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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 Volume 15 Number 2 March 2007 210 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 Volume 15 Number 2 March 2007 212 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 Volume 15 Number 2 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 Volume 15 Number 2 March 2007 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 Number 2 March 2007 © 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 Number 2 March 2007 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 Number 2 March 2007 218 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 Number 2 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 Volume 15 Number 2 March 2007 220 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. 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Asian Development Bank, http://www.adb.org/ Documents/Books/Corporate_Governance/ Vol1/default.asp (accessed December 17, 2001). 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