistently performed better and provides improved models for explaining the impact
of the independent variables on the dependent variables. The findings are consistent
with Haniffa (1999) who found that transformation using Van Der Waerden method
produced better results than the untransformed model.
8.7 Untransformed versus transformed models
If comparison is made between the untransformed and transformed models, the
multivariate regression analyses indicate that 15 out of 18 pairs of the transformed
models are more successful in explaining the variability in the performance (ROA and
ROE) than the untransformed models. The P-value for all groups of companies and all
years show that six out of nine transformed ROA models were statistically significant
(P-value < 0.10) compared to only four out of nine for untransformed models.
Similarly, the R-squared and Adjusted R- squared using transformed models are better
in explaining the variability of the dependent variable than the untransformed models in
seven out of the nine models.
For ROE, the results show that the P-value for the
transformed models are statistically significant (P-value < 0.10) and better in eight out
of the nine models. Likewise, the Adjusted R- squared using transformed models are an
improvement on the untransformed models in eight out of the nine models. In general,
the results show that the transformation using Van Der Waerden approach provides
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better models for explaining the impact of the independent variables on the dependent
variables.
8.8 Multivariate regression
The multivariate regression shows that, apart from BSZ there are no consistently
significant statistical relationships between corporate governance variables and
performance, although in individual time periods certain variables do become
significant in certain groupings (for example, BMF, NEX, BUM, SGO and POL). The
following sections discuss the multivariate regression results based on groupings of
GLCs and NGLCs, the two performance measures, ROA and ROE and year of study
from 2001 to 2003.
8.8.1 GLCs and NGLCs
The multivariate regressions show that there are no observable differences between
GLCs and NGLCs in the relationships between performance and corporate governance
structures. Based on P-values, for GLCs, in five out of six instances there are
statistically significant results. These indicate that in five out of six models the
variability in performance can be explained by the corporate governance variables used
in the regression. NGLCs had four out of six statistically significant models, which
indicate that the variability in performance can be explained by the corporate
governance variables in four out of the six models. In terms of R-Squared and Adjusted
R-Squared, the values for both groups of companies are almost identical. These indicate
that there are no noticeable differences between GLCs and NGLCs in the strength of the
association between corporate governance structure and performance. However, the
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results in both GLCs and NGLCs show that the variables that are statistically significant
are inconsistently related to performance. As such, except for BSZ, it is difficult to
conclude that any of the variables are consistently associated with performance.
8.8.2 ROA and ROE
The multivariate regressions show that statistically significant results are inconsistent
between the two performance measure of ROA and ROE. For ROA, statistically
significant variables are NEX, BUM, SGO and POL and for ROE, the significant
variables are BSZ, BMF, NEX, BUM and POL. Although NEX, BUM and POL have
common significant results for the two performance measures, the significant results are
only seen in certain years and are inconsistent throughout the groupings. BUM in All
Companies (2003) and NEX and BUM in NGLCs (2003) show statistically significant
results in both ROA and ROE.
Overall results show that statistically significant
variables for ROA and ROE are inconsistent throughout the groupings and years.
8.8.3 Years 2001, 2002 and 2003
Based on individual year, the multivariate regression results show that in 2001, three
variables (BSZ, BMF and SGO) are statistically significant to performance. BSZ is
statistically significant for all the three groupings in 2001, BMF for two groupings in
2001 and SGO in one grouping. The year 2002 has the least number of statistically
significant variables as only one variable (POL) is statistically significant for both ROA
and ROE in GLCs and NGLCs respectively. But in 2003, five variables (BSZ, NEX,
BUM, SGO and POL) have a statistically significant relationship with performance in
NGLCs. BUM is also statistically significant for All Companies in 2003. Overall, the
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findings indicate that there are inconsistencies in the relationships between independent
variables and performance across the years.
8.9 Major findings of the current study
There are eight differences found on the corporate governance structures of GLCs and
NGLCs in the preliminary univariate analyses. Therefore the first hypothesis on the
existence of significant differences between the corporate governance structures of
GLCs and NGLCs is supported. The six other variables did not conform to the first
hypothesis. However, results of the multivariate analyses show that there is no empirical
evidence found for differences in the relationship between corporate governance
structures and performance in GLCs and NGLCs. Both groups show no consistency in
the presence of statistically significant relationships across the groupings, performance
measures of ROA and ROE and in all years. These inconsistent results indicate that
there is no stability in statistical relationships throughout the three year period. The
implications of inconsistent results from a three year view for corporate governance
research is that empirical research may reach conclusions based on statistically
significant results at a point in time that are only relevant for this historic context and
may not persist. Therefore, the findings suggest that notwithstanding the eight
differences in governance structures, the observed differences in the performance of
GLCs and NGLCs could not be explained in terms of their corporate governance
structures. As a result, the relationship between corporate governance structures and
performance of GLCs and NGLCs does not differ much in the post-AFC from 2001 to
2003. Hence, the hypothesis stating that there is a significant relationship between
corporate governance structures and the performance of GLCs, NGLCs and All
Companies in the post- AFC period from 2001 to 2003 is rejected.
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These findings are consistent with the ambivalent position on the relationship between
performance and corporate governance variables observed by the literature which
exhibits conflicting arguments about the direction of relationships and empirical results
that are extremely variable. Since there are no apparent relationships between
governance structures of GLCs and NGLCs to performance, the position is consistent
with governance mechanisms that had been laid down are not specifically meant to
enhance performance, but to monitor the management and regulating companies to be
more transparent and accountable in their actions in order to gain investors’ confidence.
The current findings are also consistent with Suto (2003), which suggested that an
absence of a clear link between corporate governance structures and the performance of
GLCs were caused by weakened governance structures probably caused by government
interference and policies. The problem statement also argued that GLCs in Malaysia are
less efficient than NGLCs because GLCs directors are generally appointed from the
ranks of SGO, BUM and POL. Since such directors often lack business insight and their
investment decisions may be stimulated by social rather than commercial benefits, their
appointment was thought to contribute to the low performance of GLCs. However, this
study show that these variables have no statistically significant adverse impact on
performance.
8.10 Contribution of the current study on corporate governance knowledge
The current study contributes to the growing body of literature on the relationship
between corporate governance structures and firm performance in a number of ways.
First, it segregates the Malaysians PLCs into two sub-groups; GLCs and NGLCs and
demonstrates that there are statistically significant differences between the corporate
governance structures of both groups. The study is also the first to examine the effect of
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corporate governance structures on performance distinguishing between these two
groups of companies. Hence, this study provides new insights into the association
between corporate governance variables and performance of GLCs and NGLCs in
Malaysia.
The second contribution is, in the Malaysian context, to provide a study that examines
the relationship between BUM, SGO and POL and firm performance, which had not
been done before. As noted in the first chapter, GLCs in Malaysia are often argued to be
less efficient than NGLCs because GLC directors and managers are typically appointed
from the ranks of SGO, BUM and POL. As these variables are proxies of government
interference in the board composition of GLCs, these variables were claimed to
contribute to weak governance structures. This is because they have been criticized for
being too risk-averse and lacking sufficient entrepreneurial drive and subsequently
contributes to their poor performance. However, this study show that these variables
have no statistically significant adverse impact on performance.
The third contribution is that, although the initial findings from the univariate analysis
show that there are eight governance structures that are significantly different between
GLCs and NGLCs, the multivariate analyses indicate that these differences do not affect
the relationship between performance and governance structures of GLCs and NGLCs.
These results signify that in general the governance structures of GLCs and NGLCs do
not affect performance and are therefore probably put in place to monitor management
and to enhance investors’ confidence, not distinctively to enhance performance.
8.11 The relationships of governance variables and firm performance
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The MICG suggested that good governance is undeniably a contributing factor to firm
performance because good governance comprises, but is not limited to, professional and
ethical management of companies, and as a result, companies are more likely to conduct
their businesses in line with the “expectations of all stakeholders” (MICG, 2001).
However, the current study found inconsistent evidence across the three years that any
independent variables except board size were related to firm performance. The findings
support the view that governance structures, which were recommended in MCCG
(2000), do not improve firm performance and that firm performance is determined by
other factors. The control variable LSALE played a role in a number of the samples
tested but otherwise factors like the economic and market situation, market share,
innovation are probably more important.
8.12 Limitations of the study
This study has a number of limitations. The first is the mechanism of finding match-pair
of GLCs and NGLCs for the sample. Despite there being over nine-hundred companies
in Bursa Malaysia, the search for reasonably matched companies greatly restricted the
coverage of the sample and means that it is far from truly random. Further, although
every effort was made to produce an accurate match-pair, the process inevitably
involves compromise. For example, there was no exact pair in terms of paid-up capital.
Although the effect on performance is probably minimal, an inaccurate match-pair
could jeopardize the mechanism of the sample selection itself. A second limitation is the
possibility of omitted variables in the regression model. Such omitted variables could
possibly better predict and explain firm performance. Finally, the study examined the
relationship of corporate governance structures to firm performance in a three years
study. A longer study could have produced more comprehensive results. However, in
spite of these limitations, this study makes some unique contributions to the growing
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body of literature on the relationship between corporate governance structures of GLCs
and NGLCs and firm performance.
8.13 Recommendations for future research
The thesis could be usefully developed in the following three areas:
i) A repeat of the study, which takes all the GLCs in Malaysia as sample and examines
the relationship between corporate governance structures and performance. Research
on the performance of GLCs is lacking in Malaysia with this thesis being the only
significant study. As a major government investment arm, GLCs provides the platform
of government business participation in the corporate sectors and contribute
significantly to the economic development in Malaysia. Given this importance, there
should be a comprehensive study on characteristics of all GLCs and firm performance.
The results might be different compared to the current study as this study picked up
only GLCs that are a matched-pair with NGLCs and is therefore limited in its coverage.
ii) An investigation of a hypothesis that there is a relationship between the percentages
of shares owned by the government in GLCs and their performance. An important issue
with GLCs is the extent to which government diverts a GLC away from making
decisions on a strictly commercial basis (Ministry of Finance, 2003). The issue might be
explored using the percentage of shares owned by the government as a proxy for
government interference and its relationship to firm performance examined.
iii) A comparison of the corporate governance structures of GLCs in Malaysia with
their counterparts in Singapore’s GLCs. Singaporean GLCs, through the Singapore
government’s main investment arm, Temasik Holdings, has invested significantly in
many countries including Malaysia. Singapore’s GLCs are known to be performing
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very well in and outside the country. Although, most of the directors and managers are
civil servants, their performance has generally been better than their NGLCs (Lemmon
and Lins, 2003). Therefore, a comparison of their corporate governance structures with
those of Malaysian GLCs might provide information on how the governance of
Malaysian GLCs can be enhanced.
8.14 Summary
This study has examined the relationship between corporate governance structures and
performance of GLCs and NGLCs in Malaysia in the post-AFC period beginning 2001
to 2003. The findings show that out of fourteen independent variables used in the
univariate analyses, there were eight statistically significant differences between the
corporate governance structures of GLCs and NGLCs in a sample of matched pairs.
Therefore, the first hypothesis on the existence of significant differences between the
corporate governance structures of GLCs and NGLCs is supported. However,
multivariate analysis of the sample, with one exception, did not reveal any consistent
statistically significant association between a range of variables related to corporate
governance structure and performance measured by ROE and ROA in either GLCs,
NGLCs or the combined sample. The exception was BSZ but this was only with ROE
and not ROA. Hence, the second hypothesis stating that there is a significant
relationship between corporate governance structures and the performance of GLCs,
NGLCs and All Companies in the post- AFC period from 2001 to 2003 is rejected.
These results suggests that the observed differences in the performance of GLCs and
NGLCs are not explained in terms of their corporate governance structures and that
280
governance structures in GLCs and NGLCs probably provide appropriate monitoring on
company’s management rather than improving performance.
Although there was no consistent relationship between corporate governance variables
and performance across the period, a number of variables had a statistically significant
relationship in one period or for ROE or ROA but not both. This variability and the
more general findings are consistent with the contradictory literature on the possibility
of an association between corporate governance structures and performance. This study
also found that the relatively poor performance of GLCs in Malaysia which has been
associated with government influence on the board structures such as the appointment
of BUM, SGO and POL were basically unfounded because these variables have no
statistically significant adverse impact on performance. As such, the under-performance
of GLCs in Malaysia could have been caused by other factors.
281
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Appendix A: Performance measurement of previous studies
No
Author/s
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1968
1970
1971
1976
1978
1978
1978
1980
1979
1981
1983
1984
1985
1985
1985
38
39
40
41
42
43
44
45
Kamerschen
Larner book
Radice
Round
Steer and Cable
Vance
Berg and Smith
Jacquemin and Ghellinck
Thonet and Poensgen
Linderberg & Ross
Branch & Cole
Cockran & Wood
Baysinger and Butler, 1985
Kesner and Dalton,1985
Changanti, Mahajan and
Sharma, 1985
Demsetz and Lehn
Baysinger & Butler
Kesner, 1987
Morck et. al.
Kiel, et. al
Cho
Molz, 1988
Morck, Sheifer and Vishny,
1988
Holderness and Sheehan
Weisback, 1988
Kaplan
Murali and Welch
Schellinger, Wood and
Tashakori
Yermack,
Rosenstein and Wyatt,
McConnell & Servaise
Leach and Leahy
Pearce and Zahra
Donaldson and Davis
Rechner and Dalton
Hermalin & Weisbach
Baysinger, Kosnick and
Turk(NA)
Pearce and Zahra, 1991
Daily and Dalton, 1992
Judge and Zeithaml,1992
Mallete and Fowler
Daily and Dalton
Chen, Hexter and Hu
Canella and Lubatkin
Denis and Denis
46
Finkelson and D’Aveni
1994
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
Sales
Y
Y
Y
Y
Y
ROI
Tobin’s
Q
Y
Y
Market
Share Price
Market
PE ratio
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
1988
1988
1989
1989
1989
1991
1992
1992
1992
1993
1993
1993
1994
ROE
Y
Y
Y
1985
1985
1987
1988
1988
1988
1988
1988
1990
1990
1990
1991
1991
1991
1991
1991
1991
ROA
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
1
1
1
1
3
2
3
1
2
1
1
1
2
2
2
2
1
4
1
2
1
3
1
2
2
1
3
2
2
2
2
2
1
2
2
2
2
Y
Y
Y
Number of
measuremen
t
2
3
2
1
3
1
1
3
1
304
47
48
49
Ocasio
Barnhart et.al.
Chung and Pruitt’s
1994
1994
1994
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
Brickley, Coles and Terry,
Daily and Dalton(a),
Boyd,1994
Daily and Dalton(b),1994
Beatty and Zajac
Curcio
Keasey, Short and Watson
Westphal and Zajac
Hoskinson
McConnell and Servaes
Mehran
Daily
Thomsen and Pedersen
Zahra
Kole [1996], Working
Paper
Zajac and Westphal
Agrawal and Knoeber
Baliga, Moyer and Rao,
1996
Sandaramurthy
Stem Stewart
Sundaramurthy, Mahoney
and Mahoney(NA)
McWilliams and Sen(NA)
Sundaramurthy, Mahoney
and Mahoney,1997
McWilliams and Sen,1997
Rhoades and Rechner
Sandaramurthy et. al.
Sandaramurthy
Loderer & Martin
Cho
Farrer and Ramsay, Ian
Barnhart
Barnhardt and Rosenstein
Muth and Donaldson
Short and Keasey
Himmelberg, Hubbard &
Palia
Thomsen and Pedersen
Holderness, Kroszner and
Sheehan
Dalton et. al
Neng Lian and Joanna Li
Demsetz & Vilongga
J.W. Coles et. al 2001
Bhagat and black
Ishak Z.
Schrader, Charles, B
Peng and Buck
Wood and Sach
Lan Feng Kao et. al.
Total
Percentage
1994
1994
1994
1994
1994
1994
1994
1994
1994
1995
1995
1995
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
Y
Y
YAlternat
ive
formula
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
1996
1996
Y
Y
1996
1996
1996
Y
Y
1996
1996
1997
Y
Y
Y
Y
Y
Y
Y
Y
Y
2
3
1
Y
Y
Y
1
2
Y
Y
Y
Y
Y
Y
Y
2
2
2
1
1
1
2
3
1
5
2
2
Y
1
1
1997
1997
1997
1997
1997
1997
1997
1998
1998
1998
1998
1998
1999
1999
Y
Y
Y
Y
Y
1999
1999
1999
1999
2001
2001
2002
2003
2003
2003
2003
2004
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
8
8.04
Y
Y
47
40.9
Y
Y
Y
Y
Y
22
20.3
20
20.1
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
44
40.6
305
5
5.2
1
2
2
2
2
1
1
1
1
1
2
1
1
1
2
1
1
4
Y
Y
1
2
1
Y
30
30.1
5
2
2
7
4
1
2
1
2
3
Appendix B: Comparison of the means, t-value and significance on differences between
GLCs and NGLCs for 2001,2002 and 2003
2001
Mean
1
2
3
4
5
6
7
8
9
10
11
12
13
14
8.5098
BSZ
G
N
G
6.0196
BME
G
N
G
0.1373
RDU
G
N
G
79.791
NEX
G
N
G
37.122
IND
G
N
G
21.275
DAF
G
N
G
9.1980
WOM
G
N
G
72.229
BUM
G
N
G
58.398
SGO
G
N
G
7.5882
POL
G
N
G
3.0549
FAM
G
N
G
3.5686
ACS
G
N
G
4.3333
ACM
G
N
G
G
N
1.1373
G
1.2353
AUDI
7.2000
5.1200
0.3300
63.515
35.218
21.337
5.3725
42.986
23.616
1.7667
16.077
3.4706
4.3700
Paired
Sample
s test
t-value
2002
Sig.(2tailed)
Mean
Paired
sample
s test
t-value
Sig.(2tailed)
8.9412
3.444
.001***
7.6900
.024**
5.3300
3.776
.000***
.040**
0.3100
2.212
.032**
.000***
63.816
-2.023
.048**
40.683
6.877
.000***
23.355
-0.658
3.5765
.000***
44.463
-0.132
.000***
21.677
.008***
2.3333
2.844
.006***
.000***
13.369
6.349
3.7255
9.053
4.9800
2.274
-3.152
6.0918
0.076
.000***
40.6536
7.466
.000***
.000***
21.16
6.198
.000***
.027**
2.7
.003***
.002***
16.4291
3.8222
0.659
3.6
1.238
5.1400
0.798
5.2045
-.191
1.1111
1.2353
1.1111
-1.4
306
-1.203
3.4498
1.1373
-1.4
-0.187
4.1276
5.1800
-0.230
.000***
51.132
3.8235
0.659
6.107
63.8873
75.5307
3.5882
-3.85
.001***
6.2558
6.9588
2.774
-3.5
0.4000
23.2209
52.749
8.272
.035**
20.9013
72.508
6.973
2.174
5.2889
40.9482
8.5157
2.051
.063*
40.5796
23.063
-0.03
1.907
7.8000
84.2924
39.167
0.716
Sig.(2tailed)
0.0900
82.181
5.634
t-value
6.2000
0.1373
-2.11
Mean
8.5100
6.4314
2.323
2003
Paired
samples
test
0
Appendix C: Tests for Multicollinearity 2001, 2002 and 2003 data
Coefficientsa
Model
1
(Constant)
bs ize
meeting per annum
financial literacy
dual
non exe
independent dir
audit comm
meeting/annum
bumidirector(%)
auditors
acsize(n)
womdir(%)
politi(%)
segoof(%)
family members (%)
Unstandardized
Coefficients
B
Std. Error
-3,958
7,310
,793
,436
,353
,428
,023
,070
1,695
1,983
-,027
,056
-,076
,061
Standardized
Coefficients
Beta
,214
,097
,038
,100
-,064
-,143
t
-,541
1,818
,825
,335
,855
-,482
-1,245
Sig.
,590
,073
,412
,738
,395
,631
,217
Collinearity Statistics
Tolerance
VIF
,754
,765
,800
,773
,595
,794
1,326
1,308
1,250
1,294
1,682
1,259
,577
,985
,066
,586
,560
,828
1,208
,029
-3,202
1,656
,001
-,049
-,020
-,040
,034
2,340
1,102
,084
,079
,038
,058
,105
-,165
,167
,001
-,073
-,075
-,094
,842
-1,368
1,502
,006
-,619
-,530
-,694
,402
,175
,137
,995
,538
,598
,490
,674
,724
,846
,778
,754
,523
,575
1,483
1,381
1,182
1,285
1,327
1,911
1,739
,468
,274
-,078
,094
,014
,116
t
-1,756
4,430
2,613
-,761
,900
,114
1,123
Sig.
,083
,000
,011
,449
,371
,909
,265
a. Dependent Variable: ROA percentage
Coefficientsa
Model
1
(Constant)
bs ize
meeting per annum
financial literacy
dual
non exe
independent dir
audit comm
meeting/annum
bumidirector(%)
auditors
acsize(n)
womdir(%)
politi(%)
segoof(%)
family members (%)
Unstandardized
Coefficients
B
Std. Error
-12,676
7,220
1,909
,431
1,104
,422
-,053
,069
1,761
1,958
,006
,056
,067
,060
Standardized
Coefficients
Beta
Collinearity Statistics
Tolerance
VIF
,754
,765
,800
,773
,595
,794
1,326
1,308
1,250
1,294
1,682
1,259
-,075
,973
-,008
-,077
,938
,828
1,208
,007
-3,822
,690
-,021
-,122
-,052
-,025
,034
2,311
1,089
,083
,078
,037
,058
,022
-,178
,063
-,026
-,165
-,178
-,051
,198
-1,654
,634
-,251
-1,564
-1,406
-,425
,844
,102
,528
,802
,122
,164
,672
,674
,724
,846
,778
,754
,523
,575
1,483
1,381
1,182
1,285
1,327
1,911
1,739
a. Dependent Variable: ROE percentage
307
Coefficientsa
Model
1
Unstandardized
Coefficients
B
Std. Error
11,106
8,697
,718
,574
-,033
,428
,020
,083
-1,359
2,310
-,031
,060
-,190
,091
(Constant)
boards ize
meeting p.a
board fin.lite.
dual
non exe
independent dir
audit comm
meeting/annum
Bumidirector
auditors
acsize(n)
womdir(%)
politi(%)
segoof(%)
family (%)
Standardized
Coefficients
Beta
,158
-,009
,025
-,069
-,067
-,227
t
1,277
1,251
-,077
,237
-,589
-,520
-2,086
Sig.
,205
,215
,939
,813
,558
,605
,040
Collinearity Statistics
Tolerance
VIF
,616
,661
,856
,713
,582
,828
1,623
1,512
1,169
1,402
1,719
1,208
,839
,858
,117
,978
,331
,687
1,456
,058
-3,434
-,938
-,124
-,236
-,010
-,005
,044
2,692
1,294
,096
,078
,045
,063
,195
-,149
-,084
-,140
-,341
-,030
-,010
1,329
-1,276
-,724
-1,286
-3,041
-,218
-,082
,188
,206
,471
,202
,003
,828
,935
,455
,716
,724
,823
,779
,502
,626
2,197
1,396
1,382
1,215
1,284
1,990
1,596
a. Dependent Variable: roa(%)
Coefficientsa
Model
1
(Constant)
boards ize
meeting p.a
board fin.lite.
dual
non exe
independent dir
audit comm
meeting/annum
Bumidirector
auditors
acsize(n)
womdir(%)
politi(%)
segoof(%)
family (%)
Unstandardized
Coefficients
B
Std. Error
11,057
10,230
,660
,675
,001
,503
,045
,097
-,833
2,717
-,022
,070
-,203
,107
Standardized
Coefficients
Beta
,129
,000
,052
-,038
-,042
-,216
t
1,081
,977
,001
,462
-,307
-,310
-1,896
Sig.
,283
,331
,999
,645
,760
,757
,062
Collinearity Statistics
Tolerance
VIF
,616
,661
,856
,713
,582
,828
1,623
1,512
1,169
1,402
1,719
1,208
,920
1,009
,114
,912
,365
,687
1,456
,070
-2,663
-1,437
-,185
-,140
,000
,045
,051
3,166
1,523
,113
,091
,053
,074
,209
-,103
-,115
-,187
-,180
,001
,079
1,364
-,841
-,944
-1,636
-1,534
,004
,605
,177
,403
,348
,106
,129
,997
,547
,455
,716
,724
,823
,779
,502
,626
2,197
1,396
1,382
1,215
1,284
1,990
1,596
a. Dependent Variable: roe(%)
308
Coefficientsa
Model
1
(Constant)
boards ize
meeting p.a
board fin.lite.
dual
non exe
independent dir
audit comm
meeting/annum
Bumidirector
auditors
acsize(n)
womdir(%)
politi(%)
segoof(%)
family (%)
Unstandardized
Coefficients
B
Std. Error
8,741
7,203
-,150
,464
,110
,373
,130
,077
-,753
1,994
-,010
,057
-,015
,073
Standardized
Coefficients
Beta
-,041
,034
,190
-,050
-,025
-,023
t
1,213
-,323
,295
1,702
-,378
-,166
-,211
Sig.
,229
,748
,769
,093
,707
,868
,834
Collinearity Statistics
Tolerance
VIF
,644
,777
,824
,588
,456
,831
1,553
1,287
1,214
1,700
2,195
1,204
,293
,448
,075
,654
,515
,774
1,292
-,051
-5,317
,351
-,242
,118
,099
,039
,034
2,335
,963
,078
,098
,042
,048
-,226
-,258
,042
-,348
,139
,381
,107
-1,510
-2,277
,365
-3,087
1,209
2,355
,822
,135
,026
,716
,003
,231
,021
,414
,459
,799
,790
,806
,773
,392
,608
2,179
1,252
1,266
1,241
1,293
2,551
1,645
a. Dependent Variable: roa(%)
Coefficientsa
Model
1
(Constant)
boards ize
meeting p.a
board fin.lite.
dual
non exe
independent dir
audit comm
meeting/annum
Bumidirector
auditors
acsize(n)
womdir(%)
politi(%)
segoof(%)
family (%)
Unstandardized
Coefficients
B
Std. Error
5,214
11,558
-,870
,744
,141
,599
,032
,123
-,434
3,199
,131
,092
,044
,117
Standardized
Coefficients
Beta
t
-,153
,028
,030
-,019
,223
,043
,451
-1,169
,236
,258
-,136
1,430
,377
Sig.
,653
,246
,814
,797
,893
,157
,707
Collinearity Statistics
Tolerance
VIF
,644
,777
,824
,588
,456
,831
1,553
1,287
1,214
1,700
2,195
1,204
-,039
,719
-,007
-,055
,956
,774
1,292
-,094
-5,782
1,479
-,324
,158
,093
,069
,055
3,746
1,545
,126
,156
,067
,077
-,269
-,182
,113
-,302
,121
,232
,121
-1,733
-1,543
,957
-2,579
1,012
1,380
,901
,087
,127
,341
,012
,315
,172
,371
,459
,799
,790
,806
,773
,392
,608
2,179
1,252
1,266
1,241
1,293
2,551
1,645
a. Dependent Variable: roe(%)
309
Appendix D: Testing for Homoscedascity
1)
2)
3)
4)
Residual Statistics for the year 2001, 2002 and 2003
Histogram of Regression Standardized Residual against Frequency
Normal P-P Plot of Regression Standardized Residual
Scatter plot of Standardized Predicted Value to Regression Standardized
Residual
Residuals Statistics a
Predicted Value
Residual
Std. Predicted Value
Std. Residual
Minimum
-2,7955
-20,75105
-2,481
-2,867
Maximum
12,0995
16,03506
2,101
2,215
Mean
5,2689
,00000
,000
,000
Std. Deviation
3,25075
6,65857
1,000
,920
N
Std. Deviation
4,24730
7,20437
1,000
,919
N
Std. Deviation
3,30536
5,69059
1,000
,916
N
92
92
92
92
a. Dependent Variable: ROA percentage
Residuals Statistics a
Predicted Value
Residual
Std. Predicted Value
Std. Residual
Minimum
-9,1059
-21,25635
-3,315
-2,711
Maximum
14,8396
17,85694
2,323
2,278
Mean
4,9741
,00000
,000
,000
91
91
91
91
a. Dependent Variable: roa(%)
Residuals Statistics a
Predicted Value
Residual
Std. Predicted Value
Std. Residual
Minimum
-3,2316
-20,88876
-2,889
-3,362
Maximum
12,8763
15,82719
1,984
2,548
a. Dependent Variable: roa(%)
310
Mean
6,3191
,00000
,000
,000
88
88
88
88
Histogram
Dependent Variable: ROA percentage
20
Frequency
15
10
5
Mean = -6.82E-16
Std. Dev. = 0.92
N = 92
0
-3
-2
-1
0
1
2
3
Regression Standardized Residual
Histogram
Dependent Variable: roa(%)
20
Frequency
15
10
5
Mean = -6.99E-16
Std. Dev. = 0.919
N = 91
0
-3
-2
-1
0
1
2
Regression Standardized Residual
311
3
Histogram
Dependent Variable: roa(%)
30
20
15
10
5
Mean = -4.72E-16
Std. Dev. = 0.916
N = 88
0
-4
-3
-2
-1
0
1
2
3
Regression Standardized Residual
Normal P-P Plot of Regression Standardized Residual
Dependent Variable: ROA percentage
1.0
0.8
Expected Cum Prob
Frequency
25
0.6
0.4
0.2
0.0
0.0
0.2
0.4
0.6
Observed Cum Prob
312
0.8
1.0
Normal P-P Plot of Regression Standardized Residual
Dependent Variable: roa(%)
1.0
Expected Cum Prob
0.8
0.6
0.4
0.2
0.0
0.0
0.2
0.4
0.6
0.8
1.0
Observed Cum Prob
Normal P-P Plot of Regression Standardized Residual
Dependent Variable: roa(%)
1.0
Expected Cum Prob
0.8
0.6
0.4
0.2
0.0
0.0
0.2
0.4
0.6
Observed Cum Prob
313
0.8
1.0
Scatterplot
Regression Standardized Residual
Dependent Variable: ROA percentage
3
2
1
0
-1
-2
-3
-4
-2
0
2
4
Regression Standardized Predicted Value
Scatterplot
Regression Standardized Residual
Dependent Variable: roa(%)
3
2
1
0
-1
-2
-3
-4
-3
-2
-1
0
1
2
Regression Standardized Predicted Value
314
3
Scatterplot
Regression Standardized Residual
Dependent Variable: roa(%)
3
2
1
0
-1
-2
-3
-4
-3
-2
-1
0
1
Regression Standardized Predicted Value
315
2
Appendix E: Independence of Errors Tests –Durbin Watson for 2001 data
Model Summaryb
Model
1
R
,243a
R Square
,059
Adjusted
R Square
,048
Std. Error of
the Estimate
7,22799
DurbinWatson
2,242
Std. Error of
the Estimate
7,37212
DurbinWatson
2,316
Std. Error of
the Estimate
7,43845
DurbinWatson
2,327
Std. Error of
the Estimate
7,40316
DurbinWatson
2,324
Std. Error of
the Estimate
7,44934
DurbinWatson
2,303
Std. Error of
the Estimate
7,30987
DurbinWatson
2,295
a. Predictors: (Constant), bsize
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,145a
R Square
,021
Adjusted
R Square
,010
a. Predictors: (Constant), meeting per annum
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,057a
R Square
,003
Adjusted
R Square
-,008
a. Predictors: (Constant), financial literacy
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,113a
R Square
,013
Adjusted
R Square
,002
a. Predictors: (Constant), dual
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,020a
R Square
,000
Adjusted
R Square
-,011
a. Predictors: (Constant), non exe
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,194a
R Square
,037
Adjusted
R Square
,027
a. Predictors: (Constant), independent dir
b. Dependent Variable: ROA percentage
316
Model Summaryb
Model
1
R
,036a
R Square
,001
Adjusted
R Square
-,010
Std. Error of
the Estimate
7,44594
DurbinWatson
2,310
a. Predictors: (Constant), audit comm meeting/annum
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,124a
R Square
,015
Adjusted
R Square
,004
Std. Error of
the Estimate
7,39319
DurbinWatson
2,306
Std. Error of
the Estimate
7,32813
DurbinWatson
2,292
Std. Error of
the Estimate
7,25755
DurbinWatson
2,288
Std. Error of
the Estimate
7,44226
DurbinWatson
2,309
Std. Error of
the Estimate
7,44844
DurbinWatson
2,309
a. Predictors: (Constant), bumidirector(%)
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,181a
R Square
,033
Adjusted
R Square
,022
a. Predictors: (Constant), auditors
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,226a
R Square
,051
Adjusted
R Square
,041
a. Predictors: (Constant), acsize(n)
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,048a
R Square
,002
Adjusted
R Square
-,009
a. Predictors: (Constant), womdir(%)
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,025a
R Square
,001
Adjusted
R Square
-,010
a. Predictors: (Constant), politi(%)
b. Dependent Variable: ROA percentage
317
Model Summaryb
Model
1
R
,058a
R Square
,003
Adjusted
R Square
-,008
Std. Error of
the Estimate
7,43834
DurbinWatson
2,318
Std. Error of
the Estimate
7,42850
DurbinWatson
2,295
a. Predictors: (Constant), s egoof(%)
b. Dependent Variable: ROA percentage
Model Summaryb
Model
1
R
,077a
R Square
,006
Adjusted
R Square
-,005
a. Predictors: (Constant), family members(%)
b. Dependent Variable: ROA percentage
318
Appendix E: Independence of Errors Tests –Durbin Watson for 2002 data
Model Summaryb
Model
1
R
,218a
R Square
,047
Adjusted
R Square
,037
Std. Error of
the Estimate
8,16602
DurbinWatson
1,987
Std. Error of
the Estimate
8,35226
DurbinWatson
1,862
Std. Error of
the Estimate
8,34921
DurbinWatson
1,872
Std. Error of
the Estimate
8,23949
DurbinWatson
1,857
Std. Error of
the Estimate
8,32336
DurbinWatson
1,884
a. Predictors: (Constant), boardsize
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,059a
R Square
,003
Adjusted
R Square
-,008
a. Predictors: (Constant), meeting p.a
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,065a
R Square
,004
Adjusted
R Square
-,007
a. Predictors: (Constant), board fin.lite.
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,174a
R Square
,030
Adjusted
R Square
,019
a. Predictors: (Constant), dual
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,102a
R Square
,010
Adjusted
R Square
-,001
a. Predictors: (Constant), non exe
b. Dependent Variable: roa(%)
319
Model Summaryb
Model
1
R
,259a
R Square
,067
Adjusted
R Square
,056
Std. Error of
the Estimate
8,08231
DurbinWatson
1,826
Std. Error of
the Estimate
8,37747
DurbinWatson
1,856
a. Predictors: (Constant), independent dir
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,088a
R Square
,008
Adjusted
R Square
-,003
a. Predictors: (Constant), audit comm meeting/annum
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,072a
R Square
,005
Adjusted
R Square
-,006
Std. Error of
the Estimate
8,34520
DurbinWatson
1,891
Std. Error of
the Estimate
8,28256
DurbinWatson
1,890
Std. Error of
the Estimate
8,33766
DurbinWatson
1,866
Std. Error of
the Estimate
8,27468
DurbinWatson
1,878
a. Predictors: (Constant), Bumidirector
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,142a
R Square
,020
Adjusted
R Square
,009
a. Predictors: (Constant), auditors
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,083a
R Square
,007
Adjusted
R Square
-,004
a. Predictors: (Constant), acsize(n)
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,148a
R Square
,022
Adjusted
R Square
,011
a. Predictors: (Constant), womdir(%)
b. Dependent Variable: roa(%)
320
Model Summaryb
Model
1
R
,249a
R Square
,062
Adjusted
R Square
,052
Std. Error of
the Estimate
8,10246
DurbinWatson
2,016
Std. Error of
the Estimate
8,34574
DurbinWatson
1,876
Std. Error of
the Estimate
8,29677
DurbinWatson
1,912
a. Predictors: (Constant), politi(%)
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,071a
R Square
,005
Adjusted
R Square
-,006
a. Predictors: (Constant), s egoof(%)
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,129a
R Square
,017
Adjusted
R Square
,006
a. Predictors: (Constant), family (%)
b. Dependent Variable: roa(%)
321
Appendix E: Independence of Errors Tests –Durbin Watson for 2003 data
Model Summaryb
Model
1
R
,120a
R Square
,014
Adjusted
R Square
,003
Std. Error of
the Estimate
6,57116
DurbinWatson
2,046
Std. Error of
the Estimate
6,54504
DurbinWatson
2,043
Std. Error of
the Estimate
6,56569
DurbinWatson
2,121
Std. Error of
the Estimate
6,60057
DurbinWatson
2,071
a. Predictors: (Constant), boardsize
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,149a
R Square
,022
Adjusted
R Square
,011
a. Predictors: (Constant), meeting p.a
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,127a
R Square
,016
Adjusted
R Square
,005
a. Predictors: (Constant), board fin.lite.
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,075a
R Square
,006
Adjusted
R Square
-,006
a. Predictors: (Constant), dual
b. Dependent Variable: roa(%)
322
Model Summaryb
Model
1
R
,082a
R Square
,007
Adjusted
R Square
-,005
Std. Error of
the Estimate
6,59663
DurbinWatson
2,103
Std. Error of
the Estimate
6,59756
DurbinWatson
2,071
Std. Error of
the Estimate
6,60756
DurbinWatson
2,093
a. Predictors: (Constant), non exe
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,081a
R Square
,006
Adjusted
R Square
-,005
a. Predictors: (Constant), independent dir
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,059a
R Square
,003
Adjusted
R Square
-,008
a. Predictors: (Constant), audit comm meeting/annum
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,014a
R Square
,000
Adjusted
R Square
-,011
Std. Error of
the Estimate
6,61843
DurbinWatson
2,095
Std. Error of
the Estimate
6,38278
DurbinWatson
2,125
Std. Error of
the Estimate
6,60700
DurbinWatson
2,077
a. Predictors: (Constant), Bumidirector
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,265a
R Square
,070
Adjusted
R Square
,059
a. Predictors: (Constant), auditors
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,060a
R Square
,004
Adjusted
R Square
-,008
a. Predictors: (Constant), acsize(n)
b. Dependent Variable: roa(%)
323
Model Summaryb
Model
1
R
,289a
R Square
,084
Adjusted
R Square
,073
Std. Error of
the Estimate
6,33644
DurbinWatson
2,056
Std. Error of
the Estimate
6,60353
DurbinWatson
2,094
Std. Error of
the Estimate
6,56677
DurbinWatson
2,104
Std. Error of
the Estimate
6,57919
DurbinWatson
2,081
a. Predictors: (Constant), womdir(%)
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,068a
R Square
,005
Adjusted
R Square
-,007
a. Predictors: (Constant), politi(%)
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,125a
R Square
,016
Adjusted
R Square
,004
a. Predictors: (Constant), s egoof(%)
b. Dependent Variable: roa(%)
Model Summaryb
Model
1
R
,110a
R Square
,012
Adjusted
R Square
,001
a. Predictors: (Constant), family (%)
b. Dependent Variable: roa(%)
324
Appendix F: Normally distributed error tests
Histogram
Dependent Variable: ROA percentage
20
Frequency
15
10
5
Mean = -6.82E-16
Std. Dev. = 0.92
N = 92
0
-3
-2
-1
0
1
2
Regression Standardized Residual
325
3
Normal P-P Plot of Regression Standardized Residual
Dependent Variable: ROA percentage
1.0
Expected Cum Prob
0.8
0.6
0.4
0.2
0.0
0.0
0.2
0.4
0.6
0.8
1.0
Observed Cum Prob
Histogram
Dependent Variable: roa(%)
20
Frequency
15
10
5
Mean = -6.99E-16
Std. Dev. = 0.919
N = 91
0
-3
-2
-1
0
1
2
Regression Standardized Residual
326
3
Normal P-P Plot of Regression Standardized Residual
Dependent Variable: roa(%)
1.0
Expected Cum Prob
0.8
0.6
0.4
0.2
0.0
0.0
0.2
0.4
0.6
0.8
1.0
Observed Cum Prob
Histogram
Dependent Variable: roa(%)
30
Frequency
25
20
15
10
5
Mean = -4.72E-16
Std. Dev. = 0.916
N = 88
0
-4
-3
-2
-1
0
1
2
Regression Standardized Residual
327
3
Normal P-P Plot of Regression Standardized Residual
Dependent Variable: roa(%)
1.0
Expected Cum Prob
0.8
0.6
0.4
0.2
0.0
0.0
0.2
0.4
0.6
Observed Cum Prob
328
0.8
1.0
Appendix G: Letter Requesting for Annual Reports
Azmi Abd. Hamid,
No. 18, Jalan Sri Sedeli 6,
Taman Sri Andalas, 41200, Klang,
Selangor Darul Ehsan.
To,
The Corporate Communication Manager,
15/12/03
………………………………………….
………………………………………….
Dear Sir/Madam,
Re: Request for Annual Reports for Financial Year Ending 2001, 2002 and 2003
I am a staff of the Faculty of Accountancy, Mara University of Technology, Shah Alam.
Currently, I am doing my PhD at University of Exeter, United Kingdom. My area of
research is on the Corporate Governance Structures of companies listed on the Bursa
Malaysia. I have to analyze the corporate governance as practiced and reported by
companies in their Annual Report.
Therefore, it is important for me to have the Annual Report of your company for the
year ending as stated above. I would be grateful if you could send it to me to the above
mentioned address.
Enclosed is an introduction letter from my supervisor, Dr. Paul Collier, at Exeter
University, United Kingdom.
Your assistance in this matter is highly appreciated.
Thank you,
Yours faithfully,
(AZMI ABD. HAMID)
329
330
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