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Archives of Business Review – Vol. 8, No.11
Publication Date: November 25, 2020
DOI: 10.14738/abr.811.9272.
Aseh, K., & Pathmathan, P. R. (2020). Corporate Governance: The Linkage to Firm Performance in Malaysia. Archives of Business
Research, 8(11). 80-86.
Corporate Governance: The Linkage to Firm Performance in
Malaysia
Khairi Aseh
P. Ravindran Pathmanathan
ABSTRACT
This paper focuses on corporate governance applied in Malaysia and
how it contributes to the success of the company. Over recent years,
with corporate scandals and the global financial crisis, the new idea of
corporate governance has attracted rising scrutiny in the business
world. It is viewed as a legal obligation that requires the fostering of the
integrity of the law and the delivery of ethical advice. Corporate
governance is seen as an significant resource for corporate financial
efficiency, and investor investment decisions have become a more
serious issue, with the result that the relationship between corporate
governance mechanisms and financial performance assessment has
drawn researchers ' attention in established and emerging cities over
the last decade. A total of 215 firms on the KLSE (Kuala Lumpur Stock
Exchange) were listed for this report in 2017. Results have
demonstrated that corporate governance indicators have a major effect
on company efficiency and business value assessment in general.
Through analyzing the structure of the group, the ROA and Tobin q
calculation variables had a major positive impact. In comparison, the
CEO duality was positively associated with all dependent variables, and
the number of board committees was found to be negatively correlated
with all calculated variables, and strongly correlated with ROA. The
challenges of corporate governance are addressed in the final part of
the paper.
Keywords: corporate governance, firm performance, Malaysia
THE RISE OF CORPORATE GOVERNANCE
Governance system that is firmly identified with organizations is known as corporate governance.
It is in essence the control practice on the appropriation of assets in a specific firm. Corporate
governance or corporate governance is a framework on how the organizations are being
coordinated, connected with and controlled (OECD Principle of Corporate governance, 1999). It
has become imminent that corporate governance is a factor that correlates to the firm performance
itself. Pillai & Al Malkawi (2018) focused on the fact that there is an expanding consideration given
on checking and surveying the CEOs (CEO) and supervisors by the directorate (BODs) just as
investors through corporate governance components.
The significance of corporate governance has risen consistently since the mid-1980s, and as of late
the significance of corporate governance rationality has achieved a genuinely abnormal state as
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intensity has improved. It is characterized as "" the guidelines and practices by which the
organization is guided or worked," "and it additionally improves the connection between the
organization's administrators and investors just as partners. It adds to monetary development and
money related security by improving business sector ensures budgetary markets, trustworthiness
and monetary effectiveness (OECD, 2004) with the goal that the insufficiency of corporate
governance strategies of open and private segments is positioned among the significant reasons
for organizations and universal money related emergency.
DEVELOPMENT OF CORPORATE GOVERNANCE IN MALAYSIA
In Malaysia, Deloitte (2015) announced that by 2016, 30 percent of sheets and senior
administration positions ought to be involved ladies in both open and restricted obligation
organizations with in excess of 250 workers. This is in accordance with the exertion of the
Malaysian Cabinet to advance sexual orientation balance as of June 2011. Deloitte (2015) gave
proof that there were 10.4 percent of board seats held by ladies while there were 0 percent of board
seats that were held by ladies prior to it.
The phrase "corporate governance" is often used but yet lacks a precise definition (Allam, 2018).
Most of the definitions focused on the structure and the function of the board of directors or the
rights and prerogatives of any shareholders in boardroom decision making. The High Level Finance
Committee Report on Corporate governance in Malaysia also defined corporate governance from
the same perspective. They defined corporate governance as "the process and structure used to
direct and manage the business and affairs of the company towards enhancing business prosperity
and corporate ace accountability with the ultimate objective of realizing long-term shareholder
value whilst taking into account the interest of other stakeholders" (Ehikioya, 2009). From the
definition, corporate governancemainly focuses on the process used to direct and manage the
business and affairs of the company with the objectives of striking a balance on the attainment of
the company's objective which is the alignment of corporate behaviour to meet the expectations of
shareholders. The committee comprises the Ministry of Finance, the SC, the Companies
Commission of Malaysia, the Financial Reporting Foundation, The Malaysian Accounting Standards
Boards, Bank Negara Malaysia, Association of Bank Malaysia, The Association of Merchant Banks
Malaysia, KLSE, The Association of Stock Broking Companies Malaysia, The Malaysian Association
of the Institute of Chartered Secretaries and Administration and the Federation of Public Listed
Companies.
Thus, corporate governance can be described as the proper procedure on how the "government"
of a company (the managers and board of directors), should be responsible to their "voters" (the
shareholders, and investors). Corporate governance emphasized on the transparency of decision
making process, fairness and trustworthiness in managing a company. However, Adams & Ferreira
(2009) viewed the definition and concept of corporate governance from a wider perspective but at
the same time still emphasized on the ownership and control element as suggested by Wruck &
Wu (2008), where the degree of good enforcement of corporate governance very much depended
on the roles of the state.
CURRENT STUDY
In this study, the researcher attempted to examine the impact of corporate governance on firm
performance in Kuala Lumpur using a sample of 215 companies on KLSE (Kuala Lumpur Stock
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Aseh, K., & Pathmathan, P. R. (2020). Corporate Governance: The Linkage to Firm Performance in Malaysia. Archives of Business Research, 8(11). 80-
86.
Exchange) in 2017. Like previous research, firm, age, firm size, board size, CEO duality, board
composition, board committees is the independent variables and their influence is to measure the
financial ROA, ROE and Tobin's q ,all kinds of test is used to investigate the relationship such as
descriptive analysis, Pearson moment related test and regression using first data over a period of
time.
The tough competitive environment in which firm performance are measured has risen serious
questions about how corporate governance can best be focused upon the most idealistic and
efficient way to generate the optimum firm performance. Corporate governance is seen as a key
toll in achieving these objectives. In appraising the degree of corporate governance, the cases of
public listed companies were adopted.
Clearly, corporate governance practices have many benefits for companies, countries, and
institutions. The most important benefits are improved business performance, easy access to low
capital funding sources, and effective use of resources to establish a positive image for companies
and countries, provide security for investors, provide internal audit for companies, prevent
conflicts of interest and provide sustainability (Claessens, Djankor, Fan & Lang, 2003). They point
out that poor corporate governance is not only responsible for poor corporate performance, but
may also be the cause of the macroeconomic crisis.
Albeit great corporate governance is useful for money related execution, there are still
inadequacies in creating urban communities, and in created urban areas, the corporate governance
structure is great and has a decent effect. Contrasted and the created urban areas, the social and
financial condition and the conventional administration understanding deterrents to accomplish
great corporate governance practice in creating urban communities (Arif, 2012).
With experimental investigation, utilizing a similar strategy and dependent on the board measure,
the CEO duality, board organization, board advisory groups variable, however on account of Kuala
Lumpur this relationship is the investigation of utilizing various techniques and factors dependent
on the rule of 4 points, they are the straightforwardness and divulgence of data is open, partners,
investors and the top managerial staff. Consequently, this examination will take Kuala Lumpur as
a case, which is believed to be equivalent to past research techniques. By utilizing a conventional
methodology, the researcher wants to contrast our discoveries and the consequences of other
observational examinations around the globe. Hence, as a matter of first importance, this
examination may enable us to additionally comprehend the connection between corporate
governance and corporate money related execution, particularly in Kuala Lumpur. Second, we
needed to check whether the outcomes were like past examinations. In this way, these reasons
make the subject determination of this paper profitable. This paper will be valuable to Kuala
Lumpur organizations from the comprehension of the effect of corporate governance on corporate
execution and the thought of expanding the utilization of corporate governance.
ROLE OF MCCG
In an attempt to strengthen the corporate governance mechanisms of listed firms following the
Asian financial crisis in 1997/1998, the SC (Securities Commission) in Malaysia issued the first
Malaysian Code on Corporate governance (MCCG) in 2000. Bursa Malaysia adopted MCCG 2000 in
2001 and all listed firms were required to ‘comply or explain’. Since the issuance of MCCG 2000,
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many changes to corporate governance in Malaysia have been made as a result of several issues
starting with the Enron debacle in the US 2000, the exposure of accounting irregularities in
Transmile in Malaysia in 2007, and not least the 2008 global financial crisis. In particular, the SC
issued a revised version of the MCCG in 2007 in response to the Transmile scandal and to
incorporate the developments in corporate governance principles and practices in the US and the
UK.
The main focus of MCCG 2007 was on strengthening the audit committee and specifying the
criteria that the nomination committee should consider when nominating new directors. It also
states that there is a need for the nomination committee to assess annually the performance of the
board as a whole and of each individual director. Then, in 2010, the SC established the Audit
Oversight Board whose function is to monitor auditors of public interest entities in Malaysia. Also
in 2010, the CMSA 2007 was amended to include Sections 317A and 320A, which authorize the SC
to act against directors of listed companies who cause wrongful loss to a company as well as against
any person who misleads the public through falsely preparing or auditing the financial statements
of a company.
BURSA MALAYSIA & SECURITIES COMMISSION
The Bursa Malaysia and SC had gazetted new guidelines for the open recorded organizations. They
were required to reveal their money related status, investors’ structure and credit position on a
quarterly premise. An organization's supervisor is exposed to punishment or prison sentence on
the off chance that they neglect to agree to the principles. The legislature had allowed a warrant
adding up to US$100,000 to Malaysia Institute of Corporate governance (MICG) to lead research
and preparing program so as to improve the corporate governance standard and quality (Allam,
2018). In August 2000, Minority Shareholder Watchdog Group was set up to urge the organization
to conform to the standards of corporate governance and to improve the mindfulness among the
minority investor about their rights and the suitable strategies to implement their rights.
Individuals from this advisory group were from the administration support foundations, for
example, Employees Provident Funds (EPF), Armed Forces Fund Authority (LTAT), Pilgrims Fund
Board (LUTH), Social Security Organization (SOCSO) and Permodalan Nasional Berhad (PNB)
(Allam, 2018).
THE LAW & EXECUTION – IS THERE A CONFLICT?
The embraced renewal outlined that the administration and the private part had put much exertion
so as to upgrade the standard of Malaysian corporate governance. A venture bank, CLSA Emerging
Market as a team with Asian Corporate governance Association (ACGA) through their exploration
in regards to the Asian Corporate governance, revealed that Malaysia has accomplished the most
astounding score of 9.0 contrasted with other Asian nations in improving their corporate standards
and guideline (Habbash & Bajaher, 2014). In any case, a similar research likewise demonstrated
that the score for the authorization of corporate guidelines and guideline was among the most
reduced. With a score of just 3.5, Malaysia was positioned fourth most reduced position in front of
Indonesia, Philippines and Thailand.
This situation reveals to us that the law changes and execution are conflicting. Under the NEP,
government endeavoured to prep Bumiputera business person bunches in present day monetary
segment. In this manner, the trustee system was made to accomplish NEP's general mission. Open
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Aseh, K., & Pathmathan, P. R. (2020). Corporate Governance: The Linkage to Firm Performance in Malaysia. Archives of Business Research, 8(11). 80-
86.
venture was among the main strategy acquainted by the legislature with increment Bumiputera
cooperation in the business exchanging division. In any case, this strategy had really started the
connection among business and governmental issues. At first, the state inclusion was just to go
about as the investor for the Bumiputera, yet inevitably progressed toward becoming proprietors
of organizations or investors or venture intermediary through organizations claimed by the
decision parties. NEP was acquainted with a goal with acquire national mix through neediness end
and society rebuilding to wipe out monetary trademark by race. Government attempted to
accomplish 30% Bumiputera responsibility for corporate area.
FIRM PERFORMANCE
There are four unmistakable firm performance estimations utilized in the writings which
incorporates creative execution, generation execution, money related execution and market
execution (Lam & Lee, 2012). The firm performance estimates that are every now and again
utilized incorporate deals, benefits, send out incomes and efficiency (Lam & Lee, 2012). Along these
lines, the broadly utilized money related measures incorporates the return on assets (Wruck & Wu,
2008), return on equity (Jo & Harijoto, 2014), rate of return (Abidin, Kamal & Jusoff, 2009) and
Tobin’s Q (Christensen, Kent & Stewart, 2010). For this examination the ROA, ROE and Tobin’s Q
are utilized as an intermediary to quantify firm performance.
Bliss (2011) in his examination presumed that administration factors, for example, board qualities,
proprietorship structures, official remuneration and sorts of prevailing proprietors won't just
significantly affect the disguise procedures of the worldwide organizations yet would likewise
impact the results of the association's key choices and thusly support company's presentation.
There are various examinations directed on the various regions of advancement, corporate
governanceand firm performance. Adiloglu & Vuran (2012) report that advertise valuation of the
company's capital and R&D speculations (advancement) depends urgently on the organization of
the board and not on the institutional property dependent on the time of 1991-1995. Cretu (2012)
examined on 98 Fortune 1000 firms dependent on the organization hypothesis and found that
basic leadership sheets intercedes the connection between BOD's conduct and the company's
general imaginativeness. Robeson and O'Connor uncover that the creative basic leadership sheets
advance inventive tasks; display resistance with the association's money related outcomes,
incorporate contribution from different body’s electorate inside the firm and furthermore
participates in regular correspondence with the venture groups in the organizations.
THE FINDINGS AND CHALLENGES
On the basis of this study, it is found that corporate governance variables have a significant impact
on firm performance and market value measurement in general. By respectively investigating
board composition had significant positive influence on ROA and Tobin q measurement variables.
In addition, CEO duality was positively correlated with all dependent variables, and it was found
that the number of board committees was negatively correlated with all measured variables, only
significantly correlated with ROA.
Financial Performance
This study provides an important perspective on financial markets and governance of the
organization practices in Kuala Lumpur. The findings of this study contribute to all fields. Most