Board structure and ownership in

Malaysia:
the case of distressed listed
companies
By: Shamsul Nahar Abdullah

Abstract:
Purpose: This study wants to examine the effect of
board independence, CEO duality and ownership
structure on financial distress status

Methodology: Data from annual reports of Nondistressed and distressed firms

Finding: Board Independence and CEO duality no

link, Non-ex directors negative link, outsider
negative link,

Intorduction:
In current situation, emphasis has been made on
reforms in the board directors, because the board of
directors has not fulfilled their roles.

This paper will find the relationship between board

structure and ownership structure with financial
distress in Malaysia.

*Concentrated shareholdings by individuals and

families and shareholdings by government. {Maly}

Introduction:
Financial distress firms have to tackle several
corporate governance issues, especially the directors
effectiveness in accomplishing their monitoring roles.

Board of directors has not discharged its fiduciary

roles effectively.
Primary contribution of this study is the setting in
which this study is conducted within an emerging
economy.

Introduction:
Malaysian Paper
Chinese and Malays dominate the economics and politics in
Malaysia provides a unique research setting.
This difference directly affect the operations of BOD.

* Another contribution of this study is that is adopted different

definition of financial distress as compare to previous studies.

Theoretical development:
Definition of Financial Distress:
Financial distress is a term in corporate
finance used to indicate a condition when
promises to creditors of a company are
broken or honored with difficulty. If financial
distress cannot be relieved, it can lead to
bankruptcy. ...
A condition where a company cannot meet
or has difficulty paying off its financial
obligations to its creditors.

Theoretical Development:
Malaysian Paper
If boards are effective, companies would not have borrowed
excessively and thus risk of financial distress could be avoided.
BOD is the ultimate center of control of a corporation.

Theoretical Development:
H1: Board Independence is negatively associated with
financial distress status.

H2: There is a negative association between CEO duality

structure and financial distressed companies

H3: Management interests are negatively associated with

financial distress.

Theoretical Development:
H4: Non-ex directors interests are negatively associated
with financial distress.

H5: The extent of outside blockholders interests is negatively

associated with financial distress companies.

Methodology:
Malaysian Paper
De-listing Regulation:
1. Deficit in the adjusted shareholders equity
2. Appointment of receivers and/or Managers over the property of
the listed issuers.
3. Adverse opinions or disclaimers in respect of the going concern
from the auditor or
4. Appointment of special administrators pursuant to the
provisions of the Pengurusan Danaharta Nasional Behard Act
1998.
Fulfillment of any one of the above criteria may lead firms to Delisting.

Methodology:
Malaysian Paper:
Vanhorne describes two situations of corporate failure:
Technical Failure: If company is unable to meet its current
obligations.
Insolvency in bankruptcy: When company s net worth is
negative.
Malaysian Companies are fall under Insolvency in bankruptcy.

Methodology:

Pooled Logistic Regression

T-statistics and correlation analysis

Model:
Malaysian Paper:
statusit=+1YR1+2YR2+3BDINDit+4DUALITYit+5MGTit+6
NEDit+7OUTBLKit+8ACINDit+it
Where as:
i: firm 1 through 86;
t: year 1999 through 2001;
STATUS: 1 if distress, 0 otherwise;
YR1: 1 if financial year 1999, 0 otherwise;
YR2: 1 of financial year 2000, 0 otherwise;
BDIND: percentage of independent directors on the board
DUALITY: 1 of the board chairman and CEO roles are combined,
0 otherwise;

Model:
Malaysian Paper:
MGT: percentage of shares held by executive directors;
NED: percentage of shares held by non-executive directors
OUTBLK: cumulative percentage of shares outside shareholders
holding 5 percent or more of shares; and
ACIND: 1 if all audit committee members are independent
directors; 0 otherwise.

Results:
Malaysian Paper:
Expected Results:

Malaysian Paper:
Actual Results:

Mean Values:
EPS:

Distressed= -0.99
Healthy: 0.26
Distressed= 0.48
Healthy= 2.36
Distressed=1.87
Healthy=0.18

Liquidity:
Gearing Ratio:

Results:
Malaysian Paper:
Predicted signs:

Actual Results;

Intercept ?
YR1
?
YR2
?
BDIND
NEDBOARD
DUAL
+
CHREXEC +
ACIND
MOWN1
MOWN2
+
NEDOWN
OUTBLK
-

2.426(24.867)
0.160(0.383)
0.127(0.240)
0.832(1.321)

R square:0.359

-0.445(1.792)
Model4=+
-0.754(4.589)
-0.063(76.42)
Model3=+
-0.107(50.229)
-0.046(52.291)

Conclusion:
Malaysian Paper:
Board independence is not explaining the firm s distressed
status, an analysis was carried, which reveals that Boards have
gone under for restructuring, Independent directors may not be
aware of their responsibilities.
CEO Duality: Mixed results, combining the top two roles
enable urgent strategic decisions.
Ownership Pattern: is important among Malaysian
companies, it has significant relation with distressed status.

Policy Implications:
Malaysian Paper:
Independent directors need to undergo training to help them
improve and be aware of their responsibilities.
This paper offers the evidence on the extent to which distress is
associated with corporate governance from a developing
country.
The paper should be of interest to the regulatory bodies and
practitioners.