THE IMPACT OF CORPORATE GOVERNANCE ON FRIM PERFORMANCE: EVIDENCE FROM MALAYSIA

PERFORMANCE: EVIDENCE FROM MALAYSIA

SKRIPSI Submitted As Partial Fulfillment Of Requirement For The Degree of Sarjana Ekonomi (SE) at the Sebelas Maret University

By: RAHMAH FITRIANI F0308007 FACULTY OF ECONOMICS SEBELAS MARET UNIVERSITY SURAKARTA

THE IMPACT OF CORPORATE GOVERNANCE ONFIRM PERFORMANCE: EVIDENCE FROM MALAYSIA

Rahmah Fitriani

NIM F0308007

The objective in this research is to investigate the impact of corporate governance mechanisms on firm performance in Malaysia. Specifically, this research examines the effect of chairman characteristics, board structure, independent committees, and family control on return on assets.

This research focuses on manufacture companies that listed in Bursa Malaysia Berhad for period 2010. The research data were collected from financial statements and annual reports which published by companies. Purposive sampling method was used to determine research sample and 200 samples were collected. Hypothesis was tested by Ordinary Least Square (OLS) regression model using SPSS 17.00 software

The results of this research show that corporate governance mechanism simultaneously impact on return on assets. Only board meetings that partially and significantly had effect on return on assets. Additionally, the interaction between chairman tenure and chairman executive partially and significantly had effect on return on assets.

Keywords: Corporate Governance, Chairman Characteristics, Board Structure, Independent Committees, Family Control, Firm Performance.

· “If you ask, ask Allah. If you seek help, seek help from Allah.”

(Prophet Muhammad SAW)

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this world whereas wasting time separates you from Allah.” (Ibn Qayyim)

· “The only way to live is to put in effort.” (Baekhyun, EXO-K member) · “Don’t ask Allah to make your life easier. Instead ask Allah to make

you a stronger person.”

· “Hope for the best, plan for the worst” (The Bourne Ultimatum) · Man Jadda Wajadda (Negeri 5 Menara)

DEDICATION

This work and all things that I achieved,

Truly I dedicated to:

My Beloved Family

For all supports and love and everything for me.

I love you.

ACKNOWLEDGEMENT

Assalamu’alaikum Wr. Wb. Researcher will be grateful to Allah SWT for all the mercy and bless so that she was able to finish this research well. This Skripsi is proposed to complete all the requirements of achieves the degree of Sarjana Ekonomi of Accounting

Department, Sebelas Maret University, Surakarta.

Researcher realizes that she could not have finished this skripsi without the supports and involvement of many parties both directly and indirectly. I owe a very great debt and thanks to:

1. Dr. Wisnu Untoro, M.S., as the Dean of Economics Department, Sebelas Maret University, Surakarta.

2. Drs. Santoso M.Si., Ak., as the Head of Accounting Department,Sebelas Maret University, Surakarta.

3. Drs. Muh Agung Prabowo, M.Si., Ph.D, Ak., as my supervisor. I wish to express my deepest thanks to Mr. Agung for his considerable help to give advices and a very closely improved result.

4. Dra. Muthmainah, M.Si., Ak., as my academic advisor, thanks for all your support and advices.

5. My beloved family. Ibu, ibu, ibu. Ibu for my number one inspiration and my spirit and all things that I can’t express. I love you, bu, I really do. Bapak, who always give the biggest support, I love you and thank you. My sister

Ravin. I love you and thank you.

7. All lectures and staff in Faculty of Economics, Sebelas Maret University who have provided knowledge, guidance, and service.

8. My TILEND friends; Dyla, Mita, Rintan, Weni, Shali, Aruf, Ridwan, Andit, Risal, Dani who always brighten my days with all cheerfulness, stupidity and our friendship. TILL END, friends!

9. My friends Nita (you know we will never end!), Anes (thank you for all you help^^), Sinta (when will you married?) and Hilda (thank you for everything!). Hope you guys won’t forget me and forget our stories.

10. My Dzakia Mumtaz partners; Ajeng (someday you will meet M and C, trust me, and don’t forget our plan to attend SMTown), Oki (thank you for all things we disscuss through bbm and I hope you will find your soulmate very soon! P.s: SMTown, we need to attend it), Juma (you’re good, you’re the best! I’ve learned a lot from you), and Priska although she graduated earlier. And for the rest of Dzakia Mumtaz’s members, thank you.

11. My partner in crime, Muh Andi DHBA, finally we made it!

12. My friends Akuntansi 2008; Ayuk, Ocha, Windi, Wulan, Eva, Denny, Berlin, Evy, Sharin, and all of Akuntansi 2008 crew.

13. All of my friends in HMJ Akuntansi, especially HMJ 2008, thank you :)

14. My tlist on my 2 nd account and 3 rd twitter account, thank you very much for bring lot laughter to me! For Yesa, you’re the Kyungsoo to my Kaisoo :) 14. My tlist on my 2 nd account and 3 rd twitter account, thank you very much for bring lot laughter to me! For Yesa, you’re the Kyungsoo to my Kaisoo :)

16. My blue blitz and my pink toshiba… you’re rock!

17. For all people that Researcher could not mention one by one, I thank for all your support in the last four years.

Researcher realizes that this research is far from being perfect. This study has a lot of constraint, thus any suggestions and critics are expected for the sake of improving this study.

As I close this acknowledgment, I expect that this writing will be useful to all parties. Wassalammu’alaikum Wr. Wb

Surakarta, July 22 , 2012

Rahmah Fitriani

D. Multivariate .......................................................................

1. ................................................................................. The Impact of Corporate Governance on Return on Assets ...........................................................

2. ................................................................................. The Interaction of Corporate Governance on Return on Assets ..........................................................

CHAPTER V CONCLUSION .......................................................

A. Conclusions ........................................................................

B. Research Constraints .........................................................

C. Research Suggestions ........................................................

42 REFERENCES.................................................................................

43 APPENDIXES

LIST OF TABLES

TABLE PAGE

IV.1 Sample Selection……………………………………………

23

IV.2 Variable Definition………………………………………….

25

IV.3 Descriptive Statistics ………………………………………..

26

IV.4 Pearson Correlation…………………………………………

28

IV.5 Linear Regression (A)……………………………………….

35

IV.6 Linear Regression (B)……………..…………………………

36

IV.7 Regression with Interaction Effect (A)………………………

37

IV.8 Regression with Interaction Effect (B)…………….…………

38

LIST OF APPENDIXES

Appendix I

Previous Studies

Appendix II

List of Companies

Appendix III Corporate Governance and Return on Assets Appendix IV

Results of Linear Regression

THE IMPACT OF CORPORATE GOVERNANCE ONFIRM PERFORMANCE: EVIDENCE FROM MALAYSIA

Rahmah Fitriani

NIM F0308007

The objective in this research is to investigate the impact of corporate governance mechanisms on firm performance in Malaysia. Specifically, this research examines the effect of chairman characteristics, board structure, independent committees, and family control on return on assets.

This research focuses on manufacture companies that listed in Bursa Malaysia Berhad for period 2010. The research data were collected from financial statements and annual reports which published by companies. Purposive sampling method was used to determine research sample and 200 samples were collected. Hypothesis was tested by Ordinary Least Square (OLS) regression model using SPSS 17.00 software

The results of this research show that corporate governance mechanism simultaneously impact on return on assets. Only board meetings that partially and significantly had effect on return on assets. Additionally, the interaction between chairman tenure and chairman executive partially and significantly had effect on return on assets.

Keywords: Corporate Governance, Chairman Characteristics, Board Structure, Independent Committees, Family Control, Firm Performance.

INTRODUCTION

A. Background

Corporate governance is a system that aim and supervise firms and it concerns the effects of board structure on a firm’s performance. Corporate governance includes all needed mechanisms that discipline organizations and ensure that the resources of the firm are managed efficiently.

Corporate governance has become an important issue in Malaysia since the emergence of the Asia financial crisis in mid-1997. This crisis had been forced some companies to liquidated because they could not lasted their business. This crisis has taught corporate Malaysia that adding standards of corporate governance can improve investor’s confidence and increase capital inflow to the country.

The investors mostly use annual report in valuing financial performance. Return on assets (ROA) comes as one of those methods to understand financial performance of firms. ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. ROA is calculated by dividing a company's annual earnings by its total assets. ROA is displayed as a percentage. Sometimes this is referred to as return on investment. Some investors add interest expense back into net income when performing this calculation because they'd like to use operating The investors mostly use annual report in valuing financial performance. Return on assets (ROA) comes as one of those methods to understand financial performance of firms. ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. ROA is calculated by dividing a company's annual earnings by its total assets. ROA is displayed as a percentage. Sometimes this is referred to as return on investment. Some investors add interest expense back into net income when performing this calculation because they'd like to use operating

Bursa Malaysia underscores the importance of having independent directors on boards by its Revamped Listing Requirements by ensuring the board of directors of Malaysian public listed companies has a sufficient independent element to safeguard the interest of investors. The role of independent directors on the board of directors is to effectively monitor and control firm activities in reducing opportunistic managerial behaviors and expropriation of firm resources (Fama and Jensen 1983, Brickley et al. 1994).

Over the last three decades, corporate governance became an interesting research issue for many researchers. Researchs on corporate governance had evolved not only research on the implementation of GCG in the company but also research on how far the companies disclose the corporate governance practices within the company’s annual report. Corporate governance reporting is a report of crucial information related to management, monitoring, transparency and accountabilities which is presented to users of annual reports. With these kinds of information the users will be able to distinguish between the good and the bad company. Information about good corporate governance practices might help the investor to invest their capital in the industries that have a low agency cost.

The Malaysian Code of Corporate governance states that good corporate The Malaysian Code of Corporate governance states that good corporate

Previous empirical findings on the relationship between corporate governance elements such as board leadership structure, board composition, board size and ownership structure, and financial performance, have provided mixed results. Numerous studies has evidenced that the proportion of independent directors is correlated to firm performance (Agrawal and Knoeber 1996). Companies with more independent directors tend to be more profitable than those with fewer independent directors (You et al. 1986). There were other views which are totally different. The relationship between the proportion of independent director and firm performance was found to be negative (Klein 1998, Agrawal and Knowber 1996, Yermack 1996).

The two main issues in this research are corporate governance and firm performance. However, empirical evidences from previous research from several countries about relationship between corporate governance and firm performance are mixed. Hence it becomes very important to investigate the relationship between corporate governance and firm performance in Malaysia especially with their consistent rank on investor protection in the World Bank Doing Business Report during 2006–2010.

B. Problem statements

The problem statements for this study consists of:

1. Do chairman characteristics (chairman tenure, chairman financial

background and executive chairman) have impacts to return on assets?

2. Do board of directors (independent board, size of board and board meeting) have impacts to return on assets?

3. Does committee independence (remuneration committee independence, audit committee independence, and nomination committee independence) have impacts to return on assets?

4. Does family controlling (family involvement on board and family ownership on companies) have impacts to return on assets?

C. Research Objectives

Main objective in this study is to find empirical evidence about:

1. The impact of chairman tenure related to return on assets in Malaysian companies.

2. The impact of chairman financial background related to return on assets in Malaysian companies.

3. The impact of executive chairman related to return on assets in Malaysian companies.

4. The impact of board director numbers related to return on assets in 4. The impact of board director numbers related to return on assets in

6. The impact of board meeting related to return on assets in Malaysian companies.

7. The impact of remuneration committee independence related to return on assets in Malaysian companies.

8. The impact of nomination committee independence related to return on assets in Malaysian companies.

9. The impact of audit committee independence related to return on assets in Malaysian companies.

10. The impact of family involvement related to return on assets in Malaysian companies.

11. The impact of family ownership related to return on assets in Malaysian companies.

D. Research Benefits

1. Investors, this paper could enhance investors’ understanding on how corporate governance affects firm performance.

2. Literature improvement about corporate governance, with large corporate governance proxies; chairman characteristics which proxies as chairman tenure, chairman financial background and executive chairman, board of directors which proxies as independent board, size of board and board 2. Literature improvement about corporate governance, with large corporate governance proxies; chairman characteristics which proxies as chairman tenure, chairman financial background and executive chairman, board of directors which proxies as independent board, size of board and board

E. Organization of Skripsi

Chapter I

: Introduction

This chapter contains introduction, problem statement, research objectives, research benefits and organization of skripsi.

Chapter II

: Theoretical Framework

This chapter contains literature review which leads the way to hypotheses development and research model.

Chapter III : Research Method Population, sample, measurements of variables and data analysis method are discussed.

Chapter IV : Data Analysis and Interpretation The comprehensive interpretation of result in descriptive statistics and regression analysis are the body of this chapter.

Chapter V

: Conclusion

This chapter presents the research result in broad outline. It discloses research constrains and future research suggestion.

CHAPTER II THEORITICAL FRAMEWORK

A. Agency Theory

The perspective of agency relationship is the basic principle to understand how corporate governance works. Agency theory stated that an agency relationship exists whenever one or more individuals (principals) hire another person (agent) to perform a service where individuals are motivated solely by self- interest (Jensen and Meckling, 1976). Agency theory explaining the relationship between the company’s executives as an agent with the shareholder or owners as an principal. The relationship between shareholders and company managers is accompanied by conflicting interests. This is the result of a separation of ownership and control, different objectives and an information asymmetry between managers and shareholders. Managers have the incentive and capability of working in line with their personal interests. As a result, their actions and decisions don’t necessarily maximize the wealth and utility of the owners (Sarikhani and Ebrahimi, 2011).

Agency relationships rely on the contract as the first best solution in order to mitigate the divergence of interests between those of contracting parties (Hart, 1995). Therefore contracts are written, often containing accounting based Agency relationships rely on the contract as the first best solution in order to mitigate the divergence of interests between those of contracting parties (Hart, 1995). Therefore contracts are written, often containing accounting based

B. Corporate Governance

Corporate governance is a system to aim and to supervise a company. Corporate governance is primarily concerned with how equity investors induce managers to provide them with an appropriate return on their invested capital (Cook, Hogan and Kieschnick, 2003). Corporate governance distributed the rights and the responsibilities between parties such as directors, managers, shareholders, officers, and other, and to explain the rules and procedure to make decisions.

Effective monitoring from internal corporate governance is very important to ensure reliable and complete financial report. Since earnings management misleads users of financial statements by providing them with false information about firm’s true operating performance, the internal corporate governance serves

a monitoring role in constraining the occurence of earnings management (Chen et al, 2006). The implementation of corporate gorvernance mechanism in company could protect investor and creditor from management opportunistic behavior. This

C. Return on Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. ROA is calculated by dividing a company's annual earnings by its total assets. ROA is displayed as a percentage. Sometimes this is referred to as return on investment. Some investors add interest expense back into net income when performing this calculation because they'd like to use operating returns before cost of borrowing.

Return on assets is use to measure firm performance. Empirical researches on corporate governance use either market-based measures or accounting-based measures to assess firm performance. Klein (1998) uses return on assets (ROA) and Lo (2003) uses return on equity (ROE) as an operating performance indicator. Brown and Caylor (2005) use ROE and ROA as their two operating performance measures. Managers are directly responsible for the operations of the business and therefore the utilization of the firms’ assets. Thus, return on assets allows users to assess how well a firms’ CG mechanism is in securing and motivating efficient management of the firm. In the present study, return on assets is defined as net income before interest expense for the fiscal period divided by total assets for that same period (Barro, 1990 and Angbazo and Narayanan, 1997).

D. Conceptualization And Hypotheses Development

Chairman Characteristics Chairman knowledge and experience are significant elements in making sure the effectiveness of board monitoring function. CEO characteristic is an importance aspect of corporate governance and corporate governance reporting (Shen 2003). The difference stages of CEO tenure would influence either CEO leadership development or control of managerial opportunism. According to Gabarro (1987), new CEOs normally need one or two years to acquire needed task knowledge before they can take major actions to reshape their organizations. It takes additional time for these actions to show substantial impacts on their firms' competitive positions in the market and financial returns. Thus, the newly appointed CEO of the company will seek to reveal (disclose) more about corporate governance practices. In other words, CEOs with shorter tenure will perform control towards the important informations as their contribution to the

corporate.

Tyler and Steensma (1998) and Barker and Mueller (2002) find that the type of degree that the CEO holds has an impact on the firms’ research and development funding. For example, Graham, Harvey and Rajgopal (2005) find that CEOS holding MBAs were more likely than other executives to use techniques such as net present value (NVP) for capital budgeting and the capital asset pricing in cost of capital calculations. Hence,the type of degree that the CEO

monitoring over the board process (Fama and Jensen, 1983). The involvement of a chairman on board, either as director or chairman may create bias and inappropriately influence board decisions. Similarly, conflicts of interest may occur if a chairman is also an executive who is involved in the company management (Ismail et al., 2010). In such a firm, the executive chairman has more power over the board and firm without being supervised and evaluated. Jensen (1993) claimed that boards are less effective when the chief executive officer is also the chairman. Thus the following hypothesis is developed:

H 1a : Chairman tenure is related to return on assets.

H 1b : Chairman financial background is related to return on assets.

H 1c : Executive chairman is related to return on assets.

Board of directors

Bursa Malaysia underscores the importance of having independent directors on boards by its Revamped Listing Requirements by ensuring the board of directors of Malaysian public listed companies has a sufficient independent element to safeguard the interest of investors. The role of independent directors on the board of directors is to effectively monitor and control firm activities in reducing opportunistic managerial behaviors and expropriation of firm resources (Fama and Jensen 1983, Brickley et al. 1994).

Numerous studies has evidenced that the proportion of independent Numerous studies has evidenced that the proportion of independent

The Malaysian Code of Corporate governance states that good corporate governance rests firmly with board of directors and the Code required at least one third of the board to comprise of independent directors. The term independent as described by the Malaysian Governance Code refers to independence from management and significant shareholders. The literature suggests that increases in the proportion of outside directors on the board increases firm performance as they can more effectively monitor managers (Adams and Mehran, 2003).

Board size is the number of directors on the board and an important factor in the effectiveness of the board in making return on assets higher or lower. Jensen (1993) opines that limiting board size improves firm performance because the benefits by larger boards of monitoring are overshadowed by the poorer communication and decision-making of larger groups.

Conger et al. (1998) views board meetings as an important resource in improving the effectiveness of the board. Effectiveness of a board depends on how often the board members meet to discuss the various issues facing a firm (Vafeas, 1999).Increase in board meetings is considered to represent the intensity of board activity. From the agency perspective, the main responsibility of the Conger et al. (1998) views board meetings as an important resource in improving the effectiveness of the board. Effectiveness of a board depends on how often the board members meet to discuss the various issues facing a firm (Vafeas, 1999).Increase in board meetings is considered to represent the intensity of board activity. From the agency perspective, the main responsibility of the

H 2a : The proportion of board inpedendent is related to return on assets.

H 2b : The total number directors on the board is related to return on assets.

H 2c : The total meeting is related to return on assets.

Independent Committee

The primary function of the audit committee is to review management information, financial statements and internal control system (Klein, 1998). The importance of audit committees as a corporate monitoring mechanism has been emphasized by many researchers in recent years. Number of audit committee meetings with impendent and financially literate directors will work as ineffective monitor for the audit committee.

The presence of remuneration committee is consistent with agency theory, which advocates the separation of management from control (Barkema and Mejia, 1998). The main function of remuneration committees is to determine and review remuneration packages for senior management of the firm (Klein,1998). There has been an increasing demand for greater accountability for remuneration (Bosch, 1995).

The ability of non-executive directors to perform the monitoring function is related to their independence, which in turn is related to director selection by The ability of non-executive directors to perform the monitoring function is related to their independence, which in turn is related to director selection by

H 3a : Nomination committe independence is related to return on assets.

H 3b : Remuneration committe independence is related to return on assets.

H 3c : Audit committe independence is related to return on assets.

Family Controlling

The family controlled firm or family ownership is the most common form of business organization in the world and developing countries mostly have large firms which are controlled by family ownership. According to the study of Clasessens et al (2000) on the separation of ownership and control in nine East Asian corporations (Hong Kong, Indonesia, Japan South Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand), Malaysia has the third highest concentration of control after Taiwan and Indonesia.

Due to controlling power in company, the dominant family is able to influence appointments of top managers as well as board members. Based from previous study, Prabowo and Simpson (2010) find that controlling family ownership and the family involvement on the board are found to have negative relationship with firm performance.

Thus the following hypothesis is developed:

H 4a : The presence of director who is the family member on the board is related to return on assets.

H 4b : The proportion of family ownership is related to return on assets.

CHAPTER III RESEARCH METHODS

A. Research Design

This study is a hypothesis testing study because it aims to test variables that have impact on dependent variable. This study was conducted to test and examine the effect of coporate governance mechanism to return on assets. This is a cross sectional studies which means that the data were only taken once (2010). Independent variables in this research consist of chairman tenure, chairman financial background, chairman executive, board size, independent board, board meeting, remuneration committee independent, nomination committee independent, audit committee independent, family involvement, and family ownership. Dependent variable is return on assets.

B. Population and Sample

Population refers to the entire group of people, events, or things of interest that researcher wishes to investigate (Sekaran, 2000). Population of this research is annual reports of manufacturing companies listed in Bursa Malaysia Stock Berhard in 2010.

Sampling is the process of selecting sufficient number of elements from the Sampling is the process of selecting sufficient number of elements from the

1. The firm is manufacturing company which listed in Bursa Malaysia during the period 2010.

2. Annual report is in English or at least has the English version.

3. Complete data on coporate governance and return on assets.

C. Source and Data Collecting Technique

This study uses secondary data which means data that refers to information that obtained from sources. The data taken from annual reports in Bursa Malaysia Berhard (Bursamalaysia.com). Data used in this research:

1. List of manufacturing companies in 2010 is taken from Bursa Malaysia Berhard website.

2. Company’s corporate governance data is based on annual reports disclosures which published by the company.

3. Return on assets is obtained from the financial statements of companies.

D. Operational Definition and Measurement of Variables

This study uses the independent variables, dependent variable, and control variables. The operational definition and measurement of the variables are described as follows:

1. Independent Variables

Independent variable in this study is good coporate governance which can

be explained by chairman tenure, chairman financial background, chairman executive, board size, independent board, board meeting, remuneration committee independent, nomination committee independent, audit committee independent, family involvement, and family ownership.

a. Chairman tenure is measured by duration of chairman tenure until year t.

b. Chairman financial background is dummy variable. If chairman has financial education background = 1, otherwise = 0

c. Chairman executive is dummy variable. If chairman on the board is executive= 1, otherwise = 0

d. Board size is measured by the total number of board members on the board.

e. Independent board is measured by the proportion of independent directors on the board, expressed as a percentage.

f. Board meeting is measured by total number of board meeting which held annualy by the board of directors.

g. Remuneration committee independence is measured by the percentage of g. Remuneration committee independence is measured by the percentage of

Audit committee independence is measured by the percentage of audit committe independent to total committee.

j. Family involvement is measured using ratio family members on the board to total number of directors.

k. Family ownership is measured by using percentage of direct shares owned

by family control directors. l.

Firm size is measured by nantural logarithm of total assets. m. Leverage is measured by ratio of total debt to total assets. n. Type of indsutry is dummy variables (1,2,..,5)

2. Dependent Variable

Dependent variable in this study is return on assets. Return on assets define as eaning before interest and taxes divided by total assets. Return on assets is use

to measure firm performance. Barro (1990) and Klein (1998) use return on assets (ROA) as an operating performance indicator. Brown and Caylor (2005) use ROE and ROA as their two operating performance measures. Managers are directly responsible for the operations of the business and therefore the utilization of the firms’ assets. Thus, return on assets allows users to assess how well a firms’ CG mechanism is in securing and motivating efficient management of the firm. In the present study, return on assets is defined as net income before interest expense for the fiscal period divided by total assets for that same period (Barro, 1990 and

Control variables in this study is explained by firm size, leverage and type of industry.

a. Firm size is control variable which measured by nantural logarithm of total assets.

b. Leverage is control variable which measured by ratio of total debt to total assets.

c. Type of indsutry is dummy variables which represented by give score (1,2,..,5) on each type of manufacturing companies.

E. Data Analysis Methods

In this study, OLS analysis regression is used to analyze the realationship between independent variables, dependent variable, and control variables. SPSS

17.00 for Windows is used as an analytical data tool to test the regression model. Theoretically, the model will give the valid value if classical assumption test are fulfilled.

1. Classical Assumption Test

Before testing the hypothesis, classical assumption test is important to ensure that study results are valid. Classical assumption test consist of several kinds of tests including normality test, multicollinearity test, autocorrelation test, and heteroscedasticity test.

a. Normality Test

Normality test is used to determine whether the residual value in regression model is well- modeled by a normal distribution (Ghozali, 2006). T-test and F-test is done with underlying assumption that residual value is normally distributed. Kolmogorov-Smirnov test is applied to test this assumption. Criteria that operate in this test are two tailed test, comparing p- value with significance level. This study use significance level 0.05. If p- value > 0.05 then the data is normally distributed.

b. Multicollinearity Test

Multicollinearity test is used to determine whether two or more independent variables in a multiple regression model are highly correlated (Ghozali, 2006). Tolerance value and variance inflation factors (VIF) could provide measurement to detect if multicollinearity exist. These measurements can show which independent variables are explained by other independent variables. If tolerance value < 0.05 and VIF > 5, then multicollinearity exist.

c. Autocorrelation Test

Autocorrelation test is used to determine whether there is a correlation between values of the process at different points in time, as a function of the two times or of the time difference. If there is no correlation between residual value, then the residual value is random (Ghozali, 2006). This study use run test to detect autocorrelation. Criteria that operate in this test are two Autocorrelation test is used to determine whether there is a correlation between values of the process at different points in time, as a function of the two times or of the time difference. If there is no correlation between residual value, then the residual value is random (Ghozali, 2006). This study use run test to detect autocorrelation. Criteria that operate in this test are two

d. Heteroscedasticity Test

Heteroscedasticity test is used to determine whether the variance of the error terms differ across observations (Ghozali, 2006). Tests to detect existance of heteroscedasticity is look at the graph scatterplot between the predicted value of the dependent variable (ZPRED) and the residual (SRESID). When the dots result is spread and random, then there is no heteroscedasticity.

2. Descriptive Statistics and Univariate

Descriptive statistics used to find the average (mean), standard deviation, and maximum and minimum value from variables tested in the study. This analysis is intended to provide idea of distribution and behavior data samples (Ghozali, 2006).

3. Multivariate

From the hypothesis above, the research model can be explained by this formula:

ROA

= return on assets

= parameters (i = 1,2,3,...11)

CTE

= chairman tenure

ROA =β 0 +β 1 CTE + β 2 CFB + β 3 CEX +β 4 BDIND +β 5 BDSZ +

β 6 BDM + β 7 NOM +β 8 REM +β 9 AUD + β 10 FAM + β 11 OWN +e

BDIND = board independent BDSZ

= board size

BDM

= board meeting

NOM

= nomination committe independent

REM

= remuneration committe independent

AUD

= audit committe independent

FAM

= family involvement

OWN

= family ownership

e = error terms

a) Significance Silmutaneous Test (F-Test)

F-Test is used to prove whether all independent variables have a simultaneously effect on dependent variables.

b) Coeffcient of Determination (R 2 - Test)

Coefficient of determination is used to explain how much of the variability of regression model can be caused or explained by its relationship to dependent

variable. Each additional independent variable will make R 2 increase.

c) Partial Regression Test (t-test)

This test is to determine whether the independent variables in the partial will affect the dependent variable, assuming the other independent variables constant. Criteria of test:

a. If significant value > alpha (5%, 1% , or 10%), it means an individual independent variable has no effect on the dependent variable.

b. If significant value < alpha (5%, 1% , or 10%), it means an individual

DATA ANALYSIS

This chapter will describe the data analysis and research results about corporate governance and ROA, which are about data research collection, data test, data test analysis. Analytical model used in this study is multiple linear regressions using SPSS release 17.0.

A. Data Collection Analysis

The population from this research is all Malaysian main market companies which listed in Bursa Malaysia Berhard in 2010. Based on the sample criteria discussed above, this study obtained 200 samples.

Table IV.1 Data Research Collection

Explanation 2010

Total companies Total non-manufacturing companies Total unpublished annual report of manufacturing companies until the end of 2010 Total manufacturing companies with incomplete data

(82) Total samples

200 Source: Bursa Malaysia Berhard (2012)

B. Classic Assumptions Test

The result from this test is prepared in appendix . Based on the results, the data in this study is passed from classic assumptions test which include normality test, multicollinearity test, autocorrelation test, and heteroscedasticity test.

C. Descriptive Statistics

Descriptive statistics in this study is use to find mean value and deviation standard, minimum and maximum from the variables. Table IV.2 is prepared to define the variables that used in this study.

Table IV.2 Variable Definition

Variables

Acronym

Operational Definition

Return On Assets

ROA

Return on assets of the company on year t Chairman tenure

CTE

Chairman’s duration of tenure until year t Education background

of chairman

CFB

If chairman has financial education background = 1, otherwise = 0

Chairman Executive

CEX

Chairman executive = 1, chairman non- executive = 0

Proportion of board independent

BDIND

The proportion of independent directors on board

Size of board

BDSZ

The size of board on year t Board Meetings

BDMET

Total number of board meeting held annualy by the board of directors

Nomination committee independence

nomination committe independence to total committee on year t Remuneration committee independence

REM

Percentage of remuneration committe independence to total committee on year t

Audit committee independence

AUD

Percentage of audit committe independence to total committee on year t

Family involvement

FMI

Percentage of family involvement on the board

Family ownership

OWN

Percentage of direct shares owned by family on the board

Asset

AST

Natural logarithm of total assets Leverage

LEV

Ratio of total debt to total assets Industry

IND

Industry dummy variables

Table IV.3 represents the result of descriptive statistics.

Table IV.3 Descriptive Statistics

Min

Max

Mean SD ROA

ROA has minimum score on -97% and maximum score 61% with 0,54% as the average score. It means some companies still has negative value on returning their assets and still have low score. The average of chairman tenure is 7 years with some companies with a very new chairman (0 year) and the longest duration is 31 years with 31% of them have financial education background. This reveals that less than half of chairmen have financial background on their education and the averages of chairmen are on their medium tenure. The average position of chairman is 39% as executive member.

The average proportion of independent directors on board is met with what Malaysian’s government requires. The proportion should at least contain one third The average proportion of independent directors on board is met with what Malaysian’s government requires. The proportion should at least contain one third

14 members, with having 6 meetings for 2010. Nomination committee from all companies has 80% independent members, while remuneration committee has 65% independent member and audit committee has 88% independent members. The number of audit committee has met with the rule which stated one third of the members should commit as independent members.

All of companies in this study have 22% of family relationship on board, with minimum number zero and maximum number is 80%. The average family ownership of the companies is not as big as its maximum number (80%) which is only 0,7%. It means not all families have their ownership on the company.

Control variables for this study are company size (AST), leverage (LEV), and type of industry (IND). The average score of company size is 19.5344 with a lowest score 17.16 and a highest score 23.36. Leverage has an average score 0.4204 with a lowest score 0.03 and a highest score 1.42. Type of industry (IND) is a dummy variables with minimum value 1, maximum value 5 and an average score 3,12.

BDIND ** -0.062 -0.122 0.187 -0.066

-0.040 0.320 AUD ** 0.249 ** 1 -0.043

0.188 ** -0.146 * 0.177 * -0.201 ** 0.161 * -0.162 * 0.006

-0.127

0.145 FAM * 1 OWN ** 0.032 0.040 -0.106 0.064 -0.044 0.011 -0.133 0.086 0.036 0.072 0.407 1

**

AST ** 0.238 0.071 0.106 -0.008 -0.095 0.274 0.116

LEV ** -0.375 -0.167 -0.022 -0.228 0.027 -0.058 0.374 0.023

IND * 0.073 0.038 0.069 -0.013 0.061 0.104 0.184 ** 0.102 0.181 * 0.158 0.005

0.017 0.257 ** 0.059 1

*Correlation is significant at 5%, **Correlation is significant at 10%

are relatively low so there is no multicollinearity issues. Independent variables as stated as chairman tenure (CTE) and board meeting (BDME) significantly correlated to return on assets. Otherwise, the variable chairman financial education background (CFB), executive chairman (CEX), independent board (BDIND), board size (BDSZ), independent nomination (NOM), independent remuneration (REM), independent audit (AUD), family involvement (FMI) and family ownership (OWN) insignificantly correlated to return on assets. The control variable; leverage (LEV) significantly correlated to earnings management, while company size (AST) and type of industry (IND) are insignificantly correlated to earnings management.

D. Multivariate

1. Corporate Governance and Return on Assets

Table IV.5 shows the results of linear regression in this study between corporate governance and control variables with return on assets. Corporate governance is proxies as chairman characteristics, board structure and family involvement. All regressions together make a significant impact to return on assets. This reveals that corporate governance is playing a role to make return on assets better or worse.

F values show that all regressions significantly impact return on assets with the highest adjusted R 2 score on model 2. The highest score is 31,2% which

means all the variables on chairman and board of directors could be explained by means all the variables on chairman and board of directors could be explained by

that the total meeting is related to return on asset is accepted at the 10% level. This finding consistent to Vafeas (1999), Lawler et al. (2002) and Triki et al. (2011). Meetings bring benefits such as more time to discuss, set strategy, and monitor management, however, there are also cost associated with board meetings, for example managerial time, travel expense and director fees (Vafeas, 1992). Fancis, Hasan and Wu (2012) argues that board meetings activity is important channel through which directors can obtain firm-specific information, monitor management, and determine strategic responses to different events. This finding however incosistent with Bathula (2008) and Kreyeboah-Coleman (2007) who found that board meetings insignificantly related to return on assets. They argue board meetings are only a small part of corporate governance that actually makes

a big impact on return on assets. All regressions for chairman tenure are insignificant to return on assets. It means that H 1a is rejected; the chairman tenure does not have any impact to the

better or worse return on assets. This, however, inconsistent with Kakabadse and Kakabadse (2005) who argues that in UK and Australian companies which consistently exhibited higher performance have their chairman being in role between 12 to 15 years and US chairmen and board members considered length of better or worse return on assets. This, however, inconsistent with Kakabadse and Kakabadse (2005) who argues that in UK and Australian companies which consistently exhibited higher performance have their chairman being in role between 12 to 15 years and US chairmen and board members considered length of

undergraduate degree. Thus, H 1b is rejected. All regressions for executive

chairman show that it insignificantly has impact on return on assets. This however inconsistent with Mishra et al. (2003) who found in India CEO duality is significantly affect firm performance. In Malaysia, whether the chairman sits as chairman or as CEO it does not matter because they are not tend to make return on assets higher or lower.

The coefficients for percentage independent directors on the board are insignificant to return on assets. Hence, H 2a is rejected. It can be inferred that