The influence of a board’s ethical commitment on corporate governance in enhancing a company’s corporate performance

Author:Ahmad Saiful Azlin Puteh Salin, Zubaidah Ismail, Malcolm Smith, Anuar Nawawi
Position:Faculty of Accountancy, Universiti Teknologi MARA, Perak Branch Tapah Campus, Tapah, Malaysia
Pages:496-518
SUMMARY

Purpose The purpose of this paper is to examine the relationship between corporate governance and company performance and how a board’s ethical commitment can influence this relationship. Prior studies documented mixed evidence on the corporate governance and corporate performance relationship, which can be due to the influence of a board’s ethical commitment and will shape the corporate governance mechanism in the company and, in turn, influence performance. Design/methodology/a... (see full summary)

 
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The inuence of a boards ethical
commitment on corporate
governance in enhancing a
companys corporate performance
Ahmad Saiful Azlin Puteh Salin
Faculty of Accountancy,
Universiti Teknologi MARA, Perak Branch Tapah Campus, Tapah, Malaysia
Zubaidah Ismail
School of Business and Law, Edith Cowan University, Joondalup, Australia
Malcolm Smith
University of South Australia, Adelaide, SA, Australia, and
Anuar Nawawi
Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Malaysia
Abstract
Purpose The purpose of this paper is to examine the relationship between corporate governance and
company performance and how a boards ethical commitmentcan inuence this relationship. Prior studies
documented mixedevidence on the corporate governance and corporateperformance relationship, which can
be due to the inuence of a boards ethicalcommitment and will shape the corporate governancemechanism
in the companyand, in turn, inuence performance.
Design/methodology/approach This study collected data for two years, i.e. 2013 and 2014, from
the biggest 500 Malaysian companies listed in the stock exchange. Corporate governance is measured
based on the requirements of the Malaysian Code of Corporate Governance (MCCG), while a boards
ethical commitment is measured based on the MCCG and various international best practices. Corporate
performance is measured based on return on equity, return on assets, net prot margin, market-to-book
value and TobinQ.
Findings A boards ethical commitment was found to be signicant in increasing the strength of the
relationship between corporate governance and corporate performance. The ndings are robust to the
alternativeperformance measurements and laggedone-year corporate performance.
Research limitations/implications This paper provides further evidence on the importance of
ethical practicesto improve corporate environment and, hence,sustain a companys performance. This study,
however,was conducted on only large companies with alimited data collection period.
Practical implications This study provides an indicator that the policymaker and regulatory
authorities need to doubletheir efforts in promoting and encouraging a board of directorsto take a bold step
in improving its ethicalculture. Shareholders and investors need to use their power andrights to demand the
companyto improvetheir governance and ethical practices.
Originality/value This study is original, as it measures a boards ethical commitment from various
sources of local and international best practicessuch as Malaysia, Australia, Canada, Norway, South Korea,
Singapore, Sweden, Turkey, the UK and the USA. It also contributes to the literature and theoretical
understanding of the interaction between a boards ethical commitment and corporate governance on
corporateperformance, particularly in developingcountries like Malaysia, which is scarce in the literature.
Keywords Ethics, Governance, Malaysia, Integrity, Fraud, Moral
Paper type Research paper
JFC
26,2
496
Journalof Financial Crime
Vol.26 No. 2, 2019
pp. 496-518
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-04-2018-0035
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
Introduction
The inability of current corporate governance mechanisms to contain fraud and corporate
scandals can be evidenced fromthe various scandals that have occurred in the banking and
nancial industries. Although theseindustries are closely monitored and strictly regulated,
fraud still persists (Manan et al., 2013). For example,the sub-prime mortgage crisis in 2008,
which contributed to the USA and the rest of the world recession, involved manymerchant
banks, hedge funds, and rating agencies such as Lehman Brothers, Merrill Lynch,
JPMorgan, Citigroup, RBS Greenwich Capital Investments Corporation, Swiss Bank, Credit
Suisse and Goldman Sachs.Although these entities have been slapped with huge nes,they
still committed fraud. In 2012, many banking and nancial institutions again colluded in
manipulating interest rates, known as the London Inter-Bank Offer Rate (LIBOR), to prot
from trades or give the impression that they were more creditworthy than they were. This
scandal involved almost the same players, e.g. Barclays Bank, UBS, Citigroup, The Royal
Bank of Scotland, DeutscheBank, JPMorgan and Lloyds Bank.
The Malaysian corporate sector is also unable to run away from these problems.
Although much effort, especially from regulators, has been made to stop these various
scandals from occurring, they still continue. This includes introducing MCCG in 2000 and
constantly revising it to be appropriately suited with the current business environment,
formation of the Public CompanyAccounting Oversight Board to monitor the work of audit
rms, and strengthening watchdog agencies, such as Malaysias anticorruption agencies,
securities commission and company commission,by empowering more enforcement power,
thus ensuring their independence.
However, this effort seemsinsufcient and not fruitful, as much corporate malfeasance is
still recurring, i.e. Perwaja Steel, Bumiputra Bank, Maminco, Pan-Electric Industries,
Malaysian Airline System, Central Banks forex losses, Port Klang Free Zone, Idris
Hydraulic and Transmile have wasted billions of shareholder and taxpayer money. The
latest corporate scandal involves the Federal Land Development Authority (Felda), the
worlds biggest producer of crude palm oil. Felda saw its plots of land worth up to RM1bn
being transferred throughdubious means in 2015. Before that, its holding company, namely,
Felda Global Ventures, was also under the fraudspotlight after its stock price, rst listed at
RM4.55 per share, dropped almost 60 per cent to RM1.83 per share due to various fraud,
graft and wrongdoing allegations in the management of the company. The bulk of settlers
holding shares in thiscompany rst helped to steer the rural poor out of poverty.
The corporate wrongdoings that involved the company, namely, 1Malaysian
Development Berhad (1MDB), put Malaysia in a state of disgrace.This scandal, claimed by
the US Department of Justice as the worst kleptocracyin the history, involved high-ranking
Malaysian Government ofces. The possible amount of misappropriated money, of
allegedly more than US$4.5bn, was laundered via a series of complex transactions and
fraudulent shell companies with bank accounts located in Singapore, Switzerland,
Luxembourg and the USA. The stolenfunds were laundered and used to buy expensive real
estate and properties in New York and Los Angeles, jet aircraft, jewellery, works of art,
interest in music publishing rightsand nanced the production of Hollywoodmovies. These
transactions were allegedly intended to conceal the origin, source and ownership of the
funds (Departmentof Justice, 2017).
Arguably, the recurring corporate scandals are due to poor ethical commitment and
practices exercised by top management of a company, including directors. It also indicates
that corporate governance is not effective as a standalone mechanism to safeguard a
company and protect its stakeholder interest. Schwartz et al. (2005) suggest that
commitment to ethics should become a foundation upon which to build corporate
Boards ethical
commitment
497

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