FACULTY OF BUSINESS MANAGEMENT

SEPTEMBER 2016

BBCG 4103

CORPORATE GOVERNANCE

MATRICULATION NO: 86071530116001

IDENTITY CARD NO. : 860715305116
TELEPHONE NO. : 016-7144431
E-MAIL : thava1986@oum.edu.my
LEARNING CENTRE : MELAKA LEARNING CENTRE

CONTENTS PAGE
1.0 INTRODUCTION.................................................................................. 2, 3
- Definition and Importance of corporate governance

2.0 FACTORS AND FORCES....................................................................... 4, 5

- Influence the development of corporate governance

3.0 THEORIES.............................................................................................. 6,7,8,9

4.0 ANALYSIS........................................................................................... 10,11,12,13

-Relationship between separation of ownership and control.

5.0 SUMMARY......................................................................................... 14

6.0 REFERENCES................................................................................... 15, 16

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1.0 INTRODUCTION
- Definition and Importance of corporate governance
Corporate Governance refers to the way and technique a corporation is controlled, directed and
managed an organisation. It means conducting the business as per the stakeholders interest.
Corporate governance actually controlled by the board of Directors and ensures the companys
stakeholders benefit well concerned. It is balancing individual and societal, economic and social
goals. The other mechanisms include monitoring the actions, policies, practices, and decisions of
corporations, their agents, and stakeholders.

Corporate Governance is a communication between shareholders, board of directors, and

companys management in creating corporations performance and the way it is proceeding
towards. Then, the relationship between the owners and the managers in an organisation must be
healthy without any conflict. The owners must see that individuals actual performance is
according to the standard practice. These dimensions of corporate governance should not be
overlooked. While, Sir Adrian Cadbury advocates that "Corporate governance is concerned with
holding the balance between economic and social goals and between individual and communal
goals...the aim is to align as nearly as possible the interests of individuals, corporations and
society" (Corporate Governance Overview, 1999, World Bank Report).

Moreover, corporate governance deals properly with the financial matters to getting a fair return
on their investment. Corporate Governance clearly distinguishes between the owners and the
managers.

Corporate Governance also deals with determining ways to take effective strategic decisions and
gives importance and complete responsibility to the Board of Directors. Corporate Governance is
essential to develop added value to the stakeholders. Corporate Governance has large aims which
are social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as
well as ethical environment.

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In todays market- oriented economy, the need for corporate governance arises because the
importance such:-

1) Create a proper management

Corporate governance ensures the management of an organisation takes important decisions
which could benefit shareholder, directors, employees and social welfare. That is, they lead the
management to become more efficient, transparent, and accountable. They will request the
management to make consumer-friendly policies, to protect all social groups and to protect the
environment. So, the changing ownership structure and rules has resulted in corporate
governance.

2) Create success and economic growth organisation.

Good corporate governance helps to prevent corporate scandals, fraud, and potential civil and
criminal liability of the organisation. They always care the integrity of the management and
managers. They want the performance of the company is transparency, fairness and
accountability that all business activities run smoothly without any frauds. It helps can maintain
investors confidence and company can raise capital efficiently and effectively.

3) Guide Globalisation
Now, most big companies are selling their goods in the global market through face to face or
online business. So, they have to attract foreign investor and foreign customers while follow
foreign rules and regulations. So that, corporate governance requires fulfilling the requirements
and guiding them to enter, survive and succeed in the global market

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2.0 FACTORS AND FORCES INFLUENCE THE DEVELOPMENT OF CORPORATE
GOVERNANCE
Article#1
Abdul Hadi bin Zulkafli 1 M.Fazilah bt. Abdul Samad 2 Md Ishak Ismail 3(CORPORATE
GOVERNANCE IN MALAYSIA) by Keywords: Financial Crisis, Corporate Governance
Retrieved 26.October.2016 from http://www.gomalaysiatour.com/

According to the article I found that the main sources of the Corporate Governance develop or
reform in Malaysia after economic crisis in 1997 from the Malaysian Code on Corporate
Governance by Finance Committee on Corporate Governance, Capital Market Master Plan
(CMP) by Securities Commission and Financial Sector Master Plan (FSMP) by Bank Negara
Malaysia on the financial sector. It provides guidelines on the principles and best practices in
corporate governance and the direction for the implementation as well as charts the future
prospects of corporate governance in Malaysia. Then the Inception of Malaysian Institute of
Corporate Governance (MICG) which mandate was to raise the awareness and practice of good
corporate governance in Malaysia.
MICG is committed to encouraging organizations and corporate advancement in the nation
through enhanced corporate administration best practices. Corporate administration has
prevailing with regards to pulling in a decent arrangement of open intrigue in view of its clear
significance for the financial wellbeing of enterprises and society when all is said in done.
By highlighting the systems that ordinarily utilized as a part of the scholastic research, the paper
recognizes a portion of the critical instruments connected in the changes of the Malaysian
corporate administration. It is found that the systems that have been set up are far reaching and
covers a wide range of corporate administration internally and externally.
Other factor state in the article is the roles of board of directors. They assigned with the end goal
of guaranteeing the arrangement of the firm exercises what's more, its predetermined
destinations. The board has the obligation for ensuring that the top chiefs are carrying on in a
way that will give the ideal esteem to shareholder. There is no most extreme number of
directorships endorsed by the Malaysian Code of Corporate Governance. Be that as it may, Bursa
Malaysia in its posting prerequisites in 2002 receives limitation in the quantity of directorship of
a man. Under the limitation, an executive may just hold not more than 10 directorship of an open

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recorded organizations and not more than 15 directorships in non-recorded organizations. The
normal is for the chief to play out his/her obligations successfully with less responsibility, assets
and time accessible. There are diverse attributes of top managerial staff honed by the
organizations everywhere throughout the world that predetermined the corporate administration
structure of every firm.

Article#2
Loh Leong Hua & Ragayah Haji Mat Lin, Akademia 71(Julai 2007) corporate governance-
Theory and some Insights into the Malaysian Practices- (http://www.ukm.my/)

This article also discussed about MCCG, stakeholders relationship, shareholders activities and
remuneration as the factors of development of corporate governance. For example we take
remuneration which motivate the top management have been portrayed as a critical component
of corporate governance as it guarantees the arrangement of the administration and the
shareholders intrigue. It is a component for determining the contention of enthusiasm among the
supervisors and shareholders. The compensation is in the form of cash and stock and is termed as
Deferred Compensation or Deferred Stock.
According to Adams and Mehran (2002), nearly 95% of the firms have deferred compensation
plans for their directors. However, only 31% of the firms offer a choice of stock or cash to their
directors. The Malaysian Code on Corporate Governance requires that directors remuneration
should be appreciable and should reflect the responsibility and commitment of the directors. In
the case of executive director, remuneration should link rewards to corporate and individual
performance while in the case of non-executive directors, it should connect rewards to
experience and level of responsibilities. The level of remuneration for the executive directors
should be decided by the remuneration committee consisting wholly and mainly of non-
executive directors. On the other hand, remuneration of the non-executive directors should be
determined by the board as a whole. The company is also required to disclose the details of the
remuneration of each director in its annual reports. This will encourage the develop and success
of corporate governance.

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3.0 THEORIES
There are several theories associated with the development of corporate governance. Figure 3.0.1
lists the four main theories.

Agency Theory Stewardship Theory

Corporate
Governance

Transaction Cost
Stakeholder Theory Economics

Figure 3.0.1 main theories on development of corporate governance

Article#1:
Wan Fauziah Wan Yusoff1* and Idris Adamu Alhaji1, (Insight of Corporate Governance Theories
Journal of Business & Management Volume 1), Issue 1 (2012), 52-63 ISSN 2291-1995 E-ISSN
2291-2002 Published by Science and Education Centre of North America

Article#2
Haslinda Abdullah, Benedict Valentine (Fundamental and Ethics Theories of Corporate
Governance) Middle Eastern Finance and Economics, Issue 4 (2009)
http://www.eurojournals.com/MEFE.htm

According to the journal, the author mentioned that the progression of theories or models of
corporate governance, it is one of the new dimensions taken in a very crux of social ethics that is
minimal and profit making took center stage. In this competitive world, companies are trying to
inculcate the wisdom of good governance into their corporate organisation.
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3.1 Agency Theory
First of all, in the agency theory corporate governance has focused upon the separation of
ownership and relationship which results in principal-agent problems arising from the dispersed
ownership in the modern corporation. They regarded corporate governance as a tool where a
board of directors is a main guidance device to minimise the problems brought about by the
principal-agent relationship. In this context, agents are the managers while principals are the
owners (Mallin, 2004). Moreover, literature on corporate governance attributes two factors to
agency theory. In the agency theory, the director refers to the governance function of the board of
directors in serving the shareholders by ratifying the decisions made by the managers and
monitoring the implementation of those decisions. According to the perspective of agency theory
the primary responsibility of the board of directors is towards the shareholders to ensure
maximisation of shareholder value and focus the principal and agent relationship for example
shareholders and corporate managers, has created uncertainty due to various information
asymmetries (Deegan, 2004). The agency costs the sum of monitoring expenditure by the
principal to limit the aberrant activities of the agent; bonding expenditure by the agent which will
guarantee that certain actions of the agent will not harm the principal or to ensure the principal is
compensated if such actions occur; and the residual loss which is the dollar equivalent to the
reduction of welfare as a result of the divergence between the agents decisions and those
decisions that would maximise the welfare of the principal. This emphasises the role of
accounting in reducing the agency cost in an organisation, effectively through written contracts
tied to the accounting systems as an important component of corporate governance structures,
because if a manager is rewarded for their performance such as accounting profits, they will try
to increase profits which will bring to an increase in bonus or remuneration through the selection
of a particular accounting method that will increase profits.
When arise agency problem, principal will monitor and act in best interest monitoring and
disciplining the agent tom prevents abuse. However, the agency problem depends on the
ownership characteristics of each country. In countries where ownership structures are separated,
if the investors disagree or disappointed with the management performance, they use the exit
options, which will be signaled through reduction in share prices. Therefore according to the
view of the agency theorists, an efficient market is considered a solution to mitigate the agency

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problem, which includes an efficient market for corporate control, management labor and
corporate information (Clarke, 2004).

Retrieved from the article:

3.2 Stakeholder Theory

This theory stated the importance and issues concerning the stakeholders in an organisation.
The firm will recognise shareholders by business law in most countries because they are the
owners of the companies. In view of this, the firm has a fiduciary duty to maximise their returns
and put their needs first. The stakeholders included employees, suppliers, customers, and
management. This model is responsible to touch the needs of the stakeholders. Freeman (1984)
contends that the network of relationships with many groups can affect decision making
processes as stakeholder theory is concerned with the nature of these relationships in terms of
both processes and outcomes for the firm and its stakeholders. Donaldson & Preston
(1995)argued that this theory focuses on managerial decision making and interests of all
stakeholders have intrinsic value, and no sets of interests is assumed to dominate the others.

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3.3 Stewardship Theory

Stewardship theory has its roots from social psychology and sociology which tells on the
behavior of executives and managers working for the shareholders, protects and makes profits
for the shareholders. This theory also shows a strong relationship between managers and the
success of the firm. According to Smallman (2004) where shareholder wealth is maximised, the
stewards utilities are maximised too, because organisational success will serve most
requirements and the stewards will have a clear mission. He also states that, stewards balance
tensions between different beneficiaries and other interest groups. Therefore stewardship theory
is an argument put forward in firm performance that satisfies the requirements of the interested
parties resulting in dynamic performance equilibrium for balanced governance. Therefore
stewardship theory takes a more relaxed view of the separation of the role of chairman and CEO,
and supports appointment of a single person for the position of chairman and CEO and a
majority of specialist executive directors rather than non-executive directors (Clarke 2004).

3.4 Transaction Cost Economics

Transaction cost theory being closely related to agency theory. It takes the firm as a governance
structure. This transaction cost economics theory was first initiated by Cyert and March (1963)
and later theoretical described and exposed by Williamson (1996). Transaction cost theory was
an interdisciplinary alliance of law, economics and organisations and view the firm as an
organisation adding people with different views and objectives. The main assumption of
transaction theory is that firms have become so large they in effect substitute for the market in
determining the allocation of resources to determine price and production.

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4.0 ANALYSIS
-Relationship between separation of ownership and control.

Article#1
Devinaga Rasiah (The Separation of Ownership and Control in Malaysian Domestic Companies)
vol.38 (2012) Faculty of Business and Law Multimedia University (Malacca Campus)-
http://www.ipedr.com/vol38/024-ICEBI2012-A10014.pdf

Article#2
NOOR AFZA AMRAN & AYOIB CHE AHMAD Effects of Ownership Structure on Malaysian
Companies Performance Asian Journal of Accounting and Governance 4: 5160 (2013)
http://www.ukm.my/ajag/vol4ch5.pdf

Article#3
Ayoib Che Ahmad, Zuaini Ishak and Nor Aziah Abd Manaf( CORPORATE GOVERNANCE,
OWNERSHIP STRUCTURE AND CORPORATE DIVERSIFICATION: EVIDENCE FROM
THE MALAYSIAN LISTED COMPANIES) Asian Academy of Management Journal, Vol. 8,
No. 2, 6789, July 2003

The relationship between separation of ownership and control was discussed clearly in the above
3 journals.
4.1 Definition of separation of ownership and control
The most well known description of the separation of ownership and control was given by
Marks,(1999), for he states that it refers to the affairs related with publicly held business
corporations where the shareholders, also known as the residual claimants, have indirect or very
few control over management decisions.
In Malaysia, researchers such as Ali (2008) and Claessens (1999), was provided evidence on
Malaysian ownership structures and the degree of separation, respectively. In discussing
ownership structures, Schleifer and Vishny, (1997), explained that it is made up of ownership
concentration and composition. Loh and Zin, (2007), acknowledged the two elements and
explained why they were linked to corporate performance.

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4.2 Ownership structure
Ownership structure has vital impact in deciding corporate performance. It was shown in
Malaysian listed companies, the proprietorship structure can control profit management
activities. The separation of ownership and control refers to the phenomenon associated with
publicly held business corporations in which the shareholders (the residual claimants) possess
little or no direct control over management decisions. This separation of shareholders (owners),
from the management (directors), resulted in what has created the agency problem. The
directors of the company are managers of the shareholders capital, rather than their own; this
therefore presents an obvious threat to shareholders interests, since directors may well act in
their own interests and not that of the shareholders. Accordingly, community oriented activities
by this gathering would be much less demanding. This objective coinciding between
shareholders would prompt to a superior organization execution. Conversely, when control was
scattered among numerous shareholders, objective harmoniousness was not accomplished. This
was on account of shareholders with a littler stake in the organization had not disturbed with the
observing of the organization, since that individual suspected that the cost of checking was not
worth the exertion when contrasted with the advantages. For example, a relative or an entire
family assemble who are particular proprietors of a firm would be more disposed to control
advantages and benefits also. This can be contrasted and an institutional financial specialist, who
may just be keen on benefits. This once more, results in objective incongruence, ought to the
institutional speculator be just keen on the benefits and did not concur with administration
choices made by the leading group of executives case, in any extension of the organization.

4.3 Analysis of positive implications of the Separation of Ownership and Control

A few advantages could be closed from the division of possession and control. One such
advantage would be that having a progressive basic leadership arrangement could be more viable
than a market designation. This is along these lines, on the grounds that both structures are
included in causing expense and basic leadership, where advertise expenses can be high. Along
these lines, various leveled basic leadership is significantly more productive. In any case, these
are not appropriate to all conditions and a wide range of choices. This is because of economies of

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scale in production and decision making, which is mostly associated with goal congruence of
shareholders and management (Marks, 1999).
Another advantage from isolating proprietorship and control would be as far as firm size. It is
expressed that the ideal firm size of organizations that practice high partition of possession and
control can be somewhat extensive.). At long last, when shareholders are not engrossed with
administration work, they have sufficient energy to build up an ideal venture technique where
they will have the capacity to differentiate and pool. All things considered, this makes it
workable for the proprietors of the organization to change their assignments as needs be with the
changing business sector environment. With the collaboration from all these three components,
an extensive estimated organization that receives various leveled structures and enhances its
speculations is probably going to have value-based, enlightening and profitable efficiencies.
These criteria would then give the organization a focused edge over other corporate structures.

4.4 Analysis of negative Implications of the Separation of Ownership and Control

Separating ownership and control may acquire harm the feeling that the directors of
organizations that have a high level of partition would encounter an absence of motivating forces
to run the organization productively and make it more gainful, as alluded from Marks, 1999.
Conversely, they would rather work the firm sub-optimally and trade out more rewards into their
"pockets". In addition, others believe that agency problems may arise from ownership diffusion
in a company an indicated by Nor et al., (2010).
Therefore, the firm would need to endure the expenses coming about because of this
relationship. For example, cost to screen the operators, holding consumptions by directors and
the misfortunes because of uniqueness of enthusiasm of administrators are a portion of the
regular chief specialist uses. A standout amongst the most unmistakable ramifications of the
detachment of proprietorship and control is the agency problem. An agency issue emerges when
there is an irreconcilable circumstance among banks, shareholders, and administration because of
their distinctive objectives. The self enthusiasm of administrators may lead them to act
contrastingly without securing the enthusiasm of shareholders. For instance, directors may boost
their own particular pay, rewards and advantages from the organisation costs. Because of the way
that the chief (operator) has less motivator in amplifying benefits than shareholders (central),

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supervisors may act to their greatest advantage instead of securing shareholders' advantage.
Henceforth, partition of proprietorship and control is considered as conveying along good peril
issues to the association.

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5.0 SUMMARY
At this point, we understand that corporate governance is very important for creating a successful
organisation. There are many factors or forces influence the development of corporate
governance such as rules and regulation by MCCG, company structure, board of directors and
stakeholders relationship, remuneration and also proper management system. For the theories of
corporate governance agency theory is most important because its related to the organisation
structure. Followed by stewardship theory, shareholders theory and transaction cost economics.
Meanwhile, separation of ownership and control defined as the divergence of interest between
ownership and control had created a division of functions. Within the corporation, shareholders
had only interests in the enterprise while the directors had power over it (Sheikh and Chatterjee,
1995). There are positive and negative outcomes through implementing the separation owner and
control. So that by taking proper way and ideas an organisation can have a leading corporate
governance.

(3381 words)

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6.0 REFERENCES

1. Abdul Hadi bin Zulkafli 1 M.Fazilah bt. Abdul Samad 2 Md Ishak Ismail 3-
CORPORATE GOVERNANCE IN MALAYSIA by - http://www.gomalaysiatour.com/

2. Ayoib Che Ahmad, Zuaini Ishak and Nor Aziah Abd Manaf Asian Academy of
Management CORPORATE GOVERNANCE, OWNERSHIP STRUCTURE AND
CORPORATE DIVERSIFICATION: EVIDENCE FROM THE MALAYSIAN LISTED
COMPANIES * Journal, Vol. 8, No. 2, 6789, July 2003 Universiti Utara Malaysia-
http://web.usm.my/aamj/8.2.2003/AAMJ%208-2-4.pdf

3. Corporate governance From Wikipedia,

https://en.wikipedia.org/wiki/Corporate_governance

4. Devinaga Rasiah -The Separation of Ownership and Control in Malaysian Domestic

Companies + Faculty of Business and Law Multimedia University (Malacca Campus)-
http://www.ipedr.com/vol38/024-ICEBI2012-A10014.pdf

5. Haslinda Abdullah, Benedict Valentine Fundamental and Ethics Theories of Corporate

Governance Middle Eastern Finance and Economics, Issue 4 (2009)
http://www.eurojournals.com/MEFE.htm

6. Joel Tham Kah Marn, Dondjio Fomedjou Romuald JOURNAL FOR THE
ADVANCEMENT OF SCIENCE & ARTS, VOL. 3, NO. 1, 2012 31 The Impact of
Corporate Governance Mechanism and Corporate performance: A study of Listed
Companies in Malaysia. 1.2 UCSI UNIVERSITY UCSI University,
http://www.ucsiuniversity.edu.my/

7. Kamini Singam -Bond Law Review Volume 15 Issue 1 Special Issue: Comparative
Corporate Governance Article 13 2003 Corporate Governance in Malaysia -
http://epublications.bond.edu.au/

8. Loh Leong Hua & Ragayah Haji Mat Lin -Corporate governance- Theory and some
Insights into the Malaysian Practices- (http://www.ukm.my/)

9. NOOR AFZA AMRAN & AYOIB CHE AHMAD- Effects of Ownership Structure on
Malaysian Companies Performance http://www.ukm.my/ajag/vol4ch5.pdf

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10. Nazrul Hisyam Ab Razaka ,Rubi Ahmad (PhD)b , Huson Joher Aliahmed (PhD)c-
GOVERNMENT OWNERSHIP AND PERFORMANCE: AN ANALYSIS OF LISTED
COMPANIES IN MALAYSIA By
http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan050510.pdf

11. Ros Haniffa and Terry Cooke-(CULTURE, CORPORATE GOVERNANCE AND

DISCLOSURE IN MALAYSIAN CORPORATIONS)- November 2000

12. Wan Fauziah Wan Yusoff1 and Idris Adamu Alhaji-Insight of Corporate Governance
Theories - http://www.todayscience.org/

13. The Separation of Ownership and Control- http://www.lawteacher.net/

14. 3 factors driving better corporate governance- https://www.weforum.org/agenda/2015/08/3-

factors-driving-better-corporate-governance/

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