Efficiency and boardroom attributes of insurers and takaful operators in Malaysia

Abstract

The topic of corporate governance remains an important area of studies within the dynamic changes of business landscape. This is proven through its numerous, long trail of discussions. In this case, corporate governance issues that constantly emerge in various different forms need to be reviewed from time to time. In the present study, the role of board of directors, being one of the essential mechanisms of corporate governance, had been examined in relation to firm efficiency. The insurance and takaful industry in Malaysia was selected as the research setting. The objective of this study is fourfold. First, it aims to measure the efficiency of insurers and takaful operators in Malaysia. Second, it examines the relationship between boardroom attributes and firm efficiency. Third, it examines the relationship between Shariah Committee (ShC) competency and firm efficiency of takaful operators. Finally, this study explores the self-perception of ShC members of takaful operators in terms of their independence in carrying out their duties and obligations. The agency theory and resource dependence theory were incorporated as a conceptual framework of this study. In total, 30 insurance companies and 11 takaful operators were taken as samples for each of three consecutive years under study: 2012, 2013 and 2014. The Data Envelopment Analysis (DEA) method was used to measure firm efficiency. Analysis and comparison were made between the insurers and the takaful operators, as well as between different lines of business (general, life/family and composite). Next, the relationships between different variables of boardroom attributes, namely (i) board independence (ii) board size (iii) frequency of board meetings, and firm efficiency were examined using Ordinary Least Squares (OLS) regression method. The relationship between board independence and firm efficiency was further examined with two board demographic variables adopted as the moderating variables, namely gender and nationality. Meanwhile, an additional governance variable, ShC competency, had also been examined in the case of takaful operators. Finally, a controversial issue regarding the independence of ShC members was explored through interviews with six selected ShC members of takaful operators and one member of Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM). The results indicated that insurers were generally more efficient than takaful operators. In terms of line of business, it was found that life insurers were relatively more efficient than general insurers, and composite takaful operators are more efficient than family takaful operators. Meanwhile, board independence and board size had significant positive relationship with firm efficiency of the insurers. Additionally, for insurers, nationality had a significant negative moderating effect on the board independence-firm efficiency relationship. However, the boardroom attributes including ShC competency was found to be not significantly related to firm efficiency of the takaful operators. Finally, the interviews with Shariah Committee members revealed that it was unanimously agreed that there was no pressure, neither from the board of directors nor the management, upon the Shariah Committee members when making any decisions related to Shariah matters. In summary, the Shariah Committee is independent from the board and management in carrying out their duties and obligations. The findings of this study are hoped to benefit the industry players, business stakeholders, policymakers, and academics.