The relationship of board structure in Malaysia Essay

The intent of this survey is to analyze the relationship of board construction ( viz. board size, proportion of independent non-executive managers and dichotomy function ) on company public presentation. The research concentrated on Malayan public listed company. The chief purpose of this context is to reexamine the literature relevant to this survey. First, the literature reviews on three chief country of board construction influence house public presentation ; board size, proportion of independent non-executive managers and dichotomy function. Then, followed by relevant literature sing the measuring of company public presentation.

2.2 Agency Theory

In concern organisations there must be an effectual corporate administration constructions to minimise bureau job arise. The bureau job could be originating because of the separation of direction and finance or from different position it refers to the separation of concern ownership and control activities in the organisation ( Shleifer and Vishny, 1997 ) .

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As the debut points out, Jensen and Meckling ( 1976 ) stated that the thought of bureau theory is due to the principal-agent relationship in which it is more on the contract between two parties ( chief and agent ) with a intent to execute some services to maximise the stockholders ‘ wealth. The stockholders ( principal ) prosecute the direction ( agent ) to move on behalf of them through undertakings deputation and determination devising authorization.

When the determination made by the agent was non in the best involvement of the principal it leads to the struggle of involvement behaviour ( Arnold and de Lange, 2004 ) . A possible struggle of involvement exists within two parties when the directors ‘ personal involvement overrides the maximization stockholders ‘ wealth. Further Zainal Abidin, Mustaffa Kamal and Jusoff ( 2009 ) imply that the stockholders ( principal ) unable to supervise over the direction activities and behaviours, therefore it brings an exposure to the agent to set less accent on maximising returns to the stockholders.

The being of information dissymmetry besides becomes a factor towards the bureau job in which the direction has the competitory advantage on information over the stockholders ( proprietors ) . Indirectly, this state of affairs gives an chance to the directors to move and do a determination in their best involvement while cut downing the public assistance of the proprietors ( Arnold and de Lange, 2004 ) .

As the bureau job goes on, companies have to incur bureau costs to supervise the direction action and to prolong an effectual relationship between principal and agent. In line with Jensen and Meckling ( 1976 ) , bureau cost is divided into three classs: monitoring costs, adhering costs and residuary losingss. In order to minimise the bureau costs, it was suggested that an effectual corporate administration constructions was seen as an option to cut down the bureau jobs and to better aline the involvement of principal-agent relationship ( Fama and Jensen, 1983 ) . Harmonizing to the writers, the presence of board of managers is to supervise direction behaviours every bit good as to protect stockholders ‘ involvement.

As it suggests, the assignment of boards is to move as a watchdog to supervise and looks around the behaviour and action of directors to be in line with stockholders ‘ involvement ( Jensen and Meckling, 1976 ) .

2.3 Overview of Corporate Governance

2.3.1 Roles of Board of Directors

All companies all around the universe have drawn an attending to the importance of holding a group of board of managers as the representative of the stockholders in the company. While in the US, board of managers is claimed to be the in-between individual between direction and stockholders to look into and construe the determination on behalf of the stockholders ( Denis and McConnell, 2003 ) .

Kakabadse, Kakabadse and Kouzmin ( 2001 ) conclude that the function board of managers can be classified into three which is service function ( where the boards provide service on reding to the direction in explicating schemes to heighten repute of companies every bit good as implementing a good determination devising for stockholders ‘ wealth. Next is control function ( where the boards monitor the CEO and direction public presentation with a intent to safeguard stockholders ‘ involvement ) .Third is strategic function ( it is more on the functions of the relaxation in geting finance resources for the future success of the house while steering the corporate mission and the development of house scheme ) .

Harmonizing to Sunday O ( 2008 ) , the codification of corporate administration best patterns of Nigeria mentioned the functions of the board of managers as:

The concern of a house is managed under the way of a board of managers who delegates to the CEO and other direction staff, the twenty-four hours to twenty-four hours direction of the personal businesss of the house.

The board sees to the assignment of a qualified individual as the CEO and other direction staff.

The managers, with their wealth of experience, supply leading and direct the personal businesss of the concern with high sense of unity, committedness to the house, its concern programs and long-run stockholder value.

The board provides other oversight maps.

On the other manus, Ponnu ( 2008 ) summarized the duties of the boards are to explicate the corporate ends and policy, to elect the senior executives and supply wage to them. Besides, board of managers is accountable to the fund suppliers ( stockholders ) , governments and stakeholders. Therefore, every bit far as board of managers is concern, the success of the company depends on the effectivity of the board in carry throughing their responsibilities on behalf of the stockholders and supervising the direction activities.

2.3.2 Board Structure and Malayan Code of Corporate Governance

In Malaysia, codification of corporate administration is seen to be an of import tool to every company because of the 1997 Asiatic Financial crisis which brings a large impact to Malayan companies every bit good every bit economic system as a whole. Therefore, the first codification of corporate administration was issued by Malaysian Institute of Corporate Governance in March 2002 for the counsel and consciousness of corporate sector, investors and public. While important betterment has been achieved, in 2007 the Code is revised to better the quality of the board of public listed companies ( PLCs ) by taking into consideration the function of board of managers and audit commission.

A definition by the FCCG ( Malaysia ) in the Report on Corporate Governance ( 1999 ) states that:

“ Corporate administration is the procedure and construction used to direct and pull off the concern and personal businesss of the company towards heightening concern prosperity and corporate answerability with the ultimate aim of recognizing long term stockholder value, whilst taking into history the involvements of other stakeholders. ”

( FCCG, 1999 )

As defined by Ibrahim, ur Rehman and Raoof ( 2010 ) , corporate administration is the system working to direct and command the corporate sectors. By implementing good best patterns codification of corporate administration, it may direct the scene and achieve house aims. Then, it besides can be used to measure and analyze the fiscal public presentation of the house.

However, Malayan definition on corporate administration provided by Noordin ( 1999 ) is corporate administration is more about answerability and transparence. Transparency is more on the image of how the company presents and shows itself transparently to the stockholders, public and other involvement group. Besides, transparence can be related to the revelation made to the foreigners about the existent managerial actions in carry throughing the stockholders ‘ involvement.

To heighten the good patterns in corporate administration in Malaysia, the enforcement and control should be strengthened to promote the answerability and transparence. Harmonizing to the MCCG ( revised 2007 ) , the control mechanism can be divided into two: internal and external corporate administration control. For internal corporate administration control, the map is to supervise activities and take disciplinary action to carry through organisational ends. The illustrations include monitoring by the board of managers, stressing the internal control processs and internal hearer ‘s functions and responsibilities, equilibrating the power of Chairman and CEO and Remuneration based on the managers public presentations. While, external corporate administration controls encompass the controls of external stakeholders exercise over the organisation.

As stated in MCCG ( revised 2007 ) the efficiency and answerability of the board of managers in PLCs are emphasized in order to heighten the credibleness of managers in dispatching their responsibilities on behalf of the stockholders. The Code emphasizes that the Board must consist a combination of non-executive managers and independent non-executive managers to guarantee board capableness in exercising independent judgement. Furthermore, the Code has prescribed the demand to equilibrate the power and authorization between CEO and Chairman. There should besides be a clearly recognized division of duties between these both places.

In line with accomplishing stockholders ‘ wealth, a good corporate administration pattern can guarantee the sustainability and endurance of the house to keep the concern life for a long term ( Mohamad Mokhtar, Muhamad Sori, Abdul Hamid, Zainal Abidin, Mohd Nasir, Yaacob, Mustafa, Mat Daud and Muhamad, 2009 ) . Equally far as we are concern, board of managers play an of import functions in the organisation to supervise and command directors ‘ behaviour to do certain company activities parallel with the aims and accomplishing a valuable stockholders ‘ wagess.

2.4 Board Structures and Firm Performance

2.4.1 Board Size and Firm Performance

Board size is recognize as one of the element board construction which contribute as an of import determiner of house public presentation ( Othman et. Al. 2009 ) . Board size consists of a little and a big figure of managers on board. The MCCG does non stipulate in item the exact figure of managers on board. In fact, the Code recommended that the size of board should be in a sufficient figure to promote active engagement of managers and can expeditiously execute their undertakings exactly. As mentioned in the survey of Ibrahim and Abdul Samad ( 2011 ) , board size is of import in pull offing concern personal businesss which may act upon the company public presentation. The survey suggested that a little board size is more efficient in carry oning concern personal businesss.

MCCG ( revised 2007 ) described that to hold an effectivity of board, size of the board should be examined objectively. Mohd Saad ( 2010 ) found that in Malaysia, figure of managers sit on the board before the execution of corporate administration is 16, while during and after corporate administration execution, the mean size of the board is about six to ten individuals. On the other manus, based on KLSE-PricewaterhouseCoopers ( 1999 ) the mean Numberss of managers sit in Malaysian Public Listed companies is eight. Whereas, in survey of Nam & A ; Nam, ( 2004 ) the mean board size is about 10. From all this, as what recommended by Bursa Malaysia listing demands ( 2002 ) , the maximal figure of managers recommended for public listed companies ( PLCs ) is 10, whereas for the non-Publicly Listed Companies is 15 ( Abdul Hadi, Fazilah, & A ; Md. Ishak, 2005 ) .

In fact, Sunday, ( 2008 ) discovered that the limited figure of board size is seem to better fiscal public presentation of companies. As survey done by Othman R. et. Al. ( 2009 ) , there is a positive important influence between board sizes in maximising stockholders ‘ wealth. It indicates that a big figure of managers in a board of managers lead to the betterment of fiscal public presentation measured by ROI and EPS.

Zainal Abidin et. al. , ( 2009 ) appeared to back up the positive relationship based on sample size 75 companies which indiscriminately selected on the chief board of Bursa Malaysia. Finding of this survey summarized that with a more figure of managers on boards contribute to an sweetening of steadfast public presentation with a strong statement when company has larger board members there are more thoughts and accomplishments can be shared among them to do an betterment in companies ‘ day-to-day activities. Mohd Saad ( 2010 ) argued that fiscal public presentation sound to be good through a large size of boards because company will hold more expertise managers on board which can work and collaborate together to do a determination for the benefit of company.

Contrary to analyze done by Cheng ( 2008 ) , where it shows a big figure of board size negatively associated with company ‘s public presentation. A larger board will do less effectual treatment among them to make any understanding in doing a determination. Otherwise, smaller size of boards helps in cut downing the free rider of managers. Meaning, house public presentation will be more efficient with a smaller board size compared to holding larger board size. A similar sentiment shared by Mashayekhi and Bazaz ( 2008 ) where a negative relationship was proved between board size and house public presentation placeholder by ROA, ROE and EPS.

In other state of affairs, there are surveies which conclude board size does non hold any important relationship with corporate public presentation ( Ponnu and Karthigeyan, 2010 ) . It summarized board size does non explicate any important to act upon the house public presentation. The overall consequences provided different grounds topic to the different types of sample.

2.4.2 Proportion of Independent Non-Executive Directors and Firm Performance

The old research acknowledges that independent non-executive manager was appointed for a intent to accomplish a balance and effectual board. Ponnu ( 2008 ) claimed that to set up an effectual board at that place must hold a balance of managers between executive and non-executive managers to enable the independent managers to work co-operatively with executive members by supplying an independent position and judgement when it was required.

The non-executive managers are appointed because they believed to be independent and free from any struggle of involvement every bit good as assumed to be the most effectual proctors of direction action ( Ameer, Ramli, and Zakaria, 2008 ) . Further, alternatively non-executive managers classify as an independent to the organisation, they besides have an independent point of view and are able to inquire inquiries and examine further about an issue arises in the company. They are besides able to convey in an experience from external environment which can be applied in the company ( Siladi, 2006 ) .

Proportion of independent non-executive managers plays an of import function in act uponing fiscal public presentation of company. As stated by Ibrahim and Abdul Samad ( 2011 ) and Ameer et.al. ( 2008 ) , house boards populated by non-executive managers have a important positive consequence on house public presentation and it becomes a utile mechanism to turn to bureau jobs. A similar consequence besides shared by Zainal Abidin et. Al. ( 2009 ) which a higher proportion of independent non-executive managers on the board conveying a positive impact towards house public presentation based on Value Added Intellectual Coefficient ( VAIC ) . The consequences summarized the of import of proportion of non-executive managers on the board as required by MCCG and Bursa Malaysia Listing Requirement was seen as a good pattern to accomplish a long term corporate public presentation

On the other manus, a survey by Bhagat and Black ( 1999 ) fail to obtain positive relationship between board composing and corporate public presentation. In which they found bulk of independent non-executive managers on boards resulted the company to execute worse. Similarly, Aik Leng and Abu Mansor ( 2005 ) reported that the presence of independent managers has non improved steadfast public presentation. Among the grounds in lending negative relationship are deficiency of accomplishments ain by independent managers, limited function they can play every bit good as limited clip spent on company personal businesss.

While Ponnu ( 2008 ) found no important relationship arise between board independent and company public presentation listed in chief board. There are other surveies which besides found inconclusive grounds between board independency and fiscal public presentation ( Abdullah, 2006 and Ponnu and Karthigeyan 2010 ) . The consequence explained that the inclusion of independent non-executive managers on board does non convey any influence or any part towards steadfast public presentation.

2.4.3 Duality Role and Firm Performance

The MCCG ( revised 2007 ) recommends a separation place and functions between Chairman and CEO in each company with purpose to hold an independent board, to hold balance of power and maltreatment struggle of involvement which can help increase house ‘s value. Other ground to hold a separation function is to maintain away from a individual individual to suppress the board in doing a determination besides to promote just judgement and sensible concern. However, for a company which prefers to keep a double leading, the combined functions must be clearly explained in the one-year study and that individual must be independent plenty to keep the place ( Mohd Saad, 2010 ) . Previously, there are several surveies conducted to find the influence or if there is any relationship between separate or combined CEO dichotomy functions towards steadfast public presentation.

Aik Leng and Abu Mansor ( 2005 ) recommended no separation place of CEO and Chairman bring a positive influence and give superior company ‘s fiscal public presentation. It shows no separation functions will do one individual rule the determination, besides that individual will aware to anything go on which could take to the faster determination made ( Chang, 2009 ) .

Contrary to above literature, harmonizing to Ponnu ( 2008 ) , there is no important relationship between dichotomy functions to tauten public presentation placeholder by ROA and ROE. Study was conducted during 1999 ( before MCCG execution ) and during 2005 ( 5 old ages after MCCG execution ) . Not merely that, Ibrahim and Abdul Samad ( 2011 ) and Wei Chen, Barry Lin, and Yi ( 2008 ) provided a similar grounds where they found no conclusive consequence. It confirms that no betterment in company public presentation after separation functions of CEO and Chairman or there is no important consequence of CEO dichotomy to tauten public presentation.

Contrary, Kholeif ( 2008 ) explained that CEO dichotomy provide a negative relationship to tauten public presentation. It means that, a combined function will take to lower public presentation of companies whereas a separation function will take to higher public presentation of companies. It illustrated the involvements of stockholders are safeguarded when there is a separation place between the Chief Executive Officer ( CEO ) and the president of the board to a different individual.

A alone determination released by Yan Lam and Kam Lee ( 2007 ) where it found a relationship between CEO dichotomy and fiscal public presentation on the presence of the household control house. It shows that CEO dichotomy provides an betterment toward fiscal public presentation of non-family houses. While separation function is contributed to betterment in fiscal public presentation of family-controlled houses or in other word it provides negative relationship between the combined CEO/Chairman functions on house public presentation.

2.4.4 Board Gender Diversity and Firm Performance

Board diverseness can be defined as the mix of male and female proportion sit on board of managers. In recent old ages, issues sing board gender diverseness has become a extremely debated administration issues and most likely of import to the effectivity of administration construction ( McMahon, 2010 ) . As discussed by Smith, Smith and Verner ( 2006 ) the engagement of adult females on top place and board of managers of the company is still low. Due to that, the encouragement of board diverseness could assist to increase the fight of the house and reduces the spreads of female engagement on boards ( McMahon, 2010 ) .

As discussed by Marinova, Plantenga and Remery ( 2010 ) , amongst many companies in Norway by twelvemonth 2006, they must hold at least 40 % of female managers ‘ engagement on board chairs. Whereas, in Finland get downing from 1st January 2010, the Finish listed that companies must hold at least one female manager to fall in the boards. An betterment of board gender was besides noted among Malayan listed companies, where the adult females engagement on boards now comprise 8.2 % in twelvemonth 2010 which has been increased from 7.5 % in 2009 ( The New Straits Times Special, 2010 ) .

The issue of gender diverseness is seems to be a value-driver in house scheme every bit good as public presentation. Kang, Ding, and Charoenwong ( 2010 ) suggested the more diverse of corporate boards may better boards ‘ ability to dispatch their strategic responsibilities and control. There is an premise of positive relationship between engagement of adult females managers towards steadfast public presentation in footings of house productiveness and profitableness ( Marinova, Plantenga and Remery, 2010 ) .

It is agreed by the research workers from Catalyst ( 2004 ) ; Carter, Simkins, and Gary Simpson ( 2003 ) which showed a company with more diverse of boards achieved better fiscal value. It concludes that group of companies with the highest engagement of female manager are financially outperformed comparison to the companies with the lowest female managers engagement. The old literature is in line with Galbreath ( 2011 ) where a positive nexus appeared between adult females engagement on board to the economic value. The research worker remarks that this is due to adult females abilities to prosecute with the stakeholders while reacting to their demand.

Contrary to that, board gender diverseness is seemed non to give any impact to tauten value ( Marimuthu and Kolandaisamy 2009 ) . The grounds on the relationship between gender diverseness and corporate public presentation as found by Adams and Ferreira ( 2009 ) besides mentioned that houses with the engagement of adult females on boards have worse fiscal public presentation in footings of Tobin ‘s Q, while in footings of ROA, they have a better public presentation. The being of adult females managers bring a important impact on board inputs ( attending behaviour and commission assignments ) . Therefore, the findings suggest that board gender diverseness influence the monitoring activities by boards towards direction to be in line with the stockholders involvement.

On top of that, Smith, Smith and Verner ( 2006 ) found that there is a positive relationship between the engagement of female on boards of managers and corporate public presentation. The consequences conclude that the positive relationship depends on the degree of instruction and makings of the individual itself. It means, the making besides plays an of import function to judge the credibleness of the adult females in keeping the manager ‘s station.

2.4.5 Measurement of Firm Performance

Corporate fiscal public presentation was seen to be measured by utilizing a different public presentation steps like long term market public presentation measuring and short term measuring viz. non market-oriented steps ( Zainal Abidin et. al. , 2009 ) . Accounting steps of house public presentation is used to prove the hypothesis of the survey ( Ponnu and Karthiyegan 2010 ) .

There are legion measurings used by old survey to measure corporate public presentation in order to transfuse investors assurance towards company they were invested. In fact, assorted surveies tested the relationship exist between corporate administration features which bring an influence toward corporate fiscal public presentation ( Ponnu and Ramthandin 2008 ) .

In order to mensurate stockholders ‘ wealth, return on investing ( ROI ) and net incomes per portion ( EPS ) being used ( Othman et. al. , 2009 ) . They found that ROI and EPS looks like an of import indexs to the success of company in bring forthing income to supply superior return to stockholders.

While in survey of Ponnu ( 2008 ) and Ponnu and Karthiyegan ( 2010 ) , to mensurate the superior public presentation of company, the widely used public presentation steps are return on plus ( ROA ) and return on equity ( ROE ) . These two measurings are used by the research workers because it represents a tool to measure the existent public presentation of company. Likewise ROA and ROE refer to an accounting-based public presentation step normally used in empirical research and it is by and large accepted by the corporate administration research workers. On top of that, ROA is considered as a strong public presentation step by a figure of bookmans ( Ponnu and Karthigeyan, 2010 ) .

On the other manus, Mohamad Mokhtar et. al. , ( 2009 ) stated that the fiscal ratios used to mensurate steadfast public presentation are ROA, ROE, EPS and net income border ( PM ) . On top of that, Value Added efficiency of entire resources is the other type of fiscal measuring used to efficaciously measure the fiscal public presentation of company. Performance of company was measured harmonizing to the house ‘s entire resources which are calculated utilizing Value Added Intellectual Coefficient ( VAIC ) methodological analysis developed by an Austrian, Ante Pulic ( Zainal Abidin et. al. , 2009 ) .

From the above literature, measuring of concern public presentation is really of import to the concern entity and to the stockholders. It indicates that the public presentation steps will bespeak how good the direction of the company is and it measures the effectivity of the company in using the resources to run the concern activities ( Robinson, K. , 1998 ) . From that, we can state that public presentation steps would give a warning mark to the director to take a disciplinary action and implement a strategic program to accomplish company ends and accomplishing stockholders wealth.

2.5 Chapter Summary

This chapter reviewed literature on the overview of corporate administration constructions in Malaysia. Then, it followed by the literature reappraisal on the specific board construction size, proportion of independent non-executive managers, dichotomy function, board gender diverseness and their relationship with house public presentation. From the literature, it can be concluded that board construction above can hold positive or negative relationship with house public presentation. The Government takes an attempt to put up board construction guidelines under the MCCG to heighten board effectivity and in return to better Malayan companies public presentation.