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208 CORPORATE GOVERNANCE

© 2007 The Authors

Journal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road

Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USAVolume 15 Number 2 March 2007

Blackwell Publishing IncMalden, USA

CORGCorporate Governance: An InternationalReview0964-8410© 2007 The Authors; Journalompilation © 2007 Blackwell Publishing Ltd

March 2007152208222ORIGINAL ARTICLES

OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN

MALAYSIACOPRORATE GOVERNANCE

*Address for correspondence:Faculty of Business and Eco-nomics, Monash University,26 Sir John Monash Drive,Caulfield, Victoria 3145,Australia. E-mail: [email protected]

Ownership, Governance and Firm

Performance in Malaysia

On Kit Tam* and Monica Guo-Sze Tan

Corporate governance is often regarded as a weak link in Asia’s company performance. Moststudies have focused on the relationship between ownership and firm value, but theinstruments that mediate that relationship have often been overlooked. This paper attemptsto address this issue by examining the relationship between ownership types and firmperformance by analysing variations in governance practices and their impact on firm

performance. This paper shows that different types of majority owners exhibit distinct traitsof behaviour and preferences for corporate governance practices in an environment opervasive concentration of shareholding. Such governance practices and various firmcharacteristics are found to have an impact on firm performance.

Keywords: Ownership, corporate control, corporate governance practices, pyramids, crossshareholding, firm performance, Malaysia

Introduction

orporate governance is often regarded asa weak link in Asia’s company perfor-

mance and economic development. Moststudies have focused on the direct relation-ship between ownership and firm value, butthe instruments that mediate that relation-ship have often been overlooked. This paperattempts to address this issue by examiningthe relationship between ownership types andfirm performance by analysing variations ingovernance practices and their impact on firmperformance.

Based on data of Malaysia’s top 150 publiclylisted firms, this paper shows that there aresignificant differences in corporate gover-nance practices by different types of owners.

1

Concentration of shareholding is prevalent,with different types of owners exhibiting dis-tinct traits of behaviour and preferences forcorporate governance practices that aim toenhance the interest of the majority share-holder. Governance practices such as adoptingconcentrated ownership and CEO-duality arefound to have affected firm performance of Malaysia’s publicly listed companies. Firm

C

characteristics, such as firm age, size and sec

tor, are also shown to be related to firm performance. The results suggest that the protectionof shareholders’ rights, particularly those othe minority shareholders, remains a key issuein Malaysia as large shareholders exert dominant control via ownership concentrationand representation on company board andmanagement.

Corporate ownership and controlin Malaysia

The New Economic Policy (NEP) enacted in1971 aimed to achieve 30 per cent of corporateownership and management for Bumiputera

by 1990 (Malaysia, 1971). This policy hasentrenched government intervention in thecorporate sector, and business and politics

became intertwined in Malaysia.At the end the NEP in 1990 (Table 1), Bumi

putera ownership had grown remarkably fromonly 1.5 per cent in 1970 to 20.3 per cent in1990, but still fell short of the initial target o30 per cent (Malaysia, 1991). Non-Bumiputerahave reached the NEP target and foreign



OWNERSHIP, GOVERNANCE AND FIRM PERFORMANCE IN MALAYSIA

© 2007 The Authors

Journal compilation © Blackwell Publishing Ltd. 2007

Volume 15 Number 2 March 20

ownership has decreased tremendously butstill managed a considerable amount of 25.1per cent (Malaysia, 1991). The IndustrialCoordination Act (ICA) 1975 has liberalisedthe NEP to be more “accommodative” to-wards non-Bumiputera and foreign businesscommunities (Heng, 1997). In the post-NEPperiod, division in economic activities amongethnicities still exists: Bumiputera retaindominance in the agricultural sector; Chineseremain strong in the commercial and businesssectors, with a focus on wholesale and retailtrade; Indians remain a minority in all sectors,

considering that they are the smallest groupamong the major ethnicities in the popula-tion (Gomez and Jomo, 1997). Furthermore, itis found that income distribution was still un-even between ethnic groups, with Bumiputeramostly in the lower occupational categories(Malaysia, 1991). Moreover, the accumulatedgrowth in ownership and wealth for Bumi-putera concentrated among small and close-linked groups of entrepreneurs.

The development of equity market inMalaysia is heavily influenced by the NEP and

the ICA 1975 (Gomez and Jomo, 1997). TheMalaysian market was dominated by largetrust funds such as the Permodalan NasionalBerhad (PNB) and the Employees ProvidentFund (EPF) (Jomo, 1995). Foreign funds onlystarted to increase in the early 1990s after thestate liberalised capital flows (Suto, 2003), butnot long after, the inflow of capital once againtightened as a result of Asian Crisis 1997.

While the Securities Industry Act (1973,1983) provides a framework for investor pro-tection in Malaysia (Jomo, 1995), La Porta et al.

(1998) show that enforcement has been ineffec-

tive. This has adversely affected the develop-ment of financial markets because investorstend to shy away from financing firms if thelegal framework does not protect their inter-ests and rights (La Porta et al.

, 2000). Debtfinancing through banking institutions has

been the dominant form in Malaysia (Jomo,1995; Suto, 2003). These factors have impededthe development of investors’ rights and pro-tection in Malaysia.

This section analyses ownership types andconcentration among the top 150 listed firms

Table 1: Comparison of ownership of share capital of limited companies between 1969 and 1990

Companies incorporated in West Malaysia All industries(1969)

All industries(1990)

($000) (%) ($000,000) (%)

Residents

Malays (Bumiputera) 49,294 1.0 15,322.0 14.0

a

Malay interests (Bumiputera interests) 21,339 0.5 6,976.5 6.3

b

Chinese 1,064,795 22.8 49,296.5 44.9Indians 40,983 0.9 1,068.0 1.0

Federal and state governments 21,430 0.5 – –Nominee companies 98,885 2.1 9,220.4 8.4Other individuals and locally controlled

companies 470,969 10.1 389.5 0.3

Foreign-controlled companies in Malaysia 282,311 6.0* 27,525.5 25.1Non-residents 1,235,927 26.4* – –

West Malaysian branches of companies

incorporated abroadNet investments by head office 1,391,607 29.7* – –

Total 4,677,540 100.0 109,798.4 100.0

Source: The Second Malaysia Plan, 1971, Registrar of Companies (ROC), Central Information CollectionUnit (CICU), PNB and Economic Planning Unit (EPU) estimates in The Second Outline Perspective Plan1992–2000 (Malaysia, 1991).*Foreign ownership totalling 62.1%.

a

The amount held by this group consists of $9,000 million owned by Bumiputera as direct investors and$6,300 million as investment in institutions channelling Bumiputera funds.

b

Shares held through traditional trust agencies such as PNB, PERNAS and SEDCs. It also includes theamount of equity owned by the Government through other agencies and companies which have beenidentified under the Transfer Scheme of Government Equity to Bumiputera.



210

CORPORATE GOVERNANCE

© 2007 The Author



under the Malaysian legal and socio-economicenvironment. The impact of ownership typeson governance tools such as CEO–Chairmanduality and debt structure will also be exam-ined. The effects of the interplay among thesevariables, and firm characteristics such as firmage and size, on firm performance will beinvestigated in an integrated model.

Ownership structure

Empirical studies examining the relationship between ownership structure and firm valuein the USA, Eastern Europe and Asia, have onthe whole produced inconclusive results(Claessens and Djankov, 1998; Himmelberg

et al.

, 1999; Morck et al.

, 2000; Nagar et al.

, 2000;Demsetz and Villalonga, 2001; Wiwattanakan-tang, 2001). One explanation offered is that aslong as managers maximise shareholders’values, ownership structure would not haveany systematic impact on firm value (Demsetzand Villalonga, 2001). However, what is oftenoverlooked is the pathways through whicheffects of corporate ownership are diffusedthroughout the corporate environment. Therelationship of ownership structure and firmvalue needs to be examined in conjunctionwith key elements of a firm’s operating envi-ronment, such as socio-economic policies,governmental intervention, law and regula-tions. This paper develops an integratedmodel that attempts to explain how firm per-formance can be affected when different own-ership types utilise different modes of

ownership structures, ownership concentra-tion and CEO–Chairman duality as gover-nance and controlling mechanisms tosafeguard their own interests.

In theory, as ownership separates frommanagement, firm value may decrease due togrowing divergence in interests between thetwo (Jensen and Meckling, 1976). Conversely,as ownership is concentrated in a single share-holder, there will be closer alignment of inter-ests and this could affect firm value. Recentstudies by Wiwattanakantang (2001) and Lins(2003) find that ownership concentration ispositively related to firm performance in Thai-

land and Asia. Such a relationship is especiallypronounced in countries where investor pro-tection is low, because ownership concen-tration is found to mitigate conflicts betweenowners and managers (Suto, 2003).

However, concentration of ownership andcontrol could lead to managerial entrench-ment and domination of the controlling share-holders’ interests. A U-shape relationship

between ownership concentration and firmvalue is found by Nagar et al

. (2000) wherefirms at both extreme ends of ownership con-

centration level outperform firms whereshareholders hold a medium level of shareholdings because “expropriation is low if thecontrolling shareholder owns a large ownership stakes, thus internalising most of theexpropriation costs, or if no shareholder islarge enough to unilaterally expropriate in thefirst place” (Nagar et al.

, 2000, p. 3). This paper

will look beyond nominal ownership concentration by showing how ownership concentration’s motivation and effects might differamong major ownership types in Malaysiancompanies.

The rapid growth of Malaysia’s economy hasnot diluted the concentrated ownership structure in Malaysian firms. Lim (1981) found theownership of shareholding and wealth amongthe 100 largest firms in the 1960s to be highlyconcentrated. An update by Zhuang et al

(2001b) shows that the largest shareholdestill possesses an average 30.3 per cent ooutstanding shares among all listed firms inMalaysia in 1998, with the top five shareholderowning 58.8 per cent. Two-thirds of 2980 firmsin East Asia, and about 40.4 per cent of the 238among the sample firms in Malaysia, are closelyheld by a single large shareholder (Claessens

et al.

, 2000a). Individual/family shareholders(IND) are predominant as large shareholdersin Malaysia (Zhuang et al.

, 2001a).Many of the closely held firms by IND are

founded on the financial and human capital othe founding family (McConaughy, 2000). Asa result, these shareholders maintain intimaterelationships with their businesses, even after

these companies are publicly listed. Redding(1996) has shown that they often link theirfamilies’ prosperity to their firms’ performance. With their large initial endowmentthey have found it important to concentrateshareholding in order to maintain a dominating voice in company policies and decisionsIn addition, IND want to maintain control otheir firms so that they could pass the busi-nesses down to coming generations (Anderson and Reeb, 2002; Schulze et al.

, 2001)Consequently, IND often have longer-termhorizons with their investments. In their studies of Asian management, Redding (1996)

Wong (1996) and Hamilton (1996) show thaextensive personalised business networks andhigh concentration of control are commontools to facilitate business dealings.

CEO–Chairman duality

From the perspective of the controlling shareholder, efficiency in monitoring managemencould be enhanced through CEO–Chairmanduality (Haniffa and Cooke, 2000) because lesscontracting is needed and information asym




© 2007 The Authors



metry is reduced. By being a member of the board, often the Chairman and/or CEO, INDcould concentrate management control andalign company objectives with their own inter-ests. By participating directly in managingfirms, IND could internalise transaction costsand improve firm performance through theirreputation as the figurehead of the firm via

implicit contracting and tremendous negoti-ating power (Redding, 1996).Malaysia’s 1971 NEP has encouraged the

free-rider problem (Suto, 2003) because an in-visible investor protection umbrella for Bumi-putera was created through the establishmentof large trust funds. This has undermined thedevelopment of the market for professionalmanagers and discourages investor educationin the country. Therefore, a priori, it is notunreasonable to find the controlling sharehold-ers, particularly IND, actively manage theirfirms to exercise more effective monitoring.Anderson and Reeb (2003) found that family-founded firms have superior firm performanceto non-family firms, while Mishra et al. (2001)found a similar result.

Firm performance is not necessarily im-proved when the state (STATE), foreign inves-tors (FOREIGN) and trust funds (TF) adoptidentical controlling mechanisms in their firms.Transaction costs, due to contracting costs incumbersome bureaucracy, will increase andmonitoring becomes less effective as the prob-lem of “agents watching agents” arises(Woidtke, 2002). FOREIGN, STATE and TF maynot be able to achieve the same efficiency in

reputation and negotiation as IND could be-cause there is no single controlling shareholderwho is able to internalise the transaction andmonitoring costs. Conflict of interests mightalso arise between the monitor and agents.Governmental activism in the corporate sectormay diminish incentives for institutional in-vestors to actively monitor return on their in-vestments, leading to greater informationasymmetry and free-rider problems (Suto,2003). FOREIGN are unlikely to be active inthis area because their rationality boundary islimited due to the nature of highly personaland close-knit business networking and infor-

mation sharing in Malaysia, and in many Asiancountries (Redding, 1996; Wong, 1996).

Using Malaysian data, this paper will ex-amine the validity of the above arguments

by testing the hypotheses below.

H1: Ownership concentration is highest in firms where individual shareholders are thelargest shareholders.

H2: CEO–Chairman duality is most prominentin firms where individual shareholders are thelargest shareholders.

Debt structure

Besides equity ownership, studies on Ameri-can and Malaysian firms have examined debtfinancing as a corporate governance tool (Har-ris and Raviv, 1988; Mohamad, 1995; Mishraand McConaughy, 1999; Johnson and Mitton,2003; Suto, 2003). Malaysian firms often haveintimate relationships with banks, as the latterserve as major finance providers. A firm’sleverage is found to have significant positiveimpact on its performance in Malaysia (Moha-mad, 1995). High leverage is attained throughclosely linked creditors and borrowers, whooften sits on each other’s board of directors,resulting in higher incentives for monitoring.However, monitoring could be jeopardised

because cross-directorships could insulatemanagers and directors from scrutiny. Claes-sens et al

. (2000b) argue that preferential dealscould ruin natural market competition, henceinducing disproportionate risk and lower

incentives for banks to monitor. If debt financ-ing fails as a governance tool, firm perfor-mance will suffer.

Firm characteristics

In most studies on ownership and firm per-formance, firm characteristics were used ascontrol variables as they are treated as endo-genous. However, this study postulates thatfirm characteristics such as industry sector,firm size and firm age are factors determined

by the business and investment strategiesadopted by the controlling shareholders and

board of directors. Certain types of sharehold-ers are more likely to invest in particular sec-tors. For example, Chinese businesses oftenconcentrate in the construction and propertysectors, while the state are more likely todominate the utilities sector (Gomez and

Jomo, 1997). Firm size has been found to benegatively related to firm value in USA, whilefirm age has little impact on corporate controland firm value (Mishra and McConaughy,1999; Anderson and Reeb, 2003).

A model of how ownership structure andcorporate governance impact on firm perfor-mance is presented in Figure 1. This model is

built on the premise that, in Malaysia, differ-ent types of shareholders employ differentcontrol and monitoring mechanisms to influ-ence their firm. Controlling shareholders havethe choice to select which sector to ventureinto, and whether to concentrate their share-holdings at the beginning. Upon becoming thelargest shareholder in a firm, they then furtherexert their control over the board of directors,often through assuming the position of Chair-man and/or CEO, in order to maximisetheir investment interests. Consequently, this



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largest shareholder would influence, if notdecide, major financial decisions and businessstrategies, hence affecting their firm perfor-mance. The above propositions that firmperformance varies according to different gov-ernance structure and ownership types will betested as follows:

H3a: Firm performance varies according toownership types.

H3b: Firm performance is positively related toownership concentration.

H3c: Firm performance varies according toCEO–Chairman duality.

Methodology and result

Sources of data

The sample companies are drawn from com-panies listed on the KLSE. The KLSE AnnualCompanies Handbook from 1994 to 2001 con-tains data on market capitalisation and finan-cial data. Due to complications in collectingdata, data about ownership structure and

board of directors are only constructed for theyear 2000 which offers a considerable samplesize from the respective handbook. Significantchanges to ownership structure of a number of large listed firms due to extensive restructur-ing and mergers in 2001 occurred as a result of the earlier financial crisis. Including post-2000data will mean that many significant cases,particularly those relating to STATE, willtherefore be lost to the samples.

Definitions of variables

Definitions of variables are presented inTable 2. Ownership is defined as the amount

of equity shares an ultimate owner – INDFOREIGN, STATE and TF – holds in a listedfirm. This study defines ultimate ownershipaccording to La Porta et al.

(1999), which iswidely used by other studies (Claessens et al.

2000a). Ultimate ownership is defined as thesum of shares owned, directly or indirectly, bya single owner through cross-shareholdingsand/or pyramids. If Firm A owns shares inFirm B, the ownership of Firm B is traced untian ultimate owner in the form of IND, STATEFOREIGN or TF is found. This study looks atwo types of structures in the ownershipmakeup of the sample companies. In cross

shareholdings, a structure where firms owneach other’s shares in a parallel (horizontalchain, ultimate ownership is derived from thesum of all shares as the true amount owned bya single ultimate owner (La Porta et al.

, 1999Claessens et al.

, 2000a). In a pyramid structurewhere firms are owned in turn by another ina vertical chain, the smallest amount of sharesis taken as the true amount of shares that asingle ultimate owner holds in a firm underexamination (La Porta et al.

, 1999; Claessens

et al.

, 2000a). The smallest amount is taken inorder to examine the minimum amount that ashareholder needs to own to control a firmDepending on the structure, the shareholdingcomposition and the strength of relationsamong the companies in the vertical chain ofa particular pyramid structure, the amounthat is found in each case to have been deemedsufficient for exercising control by each largeshareholder could vary.

An amendment to the KLSE listing rules9.19 (25) has lowered the percentage of shareholding that requires mandatory disclosure othe identity of a substantial shareholder from5 per cent to 2 per cent. In 1998, the Securities

Figure 1: Model of hypothetical relationships among ownership structure, corporate governance and firm performance

OwnershipTypes

CEO-Chairman

Duality

Sector

Firm Age

Firm Size

Debt

OwnershipConcentration

FirmPerformance

Indicates direct effects between Ownership Types and variables

Indicates indirect effects between Ownership Types and variables




© 2007 The Authors



Industry (Central Depositories) Act 1991 wasamended to impose mandatory disclosure of the beneficial owner’s identity of a nomineeaccount. Therefore, in the sample firms, thetop 20 largest shareholders are listed and therelationships among individuals and firmswho are shareholders are also disclosed. Avery small number of private companies astop shareholders are further traced throughinformation obtained from newspapers, jour-nals, magazines and databases such as Dow

Jones Interactive, LexisNexis and Proquest.Hence, the ownership compositions of allsample firms are identified. The ultimateowners in the sample firms could then beconstructed and the four major groups can beidentified: IND, STATE, TF and FOREIGN.

The ownership type IND in this study of Malaysian companies encompasses both indi-vidual and family investors, as they havesimilar organisational structure, operatingstrategies and policies as compared to otherownership types. Malaysia is found to have “a

genuine one-share-one-vote rule” (Thillain-athan, 1999, p. 30). To control for size and ageof firm, the top 150 listed companies on KLSEare selected, where data are available, basedon their ranking according to their marketcapitalisation in 2000 and at least 10 years orolder in years of public listing and incor-poration.

Firm characteristics are analysed throughfirm size (measured by market capitalisation),firm age (years of incorporation) and industry/

sector (according to KLSE coding). Two perfor-mance proxies are selected: Return on TotalAssets (ROA) and Tobin’s q, each measuringdifferent aspects of firm operation and impli-cations for business decisions. This paper usestime-series averages

3

of the financial informa-tion from the years 1994–2000 to reduce serialcorrelation (Anderson and Reeb, 2003). Anapproximation of Tobin’s q

4

is used here toovercome limitation on data availability.

The sample companies accounted for ap-proximately 74 per cent of the total market

Table 2: Definitions of variables

Variable Definitions

Ownership concentration The percentage of shareholding by an ultimate ownerOwnership types Dummy variables:

State, equals 1 if state is the largest shareholder, otherwise 0Foreign, equals 1 if foreign institution is the largest

shareholder, otherwise 0Trust fund, equals 1 if trust fund is the largest shareholder,

otherwise 0Control group is Individual-owned firms

CEO–Chairman duality Dummy variables:CEO–Chairman independent, equals 1 if CEO and Chairman

positions are held by different person, otherwise 0CEO–Chairman combined, equals 1 if CEO and Chairman

positions are held by the same person, otherwise 0Control group is Structure incomplete, which is either CEO

or Chairman or both positions are not presentFirm age Age of incorporation (years)

Sector Dummy variables, sector which a firm belongs to accordingto KLSE:

Property, equals 1 if true, otherwise 0Plantation, equals 1 if true, otherwise 0Trading/services, equals 1 if true, otherwise 0Construction, equals 1 if true, otherwise 0Consumer products, equals 1 if true, otherwise 0Industrial products, equals 1 if true, otherwise 0Control group is Financial sector

Ln size Ln Market capitalisation (RM million)Firm performance Ln ROA (Profit before Ex-Item/Total Assets), Ln Tobin’s qDebt structure Ln Debt/Total Assets (D/TA), Ln Debt/Equity (D/E)



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capitalisation of all KLSE listed firms in theyear 2000/2001. Table 3 shows the distributionof firms according to ownership types andother categories. IND is the largest group of owners, owning approximately 65 per cent of the sample firms. Descriptive statistics are pre-sented in Table 4. The average ownership con-centration is 43.44 per cent among the 150 top

listed companies in the sample, compared to30.3 per cent among all public listed firms examined by Zhuang et al.

(2001b) in Malaysia in1998.

Results

Univariate analysis

The results (Table 5) show that concentrationof shareholding by a single party is highest inSTATE firms (55.23 per cent) and lowest infirms controlled by IND (38.45 per cent). Theresult means that Hypothesis 1 is to be re

jected. This result is contrary to findings of anearlier study on ownership structure in Malaysia that showed IND firms having the highest ownership concentration (Zhuang et al.

2001a). The result is nevertheless consistenwith Prowse’s (1999) finding that IND stildominates as a shareholder, since they are thelargest shareholders in 98 out of the 150 top

listed firms in the sample. However, whileIND has a significantly strong presence as sub-stantial shareholders in the sample firms, thisgroup does not show the highest ownershipconcentration compared with the STATE

Table 3: Distribution of sample companies in eachof the following categories

Variables Numberof firms

Ownership type

Individual 98State 10Foreign 19Trust Fund 23

Total 150

Chairman-CEO duality

Chairman-CEO incomplete 25Chairman-CEO independent 92Chairman-CEO combined 33

Total 150

Sector

Finance (F) 23Consumer products (CP) 20Industrial products (IP) 30Construction (C) 9Trading/services (TS) 31Plantation (P) 15Property (Pr) 19Other 3

Total 150

Table 4: Descriptive statistics

Variables Mean Median Min 25

th

Percentile 75

th

Percentile Max

n

Ownership concentration 43.00 43.29 12.57 31.03 54.85 76.52 150Ownership type

a

2.09 – 1.00 – – 4.00 150CEO–Chairman duality

a

1.45 – 0.00 – – 2.00 150Age of firm (years) 33.30 33.0 10.00 24.75 37.25 90.00 150Sector

a

4.26 – 1.00 – – 8.00 150ln Market capitalisation 6.85 6.61 0.20 6.00 7.37 10.49 150ln ROA 0.15 0.15 0.00 0.12 0.18 0.47 150ln Tobin’s q 0.98 0.92 0.00 0.84 1.10 1.84 149ln D/TA

−

0.86

−

0.81

−

3.00

−

1.21

−

0.42 1.15 150ln D/E 2.46 2.37 0.00 2.33 2.49 3.73 150

a

Dummy variable: Refer to Table 2 for definition.

Table 5: ANOVA result for ownership concen-tration according to ownership types

Variable Ownershipconcentration

Individual firms 38.45State firms 55.23Foreign firms 50.56Trust fund firms 53.69

ρ

-value 0.000




© 2007 The Authors



FOREIGN and TF. It is because the lattergroup are more actively engaged in nationalcore industries that require greater capital en-dowment while IND have less capital capabil-ity. The STATE and TF often concentrate theirshareholdings in a few large utilities and tele-communications firms and these investorshave yet to relinquish their control in thesecore industries since they are still in pursuance

of the government’s socio-economic policy.Results support Hypothesis 2 that IND

firms have the highest incidence of CEO–Chairman duality, 30.60 per cent of all INDfirms, and accounting for 90.9 per cent of allfirms with CEO–Chairman duality (

χ

2

[6,N =

150] =

15.05, ρ

<

0.05) in Table 6.Ownership type is found to be strongly

correlated with ownership concentrationand ROA (Table 7). Ownership concentration,which is positively correlated with firm size,has no relationship with a firm’s performance

and debt structure. Industry/sector has a sig-nificant correlation with Tobin’s q, which iscommonly sensitive to industrial fluctuations.Both debt structure proxies have negativecorrelations with performance. Firm age andsize do not differ significantly among owner-ship types. Consistent with previous studies(Mishra and McConaughy, 1999; Andersonand Reeb, 2003), firm size has a significant

positive correlation with ROA.Table 8 shows that firm performance varies

significantly among ownership types. FOR-EIGN firms perform best in both proxies whileSTATE firms have the poorest performance inROA and TF firms in Tobin’s q. This studydoes not support previous results found byAnderson and Reeb (2003) that family firmsoutperform non-family firms. This is possiblycaused by the differences in the structure of the financial and equity market and the signi-ficant difference in terms of investor pro-

Table 6: Cross-tabulation for CEO–Chairman duality according to ownership types

Ownership types

a

T(

Individual-ownedfirms

State-ownedfirms

Foreign-ownedfirms

Trustfund-owned

firms

Structure incomplete 14.3 10.0 31.6 17.4 1CEO–Chairman by one person 30.6 10.0 5.3 4.3 2CEO–Chairman by different person 55.1 80.0 63.2 78.3 6

Total 100.0 100.0 100.0 100.0 10

a

ρ

<

0.05, n =

150.

Table 7: Correlations for all variables

OT OC CEO Sector Size Age ROA Tq D/TA D/E

OT 1.000 – – – – – – – – –OC 0.410** 1.000 – – – – – – – –CEO 0.066 0.056 1.000 – – – – – – –Sector 0.034 0.019

−

0.031 1.000 – – – – – –Size 0.162* 0.168* 0.104

−

0.141 1.000 – – – – –Age 0.055

−

0.062

−

0.058 0.134

−

0.121 1.000 – – – –ROA 0.277** 0.110

−

0.043

−

0.182* 0.248** 0.194* 1.000 – – –Tq 0.054 0.031

−

0.089

−

0.244** 0.121 0.020 0.431** 1.000 – –D/TA

−

0.064

−

0.051 0.118

−

0.107 0.115

−

0.039

−

0.291**

−

0.098 1.000 –D/E 0.005

−0.017 −0.042 0.000 0.155 0.057 −0.199* −0.307** 0.475** 1.000

Notes: OT = ownership type, OC = ownership concentration, CEO = CEO–Chairman duality, Size =

ln market capitalisation (RM million), Age=

years of incorporation, ROA=

ln ROA, ROE=

ln ROE,Tq = ln Tobin’s q, D/TA = ln debt/total assets, D/E = debt/equity. **Significant at 1% level, *significant at5% level.




© 2007 The Author



tection between Bumiputera and Non-Bumiputera IND. CEO–Chairman duality hasno significant impact on any variables and dueto space limitation, the results are not shownhere.

Multivariate analysis

Structural equation modelling (SEM) isemployed in this study to examine the multi-variate relationships among variables. SEM isused to examine the direct, indirect and totaleffects in an integrated model. There are threemodels: Model 1 using ROA and D/TA,Model 2 using Tobin’s q and D/TA and Model3 using Tobin’s q and D/E. In all models,insignificant χ 2 is used to indicate good fit. Allindices show good fit except for χ 2/df and TLIindicating overfit. This might be explained by

the use of a large number of dummy variables.Table 9 shows the coefficients between vari-ables for each model. With Tobin’s q, only themodel using D/E as a proxy for debt structureis presented as the result is superior to themodel using D/TA. Only direct effects are pre-sented, since indirect effects are mostly foundto be insignificant.

In Table 9a, ownership types are found toexert significant influence over the levels of ownership concentration, with STATE as theleader and IND firms in the lowest of the rank.Different patterns of ownership types arefound in different sectors, with FOREIGN

firms concentrating in consumer products,STATE firms in trading/services and TF firmsin plantation. Firm size and firm age alsovaries with ownership types; with FOREIGNand TF firms slightly older than IND firms,while STATE firms are the youngest. Debtstructure does not differ between ownershiptypes, but CEO–Chairman duality variesaccording to ownership types, consistent withunivariate analysis.

With regard to firm performance (Table 9a),the relationships vary according to proxy.

FOREIGN firms perform best in both proxiesIND firms perform moderately, surpassed byFOREIGN firms in both proxies, but outperform STATE firms in ROA, and are superior to

both STATE and TF firms in Tobin’s q. Performance by TF firms in ROA and FOREIGNfirms in Tobin’s q are mediated by variablessuch as firm size, debt and ownership concentration, with no significant individual indireceffect. This supports the argument that thelargest shareholder employs different businessstrategies in different industries, hence differing in their level of performance. The fact thathese results vary significantly according toproxies suggests that the inconclusive findingsin the literature on the relationships betweenownership structure and firm performancemay be due to the use of different proxies. Alsignificant relationships between ownership

types and the exogenous variables are directfew mediating effects are present.Table 9b shows that higher debt (D/TA) is

employed when CEO and Chairman are independent of each other. Firms are larger insize with CEO–Chairman duality in Model 1Ownership concentration is negatively relatedto ROA, rejecting H3b and contrary to resultsfrom previous findings and arguments thalarge shareholders could internalise most othe expropriation costs (Wiwattanakantang2001; Nagar et al., 2000; Lins, 2003).

Both firm age and size are positively relatedto ROA and Tobin’s q. This indicates that the

growth in firm assets is better utilised withgreater experience in managerial knowledgeand economies of scale (Himmelberg et al.1999). As Tobin’s q involves psychological factors of investors, older and bigger firms alsooffer better reputation to investors in safeguarding their interests and future prospectsAnother governance variable, debt structurehas a significant negative impact on firm performance, coefficients of –0.515 with ROA and–0.342 with Tobin’s q. These findings are consistent with Claessens et al.’s (2000b) studies

Table 8: Univariate analysis of variance for ownership types with age, size, performance and debt structur proxies

Age Size ln ROA** ln Tq* ln D/TA ln D/E

Individual 32.98 7.0558 0.1401 0.9638 −0.8469 2.4571State 25.50 8.0511 0.1386 0.9915 −0.6945 2.4896Foreign 38.63 7.1269 0.2130 1.1444 −0.9351 2.4308Trust Fund 33.65 7.2455 0.1679 0.9264 −0.9525 2.4730

Total 33.30 7.1495 0.1536 0.9827 −0.8640 2.4584

Notes: Age = year of incorporation, Size = ln market capitalisation (RM million), Tq = Tobin’s Q, D/TA =

debt/total assets, D/E = debt/equity. **Significant at 1% level, *significant at 5% level.




© 2007 The Authors



Table 9a: Coefficients, t-values and standard errors for direct, indirect and total effects between sectors, firm age, firm size, debt structure (debt/total assets), ownership concentration, CEO–Chairman dualityand firm performance (ROA) as exogenous variable and ownership types as endogenous variable usingSEM

Hypothesised relations Model 1: ROA, D/TA Model 3: Tobin’s q, D/E

Direct effect Direct effect

Std RWa t-values Std SE Std RWa t-values Std SE

State b-owned firm withPropertyc

−0.099 −3.808*** 0.026 −0.107 −4.458*** 0.024Trading/servicesc 0.324 3.146*** 0.103 0.283 2.830*** 0.100Consumer productsc

−0.060 −2.727*** 0.022 −0.064 −3.556*** 0.018Constructionc

−0.084 −3.818*** 0.022 −0.090 −4.500*** 0.020Plantationc 0.062 0.579 0.107 0.038 0.413 0.092Industrial productsc

−0.112 −4.308*** 0.026 −0.120 −4.800*** 0.025Firm age −0.116 −1.681* 0.069 −0.081 −1.209 0.067Firm size 0.224 1.349 0.166 0.281 1.912* 0.147Debt/total assets −0.052 −0.627 0.083 −0.032 −0.432 0.074

Ownership concentration 0.244 3.128*** 0.078 0.201 2.310** 0.087C-C independentd 0.100 1.429 0.070 0.120 1.791* 0.067C-C combinedd

−0.093 −1.274 0.073 −0.115 −1.667* 0.069Firm performance −0.035 −0.455 0.077 −0.050 −0.847 0.059

Foreign b-owned firm withPropertyc

−0.149 −4.806*** 0.031 −0.154 −5.133*** 0.030Trading/servicesc

−0.188 −5.875*** 0.032 −0.195 −5.909*** 0.033Consumer productsc 0.362 2.722*** 0.133 0.343 3.035*** 0.113Constructionc

−0.125 −4.630*** 0.027 −0.130 −5.200*** 0.025Plantationc

−0.073 −2.920*** 0.025 −0.020 −0.303 0.066Industrial productsc 0.164 1.491 0.110 0.147 1.455 0.101Firm age 0.058 0.951 0.061 0.140 1.818* 0.077Firm size 0.135 1.688* 0.080 0.110 1.310 0.084Debt/total assets −0.013 −0.176 0.074 −0.017 −0.236 0.072

Ownership concentration 0.285 3.800*** 0.075 0.219 2.281** 0.096C-C independentd 0.084 1.012 0.083 0.065 0.813 0.080C-C combinedd

−0.158 −2.107** 0.075 −0.176 −2.588*** 0.068Firm performance 0.278 4.712*** 0.059 0.109 1.313 0.083

Trust fund b-owned firm withPropertyc 0.036 0.371 0.097 0.025 0.248 0.101Trading/servicesc

−0.124 −1.851** 0.067 −0.132 −2.063** 0.064Consumer productsc 0.002 0.029 0.068 −0.004 −0.050 0.080Constructionc

−0.137 −4.893*** 0.028 −0.141 −5.423*** 0.026Plantationc 0.223 1.956 * 0.114 0.233 1.849** 0.126Industrial productsc

−0.100 −1.408 0.071 −0.107 −1.754* 0.061Firm age −0.036 −0.621 0.058 0.021 0.269 0.078Firm size 0.177 2.011** 0.088 0.174 2.320** 0.075Debt/total assets −0.078 −1.114 0.070 0.048 0.533 0.090

Ownership concentration 0.296 2.667*** 0.111 0.315 3.214*** 0.098C-C independentd 0.127 1.608 0.079 0.145 1.726* 0.084C-C combinedd

−0.153 −2.250** 0.068 −0.171 −2.342** 0.073Firm performance 0.086 1.536 0.056 −0.009 −0.100 0.090

*, **, *** Significant at 10%, 5% and 1% levels, respectively.aStandardised regression weights. bDummy variables, state = 1 if true, foreign = 1 if true, trust-fund = 1 if true, otherwise 0, individual-owned firms as control group.cDummy variables, property = 1 if true, trading/services = 1 if true, consumer products = 1 if true,Construction = 1 if true, plantation = 1 if true, industrial products = 1 if true otherwise 0, financial sectoras control group.dDummy variables, C-C independent = CEO–Chairman independent = 1 if true, C-C combined = CEO–Chairman combined = 1 if true, otherwise 0, structure incomplete as control group.




© 2007 The Author



Table 9b: This table indicates coefficients, t-values and standard errors for direct, indirect and total effectswhen other variables except ownership types as endogenous variables and firm performance as exogenousvariable using SEM




C-C Independentc withFirm size 0.175 1.296 0.135 −0.037 −0.170 0.218Debt/total assets 0.393 2.692*** 0.146 0.064 0.520 0.123Firm performance 0.237 0.731 0.324 −0.275 −1.310 0.210

C-C Combinedc withFirm size 0.257 1.760* 0.146 0.063 0.303 0.208Debt/total assets 0.297 1.833 0.162 0.003 0.025 0.121Firm performance 0.285 0.891 0.320 −0.288 −1.371 0.210

Ownership concentration withFirm performance −0.111 −1.708* 0.065 0.037 0.435 0.085

Debt/total assets withFirm performance −0.515 −6.959*** 0.074 −0.342 −4.817*** 0.071

Firm age withFirm size −0.035 −0.473 0.074 −0.034 −0.453 0.075Debt/total assets – – – – – –Ownership concentration – – – – – –Firm performance 0.141 2.014** 0.070 0.173 1.880* 0.092

Firm size withOwnership concentration 0.067 0.807 0.083 0.120 1.446 0.083Debt/total assets −0.061 −0.938 0.065 0.057 0.704 0.081Firm performance 0.246 3.785*** 0.065 0.190 2.568*** 0.074

Property b with

Ownership concentration−

0.053−

0.552 0.096−

0.054−

0.474 0.114Debt/total assets −0.561 −6.375*** 0.088 −0.422 −2.411*** 0.175Firm size −0.293 −3.021*** 0.097 −0.296 −3.052*** 0.097Firm performance 0.010 0.127 0.079 0.136 1.679* 0.081

Plantation b withOwnership concentration 0.064 0.744 0.086 0.029 0.269 0.108Debt/total assets −0.674 −5.712*** 0.118 −0.600 −6.522*** 0.092Firm size −0.108 −1.102 0.098 −0.148 −1.213 0.122Firm performance −0.013 −0.167 0.078 0.260 2.737*** 0.095

Trading/services b withOwnership concentration −0.074 −0.561 0.132 −0.047 −0.326 0.144Debt/total assets −0.428 −4.920*** 0.087 −0.413 −2.220*** 0.186Firm size 0.082 0.607 0.135 0.045 0.357 0.126

Firm performance 0.036 0.336 0.107 0.417 4.739*** 0.088Construction b with

Ownership concentration −0.158 −1.477 0.107 −0.153 −1.645 0.093Debt/total assets −0.217 −3.500*** 0.062 −0.254 −2.171*** 0.117Firm size 0.048 0.495 0.097 0.041 0.418 0.098Firm performance 0.023 0.274 0.084 0.236 3.688*** 0.064

Consumer products b withOwnership concentration −0.020 −0.168 0.119 0.003 0.026 0.117Debt/total assets −0.404 −4.391*** 0.092 −0.403 −2.651*** 0.152Firm size −0.053 −0.546 0.097 −0.055 −0.529 0.104Firm performance 0.324 3.857 0.084 0.301 2.922*** 0.103




© 2007 The Authors



but contradict Mohamad’s (1995). Lastly,industry/sector plays an important role infirm performance outcomes; however, therelationships are significantly mediated by thelevels of debt that are sensitive to sectors.

Discussion of results

The findings of this study highlight the com-plex relationships between corporate owner-ship, governance and firm performance. First,

they demonstrate how different controllingshareholder influences the formation of own-ership and governance structures. Second,ownership types have direct impact on firmperformance, while the underdevelopedfinancial system which fails to provide ade-quate signalling effect has yet to perform aneffective monitoring role over management.Lastly, this study shows that ownership con-centration is prominent and entrenched inMalaysia regardless of ownership types.

The prerequisite to exercise control via con-centrating shareholding is to own a large poolof capital. The surprising result that IND have

the lowest ownership concentration can prob-ably be explained by their limited financingoptions. Family funds and resources are likelyto have been exhausted in the initial businessset-up. Listing their firms at a later stage of development is a financing option for businessexpansion without bearing full risks. On theother hand, with the immature financial andequity market in Malaysia, IND are normallymore reliant on bank finance, which theywould be cautious to employ to avoid risk of default. Unlike IND, other institutional inves-

tors such as the STATE, TF and FOREIGN usu-ally have better access to funds. For instance,major trust funds such as PNB and Per-

badanan Nasional Berhad (Pernas) have closelinks to the government as they are establisheddirectly under governmental policies (Gomezand Jomo, 1997). FOREIGN could tap intoforeign capital market.

Control through board representation re-quires personal participation and managerialskills. When IND attempt to protect their in-

terests through CEO–Chairman duality orself/family representation on board of direc-tors, the boundary of rationality is expanded.Agency cost and information asymmetry is re-duced when the owner becomes the manager(Jensen and Meckling, 1976). A prominentreputation with expanded rationality boun-dary also improves negotiating power andaccountability.

In contrast, the relationship between in-stitutional shareholder and the appointedmanager/director is usually not personal.Multi-level and cross-firm contracting impliesthat agency relationships become more com-

plicated and can result in higher costs. Infor-mation sharing and timely circulation can thus

be harmed. As CEO–Chairman duality in non-IND firms creates more room for managers’shirking, it is better for non-IND owners toexercise control through ownership concen-tration rather than CEO–Chairman duality.The high ownership concentration and strongassociation with CEO–Chairman duality byIND attest to this behaviour. Results fromthis study show that the benefit of retainingcontrol and self-managing outweighs agency

Industrial products b withOwnership concentration −0.097 −0.746 0.130 −0.072 −0.545 0.132Debt/total assets −0.504 −5.860*** 0.086 −0.371 −2.108*** 0.176Firm size −0.170 −1.604 0.106 −0.171 −1.541 0.111Firm performance −0.014 −0.173 0.081 0.370 3.936*** 0.094




*, **, *** Significant at 10%, 5% and 1% levels, respectively. aStandardised regression weights. bDummyvariables. Property = 1 if true, trading/services = 1 if true, consumer products = 1 if true, construction = 1 if true, plantation = 1 if true, industrial products = 1 if true otherwise 0, financial sector as control group.cDummy variables, C-C independent = CEO–Chairman independent = 1 if true, C-C combined = CEO–Chairman combined = 1 if true, otherwise 0, structure incomplete as control group.

Table 9b: Continued




© 2007 The Author



costs in IND firms, which perform better thanSTATE and TF firms. However, FOREIGNfirms benefit from managerial know-how andexpertise from foreign markets and affiliation,which offset their disadvantage in a highlynetworked market and social environment.

Debt is not an efficient governance tool inMalaysia (Gomez and Jomo, 1997, p. 49; Suto,

2003). Our finding that higher leverage leadsto poorer performance supports the argument(Claessens et al., 2000b; Suto, 2003) that theimmature financial market fails to act as aneffective market mechanism in punishingpoorly performed firms.

The NEP has critically influenced how busi-ness activities are conducted in Malaysia,resulting in excessive political and businessrelationship-building and uneven access toopportunities (Gomez and Jomo, 1997). Con-sequently, firm performance in Malaysia isoften seen to be a function of the identity of the owner, its ties to powerful political agentsand the resulting access to business opportu-nities and finance. This raises serious issues inthe protection of minority shareholders’ rightsin Malaysia.

Malaysia is the forerunner in developingand promoting a comprehensive corporategovernance system compared to her neigh-

bouring countries. However, it seems that thecode has fallen short in addressing the signi-ficant issues of expropriation of minority inter-ests and the dominance of large shareholders-cum-directors-cum-managers, even amonglarge listed firms. In the post-financial distress

period, control by major shareholders has become more entrenched through ownershipstructure, as shown in Zhuang et al. (2001b)and supported by this study. The effect of therecently introduced code on the ownershiplandscape in Malaysia is still unknown. How-ever, with the inception of Minority Share-holder Watchdog Group (MSWG) in 2000,more attention is called for the protection of minority shareholders. But scepticism of theeffectiveness and independence of the groupremains, since the board of directors andmanagement of MSWG are dominated bykey players from trust funds who are also the

large institutional shareholders in the cor-porate sector. Hence, more independence andtransparency among policy makers and enf-orcers might be the key to more effectivecorporate governance standards and practicein Malaysia.

Conclusion

This paper presents an integrated model thatexplains how firm performance is affected

when different owners (individual, stateforeign and trust fund investors) utiliseownership structure, concentrating ownershipand CEO–Chairman duality as controllingmechanisms to safeguard their own interestsSTATE firms are found to have the highesownership concentration, while IND shareholders have the lowest. As IND shareholders

have the strongest incentives to be personallyinvolved in the governance and managemenof the company, the highest incidence of CEO–Chairman duality is therefore found. Ownership types exert significant impact on firmperformance. The impact varies according toperformance proxy, with the fundamenta

business conditions and socio-economicpolicy influencing the distribution of ownership and wealth in Malaysia. Conventionagovernance instruments, such as the board odirectors and debt structure, have failed to acas effective monitors, instead becoming mechanisms utilised by large shareholders to con-trol their firms.

The findings of this paper demonstrate thacorporate governance in Malaysia needs to be

better able to scrutinise and perhaps restrainthe power of large shareholders to protect theinterests of minority shareholders. It is obvious that Malaysia requires the development ogreater transparency and accountability in therelationship between politics and businesslarge shareholder and the board of directorsand the board of directors and managementWith more effective governance arrangements, investor protection can be enforced

market mechanisms can function competitively and minority shareholders’ interests aresafeguarded.

Notes

1. Four dominant ownership types are identified in this study: IND – an individual ora family who is the largest shareholderSTATE – a government entity with thelargest shareholding; FOREIGN – a foreignenterprise holding the largest shareholdingTF – a domestic trust fund with the larges

shareholding.2. According to Torii (1997), Bumiputera

means “sons of the soil” in Bahasa Malay-sia, the national language of Malaysia. Eventhough there is no legal definition associated with this term, “Bumiputera” effectively distinguish Malays and indigenouspeople as the NEP target groups fromChinese, Indians and other immigranpopulation.

3. Average across time for each firm and thendetermine the mean for the sample by




© 2007 The Authors



averaging across firms (Anderson andReeb, 2003).

4. Tobin’s Q = (MVE + PS + DEBT)/TA,MVE = the product of a firm’s share priceand the number of common stock sharesoutstanding, PS = the liquidating value of the firm’s outstanding preferred stock,DEBT = the value of the firm’s short-term

liabilities net of its short-term assets, plusthe book value of the firm’s long-term debt,TA = the book value of the total assets of thefirm (Chung and Pruitt, 1994).

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On Kit Tam is Professor and Deputy Dean(International) of the Faculty of Business andEconomics, Monash University, and CoDirector of Monash Governance ResearchUnit. His research interests are corporate governance, financial market development, foreign direct investment and the economy oChina. He currently serves as an independendirector of a financial joint venture betweentwo major Australian and Chinese financiainstitutions.

Monica Guo-Sze Tan obtained her PhD fromMonash University, Melbourne, Australia

specialising in the area of corporate governance and firm valuation. She has workedclosely with the Monash Governance ResearchUnit and an Honorary Research Fellow aMonash. Dr Tan is currently a Senior Consul-tant at Acumen Alliance, Melbourne, specialising in Corporate Governance and RiskManagement consulting. She holds a BA fromthe University of Western Ontario, Canadaand a Master of Management from MonashUniversity, Australia.

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