Corporate governance and firm performance in Malaysia

• Published date: 02 October 2017
• DOI: https://doi.org/10.1108/CG-03-2016-0054
• Date: 02 October 2017
• Pages: 896-912
• Author: Padmanabha Ramachandra Bhatt,R. Rathish Bhatt
• Subject Matter: Strategy,Corporate governance

Corporate governance and firm

performance in Malaysia

Padmanabha Ramachandra Bhatt and R. Rathish Bhatt

Padmanabha

Ramachandra Bhatt is

Professor at Othman

Yeop Abdullah Graduate

School of Business,

Universiti Utara Malaysia,

Sintok, Malaysia. R.

Rathish Bhatt is Assistant

Professor at General

Management and

Economics, Goa Institute

of Management,

Sanquelim, Goa.

Abstract

Purpose –The purpose of this paper is to study the effect of Malaysian Code on Corporate Governance

(MCCG, 2007 and 2012) on the performance of the listed companies in Malaysia. The agency theory

and resource dependency theories indicate that the firms with strong corporate governance outperform

firms with weaker governance. This paper explores this relationship in a developing country like

Malaysia having different institutional environment compared to western countries.

Design/methodology/approach –The study used a sample of 113 listed companies in Malaysia. The

study incorporates the endogenous relationship between corporate governance, firm performance and

leverage.

Findings –The study analyzes how the corporate governance framework affected firm performance in

Malaysia with the help of self-developed corporate governance index (MCGI). The authors’ findings

show that the performance of the firm is positively and significantly related with corporate governance

measured by MCGI. Secondly, corporate governance of sample firms shows marked improvements

after implementation of MCCG 2012 as compared to MCCG 2007.

Originality/value –The findings of this paper support the agency and the resource dependency

theories. The study contributes to the understanding of the relationship between the corporate

governance and firm performance in emerging economy and builds a case for enforcement of strong

corporate governance code by government agencies.

Keywords Malaysia, Corporate governance, Corporate governance index, Firm performance,

Malaysian Code of Corporate Governance

Paper type Research paper

1. Introduction

Corporate governance plays a crucial role to shape up a firm as also to make it competitive

with global firms (Iwasaki, 2008;Ehikioya, 2009). Corporate governance legislation and

guidelines issued by government agencies and international bodies, when implemented,

help the firm in specific and country, in general, to attract foreign investments. These

corporate governance codes would ensure investors’ safety, protecting them from

corporate scandals. Increasingly, it has been recognized that there is no one-size-fits-all

approach to achieving effective governance (Bhagat and Bolton, 2008;Black et al., 2014).

Evidence suggests that the governance practices vary across nations (Shleifer and Vishny,

1997;Doidge et al., 2007;Anderson and Gupta, 2009). This difference has been attributed

to the institutional development background of the country (North, 1990;Peng and Jiang,

2010;Judge et al., 2008). Regulating governmental bodies try to come up with governance

codes based on international best practices that suit their business environment. The

Malaysian government framed corporate governance codes such as Malaysian Code of

Corporate Governance (MCCG, 2000,2007 and 2012) in line with the Sarbanes-Oxley Act

(SOX) of 2002 in the USA, the Principles of Good Corporate Governance and Best Practice

Recommendations (ASX Corporate Governance Council, 2003 and 2007) in Australia,

Enactment of Clause 49 of the Listing Agreements by Securities and Exchange Board of India

(SEBI) in 2005, the Combine Code on Corporate Governance 2003, in the UK and others.

Received 21 June 2015

Revised 1 June 2017

Accepted 22 June 2017

PAGE 896 CORPORATE GOVERNANCE VOL. 17 NO. 5 2017, pp. 896-912, © Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-03-2016-0054

The high-level finance committee in Malaysia has made concerted efforts to reform

corporate practices to promote corporate governance in Malaysia. The first MCCG was

issued in the year 2000 (MCCG, 2000). A revised version MCCG (2007) was introduced to

strengthen the roles and responsibilities of the board of directors, audit committee and the

internal audit function. Later, the Corporate Governance Blueprint 2011 was released by

the Securities Commission Malaysia to enable for more stringent corporate governance

guidelines for companies in Malaysia. Based on this blueprint, a new MCCG 2012 (MCCG,

2012) was issued to augment board structure and composition. The observance of MCCG

(2012) by companies was made voluntary. Listed Malaysian companies were required to

report on their compliance with the principles and recommendations of MCCG (2012) in

their annual reports.

According to the high-level finance committee report on corporate governance 1999,

Malaysia, corporate governance is defined 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”. MCCG 2012 (MCCG, 2012) encapsulates eight principles and the

corresponding 26 recommendations of the high-level finance committee report. These

principles established clear roles and responsibilities of the board, strengthening board

composition, reinforce the effectiveness of independent directors, their commitments,

uphold integrity in financial reporting, recognize and manage risks, ensure timely

and high-quality disclosure and recognizing the relationship between company and

shareholders. To highlight these changes, a comparison between the MCCG 2007 and

2012 is given in Table I.

Research on the structure of corporate governance and firm performance has been

concentrated in developed countries (Rajagopalan and Zhang, 2008;Fan et al., 2011). The

literature, however, is inconclusive on the role of corporate governance on firm

performance (Bhatt and Bhattacharya, 2015;Mohd Ghazali, 2010;Nicholson and Kiel,

2007;Leng, 2004). With globalization and the rise of economic importance of emerging

markets, there has been an escalation in the interests of researchers studying corporate

governance in these developing countries. Additionally, the impact of the corporate

governance code on firm performance in emerging markets has not been established (Che

Haat et al., 2008;Ponnu, 2008). This paper attempts to provide insights into the evolving

governance structure in an emerging market like Malaysia by studying the effect of MCCG

(2007 and 2012) on the performance of the listed companies in Bursa Malaysia. We use

accounting measures of firm performance to conduct the simultaneous equations panel

data analysis on the effect of corporate governance on firm performance.

This paper makes several contributions to the literature. First, the paper provides evidence

on the impact of corporate governance on the firm performance in the listed Malaysian

companies. Thereby, establishing the role of strong institutional agencies in enforcing a

change in corporate governance environment in an emerging country like Malaysia.

Second, most of the studies in the emerging markets have not attempted to study this

relationship by constructing a corporate governance index. For our analysis, we construct

a self-defined Malaysian Corporate Governance Index (MCGI) to measure the governance

parameters. Third, we address the limitation of prior works on firm-level corporate

governance where most of them ignore the endogeneity issue. This study takes into

consideration the endogenous relationship between corporate governance, firm

performance and capital structure. The paper is subsequently organized as follows:

Section 2 provided a survey of the literature. Hypotheses and methodology were discussed

in Section 3. Section 4 was devoted to analyzing the results, and Section 5 concluded the

discussion.

VOL. 17 NO. 5 2017 CORPORATE GOVERNANCE PAGE 897