Firm performance and board structure: an empirical investigation before and after the adoption of the Malaysian code on corporate governance

Abstract

Examining the monitoring mechanisms used by the boards of directors can give an insight into how firms resolve the agency problems between top management and shareholders. The present study investigates the relationship between firm performance and board structure of the top fifty public companies listed on the main board of the Kuala Lumpur Stock Exchange. With the publication of the Malaysian Code on Corporate Governance in March 2000, the study is trying to examine the effect of the adoption of the Code on corporate governance issues such as board composition and board size. Regression tests carried out on empirical data obtained from the secondary sources provide a measure of approaches to the study for two years i.e. 1999, the pre-adoption of the Malaysian Code on Corporate Governance and the year 2000, the post-adoption period. The findings show that the composition of independent non-executive directors does add value to firms and that the board size appears to be negatively related to firm performance. It is also noticed that most sample firms have already had a large composition of non-executive directors in 1999, and a further increase in the year 2000, results in an inverse direction, as too many outweighs the benefit over the cost. Thus, firms having boards totally independent from management may be dangerous because in making decisions, boards may need information that inside directors have but outside directors lack.