Governance mechanisms and corporate performance of state GLCs in Bursa Malaysia

Abstract

State GLCs, as the financial arms of the State governments, are important profitmaking entities to the development of the state economies. But, little is known about them. Learning from the Federal GLCs that went through the Transformation Program, none was however initiated for the State GLCs. With this, knowledge on the performance and corporate governance of the State GLCs need to be investigated. Consequently, by comparing the performance of the State GLCs with the performance of the Federal GLCs, the researcher is more interested in studying the performance of the State GLCs. The main objective of this study is examine whether there are significant differences that exist in the performance of both the State and Federal GLCs when considering the relationship between the firms’ performance in terms of; (1) financial performance; (2) Social performance towards (a) employees, (b) suppliers and (c) government; (3) environmental performance and (4) certification performance. Secondly, the study examines the impact of the six governance mechanisms; (i) board composition (IndDir), (ii) accounting literacy of audit committee members (AudCom), (iii) size of directors’ nomination committee (NomiCom), (iv) size of directors’ remuneration committee (DirRem), (v) internal audit function (InAud) and (vi) size of external auditor firm (ExAud), on the firms’ performance for the financial year 2006-2007. The sample companies in this study are mainly listed on the main board of Bursa Malaysia and a few are from the second board. Overall findings suggest that there is no significant difference in the performance of both types of companies except for the financial performance in which the State GLCs underperformed compared with the Federal GLCs. Secondly, the findings also indicate that some of the governance mechanisms such as proportion of independent directors and size of directors’ nomination committee together with control variables, firm size and leverage have a negative impact on firms’ performance. Besides that, the size of directors’ remuneration committee and industry type also has a positive impact on the performance of both the State and Federal GLCs. However, results show that the audit-related mechanisms do not have any significant impact on the performance. Finally, the findings denote the incompetency of the independent directors of both the State and Federal GLCs have some impact on the performance of these companies in some areas. Hence, effectiveness of training and courses conducted for the independent directors need to be reviewed in order to help them in enhancing the performance of the companies.