1

A comparative study of Board Structure, and Firm Performance in Government-linked and

Non-government-linked companies in Malaysia.

Vico Ling

Putra Business School

 CHAPTER 1

Introduction

1.1 BACKGROUND

Government-linked companies (GLCs) played a key role in the Malaysian economy.

GLCs control important companies in the economy, and in terms of market capitalization

control about 42% of entire Bursa Malaysia and the benchmark Kuala Lumpur Composite

Index. (Terrence Gomez, 2018). Though there is increasing empirical evidence on the impact

of government ownership and company performance in developed markets but the effects

have not been empirically tested to examine the constitution of corporate governance

structure and its impact on company’s performance.

These are companies that have a primary commercial objective with the Malaysian

government having a controlling state in major decisions, appointment of management

positions, contract awards, strategy, restructuring and financing, acquisition and divestments.

(Khazanah, 2013). Market economists had alleged GLCs had been charged to be politically

motivated rather than commercially driven making them highly risk adverse. GLCs were

abused for political financing, power, and fraud in many junctures with most prominently the

1MBD controversy; and the huge disparity of remuneration between GLC and non-GLC

chief operating officers. (M. Shanmugam, 2019) GLCs are generally inferior in productivity

and performance, less efficient and less profitable than private firms (Dewenter and

Malatesta, 2001) due to the management system applied within institutional relationship with

the government and board structure in which they operate (Shleifer, 1998) The study of

board structure will be represented by independent directors, non-executive directors, chief

executive officer (CEO), and board size. The differences in the relationship between
performance of companies and board structure are examined.

1.2 PROBLEM STATEMENT

The Putrajaya Committee on GLC High Performance (PCG) reported on the

underperformance of GLC as compared to NGLC and the broader market based on

operational and financial indicators for instance in managing costs, and the effective

deployment of labour and capital. The secretariat also reports that it was due to multitude

factors including lack of focus in bottom line, ambiguous social responsibilities, ineffective

boards and poor talent management (PCG, 2019) therefore launching the GLC transformation

program and GLC Transformation Manually in 2005 to deliver performance focus, nation

building and governance, shareholder and stakeholder management. GLCs Transformation

Manual (Pg. 2) reported that most of the GLCs underperformed in terms of operations and

financial indicators since 1990. CIMB (June 2004) also found that the Malaysian GLCs are

less productive users of capital, more geared and have lagged significantly in terms of total

shareholder’s return.

Therefore, this study examines the performance of GLCs, post GLC Transformation

Graduation Report in 2015; in particular the financial and market performance measures of

the 47 listed GLCs with other 47 non GLCs as at 31st December 2018. Past studies

conducted in the past with regards to performance measures found significant differences

between GLCs and non GLCs. However, there is paucity of research post 2006 and the

GLCT report in 2015, and the relationships are still unclear between ownership structure and

performance of public listed companies in both GLCs and non GLCs. The effects of board

structure post GLC transformational program have not been empirically tested. Thus, the
current study aims to contribute on the affect of government ownership to the performance of

GLCs and non-GLCs in terms of board structure and performance post GLCTP.

1.3 RESEARCH QUESTIONS

Based on the problem statement, the research questions are to be formulated as follows:

1. Is there a significant (and positive/negative) relationship between the size of board

structure and firm performance in GLCs?

2. Is there a significant (and positive/negative) relationship between board structure

Independence with firm performance in GLCs?

3. Does corporate governance moderate the relationship between board structure and firm

performance in GLCs?

4. Does the GLC Transformational Program that was completed in 2015 mediate past

performance gaps and lead to better company performance between GLCs and non-GLCs?

1.4 RESEARCH OBJECTIVES

The general objective of this study is to measure and examine the impact of the GLC

Transformational Program on the performances of GLCs against non GLCs. The specific

objectives of the study are:

1. To determine the significant (and positive/negative) relationship between the size of board

structure and firm performance in GLCs and non GLCs.

2. To determine the significant (and positive/negative) relationship between board structure

Independence with firm performance in GLCs and non GLCs.

3. To examine the moderating effect of Corporate Governance on the relationship between

board structure and firm performance in GLCs and non-GLCs.

4. To examine the moderating effect of corporate government on the relationship between

board structure and firm performance in GLCs and non-GLCs.

1.5 SCOPE OF STUDY

This study revolves around the implementation of GLC Transformation Program

(GLCTP) which was introduced in response to observing the poor performance of GLCs

relative to the broader market on all key financial indicators. It’s implementation aims to not

only have better corporate governance but to deliver financial performances. (PCG, 2016).

The program’s main goal is to intensify performance management; enhance board

effectiveness & corporate governance; and better capital management practices.

This study aims to measure the performance of GLCs above against the measurement

above as of 31st December 2018, post GLCTP where the final phase ended in July 2015.

Particularly, this study compares financial and market performance measures of 47 listed

GLCs in main board in Bursa Malaysia with a control sample of 47 non GLCs as of 31st

December 2018. Firm performance will be measured by Tobin’s Q into firms’ market

valuation, Returns on Equity (ROE) and Return on Assets (ROA) generally used as measures

of performance. (Bhatt, 2014)

1.6 SIGNIFICANCE OF STUDY

This paper aims to measure the impact of the GLCTP on the performance of GLCs.

The findings of this research have important policy implications for the Malaysian corporate

sector as well as the government in assessing the effectiveness of the GLC Transformation
Program. Though there is increasing empirical evidence on the impact of government

ownership and company performance in developed markets but little attentions have been

given in modern developing economies such as Malaysia to examine what constitutes

governance structure and its impact on company’s performance and the effect of post

GLCTP. The current study aims to contribute some literatures on the effect of government

ownership and corporate finance on government involvement in company through

government agency to the performance of GLCs companies in Malaysia. The findings of the

study may be useful in strategic decision making involving the corporate management of

public listed companies.

1.7 DEFINITIONS OF STUDY

 Board Structure - is a group of individuals elected to represent shareholders.

A board's mandate is to establish policies for corporate management and oversight,

making decisions on major company issues. (James Chen, 2019)

 Government-Linked Companies - companies that have a primary commercial

objective and in which the Malaysian Government has a direct controlling stake.

(Will, 2019)

 Tobin’s Q - equals the market value of a company divided by its assets' replacement

cost. Thus, equilibrium is when market value equals replacement cost. (Adam, 2019)

 Return on Equity - a measure of financial performance calculated by dividing net

income by shareholders' equity. (Marshall Hargrave, 2019)

 Return on Asset - an indicator of how profitable a company is relative to its total

assets. (Marshall Hargrave, 2019)

  Corporate Governance - the system of rules, practices, and processes by which a

firm is directed and controlled. Corporate governance essentially involves balancing

the interests of a company's many stakeholders, such as shareholders, senior

management executives, customers, suppliers, financiers, the government, and the

community. (James, 2019)

CHAPTER 2

Literature Review

2.1 INTRODUCTION

This chapter discusses relevant literature on the relationships among board structure and

firms performance in GLCs and non GLCs. The chapter also explains the theories which

underpin this study and the framework which provide the foundation that guides this study.

Several studies argued that corporate governance does affect the performance of privatized

firms (Dyck, 2001) that higher gains in performance are expected when the government gives

up control (Boycko, Shleifer, & Vishny, 1996)

2.2 GOVERNMENT-LINKED COMPANIES

Sheleifer and Vishny (1997) defines state control ownership models is a separate category of

concentrated ownership in which the State uses companies to pursue political objectives,

while the public pays for its losses. Where as Ang and Ding’s (2005) findings from their

study suggest that GLCs in Singapore on average exhibit higher valuations than non-GLCs

even after controlling company’s specific factors such as profitability, leverage, company

size, industry and foreign ownership. However, the financial performance of state owned,

private owned, and mixed state-private ownership companies in India suggest that the most
profitable companies were the private owned followed by mixed ownership; while state

owned companies had the worst performance. (Kumar 2003) The results was consistent in

China for Chinese companies in comparison for domestic non-state owned companies and

foreign invested enterprises with state owned companies conducted by the National Bureau of

Statistics in 1998 and 2002. This phenomenon was concluded by Tian and Estrin (2005) that

government ownership reduce corporate value due to political interference.

However, in the Europe scene of government involvement in Germany paints a

different scene. Companies under government’s privatization agency and government

ownership organization performed better than before privatization (Dyck and Wruck,1998).

Meanwhile, Kirchmaer (2006) on corporate ownership structure and performance in Europe

identified state ownership is a third larger shareholder in Italy and France. Both countries

results found showed negative relationship between performance and corporate governance

and other control variables. Whereas the major factor was the influences of politician on

company decision making, as well as protection from market discipline.

The theoretical literature (Laffont and Tirole, 1991, Hart, Shleifer and Vishny, 1997)

suggests that governments are likely to pay special attention to political goals such as low

output prices, employment or external effects – many of which may be negatively correlated

with firm financial performance. In fact, non profit-maximizing behavior is a key rationale

for government ownership in welfare economics (Xu and Wang, 1999). Similar findings were

found by Paskelian (2006) who argued that the inefficiency results from agency conflicts as

the wealth-maximization goal may be compromised by the social and political agenda of the

government.

Nazrul and Rubi (2005) laid down the reasons behind why many government

ownerships resulted in poor financial performance. Primarily, the government is guided by

social altruism, which may not be in line with the profit motive. Second, the government is
not the ultimate owner, but the agent of the real owners – the citizens. And it is not the real

owners who exercise governance, but the bureaucrats. There is no personal interest that

bureaucrats must ensure an organization is run efficiently or governed well since they do not

have any benefits from good governance. Therefore, we conclude that GLCs had a negative

relationship in firm performance.

2.2 BOARD STRUCTURE

Focusing on the heart of corporate governance, Policy Thrust 2 of the GLCT Program

highlights a fundamental upgrade of GLCs ‘Board Effectiveness’ to catalyze the

transformation of GLC by provides a set of comprehensive guidelines covering from

compliance with the statutory, regulatory and legal responsibilities to performing beyond the

stated legal forms by Chairman of the GLCs, they must ensure 3 main components;

(1) structuring high-performing boards,

(2) ensuring effective day to-day board operations and interactions, and

(3) fulfilling their fundamental roles and responsibilities at best practice levels. (PCG, 2016)

A board’s main responsibility is to provide effective governance over company affairs;

as the backbone of corporate finance. (Garcia-Sanchez, 2009) An effective board should have

the ability to align the management’s interests and the shareholder’s interests as the board

while bearing bears overall accountability for the performance of the company.

Weak board is a phenomenon not only to underperforming GLCs but also to better

performing GLCs. According to a review on the governance of GLCs boards (PCG, 2016) It

is found that even for better-performing board, there revealed several weaknesses include

insufficient individual and collective board performance accountability, insufficient time

spent to address critical issues like strategy, talent review and risk management, too much
focus on ‘letter’ rather than ‘spirit’ of rules and procedures resulting in inconsistent board

processes such as board meeting logistics and focus. It is not the ‘main’ contributor to form

an effective board, however proper board characteristics will likely produce an effective

board that is capable to well monitor the management and to arrive to quality decision

makings. (Green Book - PCG, 2006)

2.3 BOARD STRUCTURE (SIZE) AND FIRM PERFORMANCE

The Green Book structuring high performance board guidelines propose that board

should preferably no larger than 10 directors but can be up to 12 directors with valid reasons.

Number of directors should be sufficient to ensure that the board can effectively discharge its

roles and responsibilities. At the same time, the size must be contained so that the board does

not become too large, which could then compromise board dynamics and the accountability

of individual directors. (Green Book – PCG, 2006)

Empirical studies show that boards with large numbers of directors tend to be less

effective as the benefits of increasing monitoring function is outweighed by such the costs of

slow decision-making function (Jensen, 1993) and free-rider problems (Hermalin and

Weisbach, 2003). Increasing board size would make board become less effective due to

difficulties in coordinating a large board (Yermack, 1996). Jensen (1993) recommended

boards to consist of seven to eight members while Lipton and Lorsch (1992) advocated board

size to be eight or nine. However, Kiel and Nicholson (2003) found larger board size effects

positively on performance of firms in Australia. Adam and Mehran (2003) and Belkhir

(2009) concluded larger board size is positively related to performance for regulated and

complex organizations of banks and financial institutions. Findings by Bozec and Dia (2007)

in Canada showed board size is positively related to firm technical efficiency when Canadian

state-owned enterprises (SOEs) are exposed to market discipline. Dalton’s (1998) study
found there is a positive relationship between board size and firm performance. Cole (2007)

found the relationship between board size and Tobin's Q is U-shaped, suggesting that either a

very small or a very large board is optimal but this relation only arises from differences

between complex and simple firms. Proponents for smaller board size include by Barnhart

and Rosenstein (1998) who proved that firms with smaller board size performed better than

firms with larger board size. Similarly, Yermack (1996) reported an inverse association

between board size and firm value as measured by Tobin’s Q.

The effect of board size on variable performance measures done by Guest (2009) found

board size has a strong negative impact on profitability, Tobin's Q and share returns in the

UK listed firms. Cheng (2006) showed larger boards are associated with lower within-firm,

overtime variability in monthly stock returns, annual accounting return on assets (ROA) and

Tobin’s Q. Mak and Kusnadi (2004) found there is an inverse relationship between board size

and firm value of Malaysia and Singapore listed firms with the implementation of corporate

governance codes in response to the 1997 Asian financial crisis. From the above discussion, it

can be deduced that the relationship between size of board structure and firm performance is

not clear and needs further examination. Therefore, the following testable hypothesis is

developed:

H1: There is a significant relationship between the size of board structure and firm

performance in GLCs.

2.4 BOARD STRUCTURE (INDEPENDANCE) AND FIRM PERFORMANCE

The Green Book structuring high performance board guidelines is in line with the

MCCG recommendations covered under Part 1 and Part 2 of the Code on board independence
where there should be no more than two executive directors and at least 1/3 of the board is

independent to ensure fair representation from management and shareholders. The

recommendation became compulsory under Bursa Malaysia Listing Requirements for all

listed companies include listed GLCs.

Empirical research by Fama and Jensen (1983) stated independent directors have

incentives to carry out their monitoring task and not to collude with top managers to

expropriate shareholders wealth and therefore increase the board’s ability in monitoring the

top management. Increasing in the number of outside directors on the board increases firm

performance as they can more effectively monitor managers (Adam and Mehran, 2003). In

Canada, Panasian (2003) study the impact of Dey Committee guidelines recommending

boards to comprise a majority of independent directors and provide evidence that adoption of

this recommendation positively affect performance. Empirical study by Black (2006) found

the proportion of independent directors in Korean firms has positive correlation with firm

performance represented by Tobin's Q while Dehaene (2001) concluded there is 181 a

significant positive relationship between the number of external directors and return on equity

(ROE) using a sample of 122 Belgian companies. A study by Lin and Xiao (2009) found that

in China, there is a positive relationship between proportion of independent directors in state

and non-state listed firms and their performance measured by ROA and ROE but without any

significant link.

Ramdani and Van Witteloostuijn (2009) concluded proportion of independent

directors has an effect on firm performance only for firms with average performance and not

for underperforming firms or those performing above par. American public companies boards

are more dominated by independent directors where there can be a ‘supermajority

independent board’ with only one or two inside directors. However, companies with more

independent directors have negative association with corporate performance as been found by
Bhagat and Black (2001). From the above discussion, it is apparent that the relationship

between independence of board structure and firm performance has high proximity.

Therefore, the following testable hypothesis is developed:

H2: There is a significant positive relationship between the size of board structure and firm

performance in GLCs.

2.4 BOARD STRUCTURE (CORPORATE GOVERNANCE) AND FIRM

PERFORMANCE

Corporate governance was defined as the system of legal philosophies, formulae and

factors that control operations that shapes the finance generated by the firm. (Gilian and

Starks, 1998). Studies have also concurred that corporate governance does contribute to a

better technical efficiency. The selection of appropriate governance mechanism includes

determining their board’s remuneration packages and career advancement without the rigidity

of the procedures utilized by the civil service (Anwar and Sam, 2006) The board structure

consisted of board size, chief executive officer, non executive directors, and independent

directors. Anwar and Sam also confirmed the existence of the agency problem within the

public sector, where public office holders may be interested in maximizing their personal

interest rather than that of the public. The Chief Executive Officer (CEO) and the board of

directors are crucial individuals who determine the direction of an organization, objective,

and strategic operations of a company. (Larcker, Miles and Tayan, 2014)

Recent studies have linked the new CEO or board of directors with opportunistic

earning management activities to achieve set objectives that was benchmarked and evaluated

with the performance of the previous corporate management. (Bornemann et al. 2015) If an

investor notices a change within the top management, it’s implication can be observed in the
movement of the stock price at the date of announcement. (Huson, Malatest & Parrino, 2004)

Change of leadership in the operations of a company (Weisbach 1988) hints at the future

projections of the company (Rhimet al. 2006). Capabilities, operating policies and decisions

made by top management will have an impact to companies through project selection,

financial policies and corporate culture. Therefore, exchange information top management is

a big event and may affect investor perceptions and subsequently stock prices (Hermalin &

Weisbach 1998; Isaac et al. 2013).

Mahajan and Lummer (1993) found a negative return on stocks two days before the

announcement and two days after the change of top management exchange announcement.

This study is consistent with the study of Suchard, Singh and Barr (2001) also found the

market to react negatively on announcement of succession. Both findings indicate that

investors were not confident in the performance of a new management. Similar results have

also been reported in the UK by Dahyaa et al. (2000). Recent research conducted in Malaysia

could not show any evidence of a relationship between replacement announcement

information with market on the date the announcement was made (Isaac & Abdul Latif

2012). Based on the theory of partial and efficient market efficiency inconsistent past

research we feel information the highest management exchange announced will be reflected

in the stock price. Futher, based on the theory of semi-strong partial market efficiency and

stock market reacts to a change in corporate management. Announcement of the succession

of individuals having something to do with the political party shows a positive impact on a

stock's price company (Goldman, Rocholl & So 2009). This is because political relations can

help companies be more flexible and has lower legal consequences and easier to obtain

financial resources in bank loans (Agrawal & Knoeber 2001; Khawaja & Mian 2005), and

therefore increase the value of the company (Roberts 1990; Fisman 2001; Ramalho 2007)

Gul (2006) and Johnson and Mitton (2003) proved that where companies that has
political advantage benefitted from the ‘Capital Control’ in the 1997 financial Crisis. Johnson

and Mitton (2003) showed that the Capital Control introduced by the Malaysian government

had resulted a positive performance of stock return in the early stages of the Asian financial

crisis to cronies of politically influenced companies. Gul (2006) had compared the economic

downturns in employment and audit fees applies to related companies politics. His research

shows that audit fees are higher was applied to non-GLCs than with GLCs during the

financial crisis in Asia. However, the cost of capital was reduced after the government

introducing the utilized “Capital Control” by a firm with political affiliation. therefore, GLCs

also shows greater financial performance compared to non-GLCs due to structural differences

of ownership and governance of the company (Ab Razak et al. 2008) Based on the above

discussion, it is clear that corporate governance affects the market condition through it’s

board structure and firm performance in both GLCs and non-GLCs. Consequently, the

following hypothesis is formulated.

H3: Corporate Governance moderates the relationship between board structure and firm

performance in GLCs and non-GLCs.

2.5 UNDERPINNING THEORY

According to Zikmund, Babin, Carr and Griffin (2013), a theory is a testable formal

explanation of some events which includes the predictions on how things relate to one

another. It consists of a logical set of prepositions that offer a coherent explanation of some

phenomenon an the way other things corresponding to this phenomenon. A theory is also

used to support (underpin) the research objectives and research framework, and as a basis to

be verified through the acceptance or rejection of hypothesis. This study is built on the

platform of two theories, namely Resource-Based Theory (RBT) and Contingency Theory.
2.5.1 RESOURCE BASED THEORY

Resource based theory (RBT) was first introduced by Wernerfelt (1984) and has been

considered as one of the most fast growing research areas in the last few decades (Galbreath,

2005) The theory contends that the possession of strategic resources provides an organization

with an opportunity to develop competitive advantages over its rivals and to utilize its

resources. There are much attention and initiatives to make sure that the government linked

companies always perform in an effective way and help the government to improve the

economic growth.

Board structure is seen as the backbone of corporate governance (Garcia-Sanchez,

2009) to provide effective governance over the company affairs. It is crucial for a listed

company to have an effective board with the capabilities to align the management’s interests

and the shareholders’ interests as the board bears overall accountability for the performance

of the company as a competitive advantage. The state is widely and deeply involved in

business in Malaysia. This poses grim challenges for good governance within a political

culture of patronage and where institutions can be manipulated. (PCG, 2016)

Under the resource-based theory, effective board of directors (BOD) is another key

mechanism in corporate governance. An effective board is also central to the agency theory's

prescription of minimizing agency costs, protecting shareholders' interests, and ensuring that

principal–agent interests are aligned (Conheady, McIlkenny, Opong, & Pignatel, 2014). Fama

and Jensen (1983) highlighted the need for board monitoring to ensure managers are not

driven to earning manipulations and self-serving personal interest. Munisi, Hermes, and

Randøy (2014) found that in emerging market firms, another way to improve corporate

governance practices is to particularly in enhancing board effectiveness. Whereas issue on

changes in the board of directors have been studied on and that it can have an effect on firm

performance (D’Souza et al., 2007) Previous studies have revealed that the the variables of
this study (Board Structure - Size, Independence, Corporate Governance; and Firm

Performance) could be sources of the organizational competitive advantage. Thus it justifies

the choice of RBT as the underpinning theory for this study.

2.5.2 CONTINGENCY THEORY

The essence contingency theory states that for an organization there are various or multiple

strategic choices that can be pursued and there is no best way to lead an organization or to

make decisions. Instead, the optimal course of action is contingent upon the internal and

external situation. Using the context of this study, the basic assumption underlying

contingency theory applies. The impact of firm performance is dependent on the

establishment of board structure - in board size and board independence. This relationship

can be moderated by the how corporate governance is administrated. Therefore, the

underpinning by the contingency theory for this study is in line with the strategy

implementation of Venkatraman and Camillus’s (1984) classification.

2.6 RESEARCH (CONCEPTUAL) FRAMEWORK

Corporate Governance

H3 H3

Board Structure – Independence Board Structure - Size

H1 H2

Firm Performance
 CHAPTER 3:

Methodology

3.1 INTRODUCTION

This chapter discusses about the research philosophy, approach, strategy, and

techniques employed in the study. The chapter also explains research design adopted for this

study. It discusses operationalization of the variables examined in this study. Finally the

chapter discusses the techniques employed in the data analysis.

3.2 RESEARCH PHILIOSOPHY

Guba and Lincoln (1994) define a paradigm or philosophy as a basic set of beliefs or

worldview that guides research action or an investigation. The paradigm defines a

researcher’s philosophical orientation and, this has significant implications for every decision

made in the research process, including choice of methodology and methods. The Positivist

paradigm refers to the researcher’s attempts to explain the phenomena they study in the most

economic way possible. The results obtained from a research project conducted within the

Positivist paradigm, in one context, should be applicable to other situations by inductive

inferences. Therefore, based on the research question and objectives, the quantitative

approach of the positive paradigm is best suited for adoption in this study.

3.3 RESEARCH DESIGN

The research design used in this study is quantitative and is a cross-sectional research
setting as it involves gathering the data before the GLCTP program and compare it with data

post GLCTP to achieve research objectives. (Cavana, Dalahaye & Sekaran,2001) This paper

aims to measure the impact of the GLCTP on the performances of GLCs. In particular, it

focuses on the Initiatives which underlay standards and strategies that are highly relevant

when attempting to measure the financial performances of the program. Thus, this not only

uses data covering the entire period of the GLCTP but also uses the difference-in-differences

estimation approach which is effective in estimating a treatment effect (Dehejia and Wahba

(1999)) to capture the impact of the GLCTP.

3.4 POPULATION AND SAMPLE

The source of data for this study was Bursa Malaysia and cross-checked with results

from Bloomberg. The financial data utlised are quarterly time-series data for 47 listed GLCs

in main board in Bursa Malaysia in comparison with a control sample of 47 non GLCs

covering the period pre GLCTP for 3 years before (2013, 2014, and 2015) and 3 years after

(2016, 2017 and 2018) post GCLTP are analysed and compared. Both GLCs and non-GLCs

are public limited companies, as such financial data are publicly available. Matching non-

GLCs are firms that are randomly chosen from the list of companies created to Total Assets

for Latest Year Available and Industry Sector.

3.5 INSTRUMENTS AND MEASURES

Firm Performance

In this study, firms’ performances are measured by Tobin’s Q as measured by Return on

Assets (ROA) and Returns on Equity (ROE) and into firms’ market valuation. All ratios are

widely used performance measures (Isa and Lee, 2016).

Dependent Variable

Performance Measures Calculation Objective

Tobin’s Q
Returns on Equity (ROE)
Returns on Assets (ROA)
(Market Cap + Total Measure of firm assets in
Liabilities + Preferred relation to a firm’s market
Equity + Minority Interest) / value
Total Assets
(Available for Common Measures corporation's
Shareholders / Average profitability by revealing
Total Common Equity) * how much profit a company
100 generates with the money
shareholders have invested
(Net Income / Average Total Indicator of how profitable a
Assets) * 100 company is relative to its
total assets

Independent Variables

Gowned Dummy variable is for companies having a government holding more

(GOW) than 20% of the voting shares. Multiple Studies by Ang and Ding
(2005) and Dyck and Wruck (1998) find that with government owned
share more than 20% will contribute better performance that non
government owned company. Therefore, a positive result will be
expected when it’s related to company performance.

Firm Size (FSI) Firm Size = total of all long term and short term assets as reported on
Balance Sheet. Company size has an ambiguous effect a priori on the
company performance. Larger company can be less efficient than
smaller ones because of the loss of control by top manager over
strategic and operational activities within company (Himmelberg,
Hubbard, and Palia 1999, Sarkar and Sarkar 2000). Lang and Stulz
(1994) suggests a decrease in company performance as company
becomes larger and more diversified.

Board Size Measured by the number of board members. The log transformation is
(BSI) used in the regression. The sign of the coefficient is difficult to predict
because it is generally believed that there is an optimum board size. If
the board size of the sample companies is below optimum, the
coefficient will be positive. However, if the current board size is at the
optimum point, the coefficient will be negative.
Independent Measured by the percentage of independent directors on the board.
Board Members Based on the principle of good governance, a higher number of
(IBM) independent directors is preferred. The coefficient is predicted to be
positive.
Profit Margin Profit margin = Ratio of net income/sales
(PRO)
 We want to know how efficient of company managed their sales for
getting profit. A positive relationship between Profit Margin and
company performance is expected.

Growth Morck, Shleifer & Vishnny(1998) argue that a high growth rate
(GRO) indicates greater flexibility in future investments and it will lead to
better performance. Companies with their own cash reserve can use
when company have a financial distress especially during crisis and
with higher cash balance show company have better cashflow and at
same time provide better performance. Therefore, we expect Growth to
be positively related to company performance.

Controlled Variable

Total Assets Sum of current Assets and non-current assets

3.6 VALIDITY AND RELIABILITY

Construct validity would be the right instrument to measure using factor analysis to

check construct validity on all of the scales. Factor analysis is used to check construct validity

on all of the scales. The results would be used to primarily determine the dimensionality of

the constructs.

Whereas reliability is to determine the degree of internal consistency in measuring the

instruments using Cronbach coefficient Alpha. An Alpha of 0.8 and above is considered

good and at least 0.7 is deemed acceptable.

3.7 DATA ANALYSIS

3.7.1 MULTPLE REGIRESSION

In the multiple regression, the dependent variable is the respective performance

measures, and the independent variables, which consist of factors that may be conveniently
classified as the company specific factors and corporate governance factors. This will be used

to test all the hypothesis in this study. The regression equation is as follows:

Performance (ROA/ROE/Tobin’s Q) = B0+ B1(GOW) + B2(FSI) + B3(BSI) + B4 (IBM) +

B5 (PRO) + B6 (GRO) + Controlled Variable + ε