Eyes on Hands off, The Ambiguous Role of Non-Executive Directors in Corporate Governance

FIN3016: Corporate Finance 2013/14

Eyes on Hands off: The Ambiguous Role of

Non-Executive Directors in Corporate

Governance

Low Kah Loong

Presented to the Queen’s University Management School in partial fulfilment of the

requirements for a Bachelor of Science Degree with Honours

Abstract

This paper investigates the relationship between Non- Executive Directors (NEDs) and firm

performance using corporate governance structures. Top 100 companies by operating revenue

listed on the Kuala Lumpur Stock Exchange (KLSE) Stock Exchange were selected to

conduct this study. However this study does not provide results of significant correlation

between the board sizes, proportion of NEDs, and also the remuneration of the NEDs. We

could only conclude that firm performance does not affect either of the corporate governance

structure listed above. The contradicting result in this study suggests that there is a further

need for critical thinking to restructure corporate governance as this might result to a higher

firm performance in developing countries.

EYES ON HANDS OFF: THE AMBIGUOUS ROLE OF NEDS IN CORPORATE GOVERNANCE

2

1 Introduction

Malaysia has been one of the fastest growing economies in South East Asia. On that account,

corporate governance takes on an important role. It has become is a priority in our Malaysia’s

drive to increase the competitiveness of businesses. It also allows the ability to tap into

domestic and international capital, which consequently ensures the sustaining of stable socio-

economy. Good governance is increasingly used to gauge the sustainability of performance

and profitability of business operations. Malaysian companies must therefore demonstrate

track records of good governance in order to attract and retain long-term investors.

Mostly, the reason why corporate governance is upheld sacredly is to protect the

interest of shareholders and their investments (Schleifer, Vishny 1986). The 1997 Asian

Financial crisis saw the failure of a number of “blue chip” firms, which brought issues

regarding corporate governance to light. Thus, it can be concluded that corporate governance

has not been upheld adequately as it should be because during the Asian financial Crisis, the

value of the shareholders’ investment have been vastly diminished and as such contributed to

the failure of protection to the shareholders.

In order to review the adequacy of the existing governance practiced by Malaysian

firms at that point of time, a committee named, “Finance Committee on Corporate

Governance” (FCCG) was borne. Following close analysis, a number of issues, were

identified as the causative factors of the financial fiasco. To name a few, issues such as

ownership concentration, poor regulation enforcement, lack of responsibility and

effectiveness of directors. Thus, the Malaysian Code of Corporate Governance (MCCG) was

issued early March 2000 in hopes of embedding the idea of good corporate governance as an

integral part of business dealings and culture in Malaysian firms.

LOW KAH LOONG, 40075076

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However, the MCCG was drafted with much accord given to United Kingdom’s (UK)

Cadbury Report (1992) and the Hampel Report (1998). As the business environment in

Malaysia is different from the UK, some of the recommendations in the MCCG may not be

as effective. As an example, the “National Economic Policy” was introduced after the 1963

Malaysian racial riot to ensure that the interests of indigenous businessmen are protected. As

of the year 2012, Government Linked Companies (GLCs) crowds up to nearly 40% of the

firms listed on the KLSE Main Board. As a key part of the government’s plan to liberalise the

economy, many of the GLCs have been privatised. Malaysia’s active pursuit of privatisation

and a commitment to high growth policy undertaken by the government encourages moral

hazard lending (OECD 1999). Khazanah, the government’s investment arm, has been tasked

to improve the GLCs’ corporate governance structure. These recommendations in the MCCG

fall under four big headings, which are principles, exhortations to other participants and mere

best practices (FCCG 2000).

This study involves an examination of the Top 100 companies listed on the main

board of KLSE in their last financial year based on Operating Revenue. Regression results

show significant associations between performance using market and accounting measure,

and independent variables of board size, proportion of NEDs, remuneration of NEDs and also

industry classification.

The remainder of the paper is organised as follows. Section 2 reviews previous

researches that discuss about the link between corporate governance and firm performance. It

is also the empirical evidence on the determinants of corporate performance. Besides that, it

sets out the hypotheses to be tested. Section 3 describes the data used as well as the empirical

method used to study, followed by the analysis of results in Section 4. The paper then

concludes with remarks and also avenues for further research in Section 5.


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2 Literature review

Previous research on relationships between firm performance and various corporate

governance structures, specifically the board size, proportion of NEDs as well as the

remuneration of NEDs, gives contradicting inferences. Below are three hypotheses that

discuss prior studies of board and firm performance.

H1: There is a significant relationship between the board size and firm performance.

The Size of the Board of Directors has been widely seen as a factor that contributes to

firm performance. There are a few conflicting ideas regarding the appropriate size of a board

of directors for trading and non-trading firms. A study done showed that trading firms have a

larger board of directors than non-trading firms (Booth R., Marcia Millon Cornett & Hassan

Tehranian 2002).

There is an increase in board size because of activism by institutional shareholders

who want the board of directors to hold more of a monitoring role rather than a managing

role so that agency problem can be decreased. A number of empirical data show that board

size does affect firm performance as it affects the monitoring, managing and decision making

of a firm. Smaller boards are said to be more effective in mitigating problems, but boards that

grow too big become symbolic rather than being a part of the management process

(Hermaline, Weisbach 1991). However, bigger boards can be of use to the firms as they

provide diversity that would help firms to secure resources and also reduce uncertainties.

According to previous research done by Yermack (1996) and Eisenberg et al. (1998),

it was found that there is a negative relationship between board size and market performance

based on market measures established in the US and Finland. However, another study done

on US firms by Houlthausen and Larcker (1993) found no association between board size and

firm performance. Based on the MCCG, there are no requirements on how many directors a


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board should have in order to examine board effectiveness. However, a firm should have a

board, which participates actively, and also have the ability to make decisions and executing

their duties.

H2: There is a significant relationship between the proposition of NEDs on the board and

firm performance.

It has been suggested boards that consist mostly of NEDs may help in reducing agency

problem as NEDs presumably hold majorly a monitoring role. Having a large proportion of

NEDs on a board helps controlling management behaviour and thus protects shareholders’

interest (Berle, Means 1932). Pearce and Zahra (1992) state that boards dominated by NEDs

increase the director’s decision-making capabilities in terms of providing strategic decisions

and thus improve firm performance. In contrast, Mayer (2001) found that the proportion of

non-executive directors on the board bears little relation to board turnover in poorly

performing companies.

Mayer (2001) made a comparison between two developed countries, the UK and US.

He found out that NEDs in the UK primarily play an advisory role, which is almost similar to

Malaysia but in the US In contrast, NEDs appear to perform a disciplining function.

The MCCG recommends that corporations adopt good governance practice by having

a balanced board composed of at least one third of NEDs to monitor management. However,

boards dominated by NEDs who lack independence and awareness of their responsibilities

and who do not have relevant qualifications and experience may be detrimental to firms. As

previous studies indicate mixed results, we now move on to our next hypothesis.


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H3: There is a significant relationship between the remuneration of NEDs on the board and

firm performance.

Compensation plays a huge role in resolving conflict of interest among managers,

stakeholders and also shareholders. Remuneration comes in a variety of compensations such

as salary, stock options and bonuses. As suggested by Brick, Palmon and Wald (2002),

remuneration of directors affect firm performances. Adams and Mehran (2003) found out that

there are different levels of compensations given to different industries. Manufacturing firms,

for example grant a larger stock option, then the sum of its salary and bonuses and financial

firm’s vice versa (Houston F., Christopher James 1995)

According to the KLSE, it states that NEDs are to be paid a fixed sum and it prohibits

remuneration to be paid by percentages of revenue or even by commission. Comparing it

against the UK Corporate Governance Code advises that share options or performance based

remuneration to be approved by shareholders and shares options is to be held back from

exercising till a year after the NED leaves his or her responsibility. On the other hand,

Sarbanes-Oxley Act in the US forbids any payment of profit-related commission to its

independent directors. The argument above states clear that performance based remuneration

could prejudice NEDs position in terms of objectivity and independence especially in the

event of endorsing risky business opportunities.

As recommended by the MCCG, director’s remuneration must be linked towards their

responsibility as well as their commitment. A remuneration committee is set up consisting

mainly by non-executive directors to set the level of remuneration for executive directors.

However, as for the remuneration of the non-executive directors, the board as a whole

determines their remuneration. Firms are also required to disclose the details of the

remuneration of its directors in their annual reports.


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3 Data and Methodology

As of 31st December 2012, a total of 952 firms were listed on the main board of the KLSE.

Out of the total of 952 companies, the Top 100 firms based on operating revenue were

filtered out for this study. Accounting data were mostly collected from ThomsonONE and

OSIRIS. Where the data for market capitalisation was missing, this was calculated manually

by multiplying outstanding shares with the firm’s last financial year’s share market price.

Information regarding corporate governance is extracted from firm’s annual reports found in

the KLSE Annual Report Database that contains information about the board of directors,

their profiles, their remuneration and also the financial data for each firm.

The dependent variable which is the performance of the firm and two measurements

used to measure performance, which is the Tobin’s Q and the Return on Asset are considered

in this research as a proxy for market accounting returns respectively. The higher the Q value,

the higher the governance mechanism and also a better market’s perception of the firm. The

higher the ROA indicates effective use of companies’ asset in serving shareholder’s

economic interests.

The independent variable consists of three corporate governance variables, namely

board size (BSIZE), the proportion of NEDs on the board (PROP), remuneration of NEDs

(RENUM) and control variable, operating revenue (ORET) to calculate firm size.

Model 1: Tobin’s Q =𝛼 + 𝛽1𝑃𝑅𝑂𝑃 + 𝛽2𝑅𝐸𝑁𝑈𝑀 + 𝛽3𝑇𝑂𝐵𝐼𝑁 𝑄 + +𝛽𝑖𝑂𝑇𝐻𝐸𝑅𝑆 + 𝜀

Model 2: ROA = 𝛼 + 𝛽1𝑃𝑅𝑂𝑃 + 𝛽2𝑅𝐸𝑁𝑈𝑀 + 𝛽3𝑅𝑂𝐴 + 𝛽𝑖𝑂𝑇𝐻𝐸𝑅𝑆 + 𝜀


8

In order to calculate the correlation between all these factors, multivariate regression is used.

This is also used to test the hypotheses. A regression is then used to measure the correlation

between the firm performance using both ROA and Tobin’s Q against the remuneration of

NEDs.

Table1: Research Variables Definition

Variables Acronym Definition

Dependent Variables

Tobin’s Q TOBINQ Ratio of the market value of the

shares plus the total debt divided

by the book value of total assets

of the firm

Return on Asset (%) ROA Earnings after tax divided by total

assets of the firm

Independent Variables

Board Size BSIZE Total number of directors on the

board of the firm

Proportion of NEDs PROP Proportion NEDs on the board of

directors of the firm

Remuneration of NEDs REMUN Average remuneration given per

NED on the board of directors of

the firm

Control Variables

Tobin’s Q (one year lag) TOBINQ-1 Ratio of the market value of the

shares plus the total debt divided

by the book value of total assets

of the firm of the prior year

ROA (one year lag) ROA-1 Earnings after tax divided by total

assets of the firm of the prior year

Operating Revenue ORETlog Operating revenue of the firm

(Log Return), used to represent

Firm Size

Industry classification

based on KLSE

CONSUMER Consumer sector

TRADING Trading sector

PROPERTY/HOTEL Property & Hotel Sector

CONSTRUCTION Construction sector

PLANTATION/MINING Plantation & Mining Sector

INDUSTRIAL Industrial sector

UTILITIES Utility sector


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3.2 Data Limitations

There are certain limitations to the data when being collected. Where the information for

some firm is unavailable or ambiguous, the latter is omitted and then replaced by the next

firm after the Top 100 mark in terms of operating revenue.

3.2.1 Currency

Accounting data collected from the ThomsonONE and OSIRIS database are denominated in

USD. Thus using the previous year-end currency rate against the Malaysian Ringgit (MYR),

the remuneration collected from the annual reports are then exchanged approximately to its

USD value.

3.2.2 NED Remuneration Data

There is no remuneration data stated on the database of ThomsonONE or OSIRIS thus it has

to be collected individually from the annual reports of each of the firm. As it is not obliged by

firms to disclose individual remuneration, the average of the NED’s remuneration is

calculated by taking its average.

There are also a set number of firms where remuneration of its NEDs is relatively

higher compared to their peers. It is assumed to be the following factors where founders of

the firm who remain in the firm, family members of executive directors in the firm, directors

where serve as a NED in the group but are chief executive in its listed subsidiaries. We could

consider all these NEDs as ‘de-facto’ directors.


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4 Results and Analysis

In this section, the results of all the variables are being tabulated and analysed. Graphical

analysis and also statistical regression measures are being used to present the data. Simple

graphical analysis are being used first to give readers a clear front view of the data before

moving on to deeper regression analysis looking at correlation, descriptive statistics and also

regression analysis of the variables.

4.1 Graphical Analysis

Before presenting statistical measures, we would like to first present graphical data of the

independent variables against the control variable, Operating Return (ORET).

Above is a scatter plot of Total Remuneration of NEDs against the operating revenue

of the Top 100 firms based on last available year operating revenue. This scatter plot shows

that there is no visible correlation between the latter where there are firms with high

remuneration and low output or any other relation.

Sime Darby Berhad

Tenaga Nasional Berhad

Petronas Dagangan Berhad Axiata Group Berhad

CIMB Bank Berhad

Telekom Malaysia Berhad

Maxis Berhad

Public Bank Berhad

HLFGroup Berhad

Gamuda Berhad

Perwaja Holdings Berhad

R² = 0.017

0

1000

2000

3000

4000

5000

6000

7000

8000

- 5,000,000.00 10,000,000.00 15,000,000.00 20,000,000.00

Tota

l R

emu

ner

ati

on

of

NE

Ds

(US

D'0

00)

Operating Revenue (USD '000)

Remuneration of NEDs against Firm Operating Revenue (USD '000)

Remuneration NEDs USD '000 Linear (Remuneration NEDs USD '000)


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Below is a table of the Top 30 sample, out of the 100 firms selected for this study.

Table 2: Top 30 Remuneration Payer per NED in Malaysia

Posi

tion

Firm name Sector

Total NED

Remuneratio

n

Numbe

r of

NEDs

Remuner

ation per

NED

USD ‘000 USD

‘000

1 Public Bank Berhad Trading 7,099.67 9 789

2 BLD Plantations Berhad Plantation/Mining 695.82 1 696

3 Hong Leong Financial Group Bhd Trading 2,034.46 5 407

4 Gamuda Berhad * Industrial 4,062.67 10 406

5 Perwaja Holdings Berhad * Industrial 2,476.33 9 275

6 MBF Holdings Berhad Property/Hotel 731.67 3 244

7 Astro Malaysia Holdings Berhad Consumer 1,830.00 8 229

8 Telekom Malaysia Berhad * Consumer 1,833.52 10 183

9 Ancom Berhad Industrial 1,059.00 6 177

10 CIMB Group Holdings Berhad * Trading 1,484.67 9 165

11

British American Tobacco (Malaysia)

Berhad Consumer 947.84

6

158

12 Sime Darby Berhad * Consumer 1,927.67 13 148

13 SP Setia Bhd * Property/Hotel 1,003.33 7 143

14 Malayan Banking Berhad - Maybank * Trading 1,268.91 10 127

15 Kinsteel Berhad Industrial 1,145.33 9 127

16 IHH Healthcare Berhad * Consumer 1,141.67 9 127

17 Bumi Armada Bhd Industrial 966.67 8 121

18 AMMB Holdings Berhad * Trading 1,508.67 13 116

19 Sapurakencana Petroleum Berhad Plantation/Mining 833.67 8 104

20 IJM Corporation Berhad * Construction 586.33 6 98

21 Kulim (Malaysia) Bhd * Plantation/Mining 1,263.00 13 97

22 Maxis Berhad Consumer 969.90 10 97

23 Tenaga Nasional Berhad * Utilities 1,018.66 11 93

24 MBM Resources Bhd Trading 650.67 7 93

25 DRB-Hicom Berhad * Industrial 702.54 8 88

26 Media Prima Berhad * Consumer 624.85 8 78

27 KPJ Healthcare Berhad * Consumer 755.67 10 76

28 Fraser & Neave Holdings Bhd Consumer 897.67 13 69

29 Felda Global Ventures Berhad * Plantation/Mining 595.29 9 66

30 Malaysia Airports Holdings Berhad* Trading 730.40 12 61

Total (USD ‘000) 42,846.55 260

Top 30 Weighted Average (USD ‘000) USD 164.8

* Government Linked Companies


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In most of the firms in the top 30 table, there is dominance by Government Linked

Companies (GLCs). The GLCs identified in this list are companies that have shares that are

state investment vehicles own majority, and also firms created as a result of government

initiatives or development. There are a few assumptions as in why the majority of the top 30

firms listed above give a high remuneration to its NEDs. Firstly, GLCs are expected to recruit

top talents, for example, politicians, previous corporate leaders, retired government servants

and others for their boards in for symbolic, experience or networking purposes. As GLCs are

usually large firms, they carry a higher profile, therefore, risk than a non-GLC firm. As

having additional risk, it gives extra responsibility to its directors; thus a higher remuneration.

Under the KLSE classification, the trading sector shows that it is the clear leader

giving its NEDs a total of USD 123,850 per annum per NED. This is not shocking as he or

she is responsible of protecting shareholders’ interest for this sector is high together with the

stacks of legislation that is regulating the sector. As the responsibility is higher for this sector,

more risk in making decisions is being upheld by the NEDs thus creating a higher

compensation for them. NEDs in this sector plays a bigger role as they have to attend more

board meetings than their peers and also be involved in more board committees.

46,670

48,010

70,860

71,670

77,280

90,690

123,850

0 20000 40000 60000 80000 100000 120000 140000

Construction

Utilities

Consumer

Property/Hotel

Industrial

Plantation/Mining

Trading

Remuneration per NEDs per annum (USD'000)

KL

SE

Cla

ssif

ica

tion

Remuneration per NEDs per annum

(USD'000)

Construction Utilities Consumer Property/Hotel Industrial Plantation/Mining Trading


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4.2 Statistical Analysis

Table 3 presents the correlation matrix for the dependent and continuous independent

variables. ROA against Tobin’s Q and ROAlag1 against Tobin’s Q lag 1 have a high

significance value (P<0.001) correlation of above 0.80, which means that there is two or

more predictor variables in a multiple regression model are highly correlated. In this situation

the coefficient estimates of the multiple regressions may change erratically in response to

small changes in the model or the data. Proportion of NEDs (PROP) against remuneration per

NEDs (RENUM) has a significant (P<0.05) significance level. Negative correlation of

proportion against remuneration shows that RENUM and PROP on firms’ board does not

relate to each other. As for the rest of the correlation, they do not exceed 0.80 and has a

relatively low correlation; thus multicollinearity is not a problem (Gujarati 1995).

Table 4 presents the descriptive statistics for both the dependent and independent

variables. Looking first on the dependent variable, which is what was used to measure firm

performance the Tobin’s Q, and also the ROA. The mean return was much higher for ROA

compared to Tobin’s Q showing that most of the companies’ asset are used accordingly to

serve shareholders’ economic interest. Using standard deviation as the measure for risk, we

could also see that ROA has a much higher dispersion of 10.0354 than Tobin’s Q. Moving on

analysing the statistics for independent variables; we could see that the average board size of

the firms is 9, a recommended size for board effectiveness by (Lipton, Lorsch 1992). In

terms of bard composition, the mean percentages of NEDs on the boards are above average,

0.74. However, in terms of remuneration per NED amongst the 100 firms, the average of

remuneration given to each NED is USD 81.431 million with a standard deviation of

120.132. Furthermore, the mean of the logged operating return is 14.046 with a low standard

deviation of 0.805.


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Table 3: Correlation Matrix

TOBINQ ROA BSIZE PROP RENUM TobinQlag1 ROAlag1 ORET

TOBINQ 1.000

ROA 0.850*** 1.000

BSIZE 0.607 0.037 1.000

PROP 0.083 0.021 0.088 1.000

RENUM -0.044 -0.011 0.107 -0.251* 1.000

TobinQlag1 0.113 0.103 0.010 0.122 -0.040 1.000

ROAlag1 0.114 0.139 0.030 0.150 -0.077 0.854*** 1.000

ORET -0.057 -0.010 0.179 0.147 0.106 -0.042 -0.048 1.000

*p<0.05, ** p<0.01, *** p<0.001

Table 4: Descriptive Statistics of Variables

Dependent Variables Independent Variables Control Variables

TOBINQ ROA

BSIZE

PROP

RENUM

TOBINQlag1 ROAlag1 ORETlog

Observation 100 101 100 100 101 100 101 101

Mean 1.099 7.656 9.152 0.736 81.431 1.098 7.656 14.046

Standard Deviation 1.443 10.035 2.532 0.188 120.132 1.443 10.035 0.805

Min 0.314 -20.100 5 0.111 0 0.314 -20.1 13.097

Max 9.093 61.010 16 1 788.852 9.093 61.01 16.554 Notes:

ROA : Return on Asset

BSIZE : Board Size

PROP : Proportion of NEDs on Board RENUM : Remuneration of NEDs


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Table 4: OLS Regression

(1) (2)

VARIABLES TOBINQ ROA

BSIZE 0.0573 0.253

(0.812) (0.516)

PROP 0.638 0.0117

(0.771) (0.00205)

RENUM -0.00015 -0.000947

(-0.520) (-0.476)

ORETlog -0.138 -0.153

(-0.720) (-0.116)

TobinQlag1 0.0968

(0.920)

ROAlag1

0.129

(1.233)

Constant 2.016 6.983

(0.761) (0.384)

Observations 97 99

R-squared 0.029 0.022

Adjusted R-squared -0.027 -0.033

F-test 0.540 0.421

t-statistics in parentheses

*** p<0.01, ** p<0.05, * p<0.1

Table 4 gives the Ordinary Least Squares of firm performance of using both market

measure and accounting measure. The results are based on the regression of market or

accounting measure against all the corporate governance structures and performance

variables. The F-value shows no significance for both the regression. The R-squared values

are 2.9% and 2.2% for Tobin’s Q and ROA respectively. The adjusted R-square of both

Tobin’s Q and ROA values emphasized the explanatory power are negatively correlated at -

2.7% and -3.3% respectively. As the adjusted R-squared is given by {[(n -1)/(n-k)]*R2 + (1-

k)/(n-k)}, you'll get a negative value whenever the number the observations is lower than the

number of estimated parameters. A low R-squared, as well as a low adjusted R-squared,

means that the model has a low fit but does not necessarily mean that the model did a bad job

cross-sectional data is being used.


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Significance level for each of the independent variables was compared with the two

firm performance measures. Firstly comparing both the measures using the Board Size

(BSIZE) variable, the ROA has a higher coefficient than Tobin’s Q but neither of them is

significant to the firm performance models. Yermeck (1996) suggested that firms with larger

boards does not necessary mean better firm performance as it tends to be more symbolic

rather than making an impact on firm performance. Moving on to the proportion of NEDs

(PROP) variable, none of the measures are significant in value. This supports Hermalin and

Weisbach (1991) and Weir and Laing (2002) findings about board composition in the UK

where they found no significant relationship between proportion of NEDs and firm

performance. Remuneration then held a negative coefficient but and is both not significant to

the model as well.

The control variable, which is the logged operating return or revenue that is used to

measure firm size, does not have any significant with the model as well. As the variable is

insignificant, it therefore supports Weir and Laing (2002) findings that showed that market

perceives smaller companies as better performers than their larger counterpart.


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5 Conclusion

This study examines the relationship of the firm performance measure against the

corporate governance structure. Based on the OLS regression, there are no significant

relationship between the both of them, thus the stated hypotheses above are rejected.

Comparing a few studies we could take this into an argument of why the hypothesis was

rejected.

Boards dominated by NEDs do not seem to affect performance regardless of the

measures used. This implies that the recommendation by the Malaysian Institute of Corporate

Governance to have at least one third of the board comprising NEDs, may not actually be as

beneficial as it was hoped to be. Although this mimics the prescriptive approaches of the

Cadbury Report (1992) and the Hampel Report (1998) in the UK, however what may work

fully well for one country this may not be necessary work the same for another country

Malaysian corporations. In a country such as Malaysia, a currently still a developing country,

it has much room to work on. Most NEDs are not selected solely due to their expertise and

experience but more often for political reasons, which help to legitimise business activities,

forge contacts and seal contracts. Hence, such directors may not be able to contribute to

independent monitoring and reducing the agency conflicts associated with the potential

misallocation of excess resources. Furthermore, due to a lack of knowledge of their roles,

they may not be able to efficiently perform their duties efficiently. The step taken by the

MICG to have all directors of newly listed companies to undergo training may be seen as a

stepping stone towards the right direction. Non-executive directors have an implicit duty to

work in a collegial manner with the executive directors in performing their functions and

discharging their duties to ensure the sustainability of the companies under their care. Hence,

an “eyes on, hands off” approach that would best describe the manner in which non–


18

executive directors should act. This allows the NEDs so as to provide insights without

attempting to micromanage.

The contradicting result in this study suggests that there is a further need for

conceptual thinking to restructure corporate governance resulting in a higher firm

performance in developing countries. By blindly replicating a developed country corporate

governance structure without putting into consideration of the current socio-economic

situation would not help in improving firm performance thus but rather it may very well

slowing the country’s ability to grow politically and economically.

To conclude, good corporate governance cannot be achieved purely on the strength of

regulations. Regulation is only one of the core components of good corporate governance.

The core components of corporate governance as stated and as it can be seen from in the

UK’s the Cadbury Report (1992) and Principles of Corporate Governance (OECD 1999), it

also emphasizes the are rights and equitable treatment of shareholders, interest of other

stakeholders, role and responsibilities of the board, integrity and ethical behaviors and

disclosure and transparency.

Robust corporate governance also requires fully functioning self and market

disciplinary mechanisms, where all stakeholders assume responsibility for their decisions and

actions. Shareholders should are also required to be proactive in holding the directors into

account of their actions and . It is also equally crucial to ensure market discipline is instilled

in the directors to promote good corporate governance. Therefore there is an urgent need for

Malaysia to move beyond reliance on regulatory discipline, and to firmly embed corporate

governance culture in listed companies and more generally within the entire ecosystem.


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6 References

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Booth R., J., Marcia Millon Cornett & Hassan Tehranian 2002, "Board of Directors,

ownership and regulation", Journal of Banking and Finance 1973-1996, .

Brick E., I., Palmon, O. & Wald K., J. 2002, CEO Compensation, Director Compensation,

and Firm Performance: Evidence of Cronyism.

Cadbury 1992, Cadbury Report; The Financial Aspects of Corporate Governance, Gee

Publishing Ltd, London.

Eisenberg, T., Sundgren, S. & Wells, M. 1998, "Larger Board Size and Decreasing Firm

Value in Small Firms", Journal of Financial Economics, vol. 48, pp. 35-54.

FCCG 2000, Malaysian Code of Corporate Governance, Ministry of Finance, Malaysia.

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Eyes on Hands off, The Ambiguous Role of Non-Executive Directors in Corporate Governance

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