The Effect of Implementation of Malaysian Code of Corporate Governance (MCCG) 2007 on Corporate Governance Attributes and Financial Performance

The main objective of this study is to investigate the effect of implementation of Malaysian Code of Corporate Governance (MCCG) 2007 by examining correlation between corporate governance variables derived from the code and financial performance for period of 2006 and 2008. The rationale of using MCCG 2007 as the basis of the variables was because there were several significant changes done to the earlier code especially on board of directors and audit committees. The new code emphasized on specific criteria such as experience, professionalism and knowledge for the board selection. It also recommended that audit committee members to possess a financial skill and be a member of professional body. In lieu of those changes, the study selected the years of 2006 and 2008 to represent pre and post periods of the code implementation respectively. Besides board characteristics and audit committees variables, boards’ remuneration committee and directors’ ownership were included as part of the theoretical framework. Board of directors was very critical in making right business decisions and setting up the companies’ strategic directions. Audit committee, on the hand, focused on the companies’ governance of financial aspects to ensure good internal control and avoid fraud. In addition, boards’ remuneration variable acted as the reward system to the directors for good financial achievement. The last variable was included due to its influential factor on companies’ governance and performance. The sample size comprised of 162 companies listed at Bursa Malaysia covering all sectors except for finance, mining and REITs were used in this study. The exclusion was due to insignificant number of companies and due to regulatory requirement which potentially caused a distortion to the results. This study also provided a feedback on effectiveness of MCCG 2007 by comparing the t-test results of overall corporate governance attributes. In addition, ANOVA and regression methods were applied to determine the correlation of the corporate governance variables and financial performance.
Overall, the t-test result reflected better mean governance scores for year 2008. Hence, it justified to conclude that MCCG 2007 was effective in enhancing corporate governance
among corporations. In addition, the results also showed that there were correlations between board and audit committee with the organizations’ performance for year 2008 i.e. after the implementation of Code 2007. In addition, analysis on directors’ ownership for level between 5% and 20% highlighted a negative correlation between governance
attributes and financial performance for year 2008 when the directors’ shareholding was above 5%, less than 10% and above than 10%. The outcomes had theoretical and practical
implications which provided a further support to the Agency and Resource Dependency Theory. In conclusion, the revision of MCCG 2000 by Securities Commission was justified.