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Procedia Economics and Finance 35 (2016) 287 296

7th International Economics & Business Management Conference, 5th & 6th October 2015

Corporate Governance Practices and Firm Performance: Evidence

from Top 100 Public Listed Companies in Malaysia
Shafie Mohamed Zabria,*, Kamilah Ahmadb, Khaw Khai Wahc
a, b, c
Faculty of Technology Management and Business,
Universiti Tun Hussein Onn Malaysia, Pt. Raja, 86400 Batu Pahat, Johor, Malaysia

Abstract
Corporate governance practices have been a concerned issue by many Asian countries after the Asian Financial Crisis in 1997
including Malaysia. Due to the crisis, Malaysian Code of Corporate Governance (MCCG) has been introduced as part of the
Bursa Malaysia (BMB) listing rules. This study hence focuses on corporate governance practices among Top 100 public listed
companies in Bursa Malaysia and the relationship between corporate governance practices with firm performance. Two corporate
governances indicators (Board size and Board Independence) were chosen in testing the hypothesized relationship between
corporate governance practices with firm performance, which was measured by return on asset (ROA) and return on equity
(ROE). Descriptive and correlation analysis were used to examine the hypotheses in this study. The result showed that board size
has significantly weak negative relationship with ROA but it was found to be insignificant to ROE. The other finding indicated
that there was no relationship between board independence and firm performance. This study provide useful information for
policy makers or regulators in improving the corporate governance policies in the future and also helps in increasing
understanding on the relationship between corporate governance practices and firms performance.
2016
Elsevier
B.V.
This is an open access article under the CC BY-NC-ND license
2015The
TheAuthors.
Authors.Published
Publishedbyby
Elsevier
B.V.
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-reviewed under responsibility of Universiti Tenaga Nasional.
Peer-reviewed under responsibility of Universiti Tenaga Nasional
Keywords: Corporate Governance; Firm Performance; Top 100 Malaysian Public Listed Companies.

Corresponding author. Tel.: +60-7-453-3853; fax: +607-453-3833

E-mail address: shafie@uthm.edu.my

2212-5671 2016 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).

Peer-reviewed under responsibility of Universiti Tenaga Nasional

doi:10.1016/S2212-5671(16)00036-8

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Shafie Mohamed Zabri et al. / Procedia Economics and Finance 35 (2016) 287 296

1. Introduction
Issues related to corporate governance is not new as it was emerged with the birth of corporation. However, this
issue only received considerable attention due to the wave of CEO dismissals in the first half of 1990s and after the
massive bankruptcies of Enron and World.com in the early 2000s. The issue of corporate governance in Asian
countries including Malaysia has been a concern in the late 1990s following the Asian Financial Crisis in 1997.
Malaysian Code of Corporate Governance (MCCG) or named as 2001 Code was first issue in the year 2000 as a
milestone in corporate governance reform in Malaysia. Many researchers argued that corporate governance plays an
important role in controlling the firms operations (Fama, 1980; Fama & Jensen 1983). However, previous studies
found mixed findings on the relationship between corporate governance practices and firm performance. This study
investigate this issues with an aims to study the corporate governance practices among Top 100 PLCs in Malaysia
and to gauge the relationship between corporate governance practices and firms performance.
This paper is divided into 6 sections. The following section 2 and 3 discuss the relevant literatures and
methodology applied in this study, respectively. Section 4 focuses on presenting the data analysis and results whilst
the final two sections conclude and discuss the limitation and recommendation for future research.
2. Literature Review
This section explores and discusses the related literatures related to the relationship between corporate
governance and firm performance. Details of dependent variables and independent variables was discussed in the
following section.
2.1 Corporate Governance
Corporate governance became an attractive issue for Asian researchers especially after financial crisis in 1997.
Finance Committee on Corporate Governance in Malaysia has defined corporate governance as the process and
structure used to direct and manage the business and affairs of the company towards enhancing business prosperity
and corporate accountability with the ultimate objective. From the economic perspective, corporate governance
plays an important role in achieving an efficiency in which scarce funds are moved to investment project with the
highest returns. It is also became a crucial determinants for institutional investments (Bushee et al., 2007) and
components of institutional investors reform initiatives (Karpoff, 2001). There are two categories of corporate
governance mechanisms which are internal mechanism (e.g. board size, board independence and board of directors)
and external mechanism (e.g. competitive market conditions, the market for managerial labor and talent and market
for corporate control). In this study, two of the most influential internal indicators of corporate governance were
used which are Board Size and Board Independence. These indicators are explained in the following subsections.
2.1.1 Board Size
The definition of board size is the total number of directors on a board (Panasian et al., 2003; Levrau and Van
den Berghe, 2007). An optimal board size should include both the executive and non-executive directors (Goshi et
al., 2002). The effectiveness in structuring the board is important for governing the company. Board size has been
found to vary between one country and another as every country has different cultures. This means that there has no
optimal and standard board size among the companies in the world. Heidrick and Struggles (2007), in their study of
corporate governance among European firms have found that firms in United Kingdom, Switzerland and Holland
tend to have a small board size while Belgium, France, Spain and Germany tend to have a large board size (Thirteen
to nineteen members). Lipton and Lorsch (1992) claimed that the board members on board should be between eight
and nine while Leblanc and Gillies (2003) preferred eight to eleven persons on board. A board with thirteen
members is an optimal board size for most small and medium companies. Epstein et al. (2002) and Goshi et al.
(2002) claimed that an average of sixteen directors may be considered optimal for large companies. These views are
opposed from view of Florackis and Ozkan (2004) as they argued that boards with more than seven or eight
members are unlikely to be effective. In Malaysia and Singapore, Mak and Yuanto (2003) stated that companies

Shafie Mohamed Zabri et al. / Procedia Economics and Finance 35 (2016) 287 296

performance was highest when their boards consist of five members. According to John and Senbet (1998), the
determination of board size is depended on forces outside the market system. In reality, there has no optimal board
size as the right size for a board should be decided by effectiveness of a board to operate as a team (Conger and
Lawler, 2009).
2.1.2 Board Independence
Board independence refers to percentage of the total number of independent non-executive directors to the total
number of directors (Prabowo and Simpson, 2011). It was also defined as level of presence of independent directors
or presence of non-executive directors in the board (Abdullah and Nasir, 2004). According to BMB Listing
Requirement, listed companies need to have a balance on the board of directors with at least two Directors or onethird of board members must be independent. Thus, boards of directors are more independent with the increase of
independent directors (John and Senbet, 1998).
2.2 Firm Performance
This study use ROA and ROE as the measurement of financial performance for the selected companies. Many
previous studies using ROA (Brick et al., 2006; Cheng, 2008; Jackling and Johl, 2009; Brown and Caylor, 2005;
Klein, 1998) and ROE (Lo, 2003) as their firm performance measures. ROA is defined as net income before interest
expense for the fiscal period divided by total assets for that same period. It shows the amount of earning that have
been generated from an invested capital assets (Epps and Cereola, 2008) and incorporates firms profitability and
efficiency by shareholders and all of the stakeholders. ROA measurement is a well-understood measure of the
organizations (Kim, 2005) and it represented the actual firm performance (Ponnu, 2008). ROE is defined as the
income before interest expense for the fiscal period divided by total shareholders equity for that same period. ROE
has been proven to be a trusted performance measure for corporate stakeholders (Johnson and Greening, 1999) and
it is suitable both in short-term and long-term for most investors (Brealey and Myers, 2000). Overall, ROE is a
measure that shows an investor how much profit can be generated by the firm, using the money invested from its
shareholders (Epps and Cereola, 2008).
2.3 Relationship between Corporate Governance Practices and Firm Performance
2.3.1 Relationship between Board Size and Firm Performance
It cannot be denied that board size is the one of an important mechanism of effective corporate governance (Bonn
et al. 2004). Despite considerable amount of effort in research on board size, there are still no consensus answers
among researchers. Based on previous studies, some researchers indicated that there is positive relationship between
board size and firm performance (Shukeri et al., 2012; Adam and Mehran, 2003; Mak and Kusnadi, 2005; Kiel and
Nicholson, 2003). Lakhal (2005) found that there is a positive but weak relationship between board size and firm
performance. In addition, Chen et al. (2006) also found that board size is positively related to firms earning per
share (EPS) among listed companies in China while Shukeri et al. (2012) indicated that board size positively
influences firms return on assets (ROA). In another study by Sanda et al. (2003), small board size was found to be
positively correlates with firm performance but this statement is opposed when it comes to a large board.
On the other hand, some researchers argued that there has negative relationship between these two variables
(Mishra et al., 2001; Singh and Davidson, 2003). Forbes and Milliken (1999) also argued that board size is not truly
a demographic attitudes, thus it is unlikely to affect the board functioning. This statement is also supported by
Holthauson and Larcker (1993) who are failed to relate board size with firm performance. Eisenberg et al. (1998)
also found negative correlation between board size and profitability when using sample of small and medium
Finnish firms. The result is consistent with study on corporate governance of family firms in Norway (Mishra et al.,
2001).

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2.3.2 Relationship between Board Independence and Firm Performance

Past studies showed that there was an argument for board independence issues among researchers. Some
researchers found that board independence can provide benefits to companies (Ramdani and Witteloostuijn, 2009;
Zubaidah et al., 2009; Rhodes et al., 2010) while some disagree (Chen et al., 2006; Conger and Lawler, 2009;
Haniffa and Hudaib, 2006). According to Abdullah (2004), independent directors can bring independence into the
board and add to diversity of skills and expertise of the directors. Independent directors are able to alleviate agency
problems and curb managerial self-interest (Rhodes et al., 2000). Through agency theory, managers would tend to
pursue their own goals at the expense of shareholders due to the separation between ownership and control (Jensen
and Meckling, 1976). With the emerge of independent directors, this problem can be solved as they can contribute to
reduce the management consumption of perquisites (Brickley and James, 1987) and led to better auditing systems
(Salleh et al., 2005). This is why the Code regarded improving board composition to ensure that there are effective
independent directors on the board and that the decision process is independently carried out. Besides that, increase
of independent directors on the board can protect the shareholders interests (Ramdani and Witteloostuijn, 2009) and
have above-average stock price returns (Dennis and Sarin, 1997). Therefore, companies with more independent
directors tend to be more profitable compared to those with fewer independent directors (You et al., 1986).
According to Fama (1980), independent directors were hired to ensure that competition among insiders stimulates
actions consistent with shareholder value maximization. Independent directors are also useful for monitoring board
activities and improving the transparency of corporate boards as they improved the firms compliance with the
disclosure requirements (Chen and Jaggi, 2000).
Previous studies showed that the result for relationship between board independence and firm performance are
mixed. Dehaene et al. (2001) unveiled that a proportion of independent directors has a positive correlated ROE
among Belgian companies. This finding is supported by Byrd et al. (2010) as he pointed out a significant positive
effect of independent directors on firm performance. Ramdani and Witteloostuijn (2009) claimed that board
independence only has an effect on firms with average performance; firms with below average performance are not
affected. On the other hand, Chen et al. (2006) claimed that the percentage of independent directors on boards has
(2001)
found no evidence
little impact on overall
firmGovernance
performance. Inversely, research by Hermalin and Weisbach
Corporate
Firm
Performance
that board independence affects firm performance. This result was consistent with another study conducted by Klein
H1
et al. (2005).
Firms ROA
Board Size (BSIZE)
H2

2.4 Conceptual Framework

H3

Four hypotheses Board

were developed
in (BIND)
this study, which are presented in the following Figure 1.0
Independence
Firms ROE
H4

Figure 1.0 Conceptual Framework

Shafie Mohamed Zabri et al. / Procedia Economics and Finance 35 (2016) 287 296

The main component of this study consist of the corporate governance practices which are indicated by board
size and board independence (independent variables) whereas the firm performance was measured by using firms
Return on Assets (ROA) and firms Return on Equity (ROE) (dependent variables). The following are hypotheses
developed to be tested in this study.
Hypothesis 1: There is a relationship between board size and firms ROA.
Hypothesis 2: There is a relationship between board size and firms ROE.
Hypothesis 3: There is a relationship between board independence and firms ROA.
Hypothesis 4: There is a relationship between board independence and firms ROE.
3. Methodology
3.1 Research Design
This study was relying on quantitative design. Statistical analysis, table or graph was typically applied in this
study. The evaluation and assessment of the firm performance was according to the data gathered from the
companys annual report.
3.2 Sampling and Data Collection
This research is limited to the Top 100 public listed companies in BMB, covering the period from 2008 to 2012.
Companies with insufficient data were eliminated and not be replaced in order to sustain the originality of data
sampling. After data collection process was completed, it was found that there were only 86 companies suited to be
used as samples in this study.
3.3 Data Analysis
Statistical Package for Social Sciences (SPSS) was used to assess and analyze the collected data to examine the
relationship between corporate governance practices and firm performance. There are two methods of analysis used
in this study, which are descriptive and correlation analysis. These methods were used as the underlying statistical
tests to describe the original characteristics of a data set and are the key to summarizing variables, and also
examining the relationship between two different variables.
4. Data Analysis and Findings
4.1 Descriptive Analysis
Variables

Minimum Maximum

Mean

Standard Deviation

BSIZE

86

5.0

13.2

8.9279

1.8494

BIND

86

0.20

0.82

0.4603

0.11264

ROA

86

-0.25

0.508

0.08655

0.08262

ROE

86

-0.350

1.700

0.19878

0.25921

Table 1: Descriptive statistics results

The mean value of the board size was 8.9279 persons (approximately to 9 persons), and the standard deviation
was 1.8494 (approximately to 2). This low standard deviation indicated that the data tends to be very close to the
mean. Thus, the average number of board of directors of most samples was identified as between 7 and 11 persons.

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The mean ratio of the board independence was 0.4603, and the standard deviation was 0.11264. This indicated
that the average ratio of board independence in the board of most samples was located between 0.3477 and 0.5729.
On the other hand, the mean value of ROA over past five years was 0.0866 with the standard deviation of
0.0826. Therefore, the average mean of ROA was between 0.004 and 0.1692. For firms ROE, the mean value of
ROE was 0.19878 with the standard deviation of 0.25921. This indicated that the average mean of ROE was
between -0.0643 and 0.45799.
4.2 Correlation Test
The following table shows the result of Spearmans Correlation Test.

Spearmans rho

BSIZE Correlation Coefficient

Sig. (2-tailed)
N
BIND Correlation Coefficient
Sig. (2-tailed)
N

ROA
-0.214*
0.048
86
0.030
0.786
86

ROE
-0.139
0.201
86
0.060
0.582
86

*. Correlation is significance at the 0.05 level (2-tailed)

Table 2: Result of Correlation Test

Correlation analysis was conducted to examine the relationship between two variables. A strong or high
correlation means that two or more variables have a strong relationship with each other. On the other hand, a weak
or low correlation means that the variables are hardly related. Correlation coefficients reveal the strength of the
relationship between two variables and the direction of relationship (positive and negative). It can range from -1.00
(a perfect negative value) to +1.00 (a perfect positive value). It can be justified that there is no relationship between
the variables being tested if the value is 0.00.
4.3 Results of Hypothesis Testing
For hypothesis 1 (relationship between board size with ROA), the correlation coefficient was -0.214. This
negative value indicated that these two variables have weak negative correlation. This means that the board size was
inversely proportional to firms ROA. The larger size of board will cause the lower firms ROA. The significance
value of p=0.048 was less than 0.05, this means that the value was significance, thus the H1 is accepted. It can be
concluded that there is a statistically significant relationship between board size and firms ROA. For hypothesis 2
(relationship between board size with ROE), the correlation coefficient was -0.139. This negative value indicated
that these two variables have weak negative correlation. This means that the board size was inversely proportional to
firms ROE. The larger size of board will cause the lower firms ROE. The significance value of p=0.201 was more
than 0.05, this means that the value was insignificant, thus the H0 is accepted. It can be concluded that there is no
relationship between board sizes with firms ROE. These results show that the relationship between board size and
firm performance was inconclusive.
The negative values of correlation coefficient with ROA (-0.214) and with ROE (-0.139) indicated that there is a
weak negative correlation between these two variables. The negative correlation indicated that smaller board size
can lead to better firm performance. This finding was consistent with Cheng (2008), Florackis and Ozkan (2004)
and Byard et al. (2006) who indicated that a smaller board was better than a larger board. Previous research
conducted by Mak and Yuanto (2003) in Malaysia and Singapore showed that firm performance was highest when
their boards consist of five members. Byard et al. (2006) argued that smaller board is better in monitoring the
decision-making. Cheng (2008) also supported this statement as he claimed that it may face problem for company to
plan for board meetings and for board to have united answer during meeting when they are having larger board size.

Shafie Mohamed Zabri et al. / Procedia Economics and Finance 35 (2016) 287 296

For hypothesis 3 (relationship between board independence with ROA), the correlation coefficient was 0.03. This
indicated that these two variables have weak positive correlation. This means that the board independence was
proportional to firms ROA. The higher ratio of board independence will cause higher firms ROA. The significance
value of p=0.786 was more than 0.05, this means that the value was insignificant, thus the H0 is accepted. It can be
concluded that there is no significant relationship between board independence with firms ROA. For hypothesis 4
(relationship between board independence with ROE), the correlation coefficient was 0.06 with p=0.582. This
results indicated that these two variables have a weak positive correlation and H0 is accepted.
The results of hypothesis 3 and 4 shows that there are no relationships between board independence and firm
performance, as the significant value of firms ROA (p=0.786) and firms ROE (p=0.582) were insignificant. Joher
and Mohd Ali (2005) indicated that the presence of independent non-executive directors in board does not provide
any significant explanation for firm performance. Ponnu and Karthigeyan (2010) stated that there was no strong
evidence that recommend principles in MCCG as regards independent directors have any positive effect on
corporate performance. This result was also consistent with Johari et al. (2008) and Wan Yusoff and Alhaji (2012)
who argued that board independence has no effect on firm performance after they have analyzed 813 Malaysian
public listed companies from 2009 to 2011. Hashim and Devi (2005) also failed to find any significant evidence on
the relationship between proportion of independence directors and firm performance with samples of 280 Malaysian
public listed companies. The research which was conducted by Tham and Romuald (2012) using 20 listed
companies in BMB from the period of 2006 to 2010 also found no relationship between the board independence
with firm performance.
5. Conclusion
This study was conducted to investigate the relationship between corporate governance and firm performance.
The dependent variables (corporate governance) used board size and board independence as indicators while the
independent variables (firm performance) used firms ROA and ROE as indicators. There were two objectives
established which were (1) to investigate the corporate governance practices among Top 100 listed companies, and
(2) to study the relationship between corporate governance and firm performance. The first objective was achieved
by using descriptive analysis whereas the second objective which consisted of four hypotheses was achieved by
using correlation analysis. The results of first objective shows that the average number of directors in board and the
average ratio of board independence among Top 100 Malaysian public listed companies from 2008 to 2012 were 9
persons and 46% respectively. The result of second objective shows that there is a mixed relationship between
corporate governance and firm performance.
6. Limitation and Recommendation for Future Research
This study was limited to Top 100 Malaysian public listed companies from 2008 to 2012. Among the samples,
there are 86 companies that can be used as other samples cannot provide full set of information which is needed in
this study. This would cause the samples not to properly represent the whole population. There are few companies
that have changed the time period of their annual reports due to their companies internal decisions. This could
affect the accuracy of data as well. Another concern which may also affect the accuracy of data was external factors
such as economic recession. Finally, there is only two indicators used for each of the variable which are board size
and board independence (corporate governance practices) and firms ROA and ROE (firm performance). Different
results will be obtained by using different indicators.
This study can be improved by analyzing a longer time period. It is recommended that the financial data ranging
over 20 years would be reliable. It cannot be denied that the longer time period of research can provide more
accurate results. There are possible numbers of variables that can be used to investigate the determinants of
corporate governance practices and firm performance. This study only used board size and board independence as
the tools to indicate the corporate governance practices of companies. Besides other internal mechanisms of
corporate governance such as ownership structure, board meeting, audit committees and etcetera. Future researchers
can use external mechanisms as well. On the contrary, firms ROA and ROE was used to indicate the firm
performance. There are still many other indicators such as earning per share (EPS), Tobins Q can be used to

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examine the firm performance. Number of samples can also be expanded as it can widen the scope and quality of the
research, thus the findings will be more rich and accurate.
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