Corporate Governance in Malasyia

Corporate governance has been on check especially since the folding of vast corporations for instance Maxwell, Polly Peck and Enron etc. Many principles and thoughts have emerged, all these are pointing to firm performance in some issues like the governance measures and procedures. Although it is not easy to create the connection among corporation’s performance and their governance measures, though there are extensive beliefs that good governance practices might lead to greater business performance (Young, 2003). Consequently, several studies have endeavoured to offer some experiential suggestion on this matter through several methods for example developing the governance index and connecting it to performance (Klapper and Love, 2004), concentrating on event study (Baliga, Moyer and Rao, 1996, Rosenstein and Wyatt, 1990) in addition investigating for a relationship between positive governance practices and company performance (Van Ees, Postma and Sterken, 2003), Kiel and Nicholson, 2003), Coles, McWilliams and Sen, (2001), Laing and Weir, (1999), Dalton, Daily, Ellstrand and Johnson, (1998), Barnhart and Rosenstein, (1998), and Agrawal and Knoeber, 1996).

Corporate governance attracted huge attention of scholars, watchdogs and general practitioner due to the general belief that corporate governance increases stockholder willingness and assurance, also enhances the companies economy Coleman, (2006) and Garg, (2007). Moreover, the corporate governance mechanisms have argued to affect the performance of corporate (Chuanrommanee and Swierczek, 2007) and contribute to the integrity of financial reporting process in different context of organizations (Petra, 2007). This is equally important for listed private and listed state owned corporations. Thus, as main mechanism in corporate governance, board has fiduciary responsibility to monitor management against opportunistic behaviors. However, the extent of corporate governance in general and board of directors particularly to safeguards shareholders depends on the effectiveness of the mechanisms. In this regards, many corporate governance recommendations and guidance have been issued to ensure that the board of directors perform its duty effectively.

Malaysia as emerging market has issued with its own code of corporate governance in 2000 which revised by 2007 and should be followed by all listed companies. Nonetheless, Malaysian listed Government Linked Companies have been subjected to criticisms concerning their role and performance in the Malaysian economy and have recently come under government scrutiny (Abdul-Aziz et al., 2007). The reason is that GLCs suffered recurring poor financial performance Muslim Har et al., (2012). Thus, the Malaysian government as major shareholder of listed government linked companies has embarked with new transformation policy to strengthen the governance system of its owned listed firms. The underlying principles of the policy are national development, performance focus and good governance as emphasized by Putrajaya Governance Committee (PGC). One of the important thrusts of the policy is to upgrade the effectiveness of corporate governance of the GLCs through the improvement in certain board mechanisms that are suggested to have an impact on GLCs” performance.

In the GREEN BOOK of transformation policy, Putrajaya Governance Committee (PGC) has reinforced certain board characteristics such as board size, board meetings and multiple directorships as influential tools to make the board more effective in performing its oversight duties. The progress report of the transformation policy has shown that GLCs” performance is on track which suggests that the GLCs are performing better in post transformation policy period. However, there is also a question of whether the GLCs are actually performing better or whether the improvement in performance is affected by the limitations of existing performance measurement (i.e. earnings management). With enhanced corporate governance mechanisms in place as clearly stated in the Green Book, it is expected that the GLC’s improved performance should commensurate with lower activity of earnings management. Thus, it would reflect the improved quality of reported earnings with strengthening of oversight functions of the Boards. This is the essence of corporate governance initiatives undertaken worldwide. Therefore, this study aims to investigate the impact of the transformation policy on the association between board mechanisms and earnings management of the listed GLCs firms in Malaysia. In particular, the study will test whether enhancing corporate governance mechanisms are associated with lowering earnings management in the GLCs.