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The Effects of Corporate Governance Initiatives

on Corporate Entrepreneurship Performance in GLCs

Harry Entebang

Shazali Abu Mansor

Irma Yazreen Md Yusoff

Faculty of Economics & Business, Universiti Malaysia Sarawak

Abstract

Prior to the Asian Financial Crisis in 1997/98, many large and established organizations in Asia

appeared to have ignored the importance of corporate governance. However, many argued that poor

governance was a major cause of the crises. Admitting this, as well as to protect and enhance

shareholder value and the financial performance of firms the Malaysian Code on Corporate Governance

(Code) was issued and this marked a significant milestone in corporate governance initiatives in

Malaysia. Consequently, public listed companies including Government-linked companies (GLCs) have

started to issue a statement on corporate governance which highlights and describes the principles and

best practices of good governance in their organizations. On the other hand, the practices of corporate

governance have led to too much control and ways of restraining corporate decisions. Given this, the

purpose of this paper is to investigate the extent to which corporate governance initiatives have

influenced corporate entrepreneurship performance in GLCs. While recognizing the importance of

corporate governance, the results of the content analysis suggest that too much corporate governance

appeared to have a negative effect on the extent to which organizations have pursued

entrepreneurial activities.

Keywords: Corporate Governance, Corporate Entrepreneurship Performance, Government-

Linked Companies

Introduction

In the pursuit of competitive advantage, superior financial performance and growth, large and

established organizations appeared to have ignored the significance of practicing corporate

governance to the highest standards. However, since the early 1990s, corporate governance has

received increasing attention from regulatory bodies and practitioners worldwide (Cheung &

Chan, 2004). Even though most studies do not suggest that Asian firms were badly managed

(Claessens & Fan, 2002), scholars and practitioners continue to argue that weak regulatory

systems and poor governance have caused corporate failures of most organizations in Asia. In

fact, the Asian Financial Crisis of 1997/98 is regarded as a crisis of corporate governance.

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Recently, the global financial crisis caused by the US subprime problems has once again

triggered the need for conformance on principles of good corporate governance (Santiago, 2009).

On the other hand, for organization to achieve superior performance, instituting and practicing

too much corporate governance may appear to strangle corporate entrepreneurship performance

of the firm (Taylor, 2001). In fact, Taylor observes that after Enron and WorldCom, US

politicians and regulators are convinced that chairmen, CEOs and board of directors have been

too entrepreneurial and they have neglected their attention on corporate governance and hence

argues that corporate governance and entrepreneurship remains a highly controversial subject

(Taylor, 2003).

Using the conceptual perspective of content analysis, this paper examines the extent to which

corporate governance practices may affect or influence entrepreneurial activities/behaviour in

large and established government-linked companies in Malaysia. The outcomes of the semi-

structured interview suggest that corporate governance have significantly influenced corporate

entrepreneurship (CE) performance in these companies.

Literature review and theoretical foundation

Over the last decade, organizations in North America, Europe and Asia have undergone

unprecedented transformation. In Asia particularly, forces like market changes, rapid

technological changes, industry life-cycle, government intervention, uncertainty of the financial

markets and the effects of the Asian 1997/1998 economic crisis, as well as the need to deliver

high quality products and services due to an intensity of competitive pressures resulting from the

implementation of the ASEAN Free Trade Area (AFTA), have also forced many Asian corporate

leaders to rethink the strategic positioning of their business organizations (Entebang, 2010). In

fact, Dess et al., (1999, p.85) observe that “intensifying global competition, corporate

downsizing and delaying, rapid technological progress, and other organizational factors have

heightened the need for organizations to become more entrepreneurial in order to survive and

prosper.” Subsequently, scholars within the field of strategic corporate entrepreneurship suggest

that to be successful firms must have the capacity to innovate faster than their best competitors

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(Teng, 2007) and stay entrepreneurial (Thornberry, 2006). Consequently, corporate

entrepreneurship is fast becoming a weapon of choice for many large, established companies or

organizations because it entails both the mindset and skills demonstrated by successful start-up

entrepreneurs, and the inculcation of these entrepreneurial characteristics into the culture and

activity/behaviours of the large organizations (Thornberry, 2001).

Nonetheless, in pursuit of superior performance, large and established organizations in Asia

appeared to have ignored the importance of corporate governance. In fact, many argue that poor

governance was a major cause of the crises. Admitting this, the Malaysian Code on Corporate

Governance (Code) was issued in March 2000 and this has marked a significant milestone in

corporate governance initiatives in the country (Securities Commission, 2007).

Corporate governance (CG) refers to the system through which the behaviour of an organization

is monitored and controlled (Cheung & Chan, 2004) as well as by which firms are owned and

managed (Krafft & Ravix, 2005). It outlined the principles and best practices of good governance

and described optimal corporate governance structures and internal processes (Securities

Commission, 2007). In fact, in knowledge-based and advanced economies, new principles of

corporate governance have been oriented towards the maximization of shareholder value (Krafft

& Ravix, 2005). These new principles of CG driven by shareholder value appear to suggest three

things: (a) financial considerations have a central role in the way organizations are governed, (b)

information asymmetries between the different actors (i.e., between management and

shareholders) have to be eliminated, and (c) a contractual structure of organizations have to be

generalized within the firm (OECD, 1999).

However, given the unpredictable market conditions, organizations are exposed to economic and

financial risks and this would eventually destroy shareholders’ value. Hence, the principles of

good corporate governance have been introduced to increase companies’ internal efficiency, and

to favor investments through financial markets (Krafft & Ravix, 2005). In fact, Kraft & Ravix

noted that “maximizing the shareholder value in corporate governance greatly favored the

financing of emerging firms via the stock markets and the acquisition of new knowledge and

competencies on the basis of mergers and acquisitions over the period 1998-1999” (Krafft &

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Ravix, 2005, p.126). Besides, good CG has been recognized as essential for establishing an

attractive investment climate characterized by competitive companies and efficient financial

markets (OECD, 2003). On the other hand, such an emphasis has greatly affected the viability of

companies and this has resulted in over-investment, excess capacity, downsizing, and a sharp fall

in the share price, revenue and profitability (Krafft & Ravix, 2005). Consequently, CG could

have accelerated the process of financial crisis, and contributed high turbulence in firms’

demography and dramatic changes in market shares (Lazonick & O'Sullivan, 2002).

On the other hand, corporate entrepreneurship (CE) refers to entrepreneurial activities within

existing business organizations (Schollhammer, 1982). Later, Antoncic and Hisrich (2004)

appear to share the same view and define CE as entrepreneurship within an established

organization. Alternatively, Zahra (1995) views CE as the sum of an organization’s innovation,

renewal, and venturing efforts. An alternative view is that CE is a process whereby the

organizations engage in diversification through internal development (Burgelman, 1983).

Stevenson, Robert and Grousbeck (1989) also perceive CE as a process which individuals _

either

on their own or inside organizations _

pursue opportunities without regard to the resources they

currently control. Within the same line of thought, CE is further defined as the process whereby

an individual or a group of individuals, in association with an existing organization, create a new

organization or instigate renewal or innovation within that organization (Sharma & Chrisman,

1999). However, other scholars suggest that CE is primarily concerned with entrepreneurial

behaviour inside established mid-sized and large organizations (Morris & Kuratko, 2002).

Therefore, corporate entrepreneurship appears to have a multiple definitions (Entebang, 2010),

nonetheless most entrepreneurship scholars seem to agree that CE activities focus primarily on

innovation, strategic renewal and corporate venturing aspects of the organization (Teng, 2007;

Zahra, 1993) which may contribute to organization’s survival and performance (Covin & Slevin,

1989; Drucker, 1985; Lumpkin & Dess, 1996; Miller, 1983; Zahra, 1993).

Consequently, scholars argue that organizations with high levels of corporate entrepreneurship

are more likely to perform better than those with lower levels of CE (Antoncic & Hisrich, 2004).

In fact, they find that corporate entrepreneurship is strongly, positively and significantly related

to organizational growth, profitability and new wealth. Hence, they argue that corporate

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entrepreneurship appears to be a good direct predictor of organizational performance (i.e., wealth

creation, growth and profitability).

Building on the above literature, it is clear that effective and good corporate governance is

necessary but due to intensifying global competition, rapid technological progress, and other

organizational factors the need for organizations to become more entrepreneurial through

corporate entrepreneurship remain one of the keys to competitive advantage. Therefore, although

managers of organizations are legally responsible to the shareholders (Allen & Gale, 1998),

however, in practice managers do not appear to pursue the interests of shareholders (Berle &

Means, 1932). Given this, the issue between legal rights of shareholders and the de facto control

of managers proposed by Berle and Means led to the conceptualization and development of

agency approach to corporate governance (see also Jensen & Meckling, 1976).

Problem statement

In most emerging economies, government-linked companies (GLCs) or public enterprises (PEs)

still represent a substantial part of gross domestic product (GDP), employment and market

capitalization. Moreover, GLCs are often prevalent in several key sectors of the economy, whose

performance is of great importance to broad segments of the population and to other parts of the

business sector (Putrajaya Committee on GLC High Performance, 2006). However, the

performance of GLCs continues to be a major concern (Putrajaya Committee on GLC High

Performance, 2005). Therefore, building on corporate entrepreneurship literature there is an

urgent need for these companies to be more entrepreneurial. On the other hand, there has been a

great emphasis to institute corporate governance initiatives by enhancing board effectiveness and

strengthening directors capabilities in GLCs. In most Organization for Economic Co-operation

and Development (OECD) countries, the governance of state-owned enterprises (SOEs) for

instance has been regarded as critical to ensure their positive contribution to a country’s overall

economic efficiency and competitiveness. Besides, OECD experience has also shown that good

corporate governance of SOEs is an important prerequisite for economically effective

privatization, since it will make the enterprises more attractive to prospective buyers and enhance

their valuation (OECD, 2005).

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Building on an agency perspective of CG in which the division between financing (risk-taking)

and managing/controlling functions leads to difficulties i.e., principal-agent problems in relation

of managers (the agent) and owners (shareholders) or the principal proposed by Krafft & Rafix

(2005), the key research question of this investigation is to what extend the practices of corporate

governance by GLCs have influenced the corporate entrepreneurship performance in these

companies.

Research design

Building on past literature of CG and CE, pre-determined questionnaires were prepared to

assist/guide the interviewer during the interview. Senior executives or managers in GLCs

involved with CE initiatives or activities in their organizations were identified and approached

for interview. All interviews lasted between forty-five minutes to an hour. To ensure a high

degree of accuracy, all interviews were tape recorded and subsequently transcribed into

Microsoft Word. The data was later converted into Rich Text Format (RTF) and imported to

MAXQDA 2007, qualitative software for processing qualitative data and text analysis. A total of

ten senior managers participated in the exercise.

Since data reduction is a key element of qualitative analysis, effort was made to ensure the

quality of the qualitative data was respected and this was achieved through content analysis

procedures (Cohen, Manion, & Morrison, 2007). It is argued that the content analysis technique

is recognized for its efficiency and reliability (Namey, Guest, Thairu, & Johnson, 2007). Despite

this, it has been argued that the problem of reliability may still prevail because coding errors can

only be minimized, and not eliminated (Gottschalk, 1995).

Once the data were coded and categorized, data analysis was done by retrieving text based on

categories rather than only single words (Weber, 1990), because categories tend to retrieve more

than single words, drawing on synonyms and conceptually close meanings. Therefore, in this

study, the data was categorized using codes as well as sub-codes based on its themes or concepts

and not numbers/frequencies. Support for the theme and the sub-themes was presented through

use of key relevant quotations or excerpts drawn from the data transcriptions (Zhao, 2005). This

is an established technique used to demonstrate the validity of the findings in qualitative research

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(Whitemore, Chase, & Mandle, 2001). Building on descriptive evidence, appropriate explanation

for the situation was highlighted and discussed.

Findings and discussion

The goals of the interview were to find out and examine the perception of senior managers

regarding the extent to which corporate governance initiatives/practices have influenced

corporate entrepreneurship performance in their organizations over the last three years. Upon

examination of the interview transcripts, the results were divided into three major sub-themes,

the significance of corporate governance; challenges in implementing corporate governance, and

the effects of corporate governance on corporate entrepreneurship performance in GLCs. Table 1

depicts the major theme and the sub-themes of the data.

Table 1 Major Theme and Sub-Themes

Major Theme Sub-themes

Corporate Governance

Initiatives

The significance of corporate governance

Corporate governance and its challenges

Corporate governance and its implications on corporate

entrepreneurship performance

The significance of corporate governance in GLCs

The Asian Financial Crisis in 1997/1998 has served as a wake up call to many multinational

corporations (MNCs) in Asia including GLCs in Malaysia. Further more, the introduction of the

ASEAN Free Trade Area (AFTA) aiming to reduce tariff barriers among member countries

through the Agreement on the Common Effective Preferential Tariff (CEPT) scheme made

ASEAN a full free trade area in 2008 (Hapsari & Mangunsong, 2006). Recently, the effects of

the credit crunch, the collapse of Wall Street and the increase of fuel prices have become a global

pressure that affects every sector of the global economy. The accumulation of these forces has in

turn become a major global and market force that compels organizations including GLCs to

rethink the way they should conduct their businesses. Given the effects of such phenomena, the

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Code was adopted to enable public organizations including GLCs to set out principles and best

practices on structures and processes that will safeguard shareholders interests and eventually

strengthen their competitiveness. Generally, majority of the managers recognized the importance

of CG in their organizations. For instance, one senior manager stated that, “one of the big

problems within an established organization is that sometimes decisions are being made by one

person and therefore the risk of making wrong decision is higher. That‟s why we need different

people, people with different experiences, people who can look at things differently even though

this may slow down the decision-making processes of the firm. But such checks and balances will

ensure that decisions will be made optimally by collective group of professional managers.

Therefore, given the importance of corporate governance in our organization, we have one key

fundamental operating control document called the Limit of Authority (LOA), where financial

decision by any manager is made within his or her limit of authority”.

Within the financial sector, the importance of effective corporate governance is even crucial.

Banks and other financial institutions are highly regulated merely because they are the

custodians of public money. According to one of the senior managers, “corporate governance in

……(name of bank) involves the entire employees of the organization”. As a result of financial

turmoil in 1997/1998, banks are becoming more prudent. Consequently, the roles of non-

executive directors are becoming highly relevant in ensuring the rights of investors are properly

protected”.

In another organization, a senior manager argues that, “having good corporate governance will

ensure company‟s profitability because good corporate governance indicates that money is spent

wisely on various projects”.

In another company, a manager stated that “corporate governance does give us confidence that

we are doing things right. In fact, we have been recognized by other institutions for having good

corporate governance. On this basis, I do believe that bankers and other financial institutions

have actually invested or granted us loan because they know we have got good corporate

governance in place.

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From the excerpts of the interview, corporate governance initiatives in GLCs are inspired by the

needs to minimize losses through effective checks and balances, protect the rights of investors,

gain confidence among stakeholders and ensure company’s profitability. These initiatives

appeared to concur with the work of Cheung & Chan (2004) where they discovered that a key

aspect of corporate governance in Asia is to improve investor protection and by so doing will

enhance the development of local capital markets and promote foreign direct investment for

long-terms economic prosperity.

Corporate governance and its challenges

Regulators and practitioners tend to argue that good corporate governance initiatives are

demonstrated by strict compliance of rules and other regulatory requirements. By doing so,

companies and organizations will be able to improve their performance, competitiveness and

sustainability. On the other hand, there are numerous challenges at firm or organization level.

One of the senior managers of a listed company argued that as a result of strengthening the roles

of independent directors, although “we have promising project(s) with another associated listed

companies….(name of company), but because of corporate governance issues, at times even we

were the lowest in terms of contract pricing, we still did not get the job(s) and this can be very

disappointing. Hence, for the sake of adhering to the Code, we are losing the opportunity and

this can affect our performance”.

In adopting corporate governance initiatives within an organization, one of the senior managers

pointed out that “corporate governance is good for the country and it is also good for the group

as a whole, however, when we actually apply it, it makes our tasks become more difficult. Given

the size of our organization, we have to go to the Board for approval before we could participate

in any new project especially if the proposed project(s) is RM200 million and above but to us,

this amount is very small. Therefore, by going back to the Board for approval has actually

slowed down the decision-making processes of the company. This doesn‟t help us in a way

because tenders are normally very short, say within a month. On the other hand, we have to

schedule for a meeting to take place for our directors and this is not always easy. Very often than

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not, they want you to show them that the proposed projects will be able to generate some levels

of profit margin. Therefore, this has been a great challenge for us‟.

From the excerpts above, the key challenges of corporate governance initiatives in GLCs

appeared to be in the area of effective implementation, while the issue of board composition

pertaining to number of independent non-executive directors remains a debate among regulators

and practitioners. For instance, Cheung & Chan (2004, p. 19) observed that “the issue of board

composition might not necessarily provide a strong system of checks and balances between the

interest of the major shareholder and that of the minority shareholders. Since directors are

elected by the controlling shareholders, it is unlikely that the number of non-executive directors

will provide an adequate degree of monitoring of the majority shareholders or be able to exert a

strong influence on major corporate decisions. The role of such non-executive directors,

however, may serve an advisory purpose in the decision-making process”. Given this, the study

has advanced our understanding in terms of its practicality.

Corporate governance and its implications on corporate entrepreneurship performance

The key research question of this study is to what extend do corporate governance initiatives

have influenced the corporate entrepreneurship performance in GLCs. Generally, most managers

indicated that the ability to pursue corporate entrepreneurship activity is strongly influenced by

institutionalization of corporate governance framework in their organizations. Although the

ultimate goal of any organization is to enhance shareholders value, through various CE activities

but their abilities to demonstrate proactiveness, risk-taking and innovativeness are constrained by

rules and regulations. As one of the senior managers put it “although we have corporate

governance in place, but we still make losses from our projects in the Middle East. This was

mainly because of different management team and the situation at that time was unpredictable.

Since then, we really need to convince our directors. In fact, construction business is very

challenging, our environment and condition today can be very different from that of tomorrow

and therefore we really need to adapt to changes fast. However, given all these corporate

governance things i.e., rules and restrictions, it is very difficult for us to move on”.

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In fact, another senior manager claimed that the presence of corporate governance in public

organizations does empower “board of directors of the company to challenge every idea

presented to them and this has subsequently put down many good ideas and proposals”. This

argument is consistent with another senior manager in other company. The manager pointed out

that “actually corporate governance plays heavier role than the pursuit of corporate

entrepreneurship activities! This is because doing it right or doing the right things is one of the

main reasons as to why top management is very careful with their decisions especially when it

comes to new venture(s) or other CE initiatives simply because they are answerable to the board.

After all, the company will be putting in a lot of money without seeing any return for several

years. Therefore, I personally feel that given the importance of corporate governance in

minimizing risks associated with new projects or ventures, it does hold back CE activities as far

as venturing into new projects in a new territory is concerned simply because people are afraid

of failures”.

Within an established and diversified group of companies, there is a need for them to strike a

balance between corporate governance and corporate entrepreneurship even though Taylor

(2001, p. 128) has strongly proposed that “board members should focus more on the central task

of the board which is „corporate entrepreneurship‟ — creating conditions for corporate renewal,

encouraging the development of new activities and the elimination of old ones”. However, one of

the senior managers has pointed out that “we have to achieve a balance between governance and

our entrepreneurial activities so that we will not simply risking our capital or money on non

feasible/reliable project(s). In fact, more often than not most people do not see the potentials of

creativity and innovation and these are some of the downside of viewing ideas/proposals from

the perspective of corporate governance. Therefore, corporate entrepreneurship activities tend

to be affected by rigidity of corporate governance…despite this, innovation is part of our vision

and we have to be innovative in everything we do. On the other hand, we also believe that good

corporate governance will drive the shareholders value because it ensures the accuracy of

shareholders value. Nonetheless, overall, corporate governance has a negative effect on our

entrepreneurial performance”.

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In a separate interview with another senior manager, he also argued that corporate governance

has negative effects on corporate entrepreneurship in his organization. However, he recognized

the importance of having good corporate governance while pursuing various corporate

entrepreneurship activities. He stated that “it is the innovation that actually drives our progress

and development”. Building on this, the outcomes of the study appears to be quite consistent

with the work of Taylor (2001).

Conclusion, limitations and future research

Corporate governance (CG) has received considerable attention in recent years among scholars,

practitioners and regulatory bodies especially after the financial crisis in 1997/1998. A review of

the literature on corporate governance and corporate entrepreneurship confirms that, both are

important but for an organization to move forward it needs to strike a right balance. The study

shows that too much corporate governance may have a negative effect on the extent to which

organizations will pursue entrepreneurial activities. Hence, although managers as agents should

conform to the practice of good corporate governance but, at the same time they should not

forget their primary duty i.e., to protect and enhance shareholders values. This can be achieved

by putting more efforts on corporate entrepreneurship activities.

On the other hand, this study has several limitations. Firstly, only ten senior managers

participated in the exercise and this may limit generalizability of the findings. Therefore, one

should be very careful when interpreting the outcomes of the study. In addition, this is a cross

sectional study and for better understanding of the subject, the study should be conducted on

longitudinal basis using an in dept interview instead of the semi-structured approach. Future

research should consider the extent to which the relationship between CG and CE is mediated or

moderated by internal and external organizational factors.

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