Examining Corporate Governance Initiatives in Malaysia

In an effort to restore public confidence of the Malaysian capital markets, following the East Asian financial crisis in the late 1990s, the Malaysian government intensified several initiatives to promote awareness, advocacy and actions (S. Susela Devi, 2003) to enhance corporate governance in Malaysia, with prioritized focus on the capital market. Table 1.1 in Appendix I provides a chronological list of corporate governance initiatives in Malaysia.

According to Abdul Hadi bin Zulkafli et al. (2000), the main sources of corporate governance reforms agenda in Malaysia can be traced back to three official documentations, namely, the Malaysian Code on Corporate Governance, the Capital Market Master Plan (CMP) and the Financial Sector Master Plan (FSMP). While the issue of the Malaysian Code of Corporate Governance, with the advocate of Bursa Malaysia, effected an initial corporate governance regulatory framework to the public sector, the launching of the Capital Market Plan (CMP) charts the direction and corner-stones of the Malaysian capital markets for the next ten years (2001-2010), marked the beginning of a decade of corporate governance reform to the Malaysian Banking Sector. Figure 1.1 in Appendix II provides an illustration of the reform plan in accordance with the Capital Market Plan (CMP). Subsequent efforts by the Bank Negara Malaysia (BNM), from the launching of the Financial Sector Master Plan (FSMP), issuance and revision of prudential regulations guidelines to recent liberalization of the banking sector, were observed to be in accordance with the guidelines set forth by the Capital Market Plan (CMP).

Following a decade of corporate governance reform, amidst detrimental global issues, such as the financial and economic turmoil in advanced nations, the domestic banking institutions has come a long way in embracing corporate governance as a norm in the conduct of the business of banking. Nevertheless, Bank Negara Malaysia (BNM) has made great strides through the development of a comprehensive and strategic Financial Sector Master Plan (FSMP) and updating of prudential guidelines that could withstand the changing complexity of the financial and banking environment (Lum Chee Soon et. al., 2006).

Along with the authority's vigorous efforts in promoting awareness, advocacy and actions to enhance corporate governance in the Malaysian banking sector, Malaysia has also undergone rigorous corporate governance assessments from various organizations dedicated in embracing corporate governance. In 2005, Malaysia underwent corporate governance assessment by the World Bank under the Corporate Governance Report on the Observance of Standards and Codes (CG-ROSC). While the assessment commended on major key reforms highlighted in Table 1.1, it identified the following key challenges in corporate governance practices as yet to be improved, namely,

Large government ownership

Directors' Accountability

Protection of minority shareholders

Role of institutional investors and shareholder activism in corporate governance framework.

Out of the four key challenges identified for corporate governance reform in Malaysia, only directors' accountability was firm-level mechanism which can be mitigated through legal and regulatory or voluntary discipline at the firm-level. The other three challenges were institutional-level constraints in which even legal and regulatory discipline has little control over. The assessment prompted the revision of the Malaysian Code of Corporate Governance (MCCG) in 2007 to further strengthen the legal and regulatory mechanism to enhance corporate governance practices in Directors' accountability and audit through ensuring effective discharge of the roles and responsibilities of directors and audit committee.

This research paper aims to examine various types of corporate governance mechanisms that determine corporate governance quality with particular focus on the Malaysian domestic institutions. This research paper will, firstly, conduct review of literature to look for an established theoretical framework for corporate governance quality relevant to the Malaysian banking sector and secondly conduct an opinion survey to discern public perception on corporate governance quality in the Malaysian banking sector.

Problem Statement

Following a decade of corporate governance reform, amidst detrimental global issues like the financial and economic turmoil in advanced nations, the Malaysian domestic banking institutions have come a long way in embracing corporate governance as a norm in the conduct of the business of banking. At the final phase of Malaysian CMP with liberalization of the banking sector on track, there was an urgent need for Malaysia banking sector to review and prepare for the next evolution of corporate governance reform in the next decade to address any long-standing issues of corporate governance in the Malaysian banking sector such as to ensure its competitiveness and sustainability in the ever more competitive banking sector in Malaysia.

Throughout the decade, there have been volumious literature written about corporate governance quality in the context of Malaysia as well as its banking sector in great details. However, just as there was no definition or standard for corporate governance that can be applied universally (Stephen Y.L.Cheung et. al., 2004), there have been no standard set of measurements that determines corporate governance quality in which prior literature can follow. As with the recommendations of World Bank's Report of Observance of Standards and Code (ROSC) with regards to challenges of corporate governance reform in Malaysia mentioned in the introduction section, mechanisms that influence the quality of corporate governance can be viewed from various perspectives. For example, while Abdul Hadi B. Z, M. et. al.(2000) viewed corporate governance mechanisms from internal and external perspectives, Inessa Love (2010) viewed corporate governance mechanisms from the perspective of the firm and its environment. As Stijn Claessens et. al. (2002) concludes, despite progress of empirical research over the years, theoretical work on the relationship between institutional frameworks, financial market development and firm behavior have received limited analytical attention. More of such work will help to provide a better perspective on some of the empirical findings to date.

1.3 Research Objectives

As suggested by Cyril H. Ponnu (2008), the erosion of investor confidence in Malaysia was brought by the country's poor corporate governance standards in the financial system (Noordin, 1999b). That is analogous to saying that investor confidence is shaped by public perception on corporate governance quality in the context of Malaysian financial system. In the light of the above analogy, this research was inspired to conduct an opinion survey to solicit the public perception of corporate governance quality in the Malaysian banking sector.

The general objective of this research was thus to discern public perception of corporate governance mechanisms essential to enhance corporate governance quality of the Malaysian banking sector.

Specifically, the general objective can be broken down into the following:

to look for an established theoretical framework that depict the relationship between institutional framework and corporate governance quality at firm-level in the context of the Malaysian banking sector;

to identify various mechanisms that influence corporate governance quality, at firm-level, relevant to the Malaysian banking sector;

to identify various mechanisms, within the institutional framework of the Malaysian banking sector, that influence the quality of corporate governance of Malaysian domestic banking institutions;

to conduct an opinion survey to discern public perception of corporate governance quality in the Malaysian banking sector;

to discern one mechanism, within the institutional framework of the Malaysian banking sector, that is crucial to the next phase of reform; and

to discern one mechanism, from the firm-level, that is crucial to address in the next phase of reform.

1.4 Research Questions

In view of the above research objectives, this research paper addresses the following research questions:

What is the relationship between the institutional framework of the Malaysian banking sector and corporate governance quality of Malaysian domestic banking institutions?

What are various mechanisms used to guage corporate governance quality of the Malaysian domestic banking institutions?

What are various mechanisms, within the institutional framework of the Malaysian banking sector, that support corporate governance quality of domestic banking institutions?

How does the Malaysian public perceive of corporate governance quality in the context of the Malaysian domestic banking institutions?

What is the most important mechanism, within the institutional framework of the Malaysian banking sector, which would improve the public perception of corporate governance quality in the Malaysian banking sector?

What is the most important mechanism, at firm-level, which would improve the public perception of corporate governance quality in the Malaysian domestic banking institutions?

1.5 Significance of Study

While there is theoretical awareness of various types of mechanisms, exists both within the institutional framework and at firm-level, which influences corporate governance quality of banks, prior literature discusses these mechanisms without theoretical or conceptual illustration of the relationship between the two. This paper put together findings of prior studies relating to corporate governance quality in the Malaysia banking sector following a theoretical framework adapted from Faizul Haque et. al.(2008) to provide a better perspective on the discussion of various empirical findings to date.

In the light that investor confidence to Malaysian banking sector is shaped by public perception of its corporate governance quality, this research study also conducts an opinion survey to solicit public perception on the quality of corporate governance of the Malaysian domestic banking institutions.

1.6 Scope of Research

This research study aims to discern public perception of corporate governance quality of Malaysian Banking sector. While the Malaysian Banking sector comprises both domestic and foreign banking institutions, given the significant assets ownership (70% of assets) of the Malaysian banking sector as well as its unique ownership structures , this research limit its coverage only to those of Malaysian domestic banking institutions. In the light of the above, the scope of the Malaysian banking sector, in this research, will be confined to domestic banking institutions listed in the Kuala Lumpur Stock Exchange (KLSE).

In an attempt to discern public perceptions of corporate governance quality in Malaysian domestic banking institutions, this research was carried out in two main phases. Firstly, a review of academic and professional literature, retrievable from publicly available sources, was carried out to provide insights into corporate governance qualities with direct relevance to Malaysian domestic banking institutions. Secondly, this research conducts a questionnaire survey to provide support and test the theoretical framework for public perception of corporate governance quality in the context of the Malaysian domestic banking institutions.

1.7 Summary

In an effort to restore public confidence of the Malaysian capital markets, following the East Asian financial crisis in the late 1990s, the Malaysian government intensified several initiatives to promote awareness, advocacy and actions (S.Susela Devi, 2003) to enhance corporate governance in Malaysia, with prioritized focus on the capital market. The launching of the CMP in 2001, which charts the direction and cornerstones of the Malaysia capital markets for the next ten years (2001-2010), marked the beginning of the corporate governance reform in the Malaysian banking sector. Following ten years of corporate governance reform, this research paper aims to put together the findings of prior studies relating to corporate governance in the Malaysian banking sector on the basis of the theoretical framework developed by Faizul Haque et. al. (2008). An opinion survey is also conducted to gauge public perception of corporate governance quality in the Malaysian domestic banking institutions after ten years of corporate governance reform.

The remaining of this paper is set out as follows. In the next chapter a review of the relevant literature is provided while the third chapter illustrate the theoretical framework used in this study and establishes the key propositions to be investigated along with discussion on methodology used in this study. Chapter 4 described the results of the analysis and finally Chapter 5 provides a discussion of the findings, its limitations and conclusion of this study.

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