ABSTRACT
This study is designed to study the relationship between corporate governance in trading Companies in Malaysia, which are listed in Bursa, and the performance of those Companies. The performance indication is measured using return on equity and overall returns whereas the state of corporate governance is assessed using board composition, CEO duality, and audit committee independence. The literature review has been conducted to see the supporting and contrasting ideas to the chosen topic.
The methods for research have been chosen by developing a theoretical framework, where independent and dependent variables are defined along with their concepts. Hypothesis testing is also done in this part. The other elements of the research are defined such as study design, information about the population and sample and the method of sampling. The software used for the data analysis collected through primary and secondary sources is SPSS.
INTRODUCTION:
The corporate governance systems, ownership and the levels of controls vary according to different structures and no matter what the nature and extent of difference; there is a relationship between the economic performance of the firm and the effect of corporate governance on its economic growth. The effect of corporate governance is clearly reflected in the way policy makers emphasize on the topic (Brown, and Caylor, 2015). Also, various empirical evidence and discussions done in various parts of the world proved that there are many mediums by which performance of the firm may be affected through governance. The variances in these performances of firms are related to exercised control levels, the level of innovation and activities of entrepreneurship.
Background
The definition of corporate governance suggests that it comprises of a relationship set involving management of the Company, the Board, and all the remaining stakeholders (Youssef, 2015). It may also be taken as a source of structural building based on which Company objectives are developed, along with journey mapping of ways to achieve these goals and objectives through determined performance.
Empirical evidences do support that there is effect of corporate governance on behavior and performance of a firm and so comprises an important aspect of competitiveness in the firms of OECD nations (Bhagat, and Bolton, 2009). Other countries, including Malaysia, are assumed not to be an exception. The dynamic processes of corporate governance provide a direction for the Companies to understand the importance of monitoring and having a systematic system of control.
Malaysia has had a proper mechanism for corporate governance, with various policies and plans, after 1997 (Samad, Zulkafli, and Ismail, 2015). The impact of these mechanisms have been tested at some levels, and at other levels, they are yet to prove their worth. Researches on various levels suggest that these Malaysian mechanisms on corporate governance are comprehensive in nature and consider broad spectrum at internal and external levels of governance. One such entity that looks at the scale of corporate governance in Malaysia is the Bursa (Sseinitiative.org, 2015). It is associated with the World Federation of Exchanges’ Sustainability Working Group which follows the mandate of building agreement on the general purpose and realism of data related to Environment, Society and Governance (ESG).
Rational
There have been quite a few studies in order to assess the effects of corporate governance mechanisms on the performance of firms and institutions. Non-compliance to corporate governance acts as a significant reason in the modern business world for restricting the opportunities of businesses around the globe (Wessels, and Wansbeek, 2015). However, it is unknown to what extent the perceived benefits of compliance to corporate governance result in organizational financial benefits, which could be a significant area for research. This question is at the heart of the study’s rational. It is believed that Companies who have the high compliance of such governance standards benefit not just quantitatively, but also qualitatively. Malaysian companies have developed well-planned mechanisms of corporate governance to help better the all-around performance of Companies. The degree of these compliances varies, from high, low to moderate. The Companies listed in Bursa have corporate governance developed as a core of their organizational system. Since so much of resource has been poured into companies, the financial results expectations are justified. In such scenario, capturing what existing elements of corporate governance contribute to building the financial stability of an organization may be crucial.
Thus, the following issues, or research questions, arising from the problem gap are addressed by the study:
What is the significance of the relationship between the Corporate Governance and the performance of Malaysian trading sector Companies listed on the Bursa Malaysia?
Is there any difference in the significance of the relationship between Corporate Governance and the performance of Malaysian trading sector Companies listed on the Bursa Malaysia of different Companies
Objectives of the study
A healthy mechanism of corporate governance is a vital source of innovation, improvements and economic growth for any Company. This special issue is dedicated to examining the evidence of how Companies dedicated to corporate governance excellence achieve outstanding results in various elements of financial performance. Researchers have long pointed out the importance of corporate governance factors in the decision to create new businesses and sustain the existing ones.
This study is mainly focused on answering a number of issues related to the corporate culture in companies related to Bursa Malaysia. Similar researches carried in the field aim to solve the questions related to the overall performance and have been carried out in firms, without considering a specific category. This research aims to understand the concepts in more detail by choosing a specific category and also specific financial indicators so that a clearer picture can be achieved.
The objectives of this study are mainly concentrated in these four areas:
Significance of the Study
This study will access the relationship between the corporate governance and the performance of the Malaysian trading firms. The corporate governance is determined by various factors like board composition, CEO duality, audit committee independence etc. The result of this study will be very helpful in determining the future of the trading firms in Malaysia. Understanding and knowing about the various parameters that affect the performance of the company will help the company to prepare it in a better way to perform in a better way. This study will be a milestone in knowing the impact of each factor of corporate governance in the performance of the company so that the firm can keep its close supervision on those factors to produce the best result.
Review of Literature
There is a large body of literature that talks on the corporate governance. There are also many pieces of research that have been conducted in other countries, which assess the relationship between corporate governance and organizational performance. There are other researches, which also assess the quality of corporate governance, rather than its mere existence with the way finance functions in an organization. Two pieces of literature have been taken to understand the findings so far.
Literature 1: The Correlation between Corporate Governance and Company performances
This paper examines a number of issues that are crucial in defining the corporate governance factors (Maher, and Andersson, 1999). The first revelation is that there is poor performance of such organizations which have a weaker system of corporate governance. The stock returns are lower as compared to firms with stronger corporate governance. IBM has been taken as the example of a Company with strong success background, accredited to the strong corporate culture. The other revelation is that the firms that maintain loose, corporate governance result in a lower profit as compared to the profits generated by strong corporate governance Companies. There are lower returns on assets, equity, and average investments, including the net profit return.
The third revelation in the paper is about the comparative level of risks associated with Companies of strong and weak corporate governance. The firms with weak corporate governance were found to be riskier as compared to the strong ones. The final revelation is about the payment pattern of the Companies regarding dividends payments, and the grievance handling. It was found that the firms with stronger corporate governance have a better position at these aspects as compared to those with weaker corporate governance.
The main points that can be taken from this research paper are that the quality of corporate governance matters in almost all financial aspects of a Company. The weak and strong level of corporate governance directly determines the level of returns that the stakeholders are going to receive (Iaonline.theiia.org, 2015).
Literature 2: Corporate Governance and Performance: An Exploration of the Connection in a Public Sector Context
This paper discusses a comparative analysis of private and public sector and discusses the state of corporate governance in both categories and compares the categorical performance (Edwards, and Clough, 2005). The result of the study suggests that the sound corporate culture is missing in public enterprises and thus the relationship between the main decision makers in the company and the dynamics of behavior. This has a direct effect on the performance of the organizations. The main aspect that is affected due to this gap in relationships is the independence of the elected board. Having said that, public enterprises focus only on board independence as a measure for maintaining corporate governance, which may not be enough.
There can be other areas where the Companies may divert their considerations in order to get a strong corporate culture. Experiment with board structures would also fall on a possible strategy. There should be support from investors as well, in case the Company wants to have experiments in this department. The research also concludes that there should be a purpose fit tailor of structures of governance, which also comprises of processes and affiliations of the board.
The conclusion from this study may be that the level and structure of corporate governance required for varied organizations is different; in nature and in extent (VO, and PHAN, 2015). What is important for the organizations is to align their governance in such a way that it is aligned with organizational goals and objectives. This may be done through a number of experiments, not just limited to board structures and processes but other aspects as well.
The knowledge that can be derived from these and many other pieces of research on corporate governance is that there is a potential relationship between these factors discussed. There are some papers which suggest that there is no significant relationship between the independence of the Board and the firm performance, the fact that a relationship may exist, cannot be discarded.
Research Methodology
Theoretical Framework
The identification of variables was done on the basis of analysis of the related literature. The identified variables include both dependent and independent variables. The Dependent Variables include Return on Equity (ROE) and Return on Asset (ROA), while the independent variables include Board Position, CEO duality and Audit Committee Independence.
It is significant to fully understand the definitions of the variables as they relate to the study. Return on Equity can be defined as the value given when the net income is divided by the shareholders equity. The return on asset is defined by dividing the net income by the total assets. Further, with regard to the independent variables, the board composition can be defined as percentage of Non-Executive Director (NED) compared to board size. CEO Duality is defined as whether or not he CEO is also the chairman in company, as listed on the annual report. Finally, the audit committee independence can be defined as the percentage of Non-Executive Director (NED) divided by Board size. The relationship of the various variables has been presented in the following diagram:
The three sources of prediction of the role of corporate governance in financial benefits to a firm are Board Composition, CEO duality, and Audit Committee Independence. With the help of these three factors, we can predict the relationship between the corporate governance of management and the returns that they generate.
Board Composition:
The traditional definition of a board would comprise the elements of homogeneity, with people coming from similar backgrounds. Expertise on the industry matters was but a non-consideration factor (Russellreynolds.com, 2015). Tenures extended, and interlocks were a common phenomenon, which also led to the collapse of many companies. Thus, in the modern corporate world, there is a flux in the situation, with variations in board composition, in terms of background, gender and skills. There are no ideal boards, but there are boards, which will take decisions unbiased and work for the maximum benefit to the institution. Since the Companies listed in Bursa have high considerations for governance compliances, we may assume that the Companies have a board that functions optimally. There are a number of opposing considerations that they need to audit, like continuity and fresh perspective or even between corporate governance and mere financial benefits. The board in today’s companies have the member chosen as an independent member. These independent members, also known as non-executive director (NED), do have power, and these directors are there as a watchdog in the committee. The number of NED over the total size of the board is very important to control the decisions of other directors driven by self-interest rather than company interest. So, the number of NED over the board size, and their authority to make decision is very important to maintain good corporate governance.
Hypothesis 1: There is no relationship between Return on Assets and board composition
Hypothesis 2 There is no relationship between Return on Equity and Board Composition
CEO Duality:
The duality condition of CEO means that the CEO is involved in a number of processes including the role of a CEO and also in the Board as a chairman (Jstor.org, 2015). Since the board is the one who is to define of the CEO, there may be influences, which are not beneficial for the Company. When there is a condition of CEO duality, then the CEO is also working as a chairman of the BOD. When CEO is the chairman of the board, then s/he might influence the decision taken by the board or the decision of the CEO can be easily approved by the board.
Hypothesis 3: There is no relationship between Return on Assets and CEO Duality
Hypothesis 4: There is no relationship between Return on Equity and CEO Duality
Audit Committee Independence:
The independence aspect of the audit committee has always been a matter of priority in many organizations. The fact that the audit committee influences decision on many important issues means that it forms a good portion of the corporate governance system. Experts argue that there should be a periodic evaluation of the independence level of the committee members or even more periodically, as per necessity (Appointment of the audit committee and independence requirements, 2015). Audit Committee independence is calculated by the percentage of Independent NED over total NED. This will see whether the independence will affect the performance. There should also be enough consideration regarding any potential changes in the relationships and association of the audit members that can affect the strong corporate governance mechanism at an entity. Independence questionnaires may be a good way assess the level of independence in directors and others who are directly involved in the board.
Hypothesis 5: There is no relationship between Return on Assets and audit committee independence.
Hypothesis 6: There is no relationship between Return on Equity and audit committee independence.
Study design:
The purpose for which this study has been designed is to understand the relationship between corporate governance and its effect on the performance of Malaysian trading sector Companies listed in Bursa. The dependent variable considered for the study is the performance of the company in terms of ROE and ROA whereas the independent variable is the corporate governance. Further, the calculated variables used to measure the degree of corporate governance are the authority of Board Composition, the level of CEO duality and independence of the audit committee as the independent variables and the return on equity and overall returns as the dependent variables. Hypothesis testing is the design of the experiment. The best types of data collection would be cross-sectional as individual responses can be collected at a time. The research will be completed in a period of a two months; i.e. sixty days. There will be minimal interference from the side of the researcher. Thus the setting is non-contrived.
Study Location:
The location of the study is Malaysia. The accessibility of conducting the research and convenience for the researcher has been considered while locating the Companies for the purpose of the research. The research is to be conducted in the various Bursa listed Companies of Malaysia.
Population and Sample:
This research is intended towards the relationship between corporate governance and financial performance of Companies of the trading sector in Malaysia who have been listed in Bursa. The population would thus naturally comprise of those trading Companies in Malaysia that have been listed on Bursa.
Some of the listed Companies in the Bursa are Asia Media Group Berhad, WTK Holdings Berhad, CIMB FTSE ASEAN 40 MALAYSIA, I-BERHAD and others (Bursamalaysia.com, 2015).
Sample Design and Size:
The most suitable sampling design, in this case, will be probability sampling, with random sampling used as the sampling method. This way each subject in the sample size will have equal opportunity and change of getting included in the survey. The targeted respondent will include 100 companies from trad or service public listed companies in Bursa, Malaysia.
Thus, through targeted sampling, 100 Malaysian trading or service companies that are listed in Bursa will be taken as the sample for the study. These companies will be listed as public listed companies or other trading/service sector in Bursa.The research will depend on secondary data through the data which is in the annual reports of each company.
Measurement Instruments:
Regression analysis between the variables will be used as the primary instrument for measurement. Once the information is extracted from the annual report and the data of ROE and ROA are made handy from Bloomberg, the regression analysis will be conducted. In this research, the items to be measured using a regression analysis are the relationship between the ROA and ROE with Board composition, CEO duality and audit committee independence. All these variables, Board composition, CEO duality and audit committee independence need to be operationalized for the measurement of results.
Data Collection method:
The sources of data for this research will be the secondary source. Secondary source refer to the information source that is already available (Methodology: An Introduction, 2015). The study will be largely based on the secondary data. Annual reports will be used as the source of information. The information about the ROA and ROE will be obtained from Bloomberg whereas the independent variables are obtained from company annual report and most of it falls under corporate governance section. The annual reports of all the companies will be collected and the necessary information will be extracted from the annual report.
Data Analysis:
SPSS software will be used for the assessing and processing of data received from the questionnaires and other sources. The measures and dispersion as well as central tendency may be used. Thus, a series of inferential analysis will be used, including T-tests, regressions, non-parametric testing, and correlations.
The means of the observed data can be calculated by using the independent t-test. The confirmation of the existence of the relationship will be given by the Chi-square test conducted between the independent and dependent variables. The significance of the relationship between corporate governance and the economic performance of the Company can be tested using the regression analysis. Correlation coefficients can also be used to see the relationships dimensions in detail. The analysis of these findings will give us the results of the research. In addition to this, other statistical test shall be conducted as per the need.
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