Corporate governance and theoretical development

by Dr Anbalagan Krishnan and Chan Kwok Mow

The issues of corporate governance have been extensively investigated as the business risks as well as the associated costs are high in today’s business world, resulting in the need for investors and other stakeholders to protect their investments.

Investors nowadays expect corporate managements to act in the best interests of the society and shareholders by managing their businesses in ethical way. This is because managements have tended to make decisions that are influenced by personal interests and thus have overridden the interests of employees, shareholders and the community.

The demand for managing business in an ethical manner has also increased due to cases of corporate fraud where errors are concealed through the manipulation of accounting numbers. The shocking downfalls of organisations such as Enron and WorldCom has compelled other organisations to implement mechanisms to ensure their management activities are carried out in a proper and ethical manner.

In Malaysia, the Bursa Malaysia launched its environmental, social and governance (ESG) index known as FTSE4Good to embrace a more holistic approach to conducting business in the country (Saad, January 3- 9, 2015).

This FTSE4Good index is strongly supported by investors, particularly institutional investors that have set the environmental, social and governance aspects of business as their priorities.

These good management practices are translated into the code of business conduct called Corporate Governance. Good corporate governance in the form of disclosure of financial information is necessary and could help in attracting foreign and local investment.

It could also reduce capital cost, capital flight and avoid corruption (Al-Matari, Al-Swidi, & Fadzil, 2014). A corporate governance mechanism reduces the agency cost associated with information asymmetry and control system which ultimately enhances the shareholder economic wealth either through increase in share price or goodwill.

Corporate governance literature mainly focuses on agency theory which describes the theoretical framework issues related to the principal and agent. An agency relationship is related to or resulting from a contract under which shareholders (principals) engage managers (agents) to perform some service on the former’s behalf, involving the delegation of decision-making authority to the latter (Jenson & Meckling, 1976).

Managers are given the responsibility of managing firms and creating wealth for the shareholders. The principal-agent framework thus suggests the responsibility of managers in protecting and maximising the wealth of the shareholders by putting in place drivers of good corporate governance (Shleifer & Vishny, 1997).

Good corporate governance aligns the managers’ goals and objectives with the interest of the shareholders. It is therefore a reflection of a company‘s values, culture and policies concerning the maximisation of shareholders’ value in a legal, ethical and sustainable way. (Demirag, Sudarsanam, & Wright, 2000; Murthy, 2006).

A research study by Adegbite (2014) on corporate governance in Nigeria indicates that many CEOs upon retirement become the chairmen of companies and continue to retain strong influence on their successors. According to Ahunwan (2003), this is widely practiced in Nigeria because many of the CEOs own the company’s shares, and therefore the transition from holding the position of CEO to chairmanship of companies is easy.

The study also highlights the dispersal of share ownership as a prerequisite to achieving board independence in Nigeria. Adegbite (2014) indicates that the traditional role and overbearing influence of family ownership on the appointment of board members limit their function and independence.

Meanwhile, according to Yasser, Entebang and Mansor (2011), corporate governance brings enormous benefits where it increases the availability of cheaper sources of funding while Dry (2003) suggests that, besides ensuring good management and optimal use of resources, corporate governance also ensures commitments made by companies are accorded great importance and are executed accordingly.

The influence of board composition on corporate governance and firm performance continue to be an intriguing phenomenon. Dr Anbalagan and Chan are actively looking into this from corporate Malaysia perspectives.

In conclusion, corporate governance incorporates policies and practices that promote sound management practices. It also covers regulations of relationships between internal and external members and ensures these regulations are followed by all parties in overseeing the company’s operations (Al-Matar, Al-Swidi, & Fadzil, 2014).

Dr. Anbalagan Krishnan and Chan Kwok Mow are lecturers in the Department of Accounting, Faculty of Business and Humanities of Curtin Sarawak. They can be contacted via email at anbalagan.k@curtin.edu.myand kwokmow@curtin.edu.my respectively.