Board ethical commitment and corporate performance: Malaysian evidence
| Pages | 1146-1164 |
| Date | 07 October 2019 |
| Published date | 07 October 2019 |
| DOI | https://doi.org/10.1108/JFC-10-2017-0099 |
| Author | Ahmad Saiful Azlin Puteh Salin,Zubaidah Ismail,Malcolm Smith,Anuar Nawawi |
Board ethical commitment and
corporate performance:
Malaysian evidence
Ahmad Saiful Azlin Puteh Salin
Faculty of Accountancy, Universiti Teknologi MARA Perak Branch Tapah
Campus, Tapah, Malaysia
Zubaidah Ismail
School of Business and Law, Edith Cowan University, Joondalup, Australia
Malcolm Smith
University of South Australia, Adelaide, Australia, and
Anuar Nawawi
Faculty of Accountancy, MARA University of Technology, Shah Alam, Malaysia
Abstract
Purpose –The purpose of thisstudy is to examine the relationship between boardethical commitment and
the performance of the company. When directors embed ethics in discharging their duty, it will prohibit
frauds,unnecessary actions and decisions that are detrimental to the company.
Design/methodology/approach –This study collected data for two yearsi.e. 2013 and 2014 from the
annual report of the biggest 500 companies by market capitalisation as of 31 December 2013 listed under
Bursa Malaysia stock exchange. Board ethical commitment is measured based on the Malaysian Code of
Corporate Governance (MCCG) and various international best practices while corporate performance is
measuredbased on return on equity, return on assets, net profit margin, market to book value and TobinQ.
Findings –This study found that ethical commitmentby the board has a significant positive relationship
with corporate performance. The findings are robust to the alternative performance measurements and
lagged one-yearcorporate performance.
Research limitations/implications –This paper enhances the theoretical understanding of the
contributionof the board of ethical commitmentto the sustainable performanceof the company. However, this
studysuffered from a limited data collectionperiod of two years only from the annualreport of the company.
Practical implications –This study provides an indicator that the directors need to provide a good
ethical leadership example to the employees and committed to built a good ethical work culture in the
organisation via establishment of code of ethics. In addition, this code needs to be promoted, enforced and
embeddedin the operations of the organisation.
Originality/value –This study is original as it not only examinesboard ethical commitment from MCCG
2012 but also international best practices from various countries such as UK, USA and Europe. It also
contributed to the literature and theoretical understanding of the importance of board ethical commitment
specificallyin developing countries like Malaysia thatscarce in the literature.
Keywords Malaysia, Accountability, Business ethics, Fraud, Corporate governance, Integrity
Paper type Research paper
1. Introduction
Corporate governance and business ethics are not new to academic research. In Malaysia,
for example, the first corporate governance code,Malaysian Code of Corporate Governance
(MCCG), was introducedin 2000. The code was revised twice:
JFC
26,4
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Journalof Financial Crime
Vol.26 No. 4, 2019
pp. 1146-1164
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-10-2017-0099
The current issue and full text archive of this journal is available on Emerald Insight at:
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(1) first in 2007 to enhance the accountability of the board of directors generally and
audit committee particularly (Husnin et al., 2016;Asmuni et al., 2015); and
(2) second in 2012 to focus on the clarification of the directors’role, especially in
regard to the issues of independent directors, board composition, commitment to
safeguard shareholders rights and corporate disclosure policies.
However, the 1997 Asian financial catastrophe, the financial meltdown because of the subprime
mortgage crisis in 2008, the failure of high-profile companies, and the exposure of many
corporate scandals have increased public queries on the ability of corporate governance
framework in shielding the country from various malfeasance. The continuous collapse of big
corporations such as Enron, WorldCom, Arthur Andersen and Parmalat and mismanagement
in Olympus, Tyco and Satyam shows that this negligence has hardly reached fruition. Indeed,
these frauds continue to inflict even greater financial damage through more sophisticated and
complex wrongdoings involving collusion with several parties inside and outside the
organisations.
Ironically, corporate fraud also occurred in the banking and financial sectors, although
this sector is highly regulated and closely monitored by the government and its central
agencies. Some examples include traded futures fraud involving Barings Bank; subprime
mortgage crisis that involvedglobal merchant banks; hedge funds and rating agencies such
as Lehman Brothers, Merrill Lynch, JPMorgan, Citigroup, RBS Greenwich Capital
Investments Corporation, Swiss bank, Credit Suisse and Goldman Sachs and manipulation
of London Inter-Bank Offer Rate, which is comprised of banks and financial institutions
across Europe such as Barclays Bank, UBS, Citigroup, The Royal Bank of Scotland,
Deutsche Bank, JPMorgan and Lloyds Bank. Malaysia is also no exception, with many
corporate disgraces involving major corporations such as Transmile, Megan Media
Holdings, Linear Corporation, Pancaran Ikrab, Axis, Kiara Emas Asia Industries, Idris
Hydraulic, AokamPerdana, Omega Securities, Ekran Berhad and UEM (Salin et al.,2011).
These entire phenomena imply that weak ethics and poor commitment by employees,
particularly top management and directors are the focal point for fraud to occur and
contribute to company financialdisasters (Khadijah et al.,2015;Salinet al.,2017). This may
explain why many researchers are interested in examining the work of company directors,
arguably the front-liners who are responsiblefor a company’s success. Nguyen et al. (2015),
for example, found that better monitoring by boards prevents all categories of misconduct
by banks.
Many studies have been conducted on boards of directors such as on board committees
(Klein, 1998;Ruigrok et al., 2006;Husnin et al.,2013), board responsibility (Bebchuk and
Weisbach, 2010;Blair, 2012),board independence (Bhagat et al.,2008;Upadhyay et al.,2014;
Hashim et al.,2014;Nor et al.,2017) and board remuneration (Hall and Murphy, 2003;
Frydman and Jenter, 2010;Jaafar et al., 2014;Ahmad et al., 2016). However, the issue of
directors’ethicsdid not receive considerable attention from scholars.
Surveys from prior literature show that many ethics studies have been conducted, but
these studies did not tie their examination to the work of directors. Gaumnitz and Lere
(2002),Schwartz (2002),Singh (2006) and Sthol et al. (2009) conducted studies to assess and
evaluate the content, constructionand evolution of a code of ethics over the years. However,
the value of such research is questionable when the public still does not know how these
codes work, how they are communicatedand how they are transformed inside organisations
(Helin and Sandström, 2007). Afterall, directors set the tone for a company and are expected
to navigate the company responsibly toward better performance (Schwartz et al.,2005). For
example, Weaver et al. (1999) foundthat top management commitment to ethics is important
Board ethical
commitment
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