CORPORATE GOVERNANCE DILEMMA –

EVIDENCE FROM MALAYSIA

Aida Maria Ismail,1 Victoria University
Anona Armstrong,2Victoria University
Colin Clark,3Victoria University

ABSTRACT

The topic of corporate governance has entered the agendas of many boards of directors in
recent years. It is no longer a topic for idealists or academics. More corporate leaders are
convinced by the necessity of good corporate governance. Reviewing corporate annual
reports has become one of the commonly used techniques to analyse corporate governance
practices. In Malaysia, annual reports are seen to be less effective in conveying useful
corporate governance information to the users due to the disclosure of information that is not
relevant to them or that current users demand more from the contents of annual reports.
Users also consider other sources of information about the companies as more reliable,
trusted and easily accessible relative to a firm’s annual report. This has point out how the
present rule-based governance system has serious limitations. Annual report has failed to
communicate corporate governance information to the public. Ticking off boxes for
compliance only leads to a false sense of security that the right judgements and right actions
are being taken. In this study, interviews with ‘board of directors’ and ‘governance experts’
uncovered some of the inadequacies pertaining to corporate governance reporting in
Malaysia and identified how they could be addressed. The findings provide clearer views
regarding this issue and can assist security regulators to improve and promote good
corporate governance among Malaysian government link companies.

Words: corporate governance; rating, reporting, independent monitoring, board of director.

INTRODUCTION

The topic of corporate governance has entered the agendas of many boards of directors in
recent years. It is no longer a topic for idealists or academics. More corporate leaders are
convinced by the necessity of good corporate governance. The Asian financial crisis, that
started in 1997, partly originating from the prolonged recession in Japan in the early 1990s
(Sachs, 1998), adversely affected the performance of many East Asian economies. Malaysia
was not spared from the contagious effects that followed throughout 1998. It is generally
believed that a lack of sound corporate governance was, to a certain extent, a major reason for
this economic crisis in the East Asian region (D'Cruz, 1999; Khas, 2002; Kim, 1998).

Apart from that, the tragic downfall of worldwide corporate giants, which came later than the
Asian financial crises, such as Northern Rock, Bear Stearns, Enron, Xerox, Worldcom, and
Parmalat, left a deep impression on the corporate world in general. As in the case of the

1
Aida Maria Ismail, University Teknologi MARA Malaysia, Corporate Governance Research Program, Victoria
University, Melbourne, email: aidamaria.ismail@live.vu.edu.au
2
Professor Anona Armstrong, Corporate Governance Research Program, Victoria University, Melbourne,
email: Anona.Armstrong@vu.edu.au
3
Professor Colin Clark, Faculty of Business and Law, Victoria University, Melbourne, email:
colin.clark@vu.edu.au

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Asian crisis, most of the corporate failures, including Enron and Worldcom, could be said to
have been caused by a lack of good corporate governance. In addition, the recent US
accounting scandals associated with the global financial crisis (notably the Lehman Brothers
bank failure) hastened the understanding of the wide-ranging effect that poor corporate
governance can have on a country’s economy through its effects on the capital markets. Such
incidents adversely affected public confidence in the reliability of corporate reporting.

According to Graham, Litan and Sukhtankar (2002), the cost of poor corporate governance is
borne heavily by minority shareholders, a significant issue in emerging markets like Malaysia
where many public companies are family owned. Remuneration, the selection of board
members, weak investor relations, a low level of transparency in disclosing information by
companies listed on the Bursa Malaysia (BMB), formerly known as Kuala Lumpur Stock
Exchange (KLSE), and the ineffectiveness of regulatory agencies in enforcing legislation by
punishing offenders and protecting minority shareholders, are all reasons attributed to the
collapse of several Malaysian companies (Mohamad, 2002). These are the common problems
which are in the debates on corporate governance. These unsolved issues clearly show that
the exercise of a rule-based conformance approach did not work and has resulted in corporate
governance failure.

Though the term “Corporate Governance” is recognised universally, there is no one

acceptable definition of its usage. It is essentially about the control and direction of
companies, exercised by their directors or those holding power and authority. Studies of
corporate governance focus on a wide range of issues such as legal compliance with company
regulation, the structure of company boards and their authority, best practices and reporting
and accountability systems, and how these add value to a corporation’s performance.

Reviewing corporate annual reports has become one of the commonly used techniques to
analyse corporate governance practices (Horwath, 2002). Though such a technique is non-
comprehensive in nature, the analysis could provide, to a certain extent, the relevant
indicators of corporate governance actual practices. However, the conduct of extensive field
work in analysing corporate governance practices remains limited because the main sources
of data used to evaluate company corporate governance practices are based on publicly
available information such as the corporate annual reports. In fact, actual corporate
governance practices go beyond the materials that are published in corporate annual reports.
Ticking off boxes for compliance only leads to a false sense of security that the right
judgements and right actions are being taken.

Fasterling (2006) commented on the importance of honest and accurate reporting as a

fundamental value for the effectiveness of disclosure rules. He further argues that if honest
reporting is not reliable, and must instead depend solely on enforcement and verification
measures, disclosure rules rapidly become inefficient, because inaccurate disclosures are
difficult to detect and where disclosures are accurate, they still may have hidden implications
that are difficult to uncover (Kraakman, 2004).

The contributors to the present worldwide corporate governance discussion share one
common objective, and that is to restore public faith in the integrity of business, (Fasterling,
2006). The concept of integrity is related to consistency of values and actions or words and

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deeds (Kimber & Lucas, 2001). Fasterling (2006) further defined integrity as being
honourable, honest, loyal, faithful and trustworthy.

INTRODUCTION TO THE CONTEXT OF THE STUDY

The Malaysian Securities Commission (SC) revealed that it had uncovered “a variety of
breaches and mismanagement” by directors and senior officers of a number of companies
(Oh, 2003). The offences include insider trading and market manipulation, as well as
corporate governance transgressions such as purchasing assets at inflated prices, selling assets
at deflated values, submission of false or misleading information, schemes to defraud, and
misuse of proceeds from capital-raising exercises. The release of the Malaysian Code of
Corporate Governance (Ministry of Finance, 2000), the introduction of paragraph 15.26 and
12.57 of the then Kuala Lumpur Stock Exchange (KLSE) Revamped Listing Requirements
(RLR) (Ministry of Finance, 2001) and the revised Malaysian Code on Corporate
Governance (Finance Committee on Corporate Governance, 2007) have provided a
framework and structures for good governance reporting architecture. Nevertheless
organizations are ultimately controlled and run by human beings and in order to promote
transparent corporate governance reporting, voluntary acts from within, based on sincerity,
rather than conforming to an external requirement are crucial (Salleh & Ahmad, 2008).

Corporate governance and business ethics were the main concern with regards to integrity
value in Malaysian private sector. Various scandals and malpractices, involving both foreign
and local companies, have time and again demonstrated the need to uphold good governance
(Razak, 2005). Corporate crimes such as corporate frauds have tarnished the credibility and
integrity of the private sector among investors and the public (Razak, 2005). The above
problems underscore the key point of the importance of adopting good management practices
in every sphere of the corporate sector, in order to promote integrity and sustain economic
prosperity (Razak, 2005).

In Malaysia, annual reports are seen to be less effective in conveying useful information to
users due to the disclosure of information that is no longer relevant or that current users
demand more from the contents of annual reports. Che Haat et al (2005) found that users
demanded more from the contents of the annual reports and feels that annual reports failed to
convey useful information. Users were also considering alternative sources of information
about the companies as more reliable, trusted and easily accessible relative to the firm’s
annual reports. In addition, the contents of the information disclosed appear not to cater to the
needs of investors. There might also be certain fundamental information that is lacking in the
Malaysian disclosure framework as a study conducted by Standard and Poors (2004) also
revealed that most of the companies in Malaysia still fell short of global disclosure practice
(Standard & Poors, 2004; Toh, 2004).

This has been the dilemma for security regulators in assessing company corporate governance
practice which currently are not being disclosed in company annual reports. The issue of
corporate governance reporting and corporate governance practice is not yet resolved.

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THE AIMS OF THIS PAPER

The aims of this paper are to review various means of assessing corporate governance
practices and to report the results of a study which determined the views of experts and
practitioners about the reporting of corporate governance in Malaysia.

This research tries to uncover the corporate governance dilemma in Malaysian Government
Link Companies. The research identified issues or problems pertaining to corporate
governance reporting in Malaysia and how these problems can be resolved.

LITERATURE ON CORPORATE GOVERNANCE ASSESSMENT

A review of previous studies sees their focus based on the corporate governance attributes
used such as the composition of a board (including the roles of independent directors, board
leadership (separate or dual roles for CEO and Chair), and independence of audit committees.
More recently the focus has turned to assessment of compliance with governance best
practices and how these can be assessed.

In emerging economies, the quality of corporate governance can vary enormously.

Recognizing the need for a benchmark for corporate governance standards, Standard & Poors
introduced its new service called Corporate Governance Scores (CGS) (Anonymous, 2001).
Their analysis begins with an evaluation of governance issues at the country level in order to
determine the extent to which external forces at the macro level support governance practices
at the company level. Then, this is followed by the second part of the analysis which
evaluates corporate governance practices at the level of individual companies. Using a
synthesis of the OECD’s and other international codes and guidelines of corporate
governance practices as cornerstones of the scoring methodology, Standard & Poors’ scores a
company’s overall governance practices and four other components: ownership structure;
financial stakeholder relations; financial transparency and information disclosure; and board
structure and process. The extent to which a company adopts and conforms to international
codes and guidelines of good corporate governance practices is reflected by the award of
Corporate Governance Scores (CGS) on a scale from CGS-1 (lowest) to CGS-10 (highest).
The four components described earlier, all contribute to the CGS and receive individual
scores from 1 to 10. There are altogether 100 governance attributes examined in Standard &
Poor’s analysis (Anonymous, 2001).

According to the Corporate Governance Ratings and Research by Deminor Rating (2007), the
important corporate governance themes that received strong attention during the rating
process are director’s independence, splitting the roles of Chairman and CEO and the audit
and non-audit services provided by the external auditors. The ratings criteria used to
benchmark the governance of a company were included in an analysis grid containing over
300 governance indicators. The more than 300 criteria that make up the Deminor’s Rating are
classified into four main categories: rights and duties of shareholders; range of take-over
defences; disclosure and governance; and board structure. Deminor Rating’s research was
done on ten selected European countries: the UK, France, Germany, Netherlands, Italy,
Netherlands, Switzerland, Spain, Sweden and Belgium.

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Several studies suggest that investors use such ratings in investment decisions. Ernst &
Young Malaysia and BP Malaysia Sdn. Bhd (2002) cited the results of a Credit Lyonnais
(“CLSA”) study on corporate governance in emerging markets published in February 2002
which suggests that investors prefer companies with high or improving corporate governance
practices in the respective markets. The factors and weightings considered by CLSA for their
country rankings are:
1. Clear, transparent and comprehensive rules and regulations (10% weighting);
2. Commitment and effective enforcement of rules and regulations (30% weighting);
3. Political and regulatory environment affecting corporate governance and ability of
companies to maximise value without arbitrary restrictions (20% weighting);
4. Adoption of International Generally Accepted Accounting Principles (20%
weighting); and
5. Institutional mechanisms to promote awareness and a culture of good governance
(20% weighting).

A study by Cheah and Kean (2002) reports the findings of a project that examined corporate
reporting and information disclosure among Malaysian commercial banks. As a benchmark
against which Malaysian banks are compared, disclosure items used by the Basel Committee
on Banking Supervision in its 2000 banks disclosure survey were applied to Malaysian banks.
The Basel survey was categorized into twelve sections covering quantitative, strategic and
methodological information to enable better evaluation by market participants. It focused on
credit risk, which understandably is the predominant risk exposure faced by commercial
banks. The researchers examined the 2001 annual reports of a total of 18 Malaysian banks.
The sample consisted of three separate groups: four domestic banks listed on the KLSE, six
domestic non-listed banks and eight foreign banks. The disclosure rates of the three separate
groups were then compared to that of the Basel survey. The results indicate that although
Malaysian domestic banks have undergone considerable industry shakeout and consolidation,
they are still somewhat unsophisticated and disclosed far less information compared with
banks in the Basel sample. Even though, in general, Malaysian banks have met some of the
international standards, further substantial efforts to disclose more are required if they wish to
improve corporate governance practices and compete on international scale.

Thompson and Hung (2002) conducted a corporate governance study in Singapore. They
constructed a Corporate Governance Scorecard based on the guidelines from the Singapore
Code of Corporate Governance in order to evaluate the level of compliance with the Code as
well as to gauge their corporate governance practices. The study also tested for an association
between corporate governance and various corporate attributes including profitability, size
and age. In addition, they looked at the impact of governance mechanisms such as board
structure, capital structure and ownership structure on the profitability of the sample
companies. The scoring data indicates an overall low level of compliance with the Code. The
study also found a negative relationship between corporate governance and profitability; and
also between company performance and separated leadership structure. However, arguably,
the proxy used for performance was profitability (measured only by ROE), which is subject
to the limitations of such a measure.

Another study conducted by Weir and Laing (2002) examined other corporate governance
attributes, such as duality, number of non-executive directors (at 3 non-executive directors)
and independence of the non-executive directors in association with companies’ performance
(measured by return on assets, ROA).

5
Similar to the above study, Weir and Laing (2002) also looked into degree of compliance
with the governance code (Cadbury Report), finding that a majority of companies complied
with the recommendations. However, the relationships between the governance indicators
and company performance were tentative. The number of executive directors and percentage
of independent non-executive directors failed to show a positive relationship with
performance although duality was found to be an effective governance mechanism. The
authors concluded that these results suggested that the role of non-executive directors and
independent non-executive directors was more persuasive rather than taking a monitoring
role. The duality characteristic was expected to show a negative relationship, but the result
turned out to be positive. The researchers concluded that in certain circumstances, duality
was an effective governance mechanism, whereby the benefits of duality outweigh the
separation. In conclusion, they suggested that the Cadbury Report was too prescriptive;
therefore, it should allow some flexibility.

On the other hand, a contrary result was found by Desai et.al (2003) on the CEO duality
effect on firm performance measured by cumulative abnormal return (CARs) on stock value.
According to Desai et al (2003), firms without CEO duality show a positive abnormal return,
while firms with CEO duality demonstrate negative abnormal return on stock value.

Besides that, CEO compensation issues and what are the best measures to formulate CEO
compensation have always been debated. Usually, a remuneration committee is set up to
determine the CEO compensation policy. According to agency theory, there should be a link
between CEO compensation and his/her contribution to the firm’s performance. Baum et. al.
(2004) conducted a study of CEO compensation effects on corporate performance using
economic profit (economic value added, economic value added (EVA) and market value
added, (MVA). The objective of the study was to analyze the relationship between a
company’s performance (EVA and MVA) and CEO compensation. The result portrayed that
market value added (MVA) was closely related to the CEO compensation as compared to
EVA. This result indicated that economic profit was another strong determinant of the CEO
compensation rather than other traditional accounting measures such as EPS, ROI, ROCE and
stock price.

The White Paper on Corporate Governance in Asia (OECD, 2003) identified five key issues
in developing corporate governance: managing shareholder rights; equity in shareholder
treatment; disclosure and transparency of performance, investment and risk; and, role and
protection of shareholders and board structure. Based on this framework, Malaysia received
a relatively low CG score compared to its other Asian counterparts such as Singapore,
Thailand and the Philippines.

In a study of reporting, IFAC based its framework for improving corporate governance on
three key assumptions: credibility in financial reporting is both a national and international
issue; corporate financial reporting involves an information supply chain that requires quality
assurance at all points; and, integrity of both individuals and institutions involved in the
supply of information is essential.

Two Australian studies (Howarth, 2002, 2003; Wespac, 2003) critically analyzed the use of
corporate annual reports as the main source of data for their corporate governance projects.
Horwath proceeded with the development of the Corporate Governance rating for Australia.
Wespac (2003) specifically examined the Corporate Governance Statement of financial
institutions in Australia and assessed their corporate governance reporting on five broad

6
criteria: board structure, committees of the board, audit governance, remuneration policy and
corporate responsibility.

Fasterling (2006) referred to the importance of honesty and accurate reporting as a

fundamental value for the effectiveness of disclosure rules, but if it is not reliable, then
enforcement and verification measures will be considered as the solution. But again effective
enforcement required not only a non corrupt independent or governmental authority which
has power to initiate investigations, report irregularities, and impose sanctions, but also that
such authorities are endowed with sufficient financial means and a highly trained staff to
carry out their tasks (Fasterling, 2006). He further commented that the cost of these efforts
needs to be justifiable with the benefit that can be experienced from accurate disclosure and
act accordingly.

Although companies in Malaysia are required to comply with the corporate governance
guidelines, no study has canvassed the opinions of those involved in making corporate
governance decisions.

METHODOLOGY

This study adopted a qualitative approach to uncover issues in corporate governance

reporting and how to address these issues. As the aim of the study was to discover issues in
corporate governance reporting and how to address the issues, structured interviews were
conducted with the company directors and company top management selected from the top
100 companies in Malaysia (i.e. the practitioners)(Bursa Malaysia, 2008), and Malaysian
corporate governance associations, policy makers and academics (i.e. the corporate
governance experts).

The research questions addressed were:

1. What were the major issues in corporate governance in Malaysia?
2. How accurate was corporate governance reporting? What was poorly reported?
3. How reliable was corporate governance reporting as an indicator of the quality and
integrity of company management?
4. How could some of these issues be addressed?

The interview sample which represents both practitioners and corporate governance experts
provides an in-depth gauge of the issues. As the interviewees have in depth knowledge of the
subject, they can provide rich information to the study (Babbie, 2002). A total of 12
interviews were conducted with a sample of 4 practitioners and 8 corporate governance
experts. While this is a relatively small sample, the twelve respondents showed considerable
agreement in their views which suggests that the results are probably representative of the
sector.

The interviews were conducted between 15th of September 2008 to 31st of January 2009, at
offices located around Klang Valley Malaysia. Personal interview was the preferred method
of gathering the required information because this approach gives more attention to
understanding corporate governance issues in a holistic and meaningful way. From the
interview exercise, issues related to corporate governance reporting were discovered.

7
Table 1: Number of Personal Interviews with the Practitioners and Corporate
Governance Experts
Respondents group Number of interviewees Percentage (%)
Practitioners 4 33.33
Corporate Governance Experts 8 66.67
Total 12 100
Table 1 shows the number of personal interviews conducted with two sub-groups, the practitioners and the corporate governance experts.

Sources of data were taped transcripts of the interviews and the detailed notes taken by the
researcher during the interviews. These data were analysed for identification of themes and
similar responses. The tables report the number of times that responses were volunteered by
the respondents unless indicated otherwise.

This study was part of a larger study of governance in Malaysia. This paper reports the results
of the study that determined what the corporate sector believed were the critical issues in
governance reporting in Malaysia.

FINDINGS

Issues with Corporate Governance in Malaysia

In the case of Malaysian Government Link Companies, there is an unsolved issue as regards
to corporate governance reporting. Similar to Che Haat (2005) this study confirmed that
current users demand more from the contents of annual reports and in addition, the contents
of the information disclosed might not cater to the needs of the investors. This has resulted in
users now considering other sources of information about the companies to be more reliable,
trusted and easily accessible relative to the firm’s annual reports. The interviewees’ views are
typified by the following:

We wouldn’t want to report too many things in the annual report. As long
as we comply with the Bursa Malaysia (Kuala Lumpur Stock Exchange)
listing requirement that should be good enough (Practitioner)

Information reported is not transparent enough and there is a need for the
information to be verified or certify for the trueness by an independent
party. The current mandatory approach are not promoting integrity in
corporate governance reporting, it should be change to aspiration
approach (Corporate Governance Experts)

Table 2: Issues With Regards To Corporate Governance in Malaysia

Are there any issues with corporate Practitioners Corporate Governance
governance in Malaysia? Experts
No issues - 2
Comply and report on mandatory requirement 3 4
but lack on voluntary disclosure / Transparency
of the report
Quality of directorship/ Human capital 1 5
Risk Management 1 -
Monitoring and Enforcement - 2
Malaysian code on corporate governance should - 1
tailored to Malaysian listed company
Inefficient of information flow 1 1
Table 2 shows the respondents perceptions of other issues raised with regards to corporate governance.

All of the practitioners believed that there are unsolved issues pertaining to corporate
governance in Malaysia. As for the corporate governance expert group, two respondents

8
believe that, there are no issues pertaining to corporate governance in Malaysia since the
companies comply with the mandatory listing requirement. The balance of the expert group
believes otherwise. The majority of the practitioners feel that companies only comply and
report on mandatory requirements and need to improve on voluntary disclosure. This has
resulted in having reports that are low in transparency. Half of the expert group agreed and
have the same opinion as the practitioner group.

Company are good in reporting the mandatory requirement which is being

spell out in the listing requirement, but lacking in disclosure of best
practice in corporate governance which is the voluntary disclosure
(Practitioner).

Another major issue which the expert group considered as crucial is the quality of the
directorships including: board knowledge, experience, capability, integrity values, attitudes
and leadership values. Only one practitioner highlights this issue during the interview.

Quality of the board is crucial because it influence the corporate culture.

Good corporate governance starts from the top which then flows down.
They are the setting tones (Corporate governance expert).

Risk management and flow of information within the organization are other issues that the
practitioners feel need to be improved as it is considered as a critical issue.

Other issues which the expert group highlighted during the interview were the monitoring
and enforcement of the Malaysian code on corporate governance. The expert group were
concerned with monitoring and enforcement in Malaysia which they feel needs to improve.
They also believe that the Malaysian code on corporate governance should tailored to the
nature and structure of the Malaysian listed companies the majority of which are family
based and state owned companies.

Accuracy of Reporting

The majority of the corporate governance expert group believes that corporate governance
reporting needs to be reviewed by Bursa Malaysia (Kuala Lumpur Stock Exchange) since
companies tend to report only on mandatory requirements but tend not to provide voluntary
disclosures. Bursa Malaysia (Kuala Lumpur Stock Exchange) as an independent party can
also provide assurance of the trueness of the information reported.

Table 3: Accuracy of Corporate Governance Reporting

How accurate are reports on corporate Practitioners Corporate Governance
governance? Experts

Very accurate 1 1
Accurate 1 1
Need revision 2 6
Table 3 shows the respondents perceptions on corporate governance reporting in Malaysian Government Link Companies.

Corporate governance just provides legal boundaries for company to operate but not assuring
the reliability of the information. That is the reason why report on corporate governance is
questionable since it is only guided by the code but not enforced by law. Half of the
practitioners also agree with this statement. Honest and accurate reporting is the fundamental
value for the effectiveness of disclosure rules (Fasterling, 2006).

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 Corporate governance report is not like the financial report where it is
govern by law and validated by an auditor (Expert group).

Disclosure

Half of the practitioners believed that information pertaining to director remuneration and any
other benefits received are poorly reported. They feel that this is a sensitive issue on which
companies do minimal reporting. This may be due to the nature and structure of Malaysian
listed companies; family based and state owned companies. As for the expert group, they feel
that information related to director performance, effectiveness and training is poorly reported.
This is another controversial issue on which companies do minimal reporting. The issues
being highlighted by both groups share one common theme: information related to the board
of directors.

Table 4: Issues That Is Poorly Reported

What issues are poorly reported? Practitioners Corporate Governance
Experts
Directors benefit 2 1

Directors quality - 4
Integrity issues/ Accountability issues 1 1

Risk management/ internal control/ audit 1 1

Shareholder matters - 1

Assessment/ Action taken after assessment - 3

Table 4 shows the responses on issues which are poorly reported in the companies’ annual report.

The expert group also suggest that information related to the assessment conducted in the
companies and action taken after assessment is poorly reported.

Assessment conducted in the company is just on the surface, eg YES or

NO; and there is no report or data pertaining to the action taken after the
assessment. There is lack of quantitative data and if there is a report, it is
very generic (Expert group).

Other issues which are poorly reported are integrity and accountability issues; risk
management and internal control and information on shareholders.

Table 5: Greater Disclosure as a Solution

Can it be solved through greater disclosure? Practitioners Corporate Governance
Experts
Yes 4 8
No - -
Table 5 shows the respondents opinions about how greater disclosure could be address as a solution to issues in corporate governance
reporting.

All respondents from both groups agreed that greater disclosure can perhaps solve many of
the above issues in corporate governance. Fasterling (2006) argues that inaccurate disclosures
are difficult to detect and where disclosures are accurate, they still may have hidden
implications that are difficult to uncover (Kraakman, 2004). Respondents agreed:

10
 Company should be more transparent in reporting, more accountable and
they should do auditing and forensic accounting (Practitioner).

Greater disclosure perhaps can help in this issue but enforcement and
monitoring are really important. Revising the company’s act might also
help in addressing this issue (Expert group).

Assessment of the Quality and Integrity of Management

Half of the practitioners do not believe that corporate governance reporting can be a reliable
indicator of the quality and integrity of the company management. More than half of the
expert group does not believe the statement unless the information is being verified by an
independent party.

Table 6: Corporate Governance Reporting as a Reliable Indicator of the Quality and

Integrity of Company Management
Do you think that corporate governance Practitioners Corporate Governance
reporting (disclosure) can be a reliable Experts
indicator of the quality / integrity of company
management? What is your opinion
regarding this matter?
Yes 1 1
Perhaps 1 2
No 2 5
Table 6 shows the respondents’ opinions about corporate governance reporting (disclosure) becoming a reliable indicator of the quality /
integrity of company management.

Some representative comments from interviewees include:

Corporate governance reporting (disclosure) cannot be a reliable

indicator of the quality or integrity of company management. There is no
relationship between CG Reporting and quality of management
(Practitioner).

Perhaps corporate governance reporting (disclosure) can be a reliable

indicator of the quality or integrity of company management however
corporate scandals still come into sight. There is a variance between
corporate governance reporting and practice in the present form or
situation. Until then corporate governance reporting is questionable
(Corporate governance experts).

Table 7: Validation of Corporate Governance Reporting

Do you think external auditing of corporate Practitioners Corporate Governance
governance reporting will disclose the Experts
integrity practices in a corporation?
Yes 2 8
Perhaps 2 -
Table 7 shows the respondents’ opinions regarding how external auditing of corporate governance reporting discloses the integrity
practices in a corporation.

Fasterling (2006) commented on the importance of honest and accurate reporting as a

fundamental value for the effectiveness of disclosure rules. He then further argues that if
honest reporting is not reliable, disclosure rules rapidly become inefficient, and must instead
depend solely on enforcement and verification measures.

11
There was a consensus among the expert group regarding this matter. They feels that external
auditing on corporate governance reporting will help in disclosing the integrity practices
since it is an independent opinion which reviews and validates the reported information. This
practice needs to be on voluntary or aspiration driven not on mandatory or enforcement basis.
The spin-off of from this exercise will be, improving the corporate image. It will also
promote and indirectly enforce good practice of corporate governance in the organization.

Two out of four practitioners agreed with the expert group opinion whereas the other
practitioners are not sure whether external auditing of corporate governance reporting are
practical and suitable approach in disclosing the organization integrity practices . Among the
issues that the practitioner concern when corporate governance being audited are, additional
cost incurred by the company, a qualified compliance officer might have to be appointed and
the auditing approach. They suggest that the approach must be strategic and operational.

The concern issues are in agreement with what’s being highlighted by Fasterling (2006). He
highlight on the issues of achieving effective enforcement where not only a non corrupted
independent or governmental authority which has power to initiate investigations, report on
irregularities, and impose sanctions are required, but also that such authorities should
endowed with sufficient financial means and a highly trained staff to carry out the tasks. He
further commented that the cost of these efforts needs to be justifiable with the benefit that
can be experienced from accurate disclosure and act accordingly.

Corporate Governance Issues not Currently Addressed by Regulations

Leadership, board roles and board quality are areas which receive inadequate emphasis in
corporate governance regulations. All of the practitioner respondents and half the expert
group agree with this proposition.

Table 8: Issues which are not being addressed by Corporate Governance

Are there any other issues which are not Practitioners Corporate Governance
being addressed by corporate governance? Experts

Board – leadership/ roles/ quality 4 4

Human – values/ governance/ capital 3 3
Corporate Governance Auditing 1 2
Integrity values 1 -
Investment information 1 -
Public Role 1 -
Corporate Responsibility/ social/ environment - 1
Table 8 shows the respondents’ opinions regarding to issues which have not been addressed by corporate governance.

Another major issue which both groups feel that corporate governance does not address
sufficiently is related to human values, human governance and human capital.

Human values which relate to staff spiritual development, good sport,

leadership, board roles and board training are area that corporate
governance needs to stress on (Practitioner).

Quality of the Board of Director is very crucial. Human resource

department should promote quality and adherence to best practice. Clarity
in staff performance measurement and training availability are crucial to
promote human capital (Expert group).

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Corporate governance auditing is another issue that both groups feel may help to address the
current issues in corporate governance.
Other issues that corporate governance does not address sufficiently are integrity values
among board members, investment information, public roles in promoting good corporate
governance practice and corporate social responsibility.

Table 9: Suggestions on how to Instil Integrity Value in a Corporation

Are there any other suggestions on how to Practitioners Corporate Governance
instil integrity value in a corporation? Experts

Training/ human capital/ ESQ 4 1

Adequate system/ Value/ Process - 2
Regulators roles/ investors roles/ Shareholder - 2
activisms
Public announcement - 1
Key Performance Indicator - 1
Company culture - 1
Table 9 show the respondent suggestions on how to instil integrity value in a corporation.

The entire practitioner group suggested that providing training and increased awareness
among staff members regarding integrity values would be a good way to instil integrity
within the company. Fasterling (2006) also agrees that increasing awareness of human values
such as honesty and integrity would be the best approach to address this issue. On the other
hand, the expert group believes that an adequate system, stress on values and process rather
than on rules and regulation might help in promoting integrity in a company.

Provide training and promote awareness on integrity among staff

member; example ESQ training (Practitioner).

Integrity in business is a must for all corporations as it able to instil

protective systems by which business corporations are directed and
controlled. The control must be ‘kaizen’ with checks and balances
between the supervisory and executive part of the corporations (Expert
group).

The expert group also felt that regulators’ roles, investors’ roles, and shareholder activism are
other factors that can promote integrity. One of the respondents from this group also suggests
that a clear liaison with regulators may help effective enforcement being conducted. Other
suggestions made by the expert group were to have effective public announcements
pertaining to any corporate governance issues, publishing key performance indicators and
having the right company culture.

CONCLUSION

The issue of corporate governance reporting and corporate governance practice is not yet
resolved in Malaysian government link companies. This has been the dilemma for security
regulators in identifying the approach to assessing company corporate governance practices
which are not being reflected from the information disclosed in the company annual report.
Che Haat (2005) highlighted that users demanded more from the contents of the annual
reports and felt that annual reports failed to convey useful information. This has point out
how the present rule-based governance system has serious limitations. Ticking off boxes for
compliance only leads to a false sense of security that the right judgements and right actions

13
are being taken. There might also be certain fundamental information that is lacking in the
Malaysian disclosure framework as a study conducted by Standard and Poors (2004) also
revealed that most of the companies in Malaysia still fell short of global disclosure practice
(Standard & Poors, 2004; Toh, 2004).

The study limitation is that the findings do not represent all Malaysian public listed
companies. Furthermore, the problems and issues discovered here are based on the
respondents’ point of view. Thus, a further empirical study is recommended to uncover theses
in greater detail.

The study discovered that there are unsolved issues pertaining to corporate governance
reporting in Malaysia. Corporate governance reporting does not necessarily represent the
company corporate governance practice. The respondents did suggest undertaking
verification of the corporate governance reporting to ensure the reliability of corporate
governance reporting. The interview exercise conducted identified issues that impact on the
current practice of governance in Malaysia. It also helped in identifying ways to address the
issues. It is hoped that the dilemma experienced by the security regulators regarding this
matter can be eased and the study findings can assist them in improving corporate governance
practice in Malaysia.

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