Corporate risk-taking and performance in Malaysia: the effect of board composition, political connections and sustainability practices

• Pages: 635-654
• DOI: https://doi.org/10.1108/CG-05-2017-0095
• Date: 15 March 2018
• Published date: 15 March 2018
• Author: Lee-Lee Chong,Hway-Boon Ong,Siow-Hooi Tan
• Subject Matter: Corporate governance,Strategy

Corporate risk-taking and performance in

Malaysia: the effect of board composition,

political connections and sustainability

practices

Lee-Lee Chong, Hway-Boon Ong and Siow-Hooi Tan

Abstract

Purpose –This paper aims to examine how board composition, political connections and sustainability

practicesaffect risk-taking and performance of firms.

Design/methodology/approach –This paper used secondary data and regression technique to

analysethe relationship. A sample consisting of 290 firm-yearobservations was applied in the analysis.

Findings –The findings show that a largerboard size contributes to greater financial risk; however,this

risk can be reduced with more independent directors in the boardroom. An optimal board size with

appropriate number of independent directors is desired, as a large board size can be harmful to firm

performance. Politically connected firms also generate lower risk-taking and performance, and the

double-edged sword effect of political connections needs to be considered. In terms of sustainability

practices,firms have to engage in sustainable developmentto maximise the firms’ value, not ignoringthe

vital role of women in strategising businessperformance. However, the effect of sustainability practices

on firms’ risk-takingis still not noticeable.

Research limitations/implications –Even though the sample sizeis not large because of the limited

availability of data, thefindings, to a certain extent, could be generalised to emergingmarkets, as most

emergingmarkets do have similar financial and economic developments.

Practical implications –The findings from this paper can be used to support the implementation of

sustainability practices,especially in those countries where sustainability initiatives are yet to be widely

accepted.

Originality/value –This is one of the firstfew studies that examined the effect of non-financialinformation

on risk-taking and performance of firms. This study concludes the positive effect of sustainability

practiceson firm performance.

Keywords Performance, Corporate governance, Sustainability, Risk-taking

Paper type Research paper

1. Introduction

In business, firms need to make managerial decisions and to be involved in risk-taking.

Corporate risk-taking activities can nurture long-term growth for firms (Faccio et al., 2011), but

excessive risk-taking can be harmful to firms. The re-occurrence of financial crises, for example

the Asian financial crisis of 1997-1998 and the credit crunch of 2007-2008, suggested that firms

engage in excessive risk-taking to manage their businesses. The excessive risk-taking

behaviour could exacerbate financial stability and create setbacks to economic growth. In the

present global market, corporate health is deteriorating (IMF, 2016). Firms’ vulnerabilities to risk

become acute, and they have to increase their resilience to withstand against the growing

indebtedness, tighter credit situation and slowdown of the world economy.

Lee-Lee Chong is Senior

Lecturer at the Faculty of

Management, Multimedia

University, Cyberjaya,

Malaysia.

Hway-Boon Ong and

Siow-Hooi Tan are both

based at the Faculty of

Management, Multimedia

University, Cyberjaya,

Malaysia.

Received 17 May 2017

Revised 16 October 2017

2 February 2018

Accepted 3 February 2018

DOI 10.1108/CG-05-2017-0095 VOL. 18 NO. 4 2018, pp. 635-654, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 635

In protecting the interest of stakeholders, good corporate governance practices have been

emphasised by companies and regulators. Malaysia, as an emerging market, started its

corporate governance journeyback in the year 2000 after the Asian financial crisis, whereby

companies were severely affected by the financial turmoil of 1997-1998. After the episode

of financial turmoil, the Malaysian Code of Corporate Governance(MCCG) was put in place.

In 2007, the codes were revised to enhance the roles and responsibilities of the board of

directors, internal auditors and audit committees. Subsequently, the corporate governance

blueprint was outlined in 2011 to foster market discipline, and finally, the MCCG 2012 was

launched to strengthen the effectiveness of board composition and its structure. MCCG

2012 outlined broader principles and conduct of good corporate governance for public-

listed companies. Public-listed companies are required to disclose their compliance in their

annual report. This newest version emphasises the importance of board composition and

board independence. Assessment by the World Bank in 2012 on Malaysia’s corporate

governance revealed that this country was a regional leader in corporate governance, and

one of the suggested forward-moving reforms was in terms of reinforcing board

independence. Accordingly, board composition remains as the focus in corporate

governance initiatives, and it is important in driving firms’ competitiveness. Consistent with

most previous research, for example in Sener and Karaye (2014), the effect of board

composition in terms of board size, independent directors and gender diversity on risk-

taking of firms is of interest to this study.

There is a wealth of literature looking at how board composition affects firms’ risk-taking; for

instance, Huang and Wang (2015) and Nakano and Nguyen (2012) looked at board size,

Dahya and McConnell (2005) and Mathew et al. (2016) examined the independentdirectors

and Faccio et al. (2016) focused on gender diversity. Nevertheless, in the literature, the

nexus of board size and risk-taking of firms is ambiguous thus far. Cheng (2008) found that

firms with a larger board size tend to assume lower risk.This result is not consistent with our

findings in terms of the financial risk. We also hypothesized that female board members are

more risk-averse than male board members in decision-making (Agnew et al., 2003;

Bernasek and Shwiff, 2001). Our results do not conform to this finding but suggest that

idiosyncratic risk is higher when firms have more female board members. We also posited

that having independent directorsin the boardroom is expected to lead to less risk (Mathew

et al., 2016); accordingly, the results of our study lend support to this relationship. Up to

August 2017, female board members only accounted for 17.8 per cent of the top-100

public-listed companies in Malaysia, and this figure is much lower than the target of the

Malaysian Government (TheStar Online, 2017).

Stock markets in emerging markets are concentrated with politically connected firms that

hold considerable market shares. In Malaysia, firms with political connections, or the so-

called government-linked corporations (GLCs), make up almost 40 per cent of the total

market capitalisation. The GLCs play a pivotal role in the Malaysian stock market, and the

effect of GLCs is worthy of investigation. However, most of the studies in Malaysia are

focused on the effect on firm performance. In addition to the effect of GLCs on firm

performance, our study also focused on how GLCs affect firms’ risk-taking. Among others,

Boubakri et al. (2013a) have shown that politically connected firms exhibit more risk-taking,

especially for corporations with sound political connections. In the same context, politically

connected firms in China are taking more risks, and the effect is stronger for firms with

younger managers (Ding et al., 2015). The effect of firms’ risk-taking encompasses two

sides of the same coin. If risk is managed properly, it generates growth to the company.

Otherwise, excessive risk-taking could be harmful. This study sought to examine whether

firms with political connections engage in more risk and how the politically connected firms

affect both risk-takingand firms’ performance.

Apart from the effect of board composition and political connections on firms’ risk-taking,

we also gauged the impact of sustainability practices of firms on their risk-taking. The

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