Corporate governance, risky business and construction industry: a divergence between Bursa and Construction Industry Development Board (CIDB) Klang Valley, Malaysia

• Pages: 438-457
• DOI: https://doi.org/10.1108/CG-03-2018-0107
• Published date: 16 May 2019
• Date: 16 May 2019
• Author: Malik Hussain,Abdul Hadi
• Subject Matter: Corporate governance,Strategy

Corporate governance, risky business and

construction industry: a divergence

between Bursa and Construction Industry

Development Board (CIDB)

Klang Valley, Malaysia

Malik Hussain and Abdul Hadi

Abstract

Purpose –This study aims to examine the associationbetween corporate governance mechanism and

firm performance measuredby return on assets (ROA). The question is whether aneffective corporate

governance mechanism is able to increase the firm performance of Bursa and Construction Industry

Development Board (CIDB) Klang Valley, Malaysia. The main purpose of this study is the in-depth

analysis of the corporate governance mechanism and construction industry Malaysia via Bursa and

CIDB.

Design/methodology/approach –Following the primary and secondarydata comparative approach,

data are collectedfrom 46 listed construction companies and 250CIDB-registered SMEs for the financial

year 2015. Descriptive statistics, Pearson correlation test are reported, and model estimation is

performedusing logistic regression.

Findings –The empirical outcome shows that the corporate governance mechanism is significant in

case of the CIDB Malaysia-registered SMEs. While, it has insignificant impacton firm’s performance for

Bursa Malaysia.

Practical implications –This paper offers evidence specifically for Bursa and CIDB Malaysia

constructionindustry. It can also provide guidance to the boardof directors for the subscription of shares

under the corporate governance measures at Bursa Malaysia. The findings also suggest that CIDB

should increase awarenessregarding institutional investment to assist the securities market to develop

further.

Originality/value –This studygives an indication about corporategovernance, specifically for the CIDB-

registered SMEs andBursa Malaysia. It also discusses the matterof firm performance under the light of

corporategovernance.

Keywords Risk management committee, Duality, Corporate governance mechanism, BursaMalaysia,

Construction Industry Development Board

Paper type Research paper

1. Introduction

Corporate governance is a technique and structure used to control the business exercises

of the economic system of an organization to expand its success. It is a corporate

responsibility that acknowledges the value of shareholders while taking into consideration

the interests of different stakeholders(MFC, 2001). MFC defines corporate governance as a

framework that is used to control and guide organizations. Top managerial staff are

answerable for the governance of organizations. In terms of the shareholders’ part of

Malik Hussain and

Abdul Hadi both based at

the Universiti Kuala

Lumpur, Kuala Lumpur,

Malaysia.

Received 5 March 2018

Revised 25 July 2018

3 October 2018

Accepted 17 December 2018

PAGE 438 jCORPORATE GOVERNANCE jVOL. 19 NO. 3 2019,pp. 438-457, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-03-2018-0107

governance, their responsibility is to engage executives and auditors for the benefit of the

firm while guaranteeing that a competent corporate structure has been developed

(Cadbury Committee, 1992). Corporate governance bargains with components that

guarantee that enterprises get a return based on their ventures (Shleifer and Robert, 1999).

Corporate governance arranges not only the internal administration of firms, it is also

connected to a firm’s relationship with its suppliers, customers and other stakeholders. The

increasing demand for stocks and other assets from organizations expanded the vitality of

corporate governance worldwide. The act of raising investment funds and liquidity with the

view of profitability is highly competitivefor the organizations.

Corporate governance has become a well-known financial exchange platform in the modern

world. Generally, corporate governance determines the establishment of firms that defend and

flourish the expectations of stakeholders. However, corporate governance varies betwee n

countries, depending on the economic, radical and other social contexts. Orga nizations in rich

economic countries divide shareholder jurisdictions that work in stable political , budgetary

financial structures and developed legislative frameworks of corporate governance.

Corporate governance varies from entity to entity and the geographical region of countries.

Its ultimate goal is to standardize, gain high return rates and to prevent financial structures

from attaining their targets at the expense of investors (Luo, 2007). It must be

acknowledged that feeble corporate governance or noncompliance of its doctrine could

prompt financial abuses, corporate frauds and generate heavy losses for companies

(Niamh and Jill, 2008).

The World Bank Report (2012) recognized Malaysia as a regional leader in corporate

governance but has stated that there is plenty of room for improvement (Reports on

Observance Standards and Codes, 2012). A high level of ownership concentration and

composition, but weak corporate governance structure means there is inadequate

shareholder control and protection for the Malaysian corporate sector (Kamini, 2003).

Noordin and Haniffa (1999) claimed that a country’s poor corporate governance standards

are the main reason for theloss of investor confidence in Malaysia.

The construction industry is one of the main sources of economic growth and development

in Malaysia. Unfortunately, the contribution of the Malaysian construction sector to the GDP

has declined from 2013 to 2016. The continuous decrease in the GDP leads to the survival

of the construction industry. Leng (2004) stated that the problem of sustainability originates

from heavy expenses, decreasing trend of turnover, revaluation of assets and company

liquidation due to bad corporategovernance (Figure 1).

Figure 1 Contributionof Malaysian Construction Industry to GDP Growth (2011-2016)

4.6

18.1

10.8

11.8

8.8

7.4

0

2

4

6

8

10

12

14

16

18

20

2010 2011 2012 2013 2014 2015 2016 2017

Contribuon of Construcon Industryto GDP at 2010 constant prices

GDP

Year

GDP %

Source: Economic Planning Unit (2015); Department of Statistics (2016)

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