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Journal of Money, Investment and Banking ISSN 1450-288X Issue 11 (2009) EuroJournals Publishing, Inc. 2009 http://www.eurojournals.com/JMIB.

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Corporate Governance Practices and Firms Performance: The Malaysian Case


Shabnam Mohamad Mokhtar Accounting and Finance Department, Faculty of Economics and Management UPM,43400 UPM Serdang, Selangor Tel: (03) 8946 7618/7773/7733; Fax: (03) 89486188 Zulkarnain Muhamad Sori Accounting and Finance Department, Faculty of Economics and Management UPM,43400 UPM Serdang, Selangor Tel: (03) 8946 7618/7773/7733; Fax: (03) 89486188 Mohamad Ali Abdul Hamid Accounting and Finance Department, Faculty of Economics and Management UPM,43400 UPM Serdang, Selangor Tel: (03) 8946 7618/7773/7733; Fax: (03) 89486188 Zaharuddin Zainal Abidin Accounting and Finance Department, Faculty of Economics and Management UPM,43400 UPM Serdang, Selangor Tel: (03) 8946 7618/7773/7733; Fax: (03) 89486188 Azhar Mohd Nasir Accounting and Finance Department, Faculty of Economics and Management UPM,43400 UPM Serdang, Selangor Tel: (03) 8946 7618/7773/7733; Fax: (03) 89486188 Abu Sofian Yaacob Accounting and Finance Department, Faculty of Economics and Management UPM,43400 UPM Serdang, Selangor Tel: (03) 8946 7618/7773/7733; Fax: (03) 89486188 Hasri Mustafa Accounting and Finance Department, Faculty of Economics and Management UPM,43400 UPM Serdang, Selangor Tel: (03) 8946 7618/7773/7733; Fax: (03) 89486188

Journal of Money, Investment and Banking - Issue 11 (2009) Zaidi Mat Daud Accounting and Finance Department, Faculty of Economics and Management UPM,43400 UPM Serdang, Selangor Tel: (03) 8946 7618/7773/7733; Fax: (03) 89486188 Salmah Muhamad Accounting and Finance Department, Faculty of Economics and Management UPM,43400 UPM Serdang, Selangor Tel: (03) 8946 7618/7773/7733; Fax: (03) 89486188 Abstract This paper examines the relationship between corporate governance practices and company performance. In this study, a Mann-Whitney U test was performed to compare the performance between 5 Malaysian companies that practice good corporate governance and 5 Malaysian companies that did not practice good corporate governance. A study by Standard & Poors in 2004 was the main source to identify companies practicing good corporate governance and vice versa. Financial ratios namely return on assets, return on equity, earnings per share and profit margin were used as a measure of company performance. It is found that there is no difference in performance between companies that practice good corporate governance and companies that do not practice good corporate governance. High ownership concentration in Malaysia coupled with the usage of accounting performance in this study may be able to provide explanation for the insignificant finding.

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Keywords: Corporate governance, performance, KLCI, financial ratio

1. Introduction
Corporate governance has been generally defined as the system by which companies are directed and controlled (The Cadbury Committee 1992, p.15). The Malaysian Code of Corporate Governance has 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 accountability with the ultimate objective of realizing long-term shareholder value, whilst taking into account the interests of other stakeholders (FCCG, 1999). Corporate governance is therefore about the organization of a company by taking into account the responsibilities towards the shareholders and other stakeholders. The Asian financial crisis in 1997 and the recent well-publicized corporate scandals such as Enron, Worldcom and Parmalat have highlighted the importance of good corporate governance practices for the long-term survival of companies. The outcome of a good corporate governance practice is an accountable board of directors who ensures that the investors interests are not jeopardized (Hashanah and Mazlina, 2005). The accountability and transparency component of corporate governance would help companies gain shareholders and investors trust. These stakeholders need assurance that the company will be run both honestly and cleverly. This is where corporate governance is critical. (Morck and Steier, 2005). Corporate governance improves stakeholders confidence and this would aid the sustainability of business in the long run. Many stock exchange and regulators around the world are increasingly looking to set standards or codes of best practice for corporate governance to attract more capital or foreign investment to the country. For example, following the Sarbanes-Oxley Act 2002, the New York Stock Exchange (NYSE)

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and NASDAQ proposed a new corporate governance listing-standard and were approved by SEC on November 4, 2003. The new listing standards include provisions regarding board composition and structure, audit committee composition and responsibilities and other corporate governance matters. Indeed, in Malaysia, the High Level Finance Committee Report on Corporate Governance published a document called Code of Corporate Governance in March 2000 to set the corporate governance standard. Generally it is a voluntary Code, however beginning from June 2001, listed companies in Bursa Malaysia must include in their annual reports a Corporate Governance Statement to show (i) how they have applied the Principles of the Code and (ii) extent of compliance with Best Practices of the Code, stating reasons for non-compliance if any. The aim of this study is to examine the relationship between corporate governance practice and its effect on company performance. If good corporate governance is in place, it means there is a good board oversight on the management of the company. This would in turn ensure the company improves its performance. However would that also mean that weak corporate governance lead to weak performance? The objective of this study is to investigate whether there is a significant difference between the performance of companies that practice good governance and companies that do not practice good governance. Following the Asian Financial Crisis, the Malaysian government has takes vast effort to improve the corporate governance in Malaysia. The present study will offer some evidence to help evaluate the effectiveness of corporate governance reforms in Malaysia by comparing the financial ratios of five Malaysian listed companies that practice good governance and five companies that do not practice good governance in the post crisis period. Our results indicate that there is no significant difference between the performances of these companies. The paper is organized into six sections. The following section offers background information on Malaysian economy and the corporate governance practices in Malaysia. Section three offers review of prior studies. The fourth section describes the data collection and research methodology. Section five presents the research findings and discussions. The final section provides conclusion of the study, its implication and suggestions for future research.

2. Background of Malaysian Economy and Corporate Governance Practices


Malaysia (then known as Malay Straits Settlement) started large-scale business as early as the 14th under the rule of Malay Monarchy in Malacca. The port of Malacca attracted traders from various countries including Arabs, China, India and Persian. The Portuguese were attracted to the prosperous business and colonized Malacca in 1511. The Dutch took control of Malacca in 1641 but failed to revive its trade. Later the British through East India Company colonized Malacca in 1824. Britishs direct intervention in the Malays states began in Perak via the tin mining activities and continued until the 20th century. From the British colonial times, a clear division of labor among the main ethnic groups began in Malaysia. Malays and other natives lived in the rural areas concentrating on agricultural activities. Chinese were brought by the British initially to work in tin mining. Growing from tin mining to commerce in urban centers, the Chinese emerged as the first middle class in the 20th century in Malaysia, eventually controlling the marketplace. Indians were brought after 1890s to work in the plantation sector. When Malaysia attained its independence in 1957, the economy was fundamentally primarycommodity based (rubber and tin). During the independence process, the British administration advocated certain condition like non-nationalization of British owned companies in exchange for transfer of political power. The late Tun Hussien Onn (former prime minister) highlighted that British still dominated 60% of share capital of limited companies in Malaysia until 1970 (M-Ali, 1999). Although Malaysian economy gained strength after its independence in 1957, poverty and income disparities continued among the ethnic groups. The ethnic-based riots of May 13, 1969 in Kuala Lumpur between Malays and Chinese became a turning point in Malaysian history. According

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to Mason and Omar (2003), the alleged fundamental cause of the racial tension between the Chinese and the Malays was the unequal socio-economic standing of the two ethnic groups (p.3). As a result, the National Economic Policy (NEP) was enacted to eradicate poverty and restructure the society. The NEPs main restructuring target was to raise the bumiputera (Malay and other indigenous people) share of corporate stock ownership from 1.5 per cent in 1969 to 30 percent in 1990 (Sundaram, 2004). The NEP also resulted in the emergence of key corporate figures that had significant control over big Malaysian corporations due to financial assistance, credit facilities, preferential share allocation, subsidies and training. The government also established in-trust agencies such as MARA, UDA and many more to provide opportunities and avenues for Bumiputra to participate in commercial based activities. The bodies were later privatized following the privatization policy in the 1980s and 1990s. The government also acquired foreign owned shares in large Malaysian corporation on behalf of the Bumiputra to reduce economic imbalance. As a consequence, Malaysia is known for high ownership concentration. For example, the largest ten families in Malaysia control a quarter of the corporate sector, and Malaysia was also ranked as the second highest concentration of control at 76.2% of GDP after Hong Kong (Claessens et. al, 2000) After the prolonged recession in the world economy in the eighties, Malaysia underwent structural transformation of the economy and shifted its focus to the manufacturing sector. In the nineties, the government announced Vision 2020 that envisaged Malaysia becoming a developed nation in its own mould by 2020. During the early and mid-nineties, Malaysia experienced several years of rapid economic growth with GDP growing at 8.5% between 1991 and 1997. However, the Asian Financial crisis interrupted the momentum and the government established the National Economic Action Council to revitalize the economy (NEAC). The council prepared a comprehensive National Economic Recovery Plan (NERP) that was launched on 23rd July 1998. The measures introduced resulted in the recovery with GDP growing at an average of 7.2% during 1999 to 2000 (Malaysian Economic Planning Unit) Efforts to enhance the standard of corporate governance in Malaysia have been an ongoing effort. Malaysia began the effort even before the Asian Financial Crisis. For example, in 1996 the Securities Commission introduced the disclosure-based regulation (DBR) to enhance the efficiency and the transparency of the primary market. DBR aims to improve the quality, timeliness and relevance of information disclosed and requires greater accountability by issuers (i.e. companies). In addition, the Registrar of Companies had developed its Code of Ethics for Directors in 1996 (A-Kadir, 2000). The financial crisis was however an important impetus for Malaysia to adopt a concerted and holistic approach towards corporate governance reforms. A-Kadir, 1999 highlighted five main factors that lead to deficiencies in corporate governance practices in Malaysian listed companies including high ownership concentration that may risk minority shareholder, the ineffectiveness of independent non-executive directors to monitor management, shareholder passivity, deficient enforcement and lack of awareness of responsibilities by the directors. In March 1998, a high level Finance Committee on Corporate Governance (FCCG) comprising of members from the private and public sector was formed to deal with weaknesses highlighted by the crisis. The committee was entrusted to undertake a comprehensive review of the legal framework and enforcement mechanisms, to develop a Malaysian Code of Best Practices in Corporate Governance and to identify training and education needs of directors and other corporate participants. (A-Kadir, 1999) The FCCG published the Malaysian Code on Corporate Governance (MCCG) in March 2000 that was largely derived from the recommendation of the Cadbury Report (1992) and the Hampel Report (1998). The code comprises of four main parts principles, best practices, exhortations to other participants and explanatory note. The first part provides broad principles focusing on four areas including the board of directors, directors remuneration, shareholders, and accountability and audit with the aim to improve board composition and increase board efficiency. The second part describes set of best practices relating to the board of director and accountability and audit to help companies design their corporate governance. Part three of the code provides information to help

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investors and auditors enhance a companys corporate governance and the final part provides explanation of the principle and best practices. There are three broad approaches in implementing a corporate governance framework; a prescriptive approach where specific practices are recommended (like the London Stock Exchange), a non-prescriptive approach where the companies are required to disclose the actual corporate governance practice without any prescribed practices (like the Australian stock exchange) and a hybrid approach of the two. The prescriptive approach faces the problem of box ticking where it encourages the attitude of form over substances. (FCCG, 2000) Malaysia adopts a hybrid approach similar to the Combined Code on Corporate Governance (United Kingdom) where the code describes best practices as to set standard for governance practice in Malaysia, however companies have the flexibility to develop their own approach in implementing corporate governance practices. Bursa Malaysia has revamped its Listing Requirement on January 22, 2001 to help overcome the box-ticking problem. The new regulation requires companies to give a narrative statement of how they have applied the principles set in Part 1 of MCCG and compliance to the best practices in Part II of MCCG stating reasons for non-compliance. In addition, Bursa Malaysia also in its listing requirement in 2002 adopts a directorship restriction where a director may not hold more than 10 directorship of public listed company and not more than 15 directorship in non-listed companies. As a continuous effort to enhance corporate governance, Bursa Malaysia in its listing requirement requires all directors of listed companies to undergo continuous training like the Mandatory Accreditation Programme (effective 2001) and Continuing Education Programme (effective 2003). The development of corporate governance in Malaysia is also complemented with the establishment of the Malaysian Institute of Corporate Governance (MICG) and the Minority Shareholders Watchdog Group (MSWG) that play the role of institutional bodies that facilitate the implementation and improvement of corporate governance in Malaysia. With all these reforms in place, Malaysia was ranked number one in terms of rules and regulation in a study conducted by the emerging market investment bank CLSA and Asian Corporate Governance 2003. However, Malaysia only managed to obtain a score of 5.5 (out of 10) for the overall corporate governance practice (Zulkafli et. al, 2005).

3. Literature Review
Issues on corporate governance have been well documented in the literature. For example various researches have been conducted to examine the effect of corporate governance mechanism (ownership structure, board composition, board and CEO ownership, CEO compensation and tenure) on company performance. Coles et. al (2001) states that much of the academic work in the corporate governance field has focused on how to design corporate governance mechanisms that will motivate managers to make choices for the firm that will improve performance. However these researches indicate mixed findings. Coles classified governance mechanisms into two broad categories namely organizational monitoring mechanisms (including leadership structure and board structure) and CEO incentive alignment mechanisms (including CEO compensation and ownership structure). A number of studies have provided insights into the relationship between leadership structure and performance. The leadership structure of the company is the relationship between the CEO and the Chairman of the BOD. CEO duality is a situation where the CEO is also the Chairman of the BOD. CEO duality is said to increase agency problem because the chairman is suppose to monitor the performance of the CEO. Rechner and Dalton (1989) examined shareholders returns over a five-year period (1978-1983) for 141 Fortune 500 companies and found no significant difference between the performance of a separated and a combined structure firm. However, when they examined the same firms using accounting based performance measures (ROE, ROI and profit margin) in 1991, they found that the separated structure firms outperformed the combined structure firm.

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Baliga et.al (1996) studied the announce effect of changes of duality status of Fortune 500 firms and the effect of duality on accounting measures of operating performance (ROE, ROA and operating cash flow) and long term measure of performance (EVA and MVA). On the contrary to Rechner, 1991 they found that the market is indifferent to announcement changes of duality status and there is only weak evidence to support the relationship between performance (accounting and long term) firm leadership structures. Dalton et. al (1998) performed a meta-analysis of 69 samples to examine the effect of leadership structure and firm performance (accounting and market based performance) but found no relationship between the two variables. A more recent study by Rhoades et. al (2001) conducted a meta-analysis of 22 samples and found a weak but significant relationship between leadership structure and firm performance. They found that firms with a separated structure have higher accounting returns compared to companies with CEO duality. All the above studies however focused on large American corporations. The studies in other regions however indicate a different finding from those studies in the United States. In Russia for example, Judge et. al (2003) distributed questionnaires to 116 Russian managers analyzing the relationship between board structure and firm performance. Since 1996, the Russian Federal Law prohibits CEO duality. However Judge et. al. argued that the CEO could still informally influence the BOD and consequently affect firm performance. They concluded that even though the relationship between CEO duality and performance is unclear in the developed economies, there is a strong negative relationship between informal CEO duality and firm performance in Russia. In Asia, Chen et al (2005) analyzed 412 publicly listed firms in Hong Kong from 1995-1998 to examine whether corporate governance mechanisms (CEO duality, composition of BOD, audit committee) affect performance, value and dividend payout in family controlled firms. They measured firm performance using three different variables - ROA, ROE and market to book ratio. Their results indicate that there is a negative relationship between CEO duality and performance (the market to book ratio). The relationship was significant even after controlling for industry and firm fixed effects. They concluded that CEO duality is associated with lower firm value i.e. companies with combined structure have a lower performance. Abdullah (2004) analyzed all companies listed on the Main Board of Kuala Lumpur Stock Exchange (now known as Bursa Malaysia) between 1994 and 1996 to investigate the effect of board composition and CEO on company performance (ROA, ROE, EPS and profit margin). In contrast to Rechner and Dalton (1991), he found that board independence and CEO duality did not have any relation to firm performance. He also found that board independence is negatively associated with CEO duality. Thus, firms with CEO duality have lower percentage of outside director. However, he found that Malaysian companies had been dominated by outside director and majority firms practiced non-dual leadership structure. Other studies in corporate governance have focused on the composition of BOD and its effect on performance. Baysinger and Butler (1985) found weak evidence that firms with more outside directors in 1970 had higher industry adjusted ROE in 1980. The concluded that companies dominated by non-executive directors had a better performance than companies dominated by executive directors. Klein (1998) on the other hand divided boards into several committees and found that higher percentage of inside directors in finance and investment committees leads to a better accounting and stock-market performance. Thus her findings indicate that there is a positive relationship between inside director and firm performance. Dehaene et. al (2001) analysed 122 Belgian companies to verify whether a relationship exist between board composition (number of directors, percentage of outside director, CEO duality) and company performance (ROA and ROE). Their findings indicate a significant positive relationship between percentage of outside director and ROE i.e. the more external director a company has, the better is its performance. They also found a significant positive relationship between CEO duality and ROA i.e if the CEO is also the Chairman of BOD, the company would show higher ROA.

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While the above studies have looked at one or two governance mechanisms, other studies have looked at various governance mechanisms and its effect on performance. For example Coles et. al (2001) studied 144 large US corporation from 1984 to 1988 to examine the relationship between two widely used performance measures (Economic Value Added - EVA and Market Value Added MVA) and a number of governance variables (leadership structure, board composition, board ownership, CEO compensation, CEO tenure and CEO ownership) simultaneously. Their findings indicate that there is a positive relationship between EVA (an accounting measure of performance) to a combined leadership structure of companies. They also found a negative impact of outside directors and CEO salary sensitivity on MVA. However, they did not find any evidence to support relationship of board ownership, CEO ownership and CEO tenure with performance measures (EVA and MVA). In addition they found a consistent impact of industry performance on firm performance. Thus, they concluded that while some traditional agency variables (leadership structure, board structure, CEO compensation) do impact performance, industry performance was a strong and significant driver of performance in their sample firm. Haniffa and Hudaib (2006) investigated the relationship between six corporate governance variables (board size, board composition, CEO duality, multiple directorship, ownership concentration and managerial shareholding) and two performance measures (Tobin Q and ROA) in Malaysia. They studied 347 firms listed on the KLSE between 1996 and 2000. They found that board size and ownership concentration (measured by top 5 substantial shareholding) is significantly associated with both market and accounting performance measures. Board size had a negative correlation with the market performance providing evidence that the market views big boards as ineffective but had a positive correlation with accounting performance. This means that big boards help provide diversity and bring wealth and expertise into companies. Concentrated shareholding also had a negative correlation with the market performance suggesting that market performance is better for firms with diffused ownership. It had a positive correlation with accounting performance. This means that Malaysian firms produce better accounting results with concentrated ownership. In addition, they found a negative significant relationship between multiple directorship and market performance suggesting better market performance when directors do not hold additional directorship. They also found that CEO duality has a significant negative relationship with accounting performance i.e firms with a combined structure had a weaker accounting performance. Finally they found a significant negative relationship between managerial ownership and accounting performance and conclude that the insider model of corporate governance is unsuitable in the Malaysian business environment. This problem is also associated with high cross holding of ownership in Malaysian firms via pyramiding. Besides Haniffa and Hudaib, an ealier study was done by Khatri et.al (2002) to examine the corporate sector performance (efficiency) and the role of corporate governance (high leverage and ownership concentration) in Malaysia. They fitted a panel dataset of 31 largest non-financial companies listed on the KLSE for the period of 1995 to 1999 to a stochastic frontier. Their results show that ownership concentration has a high significance and explanatory power that provides evidence for a positive relationship between inefficiency and system of cross-shareholding and ownership concentration i.e firms that has a high ownership concentration are inefficient. Khoo (2003) also conducted another study in Malaysia during a review of Corporate Governance in Malaysia. He made a simple analysis of 32 firms listed on KLSE to examine the relationship between corporate governance practices and firm performance. He selected 15 firms from the KLSE Composite Index list. He then chose another 15 firms of the same industry the second liners (firms with share prices trading in the RM 1 and RM 2 per share category and are bought by investors and fund managers with smaller funds) and then selected 2 banks from the Composite Index List to make up a total of 32 firms. Then he computed market and book value of equity (to calculate premium or discount on the share price) and ROA using data obtained from the companies annual report for year 2000 (before the introduction of MCCG) and year 2002 (after the introduction of MCCG). He made a descriptive comparison on the performance of the Composite Index firms (CI) with the noncomposite index firms (NCI). He concluded that the analysis did not show any clear tendencies of

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performance superiority between the firms. He however reminded that the small sample size would not accurately reflect the general population of Malaysian listed firms. Brown and Caylor (2004) took another approach in evaluating corporate governance and firm performance. They created a broad measure of corporate governance; Gov-score comprising of 51 factors in eight corporate governance categories based on a dataset provided by Institutional Shareholder Services. They then relate Gov-score to operating performance (ROE, profit margin and sales growth), valuation (Tobin Q) and shareholder payout (dividend yield and share repurchases) for 2,327 US firms and found that better governed firms are relatively more profitable, more valuable and pay out more cash to their shareholders. They also showed that good governance as measured using executive and director compensation is associated with good operating performance. On the other hand, they provide evidence that good governance as measured by charter and bylaws (that focuses on anti-take over measures) is most highly associated with bad operating performance. They however put a caveat in their conclusion saying that although the results indicate association between good corporate governance and performance, it does not necessarily imply causality. Klapper and Love (2004) on the other hand utilized a governance ranking provided by Credit Lyonnais Securities Asia (CLSA) to compare the performance (Tobin Q and ROA) of 374 firms across 14 emerging markets. Their results indicate that better corporate governance is highly correlated with better operating performance and market valuation.

4. Methodology
This study examines the relationship between good corporate governance practice and company performance. The question that arises is how do we evaluate a company with good corporate governance practice? In May 2004, Standard & Poor's published a report called Corporate Governance Disclosure in Malaysia ranking 50 Malaysian listed companies according to their corporate governance practices1. Utilizing these score we grouped these companies into two clusters namely good corporate governance practices and weak corporate governance practices. We then computed four financial ratios (namely ROA, ROE, EPS and profit margin) from the information obtained from the respective companies annual report for the year 2000 until year 2004. Prior research by Abdullah, 2004 used the above financial ratios as an indicator for companys performance. We then compared these ratios using a Mann-Whitney U test to determine whether there is any significant difference between the performances of good corporate governance practices companies and weak corporate governance practices companies. Standard and Poors listed 5 top companies that had significant better disclosure of corporate governance relative to the other KLCI companies in their sample. For example all these top companies had board meetings more than 6 times a year, disclosed the nominating and remuneration committee meeting frequency and had a familiarization program for new directors. Comparison of the Top 5 companies versus the rest is shown is Appendix 1. We classified these 5 companies as good corporate governance practices and are shown in Table 1. Five companies out of 45 companies that did not practice good corporate governance were chosen based on business sector or the market capitalization and are listed in Table 2 as the weak corporate governance practices. The total list of the 45 companies that did not practice good governance is shown in Appendix 2.
1

Standard and Poors conducted a joint study with the Corporate Governance & Financial Reporting Centre (CGFRC) at the National University of Singapore (NUS) to evaluate corporate governance practices of four countries (Thailand, Malaysia, Singapore and Indonesia). S&P has developed a scorecard to assess the corporate governance disclosures of companies. The scorecard consists of 136 items with a maximum score of 140. It contains Board related matters, remuneration matters and audit matters. The items in the scorecard reflect the principles and best practice embodied in international corporate governance codes tailored for Malaysian environment. Their study focused only on the disclosure made in the annual report of top 50 companies from the 100 companies on the Kuala Lumpur Composite Index (KLCI). These companies were chosen based on their market capitalization as on Sept 30, 2003

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Table 1:

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Good corporate governance practicee
No. 1 2 3 4 5 Stock Code 2496 1155 2194 4197 2267 Company Malakoff Bhd Malayan Banking Bhd Malaysia Mining Corporation Bhd Sime Darby Bhd Tanjong Plc

Table 2:
Company

Weak corporate governance practicee


Selection criteria Trading (Business sector) Banking (Business sector) Market capitalization Market capitalization Market capitalization

1. Tenaga 2. Public Bank 3. Petronas Dagangan 4. Genting Berhad 5. Magnum Corporation

The performances of these companies were then compared. The following financial ratios were used as a measure of company performance: i. Return on asset (ROA): net income/average asset ii. Return on equity (ROE): net income/average common stockholders equity iii. Earnings per share (EPS): net income/weighted average of common shares outstanding iv. Profit margin (PM): net income/turnover Since this study involves a small sample size (5 companies in both groups), the Mann-Whitney U test was performed to test the following hypothesis: Ha : There is no significant difference in the performances between firms that practice good governance and firms that practice weak governance.

5. Findings
Descriptive Statistics As discussed in section 4.0, the performance of companies with good governance practices was compared with the performance of companies with weak governance practices. The companys return on asset, return on equity, earnings per share and profit margin from the year 2000 until 2004 have been calculated from the related companys annual report. Then descriptive statistics were calculated for both groups as presented in Table 3.

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Table 3: Descriptive Statistics
Minimum Good CG Weak CG 1.08 -6.96 0.57 1.76 1.13 1.49 1.28 1.64 1.38 1.27 11.79 -12.03 7.96 11.3 6.86 7.8 4.71 6.62 4.68 4.78 12.5 -34.9 26.5 15.42 19.8 12.35 12.9 13.55 10.3 4.03 8.55 -20.21 6.98 6.1 7.7 6.27 6.89 1.67 6.81 3.19 Maximum Good CG Weak CG 11.1 6.19 13.4 12.06 10.8 12.4 15.2 9.99 15.4 8.64 18.75 20.8 18.83 20.81 16.23 21.04 19 15.35 20.3 18.23 124.38 42.9 53.6 78.4 46.5 108.1 83.8 101.34 103.9 131.76 67.5 26.56 143.02 24.69 59.7 31.31 26.85 25.53 25.58 30.86 Mean Good CG Weak CG 6.88 1.78 7.516 7.172 5.918 7.088 6.314 5.016 5.906 4.632 14.542 7.12 13.722 15.134 12.188 14.356 13.648 10.904 14.204 11.864 55.556 13.79 40.32 49.266 36.44 54.97 47.7 42.038 54.668 55.458 25.212 4.784 38.816 15.424 23.946 15.736 17.642 13.514 16.714 13.818

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ROA - 2000 2001 2002 2003 2004 ROE - 2000 2001 2002 2003 2004 EPS - 2000 2001 2002 2003 2004 PM- 2000 2001 2002 2003 2004

Std. Deviation Good CG Weak CG 3.69864 5.18781 5.24624 4.68404 3.54916 4.83471 5.54233 3.68282 5.68332 3.58078 2.59747 11.87446 3.90642 3.67884 3.6458 5.00139 5.67086 3.66875 6.085 6.26829 42.25168 29.91113 10.60175 29.18142 10.73373 43.63854 26.26528 34.10895 34.60474 50.15172 24.18594 16.76553 58.58869 7.37008 21.08869 10.82018 7.43416 10.86858 7.791 13.68367

ROA for both groups seem to peak in 2001 and then decreased. The good governance practices companies seem to have a minor rebound in 2003 compared to the other group, however their ROA declined again in 2004. They had a slightly higher ROA in 2004 compared to the weak governance practices companies. The higher ROA indicate that the good governance practices companies were able to relatively better exploit their assets to generate higher return. This is supported by the profit margin ratio where the good governance practices companies had a constant higher profit margin ratio for all the years under study compared to their counterpart. As for the ROE, the weak governance practices companies seem to have overtaken the good governance practices companies in 2001 and 2002. One contributing factor to this phenomenon may be due to the shoot up in the profit margin ratio of the weak governance practices companies from 4.8% in 2000 to 15.4% in year 2001. After 2002, the weak practices companies showed a declining trend with minor rebound in 2004 whereas the good practices companies showed a constant upward trend in their ROE. As for the EPS, the weak governance practices companies again seem to have overtaken the good governance practices companies in 2001 and 2002 probably due to the shoot up in the profit margin ratio also. After 2002, good practices companies showed a constant upward trend in their EPS. The weak practices companies had a decline in year 2003 however came back with a strong rebound in 2004 where they we able to record a slightly higher EPS than the good practices companies. Overall, all performance indicators for both groups (except EPS for good governance practices companies) improved in year 2001. It is interesting to note that the MCCG was published in March 2000 and Bursa Malaysia revamped its Listing Requirement on January 22, 2001 requiring companies to include in their annual statement how they have applied the principles set in Part 1 of MCCG and compliance to the best practices in Part II of MCCG stating reasons for non-compliance. Besides this trend, the performance indicator of both groups does not show any strong inclination towards any particular group.

55 Hypothesis Testing

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To test the hypothesis stated in section 4.0 above, we employed the Mann-Whitney U test to determine whether any significant difference exist between the performance of the two groups. The MannWhitney U test is a non-parametric test equivalent to an independent t-test. This test would compare the mean from two independent samples to identify whether the samples have significant difference. The Mann-Whitney test was more appropriate for this study considering the small sample size used.
Table 4:
ROA

Results from Mann Whitney test


Ranks

ROE

EPS

PM

cotype G NG Total G NG Total G NG Total G NG Total

N 25 25 50 25 25 50 25 25 50 25 25 50

Mean Rank 26.88 24.12 27.16 23.84 27.52 23.48 29.10 21.90

Sum of Ranks 672.00 603.00 679.00 596.00 688.00 587.00 727.50 547.50

Test Statistics (a)


Mann-Whitney U Wilcoxon W Z Asymp. Sig. (2-tailed) a Grouping Variable: cotype ROA 278.000 603.000 -.669 .503 ROE 271.000 596.000 -.805 .421 EPS 262.000 587.000 -.980 .327 PM 222.500 547.500 -1.746 .081

Results from table 4 generally suggest that the null hypothesis could not be rejected. The negative sign of the Z value suggest that generally the good governance practices companies had a better performance however the difference was not significant. None of the performance measure (ROA, ROE, EPS and Profit Margin) seems to be significantly different between the two groups of companies. This finding is consistent with the findings of Abdullah (2004) who did not find any significant relationship between CEO duality, board composition and performance in Malaysian listed companies. The findings is also coherent with Khoo (2003) who did not find any clear tendencies between the performance of CI firms and NCI firms. The use of accounting measure of performance in this study coupled with high ownership concentration in Malaysia may provide explanation for this insignificant result. As Haniffa and Hudaib (2006) found in their study, ownership concentration had a positive correlation with accounting performance in Malaysia. Claessens et. al (2000) and Khatri et. al (2002) found that Malaysia is known for high ownership concentration, pyramid structure and cross-holding. High ownership concentration occurs when a single shareholder holds a big proportion of shares in the company. As pointed out earlier, the largest ten families control a quarter of the corporate sector in Malaysia. This concentration could be intensified through the pyramid structure. Claessens defined pyramid structure as owning a majority of the share of one firm that in turn holds a majority share of another firm. Meanwhile, cross holding occurs if say firm A hold 50% of firm B, that in turn holds 25% of firm A. This implies that most of the corporate firms in Malaysia are ultimately owned by a few family which may have a cross holdings in the other firms. Thus, they would be able to exert influence on the

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firms via policies and decision-making. The positive correlation found by Haniffa and Hudaib implies that the ultimate owners of Malaysian firms were able to influence the firms (accounting) performance. This may provide one possible explanation for the insignificant difference in accounting performance between firms that practice good governance and firms that practice weak governance.

6. Conclusion
This study examines the relationship between good corporate governance practices and company performance. Utilizing governance score form a study by S&P, we grouped companies into two clusters namely good governance practices and weak governance practices. Selected financial ratios namely return on asset, return on equity, earnings per share and profit margin were used to compare the performance of the two groups of companies. The study predicts that if companies practice good corporate governance, the company will be able to perform better than companies that did not practice good corporate governance because a company practicing good governance would have an effective and efficient board of directors that could play the role of monitoring and thus reduce the agency problem in companies. However the results indicate that companies performance based on financial ratios did not reveal any difference in performance between the two groups of companies. The Malaysian business environment that is characterized by high ownership concentration (Cleassens et. al 2000, Khatri et. al 2002, Haniffa and Hudaib 2006) where ultimately a few people hold ownership in the majority of companies and thus influence the performances of these companies may provide possible explanation why there is no difference in the performance between the companies that practice good governance and companies that do not practice good governance. This findings is consistent with most of the prior study made on corporate governance element which suggest that the implementation of corporate governance elements does not have an impact towards companies performance. This is especially true if implementation of governance mechanisms encourages mere box ticking attitude or procedural compliance. Companies would seem to have a better governance disclosure only to comply with exchange listing requirement i.e. they only comply in form not in substance. The findings could also suggest that the importance of corporate governance is more towards attracting investors to invest in the capital market. A good corporate governance practice offers a more conducive business environment for the investors. The results however got to be interpreted with caution because this study only involved a small sample size and only focused on accounting based performance measure. There were only 5 companies identified as companies practicing good governance. In addition, companies that were not practicing good governance were chosen only based on business sector and market capitalization. Better and more accurate matching criteria with a bigger sample size and market measure of performance may provide different results.

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Journal of Money, Investment and Banking - Issue 11 (2009) Abdullah, S.N. (2004). Board composition, CEO duality and performance among Malaysian listed companies. Corporate Governance, pp. 47-61. A-Kadir, A. (1999). The corporate governance trends in Malaysia: February 1999 Finance Committee report on corporate governance., Chairman of Securities Commission.s Available at: http://www.sc.com.my/ A-Kadir, A. (2000). Beyond the Asian financial crisis - challenges and perspectives for the Malaysian capital market., Chairman of Securities Commission.s Speech text [online]. Available: http://www.sc.com.my/ Baysinger, B. and Butler, H. (1985), Corporate governance and board of directors: Performance effects of changes in board composition, Journal of Law, Economics and Organization, 1, p.101-124 Brown, L.D. and Caylor, M.L. (2004) Corporate Governance and Firm Performance, Available at SSRN: http://ssrn.com/abstract=586423 Coles, J.W., McWilliams, V.B. and Sen, N. (2001), An examination of the relationship of governance mechanisms to performance, Journal of Management, 27, p. 23-50. Chen, Z., Cheung, Y.L, Stouraitis, A. and Wong, A.W.S. (2005), Ownership concentration, firm performance and dividend policy in Hong Kong, Pacific-Basin Finance Journal, 13, p.431-449. Claessens, S., Djankov, S. and Lang, L.H.P., (2000), The separation of ownership and control in East Asian corporations, Journal of Financial Economics, 58, p. 81-112. Dalton, D., Daily, C., Ellstrand, A. and Johnson, J. (1998), Meta-analytic reviews of board composition, leadership structure and financial performance, Strategic Management Journal, 19, p. 269-290. Finance Committee on Corporate Governance FCCG (2000), Malaysian Code on Corporate Governance (2000), Ministry of Finance (Malaysia). Hashanah, I. and Mazlina, M. (2005), PN9/2001: Case of Public Reprimands, Presented at FEP Seminar 2005. Haniffa, R. and Hudaib, M. (2006) Corporate Governance Structure and Performance of Malaysian Listed Companies. Journal of Business Finance & Accounting 33 (7-8), p. 10341062. Khatri, Y., Leruth, L. and Piesse, J. (2002), Corporate performance and governance in Malaysia. IMF working paper, WP/02/152. Available at http://www.imf.org/external/pubs/cat/longres.cfm?sk=15935 Khoo, B.Y., (2003) Corporate Governance in Malaysia, Asian Development Bank Working Paper, Available at: http://adbi.adb.org/conf-seminarpapers/2004/08/18/532.corporate.governance.malaysia/ Klapper, L.F. and Love, I., (2004), Corporate governance, investor protection and performance in emerging markets, Journal of Corporate Finance, 10, p. 703-728. Klein, A. (1998), Firm performance and Board committee structure, Journal of Law and Economics, 41, p. 275-303 Mason, R. and Omar, A. (2003). The bumiputera policy: Dynamics and dilemmas. Kajian Malaysia: Journal of Malaysian Studies, 21(1 & 2), p. 1-12. Morck, R.K. and Steier L. (2005), The global history of corporate governance: An introduction, National Bureau of Economic Research Working Paper, No 10162. Available from http://www.nber.org/papers/w11062 M-Ali, A. (1999), Early years of the accounting development in Malaysia: A case of external influence, Working paper (online). Available at http://www.deakin.edu.au/buslaw/aef/confs/deakinconf/AHICpapers.html Rechner, P.L. and Dalton, D.R. (1989), The impact of CEO as board chairperson on corporate performance: evidence vs. rhetoric, Academy of Management Executive, 32, p. 141-143

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Appendix 1
Comparison of Top 5 Companies Versus the Rest

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Appendix 2
Companies that did not practice good corporate governance
No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 Stock Code 5347 4863 3816 5051 1295 6033 5052 4162 3182 1023 5819 1961 4677 3786 4707 5398 1015 2445 5304 3735 1953 1066 1562 3867 5681 6947 4065 4588 3131 4006 3794 8664 5541 6084 3336 5014 2836 6807 3832 1597 3875 3034 6475 6645 3255 Company Tenaga Nasional Bhd Telekom Malaysia Bhd Malaysia International Shipping Corp Bhd Maxis Communications Bhd Public Bank Bhd Petronas Gas Bhd Plus Expressways Bhd British American Tobacco (Malaysia) Bhd Genting Berhad Commerce Asset-Holding Bhd Hong Leong Bank Bhd IOI Corporation Bhd YTL Corporation Bhd Malaysian Airline System Bhd Nestle (M) Bhd Gamuda Bhd AMMB Holdings Bhd Kuala Lumpur Kepong Bhd Perusahaan Otomobil Nasional Bhd Magnum Corporation Bhd Golden Hope Plantations Bhd RHB Capital Bhd Berjaya Sports Toto Bhd Malaysian Pacific Industries Bhd Petronas Dagangan Bhd DiGi.Com Bhd PPB Group Bhd UMW Holdings Bhd Kumpulan Guthrie Bhd Oriental Holdings Bhd Malayan Cement Bhd (Lafarge ) SP Setia Bhd Road Builder (M) Holdings Bhd Star Publications (Malaysia) Bhd IJM Corporation Bhd Malaysia Airports Holdings Bhd Carlsberg Brewery Malaysia Bhd Puncak Niaga Holdings Bhd Malaysian Oxygen Bhd IGB Corporation Bhd Malaysian Tobacco Company Bhd (Measat Global Bhd) Hap Seng Consolidated Bhd Ramatex Bhd Lingkaran Trans Kota Holdings Bhd Guinness Anchor Bhd