ABSTRACT

The paper provides a descriptive discussions on the practices of Corporate Governance to

create and sustain value for firms related to shareholders wealth maximisations. There also
will be an analysis composed on the techniques utilized by firms and factors that help to
enhance firms value and provide indications for better or worst performance using the
relevant approach.

1.0 INTRODUCTION

The downfall of word biggest corporation such as Enron, Xerox and Worldcom have left a
big effect on the corporate world. This all happened because of the lack of a good corporate
governance. Companies worldwide including Asia faced the downturn because of bad
corporate governance. According to Sachs (1998) the Asian financial crisis which started in
1997 mainly because of the recession that happened in Japan in the 1990, which at the same
time affected East Asian economies including Malaysia. It also can be said that lack of good
corporate governance was the main reason for this economic crisis in the East Asian region
(Mohammed et al, 2006; D'Cruz, 1999; Khas, 2002). The scandals which happened in the
USA and the financial crisis in 1997-1998 had opened the eyes of many companies around
the including Malaysia for the need of better corporate governance and transparency. In
Malaysia also some of big companies such as Renong, Perwaja Steel and Malaysian Airline
System (MAS) had faced economic downturn because of bad corporate governance. The
World Bank (1998) stated that the weakness in the banking sector was due to poor risk
management and excessive lending, where poor risk management is one of the example of
weak corporate governance. Graham et al. (2002) stated that the cost of poor corporate
governance happened mainly happened because of minority shareholders where many of the
companies are family owned. With that it can be said that many big corporation had gone
bankrupt and failure because of poor and weak corporate governance that is implemented in
their companies. Therefore, after realising that their firm failure is because of bad corporate
governance, firms now had come out with many good principles of corporate governance
which will increase their firms value and also maximise shareholders wealth.
2.0 DEFINITION

2.1 CORPORATE VALUE

According to the Business Dictionary the definition of corporate value is The operating
philosophies or principles that guide an organization's internal conduct as well as its
relationship with its customers, partners, and shareholders. Core values are usually
summarized in the mission statement or in the company's statement of core values.
Rockeach (1973) stated that corporate value can be defined as beliefs that help companies
make choices among available means and ends in a classical sense. This indicates that
corporate values are principles that a company uses to operate and also are very important for
a company to be successful and also build strong relationship with employees, shareholders,
suppliers and stakeholders. Core values are used to support the companys vision and show
what it values.

2.2 CORPORATE GOVERNANCE

The Malaysian Code on Corporate Governance Report (2012), defined corporate governance
as The process and structure used to direct and manage the business and affairs of the
company towards enhancing business prosperity and corporate accountability with the
ultimate objective of realizing long-term shareholder value, whilst taking into account the
interest of other stakeholders. According to Khan (2011) corporate governance also indicates
the processes, customs, policies, laws and institutions that directs the organizations and
corporations in the way they act, administer and control their operations. This means that
corporate governance for the most part focuses on the process used to coordinate and deal
with the business and affairs of the organization with the targets of meeting the companys
objectives and also taking into consideration of not only the interests of shareholders but also
the interests of stakeholders which is the employees, customers and communities. It also
involves in resolving conflicts of interest between the stakeholders and ensuring that the
organization is managed well.
3.0 METHODOLOGY

Methodology is a very important process in order to complete this report because it explains
the purpose of the report and how it is conducted. The purpose of this report is to study the
factors that affect the values of a company. A theoretical approach is used where all the data
collected are from previously published journals and articles and it is used as a reference.
This study uses qualitative approach which does not involve any measurement or statistics, it
involves reading and understanding journals and articles that is related to the study. For this
report at least 10 relevant articles from journals, books and articles that provide information
on the purpose of the assignment need to be collected. Data collection is a very important
process in order to complete this study. All the data and information for this report are
collected from published books, journals and articles which is known as secondary data
because and it is obtained from online sources. The data collected are from all around the
globe but preferably from Malaysia. Furthermore, all the data that is collected from the
secondary data are then analysed. The data is analysed by reading all the published journals,
books and articles and then only the important part from the data that is required for the
report are chosen. After that, all the important data is further understand and then
implementing it in the completion of the report.

4.0 APPLICATION AND PRACTICES OF CORPORATE GOVERNANCE

A firm that applies the practices of good corporate governance will usually perform better
than other companies and also be able to attract more investors which will help increase firm
value and shareholders wealth maximisations. The principles of corporate governance are
described in more detailed below.

4.1 BOARD SIZE

Board size is one of the factor that is important to a corporate governance which can affect
firm value. Researches also said that large board size can cause many problems and give
significant impact to firm performance and value. Jensen (1993) stated that the board size
should be too large and should consist of more than 8 directors. Directr free-riding can
increase because of too big of board size (Lipton and Lorsch, 1992). Jensen (1993), Lipton
and Lorsch (1992) also suggest that too big board size can lead to inefficiency and lower the
performance of the firm. With that we can see that smaller board size is more better compared
to big board size which can cause poor decision making and inefficiency that can affect the
firm value.

4.2 TRANSPARENCY AND DISCLOSURE

Transparency of firm is a very important mechanism in a corporate governance because

shareholders with credible assurances that they will refrain from fraudulent activities.
Disclosure of important matters about the firm should be true to ensure that all the
shareholders and investors have access to clear and factual information. Financial reporting
or disclosure quality had been measured as one of the mechanism in assessing the corporate
governance of a firm (Mitton, 2002 and Coles et. al, 2002). Disclosure also should include
the financial and operating result of the company where all the information about the firm
financial position must be disclosed clearly and not the edited. Besides that, disclosure major
share ownership and voting rights also is important to the corporate governance where the
numbers of shares own by the shareholders must be stated clearly in the right amount.
Company objective also must be transparent and disclosed clearly to the shareholder and
stakeholders, so that they will know what the company is planning to do. Mitton (2002)
stated that corporate governance is the act of protecting shareholders from expropriation by
managers. This also will benefit the shareholders and stakeholders where they will get more
disclosure of information which will lead to higher firm value. Therefore, transparency and
disclosure ensure that stakeholders can have more trust and confidence in the decision
making and management of the firm where the firm will have a higher value.

4.3 OWNERSHIP CONCENTRATION

Ownership concentration is also used as one of the principles in corporate governance.

Ownership concentration is defined as the amount of stock that is owned by investors and
large-block shareholders which is the investor that hold the highest amount of stock in a firm.
According to James and Meckling (1976) because of the separation of ownership and control,
managers have power over the firms resources and with this vast discretion managers are
free to pursue activities that can directly expropriate wealth from other stakeholders and from
the firm. Jensen (1993) stated that firms should increase managerial equity ownership in
order to reduce the problems related to managerial opportunism. Therefore, with the
existence of large-block shareholders, is very helpful in resolving some of the firms problem.
Shleifer and Vishny (1986) also stated that block-holders mitigate the free-rider problem,
perform a monitoring function, and reduce the scope of managerial opportunism. Therefore,
the use of ownership concentration helps in solving problems and also increase the firm
value.

4.4 DIRECTORS REMUNERATIONS

The Malaysian Code of Corporate Governance stated that there should be directors
remuneration committee formed in firm to ensure the remuneration of directors. Firms must
provide satisfied compensation or reward to directors in order to attract them. According to
John et al. (2004) the incentives of top management have been characterized as an important
mechanism of corporate governance as it ensures the alignment of the management and the
shareholders interest. This means that all the top management should be given remuneration
or reward for their satisfaction. There are several research confirms that there are positive
relationship between directors remunerations and firm performance. For example, the study
done by both Merhebi et al., (2006) and Kato and Kubo (2006) confirms that there are
positive pay-performance relationship. With that it can be said that the firm that provides
better reward and compensation to the directors and CEO have higher firm performance
which will increase the firm value and shareholders wealth.

4.5 ALLIANCES AND MERGES

Development on corporate governance by firm can be attained by having joint ventures with
locals and foreign firms. According to Coase (1937, 1960) and Williamson (1985) joint
ventures and strategic alliances may be the least costly form of governance and therefore the
most favourable coordination mechanism. This is because of the using of new and different
standards that has been learned and practiced by one of the firm. Peek and Rosengren (2000)
stated that the entrance of foreign bank will make the domestic bank need to adopt the new
management technique, mechanisms and information technology introduced by the foreign
bank and will give a significant impact towards the market. This means that domestic firm
merges with foreign firm, it will need to follow how the foreign firm operates. According to
Gleason et al. (2003) indicated there was a significant positive annual returns for holding
periods of 6, 12 and 18 months after making decision to participate in joint venture or
strategic alliance. Another study done by Bris and Cabois (2003) also stated the same where
the industry performance of Tobins Q increases when the firms within the industry was
acquired by foreign firms with better shareholder protection and better accounting standard. It
can be concluded that merging with other firm can significantly increase the firm value, so
when the firm performs better the shareholders can get benefit and can maximize the
shareholders wealth.

CONCLUSION

The study is done to discuss on the practices of corporate governance to create and sustain
value for firms related to shareholders wealth maximisations. More in depth explanation of
the application and possible practices of good corporate governance used by firms to increase
firms value have been discussed in this report. There are five principles of good corporate
governance that can be implemented which are board size, transparency and disclosure,
ownership concentration, directors remunerations and alliances and merges. Board size
concludes that firm with smaller board size is more better compared to big board size because
it can help in making decision better and easy to manage at the same time will have a better
firm value. As for transparency and disclosure, it tells that in order for a firm to have better
firm value as well as maximized shareholder wealth it needs to always provide true and fact
information about the company to the shareholders and stakeholders. Furthermore, for
ownership concentration it helps in reducing organization decision making and managerial
problem where the large-block shareholders will make any decisions. Next, for director
remuneration we learned that firm that takes care of the directors and CEO by providing
good reward and compensation can increase firm value and shareholders wealth. As for
alliances and merges it shows that by participating in joint venture or strategic alliance the
firm can learn new practices from successful foreign firms to be implemented and this will
increase the firm value as well as maximize shareholders wealth.

In a nutshell, firm that implement good principles of corporate governance will benefit them
by reaching its objective and have a better overall company performance. This also will
create safe guards against corruption, mismanagement, promoting better transparency and
attracting more domestic and foreign firm to investment. Therefore, a good corporate
governance application and practices in a firm will ensure a better and increased firm value
and shareholders wealth maximisations.
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