Corporategovernance has been on check especially since the folding of vast corporationsfor instance Maxwell, Polly Peck and Enron etc. Many principles and thoughtshave emerged, all these are pointing to firm performance in some issues likethe governance measures and procedures. Although it is not easy to create theconnection among corporation’s performance and their governance measures,though there are extensive beliefs that good governance practices might lead togreater business performance (Young, 2003).
Consequently, several studies haveendeavoured to offer some experiential suggestion on this matter throughseveral methods for example developingthe governance index and connecting it to performance (Klapper and Love, 2004),concentrating on event study (Baliga, Moyer and Rao, 1996, Rosenstein andWyatt, 1990) in addition investigating for a relationship between positivegovernance practices and companyperformance (Van Ees, Postma and Sterken, 2003), Kiel and Nicholson, 2003),Coles, McWilliams and Sen, (2001), Laing and Weir, (1999), Dalton, Daily,Ellstrand and Johnson, (1998), Barnhart and Rosenstein, (1998), and Agrawal andKnoeber, 1996). Corporategovernance attracted huge attention of scholars, watchdogs and generalpractitioner due to the general belief that corporate governance increasesstockholder willingness and assurance, also enhances the companies economyColeman, (2006) and Garg, (2007). Moreover, the corporate governance mechanismshave argued to affect the performance of corporate (Chuanrommanee andSwierczek, 2007) and contribute to the integrity of financial reporting processin different context of organizations (Petra, 2007). This is equally importantfor listed private and listed state owned corporations. Thus, as main mechanismin corporate governance, board has fiduciary responsibility to monitormanagement against opportunistic behaviors.
However, the extent of corporategovernance in general and board of directors particularly to safeguardsshareholders depends on the effectiveness of the mechanisms. In this regards,many corporate governance recommendations and guidance have been issued toensure that the board of directors perform its duty effectively. Malaysia asemerging market has issued with its own code of corporate governance in 2000which revised by 2007 and should be followed by all listed companies.Nonetheless, Malaysian listed Government Linked Companies have been subjectedto criticisms concerning their role and performance in the Malaysian economyand have recently come under government scrutiny (Abdul-Aziz et al., 2007). Thereason is that GLCs suffered recurring poor financial performance Muslim Har et al.
, (2012).Thus, the Malaysian government as major shareholder of listed government linkedcompanies has embarked with new transformation policy to strengthen thegovernance system of its owned listed firms. The underlying principles of thepolicy are national development, performance focus and good governance asemphasized by Putrajaya Governance Committee (PGC). One of the importantthrusts of the policy is to upgrade the effectiveness of corporate governanceof the GLCs through the improvement in certain board mechanisms that aresuggested to have an impact on GLCs’ performance. In the GREEN BOOK of transformationpolicy, Putrajaya Governance Committee (PGC) has reinforced certain boardcharacteristics such as board size, board meetings and multiple directorshipsas influential tools to make the board more effective in performing itsoversight duties.
The progress report of the transformation policy has shownthat GLCs’ performance is on track which suggests that the GLCs are performingbetter in post transformation policy period. However, there is also a questionof whether the GLCs are actually performing better or whether the improvementin performance is affected by the limitations of existing performancemeasurement (i.e. earnings management). With enhanced corporate governancemechanisms in place as clearly stated in the Green Book, it is expected that theGLC’s improved performance should commensurate with lower activity of earningsmanagement. Thus, it would reflect the improved quality of reported earningswith strengthening of oversight functions of the Boards.
This is the essence ofcorporate governance initiatives undertaken worldwide. Therefore, this studyaims to investigate the impact of the transformation policy on the associationbetween board mechanisms and earnings management of the listed GLCs firms inMalaysia. In particular, the study will test whether enhancing corporategovernance mechanisms are associated with lowering earnings management in theGLCs.