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208
CORPORATE GOVERNANCE
Blackwell Publishing IncMalden, USA
CORGCorporate Governance: An International
Review0964-8410© 2007 The Authors; Journal
compilation © 2007 Blackwell Publishing Ltd
March 2007152208222ORIGINAL ARTICLES
OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN
MALAYSIACOPRORATE GOVERNANCE
Ownership, Governance and Firm
Performance in Malaysia
On Kit Tam* and Monica Guo-Sze Tan
Corporate governance is often regarded as a weak link in Asia’s company performance. Most
studies have focused on the relationship between ownership and firm value, but the
instruments that mediate that relationship have often been overlooked. This paper attempts
to address this issue by examining the relationship between ownership types and firm
performance by analysing variations in governance practices and their impact on firm
performance. This paper shows that different types of majority owners exhibit distinct traits
of behaviour and preferences for corporate governance practices in an environment of
pervasive concentration of shareholding. Such governance practices and various firm
characteristics are found to have an impact on firm performance.
Keywords: Ownership, corporate control, corporate governance practices, pyramids, crossshareholding, firm performance, Malaysia
Introduction
orporate governance is often regarded as
a weak link in Asia’s company performance and economic development. Most
studies have focused on the direct relationship between ownership and firm value, but
the instruments that mediate that relationship have often been overlooked. This paper
attempts to address this issue by examining
the relationship between ownership types and
firm performance by analysing variations in
governance practices and their impact on firm
performance.
Based on data of Malaysia’s top 150 publicly
listed firms, this paper shows that there are
significant differences in corporate governance practices by different types of owners.1
Concentration of shareholding is prevalent,
with different types of owners exhibiting distinct traits of behaviour and preferences for
corporate governance practices that aim to
enhance the interest of the majority shareholder. Governance practices such as adopting
concentrated ownership and CEO-duality are
found to have affected firm performance of
Malaysia’s publicly listed companies. Firm
C
*Address for correspondence:
Faculty of Business and Economics, Monash University,
26 Sir John Monash Drive,
Caulfield,
Victoria
3145,
Australia. E-mail: onkit.tam@
buseco.monash.edu.au
Volume 15
Number 2
March 2007
characteristics, such as firm age, size and sector, are also shown to be related to firm performance. The results suggest that the protection
of shareholders’ rights, particularly those of
the minority shareholders, remains a key issue
in Malaysia as large shareholders exert dominant control via ownership concentration
and representation on company board and
management.
Corporate ownership and control
in Malaysia
The New Economic Policy (NEP) enacted in
1971 aimed to achieve 30 per cent of corporate
ownership and management for Bumiputera2
by 1990 (Malaysia, 1971). This policy has
entrenched government intervention in the
corporate sector, and business and politics
became intertwined in Malaysia.
At the end the NEP in 1990 (Table 1), Bumiputera ownership had grown remarkably from
only 1.5 per cent in 1970 to 20.3 per cent in
1990, but still fell short of the initial target of
30 per cent (Malaysia, 1991). Non-Bumiputera
have reached the NEP target and foreign
© 2007 The Authors
Journal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road,
Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN MALAYSIA
209
Table 1: Comparison of ownership of share capital of limited companies between 1969 and 1990
Companies incorporated in West Malaysia
Residents
Malays (Bumiputera)
Malay interests (Bumiputera interests)
Chinese
Indians
Federal and state governments
Nominee companies
Other individuals and locally controlled
companies
Foreign-controlled companies in Malaysia
Non-residents
West Malaysian branches of companies
incorporated abroad
Net investments by head office
Total
All industries
(1969)
All industries
(1990)
($000)
(%)
($000,000)
(%)
49,294
21,339
1,064,795
40,983
21,430
98,885
470,969
1.0
0.5
22.8
0.9
0.5
2.1
10.1
15,322.0
6,976.5
49,296.5
1,068.0
–
9,220.4
389.5
14.0a
6.3b
44.9
1.0
–
8.4
0.3
282,311
1,235,927
6.0*
26.4*
27,525.5
–
25.1
–
1,391,607
29.7*
–
–
109,798.4
100.0
4,677,540
100.0
Source: The Second Malaysia Plan, 1971, Registrar of Companies (ROC), Central Information Collection
Unit (CICU), PNB and Economic Planning Unit (EPU) estimates in The Second Outline Perspective Plan
1992–2000 (Malaysia, 1991).
*Foreign ownership totalling 62.1%.
a
The amount held by this group consists of $9,000 million owned by Bumiputera as direct investors and
$6,300 million as investment in institutions channelling Bumiputera funds.
b
Shares held through traditional trust agencies such as PNB, PERNAS and SEDCs. It also includes the
amount of equity owned by the Government through other agencies and companies which have been
identified under the Transfer Scheme of Government Equity to Bumiputera.
ownership has decreased tremendously but
still managed a considerable amount of 25.1
per cent (Malaysia, 1991). The Industrial
Coordination Act (ICA) 1975 has liberalised
the NEP to be more “accommodative” towards non-Bumiputera and foreign business
communities (Heng, 1997). In the post-NEP
period, division in economic activities among
ethnicities still exists: Bumiputera retain
dominance in the agricultural sector; Chinese
remain strong in the commercial and business
sectors, with a focus on wholesale and retail
trade; Indians remain a minority in all sectors,
considering that they are the smallest group
among the major ethnicities in the population (Gomez and Jomo, 1997). Furthermore, it
is found that income distribution was still uneven between ethnic groups, with Bumiputera
mostly in the lower occupational categories
(Malaysia, 1991). Moreover, the accumulated
growth in ownership and wealth for Bumiputera concentrated among small and closelinked groups of entrepreneurs.
The development of equity market in
Malaysia is heavily influenced by the NEP and
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
the ICA 1975 (Gomez and Jomo, 1997). The
Malaysian market was dominated by large
trust funds such as the Permodalan Nasional
Berhad (PNB) and the Employees Provident
Fund (EPF) (Jomo, 1995). Foreign funds only
started to increase in the early 1990s after the
state liberalised capital flows (Suto, 2003), but
not long after, the inflow of capital once again
tightened as a result of Asian Crisis 1997.
While the Securities Industry Act (1973,
1983) provides a framework for investor protection in Malaysia (Jomo, 1995), La Porta et al.
(1998) show that enforcement has been ineffective. This has adversely affected the development of financial markets because investors
tend to shy away from financing firms if the
legal framework does not protect their interests and rights (La Porta et al., 2000). Debt
financing through banking institutions has
been the dominant form in Malaysia (Jomo,
1995; Suto, 2003). These factors have impeded
the development of investors’ rights and protection in Malaysia.
This section analyses ownership types and
concentration among the top 150 listed firms
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CORPORATE GOVERNANCE
under the Malaysian legal and socio-economic
environment. The impact of ownership types
on governance tools such as CEO–Chairman
duality and debt structure will also be examined. The effects of the interplay among these
variables, and firm characteristics such as firm
age and size, on firm performance will be
investigated in an integrated model.
Ownership structure
Empirical studies examining the relationship
between ownership structure and firm value
in the USA, Eastern Europe and Asia, have on
the whole produced inconclusive results
(Claessens and Djankov, 1998; Himmelberg
et al., 1999; Morck et al., 2000; Nagar et al., 2000;
Demsetz and Villalonga, 2001; Wiwattanakantang, 2001). One explanation offered is that as
long as managers maximise shareholders’
values, ownership structure would not have
any systematic impact on firm value (Demsetz
and Villalonga, 2001). However, what is often
overlooked is the pathways through which
effects of corporate ownership are diffused
throughout the corporate environment. The
relationship of ownership structure and firm
value needs to be examined in conjunction
with key elements of a firm’s operating environment, such as socio-economic policies,
governmental intervention, law and regulations. This paper develops an integrated
model that attempts to explain how firm performance can be affected when different ownership types utilise different modes of
ownership structures, ownership concentration and CEO–Chairman duality as governance and controlling mechanisms to
safeguard their own interests.
In theory, as ownership separates from
management, firm value may decrease due to
growing divergence in interests between the
two (Jensen and Meckling, 1976). Conversely,
as ownership is concentrated in a single shareholder, there will be closer alignment of interests and this could affect firm value. Recent
studies by Wiwattanakantang (2001) and Lins
(2003) find that ownership concentration is
positively related to firm performance in Thailand and Asia. Such a relationship is especially
pronounced in countries where investor protection is low, because ownership concentration is found to mitigate conflicts between
owners and managers (Suto, 2003).
However, concentration of ownership and
control could lead to managerial entrenchment and domination of the controlling shareholders’ interests. A U-shape relationship
between ownership concentration and firm
value is found by Nagar et al. (2000) where
firms at both extreme ends of ownership con-
Volume 15
Number 2
March 2007
centration level outperform firms where
shareholders hold a medium level of shareholdings because “expropriation is low if the
controlling shareholder owns a large ownership stakes, thus internalising most of the
expropriation costs, or if no shareholder is
large enough to unilaterally expropriate in the
first place” (Nagar et al., 2000, p. 3). This paper
will look beyond nominal ownership concentration by showing how ownership concentration’s motivation and effects might differ
among major ownership types in Malaysian
companies.
The rapid growth of Malaysia’s economy has
not diluted the concentrated ownership structure in Malaysian firms. Lim (1981) found the
ownership of shareholding and wealth among
the 100 largest firms in the 1960s to be highly
concentrated. An update by Zhuang et al.
(2001b) shows that the largest shareholder
still possesses an average 30.3 per cent of
outstanding shares among all listed firms in
Malaysia in 1998, with the top five shareholders
owning 58.8 per cent. Two-thirds of 2980 firms
in East Asia, and about 40.4 per cent of the 238
among the sample firms in Malaysia, are closely
held by a single large shareholder (Claessens
et al., 2000a). Individual/family shareholders
(IND) are predominant as large shareholders
in Malaysia (Zhuang et al., 2001a).
Many of the closely held firms by IND are
founded on the financial and human capital of
the founding family (McConaughy, 2000). As
a result, these shareholders maintain intimate
relationships with their businesses, even after
these companies are publicly listed. Redding
(1996) has shown that they often link their
families’ prosperity to their firms’ performance. With their large initial endowment,
they have found it important to concentrate
shareholding in order to maintain a dominating voice in company policies and decisions.
In addition, IND want to maintain control of
their firms so that they could pass the businesses down to coming generations (Anderson and Reeb, 2002; Schulze et al., 2001).
Consequently, IND often have longer-term
horizons with their investments. In their studies of Asian management, Redding (1996),
Wong (1996) and Hamilton (1996) show that
extensive personalised business networks and
high concentration of control are common
tools to facilitate business dealings.
CEO–Chairman duality
From the perspective of the controlling shareholder, efficiency in monitoring management
could be enhanced through CEO–Chairman
duality (Haniffa and Cooke, 2000) because less
contracting is needed and information asym-
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN MALAYSIA
metry is reduced. By being a member of the
board, often the Chairman and/or CEO, IND
could concentrate management control and
align company objectives with their own interests. By participating directly in managing
firms, IND could internalise transaction costs
and improve firm performance through their
reputation as the figurehead of the firm via
implicit contracting and tremendous negotiating power (Redding, 1996).
Malaysia’s 1971 NEP has encouraged the
free-rider problem (Suto, 2003) because an invisible investor protection umbrella for Bumiputera was created through the establishment
of large trust funds. This has undermined the
development of the market for professional
managers and discourages investor education
in the country. Therefore, a priori, it is not
unreasonable to find the controlling shareholders, particularly IND, actively manage their
firms to exercise more effective monitoring.
Anderson and Reeb (2003) found that familyfounded firms have superior firm performance
to non-family firms, while Mishra et al. (2001)
found a similar result.
Firm performance is not necessarily improved when the state (STATE), foreign investors (FOREIGN) and trust funds (TF) adopt
identical controlling mechanisms in their firms.
Transaction costs, due to contracting costs in
cumbersome bureaucracy, will increase and
monitoring becomes less effective as the problem of “agents watching agents” arises
(Woidtke, 2002). FOREIGN, STATE and TF may
not be able to achieve the same efficiency in
reputation and negotiation as IND could because there is no single controlling shareholder
who is able to internalise the transaction and
monitoring costs. Conflict of interests might
also arise between the monitor and agents.
Governmental activism in the corporate sector
may diminish incentives for institutional investors to actively monitor return on their investments, leading to greater information
asymmetry and free-rider problems (Suto,
2003). FOREIGN are unlikely to be active in
this area because their rationality boundary is
limited due to the nature of highly personal
and close-knit business networking and information sharing in Malaysia, and in many Asian
countries (Redding, 1996; Wong, 1996).
Using Malaysian data, this paper will examine the validity of the above arguments
by testing the hypotheses below.
H1: Ownership concentration is highest in
firms where individual shareholders are the
largest shareholders.
H2: CEO–Chairman duality is most prominent
in firms where individual shareholders are the
largest shareholders.
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
211
Debt structure
Besides equity ownership, studies on American and Malaysian firms have examined debt
financing as a corporate governance tool (Harris and Raviv, 1988; Mohamad, 1995; Mishra
and McConaughy, 1999; Johnson and Mitton,
2003; Suto, 2003). Malaysian firms often have
intimate relationships with banks, as the latter
serve as major finance providers. A firm’s
leverage is found to have significant positive
impact on its performance in Malaysia (Mohamad, 1995). High leverage is attained through
closely linked creditors and borrowers, who
often sits on each other’s board of directors,
resulting in higher incentives for monitoring.
However, monitoring could be jeopardised
because cross-directorships could insulate
managers and directors from scrutiny. Claessens et al. (2000b) argue that preferential deals
could ruin natural market competition, hence
inducing disproportionate risk and lower
incentives for banks to monitor. If debt financing fails as a governance tool, firm performance will suffer.
Firm characteristics
In most studies on ownership and firm performance, firm characteristics were used as
control variables as they are treated as endogenous. However, this study postulates that
firm characteristics such as industry sector,
firm size and firm age are factors determined
by the business and investment strategies
adopted by the controlling shareholders and
board of directors. Certain types of shareholders are more likely to invest in particular sectors. For example, Chinese businesses often
concentrate in the construction and property
sectors, while the state are more likely to
dominate the utilities sector (Gomez and
Jomo, 1997). Firm size has been found to be
negatively related to firm value in USA, while
firm age has little impact on corporate control
and firm value (Mishra and McConaughy,
1999; Anderson and Reeb, 2003).
A model of how ownership structure and
corporate governance impact on firm performance is presented in Figure 1. This model is
built on the premise that, in Malaysia, different types of shareholders employ different
control and monitoring mechanisms to influence their firm. Controlling shareholders have
the choice to select which sector to venture
into, and whether to concentrate their shareholdings at the beginning. Upon becoming the
largest shareholder in a firm, they then further
exert their control over the board of directors,
often through assuming the position of Chairman and/or CEO, in order to maximise
their investment interests. Consequently, this
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CORPORATE GOVERNANCE
Ownership
Types
CEOChairman
Duality
Debt
Firm
Performance
Firm Size
Firm Age
Ownership
Concentration
Sector
Indicates direct effects between Ownership Types and variables
Indicates indirect effects between Ownership Types and variables
Figure 1: Model of hypothetical relationships among ownership structure, corporate governance and firm
performance
largest shareholder would influence, if not
decide, major financial decisions and business
strategies, hence affecting their firm performance. The above propositions that firm
performance varies according to different governance structure and ownership types will be
tested as follows:
H3a: Firm performance varies according to
ownership types.
H3b: Firm performance is positively related to
ownership concentration.
H3c: Firm performance varies according to
CEO–Chairman duality.
Methodology and result
Sources of data
The sample companies are drawn from companies listed on the KLSE. The KLSE Annual
Companies Handbook from 1994 to 2001 contains data on market capitalisation and financial data. Due to complications in collecting
data, data about ownership structure and
board of directors are only constructed for the
year 2000 which offers a considerable sample
size from the respective handbook. Significant
changes to ownership structure of a number of
large listed firms due to extensive restructuring and mergers in 2001 occurred as a result of
the earlier financial crisis. Including post-2000
data will mean that many significant cases,
particularly those relating to STATE, will
therefore be lost to the samples.
Definitions of variables
Definitions of variables are presented in
Table 2. Ownership is defined as the amount
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March 2007
of equity shares an ultimate owner – IND,
FOREIGN, STATE and TF – holds in a listed
firm. This study defines ultimate ownership
according to La Porta et al. (1999), which is
widely used by other studies (Claessens et al.,
2000a). Ultimate ownership is defined as the
sum of shares owned, directly or indirectly, by
a single owner through cross-shareholdings
and/or pyramids. If Firm A owns shares in
Firm B, the ownership of Firm B is traced until
an ultimate owner in the form of IND, STATE,
FOREIGN or TF is found. This study looks at
two types of structures in the ownership
makeup of the sample companies. In crossshareholdings, a structure where firms own
each other’s shares in a parallel (horizontal)
chain, ultimate ownership is derived from the
sum of all shares as the true amount owned by
a single ultimate owner (La Porta et al., 1999;
Claessens et al., 2000a). In a pyramid structure,
where firms are owned in turn by another in
a vertical chain, the smallest amount of shares
is taken as the true amount of shares that a
single ultimate owner holds in a firm under
examination (La Porta et al., 1999; Claessens
et al., 2000a). The smallest amount is taken in
order to examine the minimum amount that a
shareholder needs to own to control a firm.
Depending on the structure, the shareholding
composition and the strength of relations
among the companies in the vertical chain of
a particular pyramid structure, the amount
that is found in each case to have been deemed
sufficient for exercising control by each large
shareholder could vary.
An amendment to the KLSE listing rules
9.19 (25) has lowered the percentage of shareholding that requires mandatory disclosure of
the identity of a substantial shareholder from
5 per cent to 2 per cent. In 1998, the Securities
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN MALAYSIA
213
Table 2: Definitions of variables
Variable
Ownership concentration
Ownership types
CEO–Chairman duality
Firm age
Sector
Ln size
Firm performance
Debt structure
Definitions
The percentage of shareholding by an ultimate owner
Dummy variables:
State, equals 1 if state is the largest shareholder, otherwise 0
Foreign, equals 1 if foreign institution is the largest
shareholder, otherwise 0
Trust fund, equals 1 if trust fund is the largest shareholder,
otherwise 0
Control group is Individual-owned firms
Dummy variables:
CEO–Chairman independent, equals 1 if CEO and Chairman
positions are held by different person, otherwise 0
CEO–Chairman combined, equals 1 if CEO and Chairman
positions are held by the same person, otherwise 0
Control group is Structure incomplete, which is either CEO
or Chairman or both positions are not present
Age of incorporation (years)
Dummy variables, sector which a firm belongs to according
to KLSE:
Property, equals 1 if true, otherwise 0
Plantation, equals 1 if true, otherwise 0
Trading/services, equals 1 if true, otherwise 0
Construction, equals 1 if true, otherwise 0
Consumer products, equals 1 if true, otherwise 0
Industrial products, equals 1 if true, otherwise 0
Control group is Financial sector
Ln Market capitalisation (RM million)
Ln ROA (Profit before Ex-Item/Total Assets), Ln Tobin’s q
Ln Debt/Total Assets (D/TA), Ln Debt/Equity (D/E)
Industry (Central Depositories) Act 1991 was
amended to impose mandatory disclosure of
the beneficial owner’s identity of a nominee
account. Therefore, in the sample firms, the
top 20 largest shareholders are listed and the
relationships among individuals and firms
who are shareholders are also disclosed. A
very small number of private companies as
top shareholders are further traced through
information obtained from newspapers, journals, magazines and databases such as Dow
Jones Interactive, LexisNexis and Proquest.
Hence, the ownership compositions of all
sample firms are identified. The ultimate
owners in the sample firms could then be
constructed and the four major groups can be
identified: IND, STATE, TF and FOREIGN.
The ownership type IND in this study of
Malaysian companies encompasses both individual and family investors, as they have
similar organisational structure, operating
strategies and policies as compared to other
ownership types. Malaysia is found to have “a
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
genuine one-share-one-vote rule” (Thillainathan, 1999, p. 30). To control for size and age
of firm, the top 150 listed companies on KLSE
are selected, where data are available, based
on their ranking according to their market
capitalisation in 2000 and at least 10 years or
older in years of public listing and incorporation.
Firm characteristics are analysed through
firm size (measured by market capitalisation),
firm age (years of incorporation) and industry/
sector (according to KLSE coding). Two performance proxies are selected: Return on Total
Assets (ROA) and Tobin’s q, each measuring
different aspects of firm operation and implications for business decisions. This paper uses
time-series averages3 of the financial information from the years 1994–2000 to reduce serial
correlation (Anderson and Reeb, 2003). An
approximation of Tobin’s q4 is used here to
overcome limitation on data availability.
The sample companies accounted for approximately 74 per cent of the total market
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214
CORPORATE GOVERNANCE
capitalisation of all KLSE listed firms in the
year 2000/2001. Table 3 shows the distribution
of firms according to ownership types and
other categories. IND is the largest group of
owners, owning approximately 65 per cent of
the sample firms. Descriptive statistics are presented in Table 4. The average ownership concentration is 43.44 per cent among the 150 top
Table 3: Distribution of sample companies in each
of the following categories
Variables
Number
of firms
Ownership type
Individual
State
Foreign
Trust Fund
Total
Chairman-CEO duality
Chairman-CEO incomplete
Chairman-CEO independent
Chairman-CEO combined
Total
Sector
Finance (F)
Consumer products (CP)
Industrial products (IP)
Construction (C)
Trading/services (TS)
Plantation (P)
Property (Pr)
Other
Total
98
10
19
23
150
25
92
33
150
23
20
30
9
31
15
19
3
150
listed companies in the sample, compared to
30.3 per cent among all public listed firms examined by Zhuang et al. (2001b) in Malaysia in
1998.
Results
Univariate analysis
The results (Table 5) show that concentration
of shareholding by a single party is highest in
STATE firms (55.23 per cent) and lowest in
firms controlled by IND (38.45 per cent). The
result means that Hypothesis 1 is to be rejected. This result is contrary to findings of an
earlier study on ownership structure in Malaysia that showed IND firms having the highest ownership concentration (Zhuang et al.,
2001a). The result is nevertheless consistent
with Prowse’s (1999) finding that IND still
dominates as a shareholder, since they are the
largest shareholders in 98 out of the 150 top
listed firms in the sample. However, while
IND has a significantly strong presence as substantial shareholders in the sample firms, this
group does not show the highest ownership
concentration compared with the STATE,
Table 5: ANOVA result for ownership concentration according to ownership types
Variable
Ownership
concentration
Individual firms
State firms
Foreign firms
Trust fund firms
ρ-value
38.45
55.23
50.56
53.69
0.000
Table 4: Descriptive statistics
Variables
Mean Median
Min
25th Percentile
75th Percentile
Max
n
Ownership concentration
Ownership typea
CEO–Chairman dualitya
Age of firm (years)
Sectora
ln Market capitalisation
ln ROA
ln Tobin’s q
ln D/TA
ln D/E
43.00
2.09
1.45
33.30
4.26
6.85
0.15
0.98
−0.86
2.46
12.57
1.00
0.00
10.00
1.00
0.20
0.00
0.00
−3.00
0.00
31.03
–
–
24.75
–
6.00
0.12
0.84
−1.21
2.33
54.85
–
–
37.25
–
7.37
0.18
1.10
−0.42
2.49
76.52
4.00
2.00
90.00
8.00
10.49
0.47
1.84
1.15
3.73
150
150
150
150
150
150
150
149
150
150
43.29
–
–
33.0
–
6.61
0.15
0.92
−0.81
2.37
a
Dummy variable: Refer to Table 2 for definition.
Volume 15
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© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN MALAYSIA
215
Table 6: Cross-tabulation for CEO–Chairman duality according to ownership types
Ownership typesa
Total
(%)
Individual-owned
firms
State-owned
firms
Foreign-owned
firms
Trust
fund-owned
firms
14.3
30.6
55.1
100.0
10.0
10.0
80.0
100.0
31.6
5.3
63.2
100.0
17.4
4.3
78.3
100.0
Structure incomplete
CEO–Chairman by one person
CEO–Chairman by different person
Total
16.7
22.0
61.3
100.0
ρ < 0.05, n = 150.
a
Table 7: Correlations for all variables
OT
OC
OT
1.000
–
OC
0.410** 1.000
CEO
0.066
0.056
Sector 0.034
0.019
Size
0.162*
0.168*
Age
0.055
−0.062
ROA
0.277** 0.110
Tq
0.054
0.031
D/TA −0.064
−0.051
D/E
0.005
−0.017
CEO
–
–
1.000
−0.031
0.104
−0.058
−0.043
−0.089
0.118
−0.042
Sector
Size
Age
ROA
Tq
D/TA
D/E
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.000
–
–
–
–
–
–
−0.141
1.000
–
–
–
–
–
0.134
−0.121
1.000
–
–
–
–
−0.182*
0.248** 0.194* 1.000
–
–
–
−0.244** 0.121
0.020
0.431** 1.000
–
–
−0.107
0.115
−0.039 −0.291** −0.098
1.000
–
0.000
0.155
0.057 −0.199* −0.307** 0.475** 1.000
Notes: OT = ownership type, OC = ownership concentration, CEO = CEO–Chairman duality, Size =
ln market capitalisation (RM million), Age = years of incorporation, ROA = ln ROA, ROE = ln ROE,
Tq = ln Tobin’s q, D/TA = ln debt/total assets, D/E = debt/equity. **Significant at 1% level, *significant at
5% level.
FOREIGN and TF. It is because the latter
group are more actively engaged in national
core industries that require greater capital endowment while IND have less capital capability. The STATE and TF often concentrate their
shareholdings in a few large utilities and telecommunications firms and these investors
have yet to relinquish their control in these
core industries since they are still in pursuance
of the government’s socio-economic policy.
Results support Hypothesis 2 that IND
firms have the highest incidence of CEO–
Chairman duality, 30.60 per cent of all IND
firms, and accounting for 90.9 per cent of all
firms with CEO–Chairman duality (χ2 [6,
N = 150] = 15.05, ρ < 0.05) in Table 6.
Ownership type is found to be strongly
correlated with ownership concentration
and ROA (Table 7). Ownership concentration,
which is positively correlated with firm size,
has no relationship with a firm’s performance
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
and debt structure. Industry/sector has a significant correlation with Tobin’s q, which is
commonly sensitive to industrial fluctuations.
Both debt structure proxies have negative
correlations with performance. Firm age and
size do not differ significantly among ownership types. Consistent with previous studies
(Mishra and McConaughy, 1999; Anderson
and Reeb, 2003), firm size has a significant
positive correlation with ROA.
Table 8 shows that firm performance varies
significantly among ownership types. FOREIGN firms perform best in both proxies while
STATE firms have the poorest performance in
ROA and TF firms in Tobin’s q. This study
does not support previous results found by
Anderson and Reeb (2003) that family firms
outperform non-family firms. This is possibly
caused by the differences in the structure of
the financial and equity market and the significant difference in terms of investor pro-
Volume 15
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216
CORPORATE GOVERNANCE
Table 8: Univariate analysis of variance for ownership types with age, size, performance and debt structure
proxies
Individual
State
Foreign
Trust Fund
Total
Age
Size
ln ROA**
ln Tq*
ln D/TA
ln D/E
32.98
25.50
38.63
33.65
33.30
7.0558
8.0511
7.1269
7.2455
7.1495
0.1401
0.1386
0.2130
0.1679
0.1536
0.9638
0.9915
1.1444
0.9264
0.9827
−0.8469
−0.6945
−0.9351
−0.9525
−0.8640
2.4571
2.4896
2.4308
2.4730
2.4584
Notes: Age = year of incorporation, Size = ln market capitalisation (RM million), Tq = Tobin’s Q, D/TA =
debt/total assets, D/E = debt/equity. **Significant at 1% level, *significant at 5% level.
tection between Bumiputera and NonBumiputera IND. CEO–Chairman duality has
no significant impact on any variables and due
to space limitation, the results are not shown
here.
Multivariate analysis
Structural equation modelling (SEM) is
employed in this study to examine the multivariate relationships among variables. SEM is
used to examine the direct, indirect and total
effects in an integrated model. There are three
models: Model 1 using ROA and D/TA,
Model 2 using Tobin’s q and D/TA and Model
3 using Tobin’s q and D/E. In all models,
insignificant χ2 is used to indicate good fit. All
indices show good fit except for χ2/df and TLI
indicating overfit. This might be explained by
the use of a large number of dummy variables.
Table 9 shows the coefficients between variables for each model. With Tobin’s q, only the
model using D/E as a proxy for debt structure
is presented as the result is superior to the
model using D/TA. Only direct effects are presented, since indirect effects are mostly found
to be insignificant.
In Table 9a, ownership types are found to
exert significant influence over the levels of
ownership concentration, with STATE as the
leader and IND firms in the lowest of the rank.
Different patterns of ownership types are
found in different sectors, with FOREIGN
firms concentrating in consumer products,
STATE firms in trading/services and TF firms
in plantation. Firm size and firm age also
varies with ownership types; with FOREIGN
and TF firms slightly older than IND firms,
while STATE firms are the youngest. Debt
structure does not differ between ownership
types, but CEO–Chairman duality varies
according to ownership types, consistent with
univariate analysis.
With regard to firm performance (Table 9a),
the relationships vary according to proxy.
Volume 15
Number 2
March 2007
FOREIGN firms perform best in both proxies.
IND firms perform moderately, surpassed by
FOREIGN firms in both proxies, but outperform STATE firms in ROA, and are superior to
both STATE and TF firms in Tobin’s q. Performance by TF firms in ROA and FOREIGN
firms in Tobin’s q are mediated by variables
such as firm size, debt and ownership concentration, with no significant individual indirect
effect. This supports the argument that the
largest shareholder employs different business
strategies in different industries, hence differing in their level of performance. The fact that
these results vary significantly according to
proxies suggests that the inconclusive findings
in the literature on the relationships between
ownership structure and firm performance
may be due to the use of different proxies. All
significant relationships between ownership
types and the exogenous variables are direct;
few mediating effects are present.
Table 9b shows that higher debt (D/TA) is
employed when CEO and Chairman are independent of each other. Firms are larger in
size with CEO–Chairman duality in Model 1.
Ownership concentration is negatively related
to ROA, rejecting H3b and contrary to results
from previous findings and arguments that
large shareholders could internalise most of
the expropriation costs (Wiwattanakantang,
2001; Nagar et al., 2000; Lins, 2003).
Both firm age and size are positively related
to ROA and Tobin’s q. This indicates that the
growth in firm assets is better utilised with
greater experience in managerial knowledge
and economies of scale (Himmelberg et al.,
1999). As Tobin’s q involves psychological factors of investors, older and bigger firms also
offer better reputation to investors in safeguarding their interests and future prospects.
Another governance variable, debt structure,
has a significant negative impact on firm performance, coefficients of –0.515 with ROA and
–0.342 with Tobin’s q. These findings are consistent with Claessens et al.’s (2000b) studies,
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN MALAYSIA
217
Table 9a: Coefficients, t-values and standard errors for direct, indirect and total effects between sectors,
firm age, firm size, debt structure (debt/total assets), ownership concentration, CEO–Chairman duality
and firm performance (ROA) as exogenous variable and ownership types as endogenous variable using
SEM
Hypothesised relations
Model 1: ROA, D/TA
Model 3: Tobin’s q, D/E
Direct effect
Direct effect
Std RWa
t-values
Std SE
Std RWa
t-values
Std SE
−0.099
0.324
−0.060
−0.084
0.062
−0.112
−0.116
0.224
−0.052
0.244
0.100
−0.093
−0.035
−3.808***
3.146***
−2.727***
−3.818***
0.579
−4.308***
−1.681*
1.349
−0.627
3.128***
1.429
−1.274
−0.455
0.026
0.103
0.022
0.022
0.107
0.026
0.069
0.166
0.083
0.078
0.070
0.073
0.077
−0.107
0.283
−0.064
−0.090
0.038
−0.120
−0.081
0.281
−0.032
0.201
0.120
−0.115
−0.050
−4.458***
2.830***
−3.556***
−4.500***
0.413
−4.800***
−1.209
1.912*
−0.432
2.310**
1.791*
−1.667*
−0.847
0.024
0.100
0.018
0.020
0.092
0.025
0.067
0.147
0.074
0.087
0.067
0.069
0.059
−0.149
−0.188
0.362
−0.125
−0.073
0.164
0.058
0.135
−0.013
0.285
0.084
−0.158
0.278
−4.806***
−5.875***
2.722***
−4.630***
−2.920***
1.491
0.951
1.688*
−0.176
3.800***
1.012
−2.107**
4.712***
0.031
0.032
0.133
0.027
0.025
0.110
0.061
0.080
0.074
0.075
0.083
0.075
0.059
−0.154
−0.195
0.343
−0.130
−0.020
0.147
0.140
0.110
−0.017
0.219
0.065
−0.176
0.109
−5.133***
−5.909***
3.035***
−5.200***
−0.303
1.455
1.818*
1.310
−0.236
2.281**
0.813
−2.588***
1.313
0.030
0.033
0.113
0.025
0.066
0.101
0.077
0.084
0.072
0.096
0.080
0.068
0.083
0.036
−0.124
0.002
−0.137
0.223
−0.100
−0.036
0.177
−0.078
0.296
0.127
−0.153
0.086
0.371
−1.851**
0.029
−4.893***
1.956 *
−1.408
−0.621
2.011**
−1.114
2.667***
1.608
−2.250**
1.536
0.097
0.067
0.068
0.028
0.114
0.071
0.058
0.088
0.070
0.111
0.079
0.068
0.056
0.025
−0.132
−0.004
−0.141
0.233
−0.107
0.021
0.174
0.048
0.315
0.145
−0.171
−0.009
0.248
−2.063**
−0.050
−5.423***
1.849**
−1.754*
0.269
2.320**
0.533
3.214***
1.726*
−2.342**
−0.100
0.101
0.064
0.080
0.026
0.126
0.061
0.078
0.075
0.090
0.098
0.084
0.073
0.090
Stateb-owned firm with
Propertyc
Trading/servicesc
Consumer productsc
Constructionc
Plantationc
Industrial productsc
Firm age
Firm size
Debt/total assets
Ownership concentration
C-C independentd
C-C combinedd
Firm performance
Foreignb-owned firm with
Propertyc
Trading/servicesc
Consumer productsc
Constructionc
Plantationc
Industrial productsc
Firm age
Firm size
Debt/total assets
Ownership concentration
C-C independentd
C-C combinedd
Firm performance
Trust fundb-owned firm with
Propertyc
Trading/servicesc
Consumer productsc
Constructionc
Plantationc
Industrial productsc
Firm age
Firm size
Debt/total assets
Ownership concentration
C-C independentd
C-C combinedd
Firm performance
*, **, *** Significant at 10%, 5% and 1% levels, respectively.
a
Standardised regression weights.
b
Dummy variables, state = 1 if true, foreign = 1 if true, trust-fund = 1 if true, otherwise 0, individualowned firms as control group.
c
Dummy variables, property = 1 if true, trading/services = 1 if true, consumer products = 1 if true,
Construction = 1 if true, plantation = 1 if true, industrial products = 1 if true otherwise 0, financial sector
as control group.
d
Dummy variables, C-C independent = CEO–Chairman independent = 1 if true, C-C combined = CEO–
Chairman combined = 1 if true, otherwise 0, structure incomplete as control group.
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
Volume 15
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March 2007
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CORPORATE GOVERNANCE
Table 9b: This table indicates coefficients, t-values and standard errors for direct, indirect and total effects
when other variables except ownership types as endogenous variables and firm performance as exogenous
variable using SEM
Hypothesised relations
C-C Independentc with
Firm size
Debt/total assets
Firm performance
C-C Combinedc with
Firm size
Debt/total assets
Firm performance
Ownership concentration with
Firm performance
Debt/total assets with
Firm performance
Firm age with
Firm size
Debt/total assets
Ownership concentration
Firm performance
Firm size with
Ownership concentration
Debt/total assets
Firm performance
Propertyb with
Ownership concentration
Debt/total assets
Firm size
Firm performance
Plantationb with
Ownership concentration
Debt/total assets
Firm size
Firm performance
Trading/servicesb with
Ownership concentration
Debt/total assets
Firm size
Firm performance
Constructionb with
Ownership concentration
Debt/total assets
Firm size
Firm performance
Consumer productsb with
Ownership concentration
Debt/total assets
Firm size
Firm performance
Volume 15
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March 2007
Model 1: ROA, D/TA
Model 3: Tobin’s q, D/E
Direct effect
Direct effect
Std RWa
t-values
Std SE
Std RWa
0.175
0.393
0.237
1.296
2.692***
0.731
0.135
0.146
0.324
−0.037
0.064
−0.275
−0.170
0.520
−1.310
0.218
0.123
0.210
0.257
0.297
0.285
1.760*
1.833
0.891
0.146
0.162
0.320
0.063
0.003
−0.288
0.303
0.025
−1.371
0.208
0.121
0.210
−0.111
−1.708*
0.065
0.037
0.435
0.085
−0.515
−6.959***
0.074
−0.342
−4.817***
0.071
−0.035
–
–
0.141
−0.473
–
–
2.014**
0.074
–
–
0.070
−0.034
–
–
0.173
−0.453
–
–
1.880*
0.075
–
–
0.092
0.067
−0.061
0.246
0.807
−0.938
3.785***
0.083
0.065
0.065
0.120
0.057
0.190
1.446
0.704
2.568***
0.083
0.081
0.074
−0.053
−0.561
−0.293
0.010
−0.552
−6.375***
−3.021***
0.127
0.096
0.088
0.097
0.079
−0.054
−0.422
−0.296
0.136
−0.474
−2.411***
−3.052***
1.679*
0.114
0.175
0.097
0.081
0.064
−0.674
−0.108
−0.013
0.744
−5.712***
−1.102
−0.167
0.086
0.118
0.098
0.078
0.029
−0.600
−0.148
0.260
0.269
−6.522***
−1.213
2.737***
0.108
0.092
0.122
0.095
−0.074
−0.428
0.082
0.036
−0.561
−4.920***
0.607
0.336
0.132
0.087
0.135
0.107
−0.047
−0.413
0.045
0.417
−0.326
−2.220***
0.357
4.739***
0.144
0.186
0.126
0.088
−0.158
−0.217
0.048
0.023
−1.477
−3.500***
0.495
0.274
0.107
0.062
0.097
0.084
−0.153
−0.254
0.041
0.236
−1.645
−2.171***
0.418
3.688***
0.093
0.117
0.098
0.064
−0.020
−0.404
−0.053
0.324
−0.168
−4.391***
−0.546
3.857
0.119
0.092
0.097
0.084
0.003
−0.403
−0.055
0.301
0.026
−2.651***
−0.529
2.922***
0.117
0.152
0.104
0.103
t-values
Std SE
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN MALAYSIA
219
Table 9b: Continued
Hypothesised relations
Industrial productsb with
Ownership concentration
Debt/total assets
Firm size
Firm performance
Model 1: ROA, D/TA
Model 3: Tobin’s q, D/E
Direct effect
Direct effect
Std RWa
t-values
Std SE
Std RWa
t-values
Std SE
−0.097
−0.504
−0.170
−0.014
−0.746
−5.860***
−1.604
−0.173
0.130
0.086
0.106
0.081
−0.072
−0.371
−0.171
0.370
−0.545
−2.108***
−1.541
3.936***
0.132
0.176
0.111
0.094
*, **, *** Significant at 10%, 5% and 1% levels, respectively. aStandardised regression weights. bDummy
variables. Property = 1 if true, trading/services = 1 if true, consumer products = 1 if true, construction = 1 if
true, plantation = 1 if true, industrial products = 1 if true otherwise 0, financial sector as control group.
c
Dummy variables, C-C independent = CEO–Chairman independent = 1 if true, C-C combined = CEO–
Chairman combined = 1 if true, otherwise 0, structure incomplete as control group.
but contradict Mohamad’s (1995). Lastly,
industry/sector plays an important role in
firm performance outcomes; however, the
relationships are significantly mediated by the
levels of debt that are sensitive to sectors.
Discussion of results
The findings of this study highlight the complex relationships between corporate ownership, governance and firm performance. First,
they demonstrate how different controlling
shareholder influences the formation of ownership and governance structures. Second,
ownership types have direct impact on firm
performance, while the underdeveloped
financial system which fails to provide adequate signalling effect has yet to perform an
effective monitoring role over management.
Lastly, this study shows that ownership concentration is prominent and entrenched in
Malaysia regardless of ownership types.
The prerequisite to exercise control via concentrating shareholding is to own a large pool
of capital. The surprising result that IND have
the lowest ownership concentration can probably be explained by their limited financing
options. Family funds and resources are likely
to have been exhausted in the initial business
set-up. Listing their firms at a later stage of
development is a financing option for business
expansion without bearing full risks. On the
other hand, with the immature financial and
equity market in Malaysia, IND are normally
more reliant on bank finance, which they
would be cautious to employ to avoid risk of
default. Unlike IND, other institutional inves-
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
tors such as the STATE, TF and FOREIGN usually have better access to funds. For instance,
major trust funds such as PNB and Perbadanan Nasional Berhad (Pernas) have close
links to the government as they are established
directly under governmental policies (Gomez
and Jomo, 1997). FOREIGN could tap into
foreign capital market.
Control through board representation requires personal participation and managerial
skills. When IND attempt to protect their interests through CEO–Chairman duality or
self/family representation on board of directors, the boundary of rationality is expanded.
Agency cost and information asymmetry is reduced when the owner becomes the manager
(Jensen and Meckling, 1976). A prominent
reputation with expanded rationality boundary also improves negotiating power and
accountability.
In contrast, the relationship between institutional shareholder and the appointed
manager/director is usually not personal.
Multi-level and cross-firm contracting implies
that agency relationships become more complicated and can result in higher costs. Information sharing and timely circulation can thus
be harmed. As CEO–Chairman duality in nonIND firms creates more room for managers’
shirking, it is better for non-IND owners to
exercise control through ownership concentration rather than CEO–Chairman duality.
The high ownership concentration and strong
association with CEO–Chairman duality by
IND attest to this behaviour. Results from
this study show that the benefit of retaining
control and self-managing outweighs agency
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CORPORATE GOVERNANCE
costs in IND firms, which perform better than
STATE and TF firms. However, FOREIGN
firms benefit from managerial know-how and
expertise from foreign markets and affiliation,
which offset their disadvantage in a highly
networked market and social environment.
Debt is not an efficient governance tool in
Malaysia (Gomez and Jomo, 1997, p. 49; Suto,
2003). Our finding that higher leverage leads
to poorer performance supports the argument
(Claessens et al., 2000b; Suto, 2003) that the
immature financial market fails to act as an
effective market mechanism in punishing
poorly performed firms.
The NEP has critically influenced how business activities are conducted in Malaysia,
resulting in excessive political and business
relationship-building and uneven access to
opportunities (Gomez and Jomo, 1997). Consequently, firm performance in Malaysia is
often seen to be a function of the identity of
the owner, its ties to powerful political agents
and the resulting access to business opportunities and finance. This raises serious issues in
the protection of minority shareholders’ rights
in Malaysia.
Malaysia is the forerunner in developing
and promoting a comprehensive corporate
governance system compared to her neighbouring countries. However, it seems that the
code has fallen short in addressing the significant issues of expropriation of minority interests and the dominance of large shareholderscum-directors-cum-managers, even among
large listed firms. In the post-financial distress
period, control by major shareholders has
become more entrenched through ownership
structure, as shown in Zhuang et al. (2001b)
and supported by this study. The effect of the
recently introduced code on the ownership
landscape in Malaysia is still unknown. However, with the inception of Minority Shareholder Watchdog Group (MSWG) in 2000,
more attention is called for the protection of
minority shareholders. But scepticism of the
effectiveness and independence of the group
remains, since the board of directors and
management of MSWG are dominated by
key players from trust funds who are also the
large institutional shareholders in the corporate sector. Hence, more independence and
transparency among policy makers and enforcers might be the key to more effective
corporate governance standards and practice
in Malaysia.
Conclusion
This paper presents an integrated model that
explains how firm performance is affected
Volume 15
Number 2
March 2007
when different owners (individual, state,
foreign and trust fund investors) utilise
ownership structure, concentrating ownership
and CEO–Chairman duality as controlling
mechanisms to safeguard their own interests.
STATE firms are found to have the highest
ownership concentration, while IND shareholders have the lowest. As IND shareholders
have the strongest incentives to be personally
involved in the governance and management
of the company, the highest incidence of CEO–
Chairman duality is therefore found. Ownership types exert significant impact on firm
performance. The impact varies according to
performance proxy, with the fundamental
business conditions and socio-economic
policy influencing the distribution of ownership and wealth in Malaysia. Conventional
governance instruments, such as the board of
directors and debt structure, have failed to act
as effective monitors, instead becoming mechanisms utilised by large shareholders to control their firms.
The findings of this paper demonstrate that
corporate governance in Malaysia needs to be
better able to scrutinise and perhaps restrain
the power of large shareholders to protect the
interests of minority shareholders. It is obvious that Malaysia requires the development of
greater transparency and accountability in the
relationship between politics and business,
large shareholder and the board of directors,
and the board of directors and management.
With more effective governance arrangements, investor protection can be enforced,
market mechanisms can function competitively and minority shareholders’ interests are
safeguarded.
Notes
1. Four dominant ownership types are identified in this study: IND – an individual or
a family who is the largest shareholder;
STATE – a government entity with the
largest shareholding; FOREIGN – a foreign
enterprise holding the largest shareholding;
TF – a domestic trust fund with the largest
shareholding.
2. According to Torii (1997), Bumiputera
means “sons of the soil” in Bahasa Malaysia, the national language of Malaysia. Even
though there is no legal definition associated with this term, “Bumiputera” effectively distinguish Malays and indigenous
people as the NEP target groups from
Chinese, Indians and other immigrant
population.
3. Average across time for each firm and then
determine the mean for the sample by
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN MALAYSIA
averaging across firms (Anderson and
Reeb, 2003).
4. Tobin’s Q = (MVE + PS + DEBT)/TA,
MVE = the product of a firm’s share price
and the number of common stock shares
outstanding, PS = the liquidating value of
the firm’s outstanding preferred stock,
DEBT = the value of the firm’s short-term
liabilities net of its short-term assets, plus
the book value of the firm’s long-term debt,
TA = the book value of the total assets of the
firm (Chung and Pruitt, 1994).
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On Kit Tam is Professor and Deputy Dean
(International) of the Faculty of Business and
Economics, Monash University, and CoDirector of Monash Governance Research
Unit. His research interests are corporate governance, financial market development, foreign direct investment and the economy of
China. He currently serves as an independent
director of a financial joint venture between
two major Australian and Chinese financial
institutions.
Monica Guo-Sze Tan obtained her PhD from
Monash University, Melbourne, Australia,
specialising in the area of corporate governance and firm valuation. She has worked
closely with the Monash Governance Research
Unit and an Honorary Research Fellow at
Monash. Dr Tan is currently a Senior Consultant at Acumen Alliance, Melbourne, specialising in Corporate Governance and Risk
Management consulting. She holds a BA from
the University of Western Ontario, Canada
and a Master of Management from Monash
University, Australia.
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007