Corporate
governance has been on check especially since the folding of vast corporations
for instance Maxwell, Polly Peck and Enron etc. Many principles and thoughts
have emerged, all these are pointing to firm performance in some issues like
the governance measures and procedures. Although it is not easy to create the
connection among corporation’s performance and their governance measures,
though there are extensive beliefs that good governance practices might lead to
greater business performance (Young, 2003). Consequently, several studies have
endeavoured to offer some experiential suggestion on this matter through
several  methods for example developing
the governance index and connecting it to performance (Klapper and Love, 2004),
concentrating on event study (Baliga, Moyer and Rao, 1996, Rosenstein and
Wyatt, 1990) in addition investigating for a relationship between positive
governance practices  and company
performance (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 and
Knoeber, 1996).

 

Corporate
governance attracted huge attention of scholars, watchdogs and general
practitioner due to the general belief that corporate governance increases
stockholder willingness and assurance, also enhances the companies economy
Coleman, (2006) and Garg, (2007). Moreover, the corporate governance mechanisms
have argued to affect the performance of corporate (Chuanrommanee and
Swierczek, 2007) and contribute to the integrity of financial reporting process
in different context of organizations (Petra, 2007). This is equally important
for listed private and listed state owned corporations. Thus, as main mechanism
in corporate governance, board has fiduciary responsibility to monitor
management against opportunistic behaviors. However, the extent of corporate
governance in general and board of directors particularly to safeguards
shareholders depends on the effectiveness of the mechanisms. In this regards,
many corporate governance recommendations and guidance have been issued to
ensure that the board of directors perform its duty effectively. Malaysia as
emerging market has issued with its own code of corporate governance in 2000
which revised by 2007 and should be followed by all listed companies.
Nonetheless, Malaysian listed Government Linked Companies have been subjected
to criticisms concerning their role and performance in the Malaysian economy
and have recently come under government scrutiny (Abdul-Aziz et al., 2007). The
reason is that GLCs suffered recurring poor financial performance Muslim Har et al., (2012).
Thus, the Malaysian government as major shareholder of listed government linked
companies has embarked with new transformation policy to strengthen the
governance system of its owned listed firms. The underlying principles of the
policy are national development, performance focus and good governance as
emphasized by Putrajaya Governance Committee (PGC). One of the important
thrusts of the policy is to upgrade the effectiveness of corporate governance
of the GLCs through the improvement in certain board mechanisms that are
suggested to have an impact on GLCs’ performance. In the GREEN BOOK of transformation
policy, Putrajaya Governance Committee (PGC) has reinforced certain board
characteristics such as board size, board meetings and multiple directorships
as influential tools to make the board more effective in performing its
oversight duties. The progress report of the transformation policy has shown
that GLCs’ performance is on track which suggests that the GLCs are performing
better in post transformation policy period. However, there is also a question
of whether the GLCs are actually performing better or whether the improvement
in performance is affected by the limitations of existing performance
measurement (i.e. earnings management). With enhanced corporate governance
mechanisms in place as clearly stated in the Green Book, it is expected that the
GLC’s improved performance should commensurate with lower activity of earnings
management. Thus, it would reflect the improved quality of reported earnings
with strengthening of oversight functions of the Boards. This is the essence of
corporate governance initiatives undertaken worldwide. Therefore, this study
aims to investigate the impact of the transformation policy on the association
between board mechanisms and earnings management of the listed GLCs firms in
Malaysia. In particular, the study will test whether enhancing corporate
governance mechanisms are associated with lowering earnings management in the
GLCs.

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