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CORPORATE GOVERNANCE MECHANISMS AND INTELLECTUAL CAPITAL DISCLOSURE IN MALAYSIAN GLCs


Hartini Azman Multimedia University,Melaka,Malaysia hartini.azman@mmu.edu.my Amrizah Kamaluddin Universiti Teknologi Mara,Shah Alam, Malaysia amrizah@salam.uitm.edu.my
ABSTRACT The objective of this study is primarily to investigate the influence of corporate governance as well as controlling for corporate characteristics like company size (total asset) on IC disclosure for a sample of Malaysian GLCs that is listed in Kuala Lumpur Composite Index (KLCI). In this study annual report from 78 Malaysian GLCs listed in the KLCI will be used for source of information in order to analyze the IC disclosure on 2007 till 2009. The IC disclosure as dependent variable consists of relational capital, structural capital and human capital are measured by using disclosure index score. Corporate governance mechanisms as independent variables cover of ownership structure (share concentration), board of directors (cross directorship) and board of committee (audit committee meeting). Results indicate significant of all corporate governance mechanisms except company size in term of total asset that are related with one or more of the IC disclosure types. Thus, it give details explanation wherein

share concentration show significant as companies that holding more on share concentration will be more reported on IC items and dominant shareholders can be easily to access the information they needed and give them less pressure to disclose IC in annual report. Cross directorship indicate to be
significant positive relationship with IC disclosure because cross directorship hold by the member of boards lead to a positive implications for disclosure practice since they are able to get a greater and better access of information more than one company as well as to abolish any secrecy information as encouraging voluntary disclosure indirectly. While, audit committee meeting shows significant positive relationship with IC disclosure as by having more meeting between audit committee may also encourage to provide more IC disclosure in annual report. This study is still far in order to explain the influence of corporate governance towards IC disclosure. As due to the weak support by the overall proposition as well as limitations arising for this study, the opportunities for future research are still extensive whereas future research may also incorporate other corporate governance mechanisms as well as using other measures to represent the independent variables.

Keywords: Corporate Governance, IC Disclosure, Content Analysis

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1. Introduction As recent changes in the global economy, Intellectual Capital (IC) information becomes a vital source of information regarding a company, which can be provided to a wide variety of users such as investors, creditors, managers and government bodies. It is due to the recent changes from product based to knowledge based economy where it focuses more on the growth of technology based and communication that make the company rely more on human innovation and abilities such as focusing on research and development, organizational development and relationships as compared with tangible physical assets (Bontis, Keow & Richardson, 2000; Kamaluddin & Rahman, 2007). Thus, IC becomes an economic value creator because it makes competitive advantage and creates wealth for companies in the future.

The disclosure of IC in annual report becomes more important for companies in order to maintain and attract the companies customers. From the IC disclosure it will show the company performance that encourages the users to make better decisions and evaluate company results for previous periods and to reduce ambiguity. Indirectly, the sufficient and reliable disclosure of IC information will bring good governance for companies. As a result, the companies can have an excellent corporate governance practice if they really put an effort to continuously disclose, report and measure the IC (Kamaluddin & Rahman, 2007; Gan, Saleh & Abessi, 2008; Li, Pike & Haniffa, 2008).

On the other hand, good governance through corporate governance mechanisms like ownership structure, board of directors and board of committee will lead to corporate accountability and build up the corporate essential value in the form of IC performance (Saleh, Rahman & Hasan, 2004). Li, et al. (2008) argued that there is very little knowledge and information regarding the determinants of the variation in the levels of intellectual capital disclosure in companies annual reports, as well as the effects of good governance mechanisms which the public supposedly need to know. Even though it is not easy to find the link between companies corporate governance with IC disclosure, there is still prevalent belief that governance best practices will lead to a greater disclosure of IC information (Rahman, 2010).

With the vast research studies in IC disclosure, this study will explore the extent of the influence of corporate governance mechanisms on IC disclosure in the annual reports. Numerous studies have focused on the relationship of corporate governance mechanisms and IC disclosure that are practiced by public listed companies (PLCs) in Malaysia like Haniffa & Cooke (2002), Ghazali & Weetman (2006) and Gan, et al. (2008). Currently, little is known on those practices among Malaysian GLCs specifically using content analysis study. This study proposes to identify the relationship between corporate governance mechanisms and IC disclosure of Malaysian GLCs from 2007 till 2009 by using content analysis method through reviewing annual reports. By classifying corporate governance mechanisms into ownership structure, board of director and board of committee, this study attempts to investigate the factors that may influence a companys decision to disclose its IC information. This is due to a demand for better corporate governance in the twenty first century to practice voluntary disclosure of IC in achieving transparency among Malaysian GLCs.

2. Literature review 2.1 Agency theory

Corporate governance is a long standing issue which has been discussed in the previous literature mainly regarding the agency relationship between principal and agent, whereby conflict of interest arises between both

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parties. This occurs when each of them try to maximize their own wealth before the others as there is separation of ownership and control of a company. As a result the agency problem occurs when principal (shareholder) and agent (management) have different interest and attitude. In addition, the issues of corporate governance are mostly immeasurable, difficult and have hidden agendas in which many important and unsolved questions tend to arise from time to time. Besides, agency theorist propose that board of director is a middle person between management and shareholder whereby board of director try to check and interpret the decisions of top management and at the same time interfere on behalf of shareholders. On the other hand, shareholders cannot afford to monitor on what the managers are doing so shareholders elect the right representatives who is board of directors to administer the management on behalf of shareholders. Therefore, efficient board is crucial for the success and survival of the companies and consequence there is no doubt for board to improve corporate governance.

Due to this matter, many corporate governance mechanisms which are used in common practices, have been applied to minimize information irregularity. However the relations of these mechanisms are greatly complex and require very specified consideration as until now, there is no settlement between research studies regarding the approach which can make these mechanisms related in diminishing the agency problems (Adjaoud, Mamoghli & Siala, 2008). Even though it is hard to curb these agency problems, many individuals that are directly involved like shareholders, management and other stakeholders still want to take some actions and strategies to overcome these issues. This show, company will be stricter in monitoring their corporate governance mechanisms when they involve with high agency cost and disclose more voluntary information in order to minimize this cost (Jensen & Meckling, 1976). Furthermore, it will encourage manager to disclose more voluntary information in order to enhance the companys value and attract investors. Besides, Jensen & Meckling (1976) stated that the more voluntary information is disclosed, it easy for investors to minimize their ambiguity as well as to reduce their cost of capital. Thus, many researchers and scholars were interested to give their cooperation, ideas and suggestions by doing further researches on this issue with the intention to at least reduce the agency problems although cannot eliminate entirely.

2.2

Corporate Governance Mechanisms

In recent years the issues of corporate governance disclosure has become very important and have received a great deal of attention from many researchers (Akhtaruddin, 2005). The financial crisis in late 1990s highlights the importance of good corporate governance practices to help restore investors confidence in the market. The financial crisis together with the scandals in the United States listed companies have brought a critical need for firms in both developed and developing countries to improve corporate governance practices and to gain back investor confidence towards the integrity of accounting numbers (Hashim & Devi, accessed in the internet on 2 August 2010). It has been proven that most corporate failures including Enron and Worldcom, can be caused by the lack of good corporate governance. In Malaysia, the scandals in the USA, as well as the 19971998 financial crises, have been considered as a wake-up call to the need for better corporate governance and transparency among Malaysian companies (Hasan, Rahman & Sakthi, 2008). Due to the crisis also, the need for better corporate governance is deemed to be vital not only to Malaysia but the entire developing countries throughout the global, in which immediate action needs to be taken on high quality corporate governance disclosure. The investors confidence to invest should be increased. Empirical evidence suggests that foreign investors avoid investing in developing countries because of weak corporate governance practices (McKinsey, 2001; Gibson, 2003).

Corporate governance mechanisms are divided into two components which include internal and external. Internal corporate governance mechanism is a mechanism within a company which consists of various types of

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organizational engagements or events to stabilize the authority and responsibilities among the companys shareholders, directors, management and employees (Felo, Krishnamurthy & Soleri, 2001). While the external corporate governance mechanism is a mechanism outside a company such as threat of takeover, institutional ownership, legal system and competition of products (Rahman, 2010).

For this study, it only focuses on internal mechanisms that consist of ownership structure, board of director and board of committee. For ownership structure, it concentrates on share concentration only and for board of directors this study focuses on cross directorship. While board of committee enlighten on audit committee meeting.

2.2.1

Ownership structure

Ownership structures refer to the various patterns in which shareholders seem to set up with respect to a certain group of firms. Generally, ownership structures are identified by using type of ownership and the ownership concentration. Type of ownership is basically divided into three categories. These are institutional ownership, managerial ownership and individual ownership (Joher, Ali & Nazrul, 2006). The share ownership structure is defined as the proportion of the voting shares of a sample company owned directly and/or indirectly by corporate insiders.

It is assumed that a wider dispersion of share ownership of a company is associated with its compliance with mandatory disclosure rules. This proposition is explained in terms of positive (agency) theory of accounting because modern companies are characterized by a separation of ownership and control (Owusu-Ansah, 1998). Tsamenyi, Enninful-Adu and Onumah (2007) found a significant but negative relationship between ownership shareholding and disclosure. The results suggest that firms with block shareholders disclosed more. Overall, their findings suggest that the ownership structure has an influence on corporate disclosure.

However, they did not look at the influence of foreign ownership on corporate disclosure. The evidence of the influence of disclosure and foreign ownership relationship in developing countries is offered by Mangena & Tauringana (2006) in a study based on the Zimbabwe Stock Exchange. They found a positive association between foreign share ownership and independent audit committees and between foreign share ownership and institutional investors. These findings are in respect of companies with stronger or better corporate governance structures such as audit committees, which are corporate governance mechanisms. Mangena & Tauringana (2006) did find a significant relationship between voluntary disclosure and foreign share ownership. Tsamenyi, et al. (2007) also find a similar relationship between ownership structure and voluntary disclosure and that, firms with multinational block holdings disclosed more compared to those with local block holdings, thus the similar evidence presented by Mangena & Tauringana (2006). Furthermore, Tsamenyi, et al. (2007) found that ownership structure has a significant influence on quality of corporate governance disclosure. The reason is when shareholders are dispersed then there is the need for monitoring and that can only be satisfied by increased transparency of corporate disclosure.

2.2.1.a

Share concentration

Corporate governance and corporate value has been influenced by ownership structures in various complex ways. Fama & Jensen (1983) dispute that more scarcely assumed companies may arise greater agency

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conflicts since the controlling shareholders would have a overriding effects on corporate affairs and it would be easier for them to evade the monitoring of other shareholders. Porta, Lopez-De-Silanes, Shleifer and Vishny (1998; 1999) study explained that the controlling shareholders had regularly walked off with the minority shareholders through aggressive tunneling behaviors in the emerging transitional economy countries. In addition, they dispute that the crucial agency problem in big companies around the world is that of limiting expropriation of minority shareholders by the controlling shareholders (Porta, et al., 1999). The purpose of resources control by stakeholder which is vital for the corporation will give an authority to the stakeholder in order to influence the management (Smith, Adhihari & Tondkar, 2005). Hence, conflict of interest might arise between insider (controlling shareholders and managers) and outsider investors in highly concentrated company (Ghazali & Weetman, 2006). Besides, agency theory dispute that with the greater dissemination of company ownership will lead to the pressure by shareholders who are required for disclosure practices as to minimize the agency cost and information asymmetry (Li, Pike & Haniffa, 2007). Outside ownership also have power and influence to avoid any expropriation by insider in order to minimize the conflict of interest as well as plays monitoring role and put more pressure on management to disclose the information. However, it is absolutely not for the company closely in custody ownership which is probably not quick to respond to the public investors information cost as dominant shareholders have ability to access the information they require (Cormier, Magnan & Velthoven, 2005).

2.2.2

Board of Directors

Every stakeholder in company or corporation has draw attention to the importance of corporate boards. Investors, employees, governments and communities are examining their performance and confront their decisions. Thus, increased focus on the role of CEOs is one key driver to implement in each company. While executives contribute important role by providing vision, executing strategy, creating successful companies and so on, the board also play their role like oversee, advice and select a companys most senior management (Rahman, 2010). As a result, the importance of role play by the board of directors are taken into consideration when there is a separation of ownership and control in todays modern companies that rely more on the external sources.

2.2.2.a

Cross Directorship

Cross directorship or interlocking director is one of the issues of corporate governance that frequently discussed by the researcher. This is referring to the condition where directors regardless of executive or nonexecutive have position and sit more than one board. In other words, the two directors jointly provide services on boards of two different companies whereby CEO of first company provide services on the board of second company and CEO of second company also provide services on the board of first company (Rahman, 2010). This condition also can help a company to improve their performance as it deals with additional information on what other companies are doing and indirectly enable to do comparisons with a greater transparency of information (Haniffa & Cooke, 2002). Nevertheless, it gives competitive disadvantage to the company and with the case of executive directors that sit on more than one board will make them less independent since they will be more kind with others in same conditions (Davis, 1993).

In fact, Gan, et al. (2008) on their study of the relationship between corporate governance and disclosure found positive relationship between cross directorship and the level of IC disclosure in Malaysia. It shows that cross directorship represented by member of the boards give an important positive impact for disclosure practice as a better access of information that are getting from more than one company.

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2.2.3

Board of Committee

Effective boards can be achieved by its composition and size as well as can be referred by its internal committee structure (John & Senbet, 1998). This means, by establishing board committee the work can be divided among the board members wherein as a consequence they can accomplish their work more in their limited time (Rahman, 2010). The MCCG (2000) stated that when the committee is appointed by the board, it should clarify the authority of the committee wherein in details whether the authority given to the committee can be act on behalf of the board or only to look at into particular issue and report back with recommendation to the board. Hence, majority of the committee consist of outside directors or at least have outside directors to sit on board of committee as well as committee chair. This situation has been emphasized as the board governance discouraged CEO to monopoly and has power by playing a directive role in committees (Rahman, 2010). The board of committee consists of audit committee, nomination committee and remuneration committee.

2.2.3.a

Audit Committee Meeting

Initially, numerous regulatory agencies and interest groups have been aggressively promoted the effectiveness of audit committee in order to strengthen the corporate governance practices in all public listed companies. Furthermore, audit committee seems to improve the corporate governance in term of financial aspects (Sori, Ramadili & Karbhari, 2009). An important monitoring role played by audit committee is to ensure the quality of financial reporting and corporate accountability. Audit committee becomes a liaison person between external auditor and the board in order to avoid any information asymmetry between them. Therefore, it is crucial to have a proper function of audit committee in order to improve the effectiveness of the financial reporting and make sure financial reporting has a high quality (Chen & Zhou, 2007).

The role of audit committee has developed over the years in order to face any changing that are come from changing business, social and economic environment (Li, et al., 2008). In UK, The Smith Report (2003) has provide a guidance that are applicable for all UK listed companies which requires audit committee to properly protected the interest of shareholders in terms of financial reporting and internal control. Audit committee also play important role to review the important financial reporting matters and judgments in relation with the preparation of the companys financial statements, interim reports, preliminary announcements and related formal statements such as the operating and financial review and the release of price sensitive information. While for Malaysia, audit committees are one of requirement in many companies as listing requirements make it mandatory to form audit committee by 1 August 1994. Referring to that, audit committee can give impact on the value relevant information disclosure, containing IC.

In previous research, the number of audit committee meetings held during the financial year is considered to be a proxy for audit committee diligence, with the anticipation that the more frequent the committee meets the more possibility for them to carry out their tasks (Xie, Davidson & DaDalt, 2003). The study has shown a negative relationship between the frequency of audit committee meeting and earnings management (Xie, et al., 2003). Corporate governance guidelines concede that the meeting should be as frequent as is required to ensure committee to carry out their responsibilities effectively as there are no specific rules regarding the frequency of audit committee meetings (Smith Report, 2003). While the Blue Ribbon Committee (BRC) suggested at least four meetings per year and Smith Report (2003) suggested not less than three meetings per year with anticipation that to hold more frequent meetings by the majority of committee chairs.

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2.3

IC Definition

A precise and exact definition for IC is difficult to examine and identify since there is still debate regarding the exact definitions of IC as in the literature, most definition are particularly broad (Lev, 2001). IC can be defined in broad term as the intellectual or knowledge based organizations resources (Striukova, Unerman & Guthrie, 2008). While, as defined by Marr, Schiuma & Neley (2004), IC is a group of knowledge assets that are element to organization and add value in order to build competitive positioning to identify key stakeholders. According to Petty and Guthrie (2000), IC is intangible asset however not all IC is considered as existing intangible asset for accounting definitions whereas IC is considered as a sub set of accounting intangible asset. Thus, the term intangible asset or IC is commonly used by prior studies as the source for long term value creation for the organization (Campbell & Rahman, 2010). As stated by Goh & Lim (2004), there are three types of capital attributable to an organization which include financial capital like cash and stock, physical capital like building and equipment and IC. Unlike the first two capitals, IC is considered as an intangible asset.

From the previous literatures, IC has been categorized in various ways for examination and interpretation because several frameworks have been developed for measuring and reporting IC (Abeysekera, 2008; Abeysekera & Guthrie, 2005). In early 1996, Brooking (1996) is the pioneer to develop a model of IC frameworks that classifies IC items into three categories and then this framework has been modified by other authors (Sveiby, 1997; Kaplan & Norton, 1992; Edvinsson & Malone, 1998). Generally, in the current literature IC can be defined with three categories that include internal (structural) capital, external (relational/customer) capital and human capital (employee competence) (Brennan, 2001; Bozzolan, Favotto & Ricceri, 2003; Abeysekera & Guthrie, 2004).

2.4

Disclosure of IC

As IC information is really essential for the knowledge based companies, it is important to know and understand on what relevant information that companies need to present and report to the public. In fact, Bontis (2003) has claimed that IC information has become more essential for the company and expected that there are some favorable factors that correlate with voluntary IC disclosure. For example, when the companies are accountable to disclose more IC, it leads to greater transparency level and shareholders can easily approximate the companies risk accurately. However, if the companies refuse to disclose their IC information, it is difficult for the investors to get a clear picture on the companies potential values.

Several empirical studies have been conducted in IC disclosures that focus on content analysis studies. These studies have been conducted in several ways such as focus IC disclosure either on single or international comparative studies, either in western countries or Asian countries, based on companies or industrial sector and uses cross sectional or longitudinal studies. According to Campbell & Rahman (2010) stated that the studies have taken place in several countries either in single country (Bozzolan, et al., 2003; Oliveras, Gowthorpe & Kasperskaya, 2008; Guthrie & Petty, 2000) or in international comparative studies (Abeysekera, 2008; Abeysekera, 2007; Vandemaele, Vergauwen & Smits, 2005). Furthermore, numerous studies have been conducted in western countries such as Australia (Guthrie & Petty, 2000), Ireland (Brennan, 2001), Italy (Bozzolan, et al., 2006), Spain (Oliveras, et al., 2008) and UK (Striukova, et al., 2008) while fewer studies focused in Asian countries such as Malaysia (Goh & Lim, 2004) and Sri Lanka (Abeysekera, 2007).

Striukova, et al. (2008) stated that there are also studies of IC disclosure on the number of industrial sectors have been examined wherein the majority of studies covered either one or two industrial sectors

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(Bozzolan, et al., 2003; Striukova, et al., 2008). Due to the potential importance of IC disclosure practices between different types of industry sectors, Bozzolan, et al. (2003) compared the reporting practice between traditional companies and high tech companies whereby the results showed that are differences in the amount of IC disclosure in annual reports between companies belonging to high profile industries and those belonging to low profile industries. It was found that high profile industries disclose more information than low profile industries. Besides that, Striukova, et al. (2008) found that the industries sector with the highest level of IC disclosure is the retail sector (average IC industry) followed by pharmaceuticals/ biotechnology (high IC industries) and ICT/software (low IC industries).

Several studies on IC disclosure have examined either on cross sectional (Guthrie & Petty, 2000; Bozzolan, et al., 2003; Goh & Lim, 2004) or longitudinal study (Abeysekera & Guthrie, 2005; Oliveras, et al., 2008; Campbell & Rahman, 2010). Campbell & Rahman (2010) stated that longitudinal study is clearly more appropriate to determine and examine individual company level changes compared to cross sectional sampling. It can examine the important place of company in IC by looking at the company pattern of IC disclosure. Thus, longitudinal study shows a trend and pattern of IC disclosure for each period. Overall, findings from most studies showed that the amount of IC disclosure and reporting practice in annual report increased substantially each year wherein external (customer/relational) capital was by far the most important element in each period (Abeysekera & Guthrie, 2005; Oliveras, et al., 2008; Campbell & Rahman, 2010). Furthermore, there are studies discussed on the determinants like corporate governance mechanisms and company characteristics that influence the IC disclosure (Li, et al., 2008; Gan, et al., 2008; Haniffa & Cooke 2002).

2.5

Corporate Governance and IC

IC information is essential for stakeholders in order for them to make a better decision (Li, et al., 2008). Jensen & Meckling (1976) claimed that in the agency context it has been stated that the more IC information is disclosed, less ambiguity is encountered by investors and this indirectly minimizes a companys cost of capital. As due to that, manager is required to disclose more IC information to the public in order to increase the companys value by providing investors with a better evaluation of a companys financial position and assists in minimizing the instability of stock returns. In order to quantify the number of IC disclosures, content analysis is mainly used to identify and analyze which is normally in relation to 22-25 categories of IC information (Beatie & Thomson,2007).

From prior literature, most occasions have low level of IC disclosure reported. This is due to the lack of IC reporting framework availability and lack of companies that try to determine and report IC. The lack of framework due to the depth and breadth of the IC concept is expected by subjectivity in determining and defining IC and this make the researchers further delay on quantifying IC disclosures. As due to the problem of defining IC, the consent has been agreed that the IC can be divided into three main categories such as human capital, structural capital and relational capital. Structural capital also can be called as internal capital. While for the relational capital is identical with customer capital or external capital. Hence, for this study, IC is classified as human capital, structural capital and relational capital which is similar and consistent with the study carried out by Bontis, et al. (2000) in Malaysian context (Gan, et al., 2008).

Most IC disclosure studies commonly use content analysis from annual report as the research method. On the other hand, methods such as case study, interview and questionnaire survey can also be applied. However content analysis is perceived to be more important and has been a popular choice of many researchers (Brennan, 2001; Bontis, 2003; Abeysekera & Guthrie, 2005; Bozzolan, et al., 2007). Majority of IC disclosure studies have

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focused more on cross sectional and country specific. The examples of these studies include in Australia (Guthrie & Petty, 2000), Ireland (Brennan, 2001), Italy (Bozzolan, et al., 2003), Malaysia (Goh & Lim, 2004) and Canada (Bontis, 2003). Somewhat little studies reported on longitudinal studies (Abeysekera & Guthrie, 2005; Campbell & Rahman, 2010). Several IC disclosure studies carried out international comparative studies (Cerbioni & Parbonetti, 2007) and some have focused further than annual reports that used other communication channels like analyst presentations (Garcia-Meca & Martinez, 2005).

In addition, the study also explored on IC disclosure with corporate governance which is gaining a momentum as a topic of discussion. As evident, relevant studies have been conducted by Firer & Williams (2003), Cerbioni & Parbonetti (2007) and recently, Li, et al. (2008) with corresponding results. Despite of that, the changes in company economics and governance may influence the changes of IC disclosure. Likewise study done by Firer & Williams (2003) showed that diffused ownership and GLC disclose more IC disclosure as contrary with family owned type of ownership structure. Based on homogenous sample of European Biotechnology companies over three years of period, Cerbioni & Parbonetti (2007) found that there is a significant relationship between corporate governance variables and IC disclosure. This result is similar with the study of Li, et al. (2008) which have conducted a cross sectional study on 100 UK listed companies to examine the relationship between IC disclosure and corporate governance. It shows significant relationship with all corporate governance variables except for role duality.

On the other hand, literature review on corporate governance and IC disclosure in Malaysian context consist of mixed results. Haniffa & Cooke (2002) appeared to support significant relationship between role duality and dominance of family members on board and IC disclosure. Furthermore, Ghazali and Weetman (2006) reported significant relationship only on director ownership with IC disclosure except for government ownership, new governance initiatives and industry competitiveness in order to bring companies towards better transparency. While Gan, et al. (2008) found that only audit committees have significant relationship with IC disclosure while others like ownership structure, board size, board leadership, cross leadership, board composition and audit committee size are not. Study by Bushman, Piotroski & Smith (2004) indicated that the role of internal corporate governance in corporate transparency is not clearly understood by many people and the association between IC disclosure and corporate governance needs a further analysis. Thus, the prior discussions recommend that it is limited and uncertain for the determinants of IC disclosure. As a result, this study develops on the prior literature of IC disclosure practices within the Malaysian context and examines the relationship with corporate governance mechanisms and sizes.

2.6

Conceptual Framework

The conceptual framework for the current study is adopted from Campbell & Rahman (2010) as well as from Guthrie & Petty (2000). For this framework, the independent variables are corporate governance mechanisms that contain of ownership structure, board of directors and audit committee. While, the IC disclosure consists of structural capital, relational capital and human capital which are considered as dependent variables. Based on the review of foregoing literature, the Figure 2.1 below shows the proposed conceptual framework.

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Figure 2.1 Conceptual Framework Independent variables (Corporate Governance Mechanisms) Dependent variables (IC Disclosure)

Ownership structure Share concentration

Structural Capital

Board of directors Cross directorship

Relational Capital

Board of committee Frequency of audit committee meeting Control Variable Company Size

Human Capital

3. Development of hypotheses and Research design 3.1 3.1.1 Development of hypotheses Corporate Governance Mechanisms and IC Disclosure

According to Weimer & Pape (1999), pp. 152-166, corporate governance can be defined as a framework of legal, institutional, and cultural factors shaping the patterns of influence that stakeholders exert on managerial decision making. Corporate governance mechanisms may influence the amount of IC disclosure practices (Haniffa & Cooke, 2002; Gan, et al., 2008; Li, et al., 2008). For this study, the focus is on the internal components comprising ownership structure, board of directors and board of committee as independent variables. This is based on the strength of prior research into IC disclosure practices. Thus, for ownership structures the focus is on share concentration whereas board of directors focus on cross directorship. As for the board of committee, emphasis is on audit committee meeting. These mechanisms and proxies are described below.

3.1.1.a

Share Concentration with IC Disclosure

Ownership structure is one of the corporate governance mechanism that can influence and pressure the monitoring level as well as voluntary disclosure level for the companies. Further, the company that has good governance through ownership structure will develop more responsible and build up their fundamental values in the appearance of IC performance (Saleh, et al., 2004). Tsamenyi, et al. (2007) find a significant but negative relationship between ownership shareholding and disclosure. The results suggest that firms with block

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shareholders disclosed more. Overall, their findings suggest that the ownership structure has an influence on corporate disclosure.

Ownership structure that focuses on share concentration may influence the level of monitoring as well as level of voluntary disclosure (Eng & Mak, 2003). The company with higher inside share ownership concentration rather than outside share ownership will lead to the lower of extent for additional discloses information as the management has control to engage in expropriation. As a result, the company that has more share concentration leads to more information asymmetry between management and majority shareholder which contributes to the immoral practice of governance system. It is in contrast with the smaller share ownership that is more passive or less informed investors (Li, et al., 2007). Traditionally, Malaysia is dominated and monopolied by insider for the concentration on the shareholdings. This has been proven where majority of the listed companies in Malaysia are owned or controlled by family as many companies have change from family owned enterprise (Rahman, 2010).

Previous studies produced varying results in term of share concentration. While Cormier, et al. (2005) found significant negative association between ownership concentration and voluntary disclosure of Singaporean firms, Haniffa & Cooke (2002) show positive relationship. Malaysia has a majority of inside shareholders as can be seen in Malaysian public listed companies, thus we assume that the companies will disclose less of their voluntary information if they have higher ownership concentration.

Thus, the first hypothesis is: H1: There is a significant negative relationship between share concentration and IC disclosure.

3.1.1.b

Cross directorship with IC Disclosure

Cross directorship is when one director of the company sits in more than one board. This is a common practice among Malaysian listed companies. The association between corporate governance and disclosure has been showed in the previous study from Haniffa & Cooke (2002) where it showed positive association between cross directorship and the level of disclosure in Malaysia. This explained that cross directorship held by the member of boards lead to a positive implication for disclosure practice since they are able to get a greater and better access to information from more than one company. Accordingly, companies become more transparent and try to abolish any secrecy of information as well as encourage voluntary disclosure indirectly (Rahman, 2010).

Thus, the second hypothesis is: H2: There is a significant positive relationship between cross directorship and IC disclosure. 3.1.1.c Audit Committee Meeting with IC Disclosure

According to the Smith Report (2003), an audit committee should have enough resources and authority to perform their role effectively. There are mixed results for empirical study for audit committee meeting. Ho & Wong (2001) claimed that audit committee involvement increase the disclosure as well as improve internal control and overcome the agency cost. Based on this argument, it can be hypothesized that more frequent audit meetings are motivated to disclose more IC information.

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Thus, the third hypothesis is: H3: There is a significant positive relationship between frequency of audit committee meeting and IC disclosure. 3.1.1.d Company Size with IC Disclosure

Williams (2000) argued that corporate specific characteristics may influence the level of voluntary disclosure practices. Thus, for this study only one corporate characteristic has been choosen based on the strength of prior research into voluntary disclosure practices. These corporate characteristics include Company Size in terms of total asset.

The company size is an important determinant for the voluntary disclosure which is based on the Bozzolan, et al. (2003) study that indicated significant size effect on reported IC disclosure using Italian data. Big companies are more visible and expected to meet investors demand for information compared with small companies (Li, et al., 2008). Bigger companies may have more involvement of stakeholders who are interested to know how company manages IC. According to Akhtaruddin (2005), corporate size can be represented by many different indicators in terms of sales, total asset, number of employees, and number of shareholdings. Karim (1996) uses annual sales, total asset, and market value of the firm to measure size, whereas Hossain (2000) uses sales turnover and total asset as size variables. Based on Akhtaruddin (2005), the company size is determined by taking into account the capital employed and the annual sales of the company. Capital employed is the total net worth and long term loans. Alternatively, it is defined as total of fixed asset (net of depreciation) and net working capital, or total net asset less current liabilities. Sales is a proxy for size and is equal to net annual sales.

Consistent with previous research undertaking, it is hypothesized that there is a significant relationship between company size and the extent of information disclosed. Larger companies may tend to disclose more information than smaller companies in their annual reports due to their competitive cost advantage (Akhtaruddin, 2005). The size of the company in regard to capital employed and sales does have a little impact on the disclosure of information (Akhtaruddin, 2005). However, the influence of size was found to be significant in the studies of Karim (1996). In study done by Bujaki & McConomy (2002), larger companies tend to disclose more information than smaller ones. The arguments are that small companies experienced a costly to disclose more in the annual report; therefore they tend to disclose fewer informations. These arguments are supported by Tsamenyi, et al. (2007) who found evidence that firm size influenced disclosure. The same evidence is provided by Aksu & Kosedag (2006) in which larger and profitable firms on the Istanbul Stock Exchange exhibited higher transparency and disclosure scores. A number of prior studies have claimed that size have significant effect on IC disclosure (Guthrie, Petty & Ricceri, 2006; Bozzolan, et al., 2003; Garcia-Meca & Martinez, 2005). It is contrast with the study of Williams (2001) and Bontis (2003) that show insignificant. As the results is mixed, it is important to control the size effect.

Thus, the fourth hypothesis is: There is a significant positive relationship between company size (Total asset) and IC disclosure. H4:

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3.2 3.2.1

Research Design Sample or Population

Sample of the study contained 33 Malaysian GLCs that is listed in Kuala Lumpur Composite Index (KLCI) (source:http://www.pcg.gov.my). These Malaysian GLCs belong to various industries such as Construction, Consumer Product, Trading/ Services, Plantation, Technology and Industrial Product. GLCs have been chosen because greater attention is given to them recently, together with their exclusive characteristics such as having direct link with government through shareholding and the social and national obligations connected to them. Companies that are directly controlled by the government thus is expected to become more transparent and voluntarily disclose the information needed by their stakeholders in order to practice good corporate governance.

Besides that, GLCs performance and contribution has caught the government attention and become as one of the important discussion when the GLC Transformation Program was launched on 29 July 2005 by Putrajaya Committee for GLC High Performance (PCG). The former Prime Minister and Minister of Finance reiterated in his speech at the launch of GLC Transformation Program that GLCs need to be transformed into high performing entities critical for Malaysia towards achieving vision with prosperity and effectiveness. Due to that, there are 10 initiatives introduced by PCG in order to raise the efficiency and transparency of the GLCs. One of these initiatives is managing and developing leaders and other human capital. As such, GLCs are expected to be more responsible to disclose what they have done in line with react to the government policy.

Thus, the sample focuses on the year 2007 till 2009 to look into the impact of the GLC Transformation that was launched on 29 July 2005 and whether this transformation can give a good and big outcome to Malaysia after 4 or 5 years of implementation in terms of IC disclosure influenced by corporate governance mechanisms. Beside, with the revision of Malaysian Code on Corporate Governance (MCCG) on year 2007, it is a good year to determine and observe whether Malaysian GLCs reveal IC information in the annual report.

From the 33 Malaysian GLCs, only 26 companies have been chosen for this study. This is due to the exception of banking and financial sectors to get involved as this sector have additional and high regulation imposed on them (Ghazali & Weetman, 2006; Haniffa & Cooke, 2002).

3.2.2

Data Collection Method

The previous studies have used corporate report such as annual report, IC statement report, IPO and company website as reference materials to analyze the IC disclosures. However, most of the studies only used annual report as a source of data (Guthrie & Petty, 2000; Brennan, 2001; Goh & Lim, 2004; Abeysekera & Guthrie, 2005; Abeysekera, 2007). Striukova et al. (2008) uses the whole corporate report for analysis. There are numerous reasons for the use of annual report by the researchers in order to do content analysis because it can report the important information that gives benefits and significance influence to the investors and public.

Empirical evidence suggests that annual report is a proper medium of analysis that can evaluate relative positions and trends of intellectual capital involving companies, industries and countries (Abeysekera & Guthrie, 2005). Besides, it is a good medium for longitudinal review of IC disclosure practice which requires that the document can be recorded and preserve historical details like annual report if compared with website which is probably applicable for a decade and frequent change of their contents (Campbell & Rahman, 2010). It also helps

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a company to communicate its image to the public. Management has complete control of unrestricted disclosure of information in the report (Goh & Lim, 2004). Thus, in this study annual report from 26 Malaysian GLCs listed in the KLCI will be used to analyze the IC disclosure in years of 2007 till 2009. 3.3 Independent Variables

The independent variables of this study are related with the corporate governance mechanisms consisting of board of directors, ownership structure and board of committee mechanisms. Board composition include outsider director while ownership structure focus on share concentration and internal auditing mechanisms comprise of audit committee meeting. These variables are selected after a thorough analysis of prior researches such as Li, et al. (2008) and Gan, et al. (2008). The details of independent variables that include operationalization of independent variables are summarized in Table 3.1.

Table 3.1 The measurement of independent variables (Adopted from Li, et al., 2008) Variable Ownership structure Proxy concentration Measurement Ratio of shares owned by 10 largest shareholders to total number of shares issued Dummy variable, 1 if chairperson with cross directorship, 0 otherwise Total number of audit committee meeting held within the financial year of the annual report Data source Company annual report

Share (SHCON)

Board of director

Cross Directorship (CRDIR)

Company report Company report

annual

Audit committee

Frequency committee (ACMEET)

of

audit meetings

annual

3.4

Dependent Variables

For this study, the dependent variable is the IC disclosure items. These IC items will be categorized into three types consisting of structural capital, relational capital and human capital. Most of prior IC disclosure studies are widely adopted or adapted Guthrie & Petty (2000) 24 attributes IC disclosure framework (Li, et al., 2007). Campbell & Rahman (2010) found that there are at least sixteen previous studies adopted and applied similar framework with Guthrie & Petty (2000) like Brennan (2001) and Goh & Lim (2004) while Abeysekera & Guthrie (2005), Guthrie, et al. (2006) and Striukova, et al. (2008) have modified and extended that framework. Therefore, in order to obtain better variation of IC disclosure index, this study develops in depth IC disclosure checklist together with the definitions, indicators and attributes is provided at Appendix 1.2 that was adapted and modified from Campbell & Rahmans model (Campbell & Rahman, 2010). The final IC list includes structural capital consisting of 7 items with 13 attributes while relational capital contains 5 items with 40 attributes. Human capital contains 5 items with 34 attributes.

Methodologies used by many of the previous studies are content analysis for IC disclosures (Brennan, 2001; Goh & Lim, 2004; Abeysekera & Guthries, 2005; Abeysekera, 2007; Oliveras, et al., 2008). It is widely and regularly used as a methodology for examining the extent of IC disclosures of the companies that commonly choose annual report as the data. It is a good instrument to measure comparative positions and trends in reporting.

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The involvement of content analysis based on short listing used for several terms associated with IC disclosure and for examining the regularity of its occurrence in the documents or reports (Kamath, 2008). Many of content analysis methods adopted in prior studies for the IC information captured is measured with a lack of consistency which lead to potentially misleading results (Beattie & Thomson, 2006). Thus, this study also uses content analysis as the main data collection method to assess the IC disclosure trends of 26 Malaysian GLCs by categories in the annual report from 2007 till 2009.

For the purpose of identifying the type of IC, the researcher will record all the information for each variable on the coding sheet. For the structural capital, capital letter S is used in order to differentiate with the others. As such, relational capital with capital letter R while human capital with capital letter H. This coding can be referred from Table 3.2 below:

Table 3.2 Type of IC used in the coding instrument (Adopted from Campbell & Rahman, 2010) Structural Capital Relational Capital Human Capital Intellectual Properties (S1) Brands (R1) Employee (H1) Corporate Culture (S2) Customer (R2) Training (H2) Management Philosophy (S3) Distribution Channel (R3) Education (H3) Management and Technology Process Business Partnering (R4) Work Related Knowledge (S4) (H4) Information Networking System (S5) Corporate Reputation (R5) Innovation (H5) Infrastructure (S6) Financial Relationship (S7)

The dependent variable in this study used one metric for the measurement. It comprises of Disclosure Index (ICDI) to show the extent. For the purpose of Disclosure Index, scoring items approach is used in the IC disclosure. There are two methods regularly used in the scoring disclosure of IC which are divided into simple dichotomous scale and pre-determined criterion. However, majority of the studies have applied simple dichotomous scale method. For simple dichotomous scale, if IC items included in disclosure checklist is disclosed it is coded as one whereas if not disclosed coded as zero. The ICDI for each company is derived from the following equation which is also used by prior studies such as Li, et al. (2007) and Schneider & Samkin (2007):

ICDI i Index =
where

nj t =1

X ij

nj

ICDI i index = Intellectual capital disclosure index for i th firm


n j = number of relevant items for j th firm, n j =78
Xij = 1 if j th item disclosed, 0 if j th item is not disclosed, so that 0 ICDI i 1

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Nevertheless, this method has been criticized by some as it treats equally for the disclosure of one item (nonetheless of its form or content) without specifying how much importance would be focused for each particular content category.

3.5

Control Variables

The control variables comprises the corporate characteristics components. It includes the company size. Table 3.3 summarised the operationalisation of control variables as follow:

Table 3.3 The measurement of control variables (Adopted from Li, et al., 2008) Variable Proxy Measurement Company size Total asset Total asset of financial year

Data Source Company annual report

3.6

Regression Model

The objective of this study is to determine the relationship between corporate governance mechanisms and IC disclosure of the Malaysian GLCs listed in KLCI. Therefore, multiple regression is applied in order to achieve this objective. It is to identify whether there exist any relation between IC disclosure and corporate governance like share concentration, cross directorship, audit committee meeting. The regression model of this study is as follows: ICDi = 0 + 1 SHCON + 2 CRDIR + 3 ACMEET + 4 TA + i

Where, ICDi = Intellectual Capital disclosure index (ICDI) SHCON = Ratio of shares owned by 10 largest shareholders to total number of shares issued CRDIR = Dummy variable, 1 if chairperson with cross directorship, 0 otherwise ACMEET = Total number of audit committee meeting held within the financial year of the annual report TA = Total asset of financial year = Parameters i = Residual term

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4. Findings and Discussions 4.1 Test of normality


Table 4.1 Kolmogorov-Smirnov test Variables Share concentration Frequency of meeting LG_ICDHC LG_ICDSC ICD Relational capital ICD Kolmogorov-Smirnova Statistic .149 .211 .135 .198 .080 .077 df 76 76 76 76 76 76 Sig. .000 .000 .002 .000 .200 .200

Assessment for normality of the data can be applied by using Kolmogorov-Smirnov test or skewness and kurtosis. The reason to do the assessment of normality of the data for further analysis is due to determine whether ther the data is normal or not. Normality can be analyzed by using both graphical and statistical method. The data is assumed to be normally distributed when the significant level is more than .05 by using KolmogorovSmirnov test while the value is zero or in a range between 2.58 to -2.58 by using skewness and kurtosis.

Referring to Table 4.1, it shows the Kolmogorov- Smirnov test for all variables. From the result, it can be explained that there are only two variables such as ICD relational capital and ICD have significant level more than 0.05, nevertheless the other variables show significant level less than .05. As a conclusion, it can be assumed that all variables are normally distributed even though only two variables that normally distributed as the sample is 78 whereby more than 30 (Field, 2009).

Table 4.2 Skewness and Kurtosis Variables Share concentration Frequency of meeting LG_ICDHC LG_ICDSC ICD Relational capital ICD

Skewness -0.362 2.151 -0.138 -2.433 -0.014 0.079

Kurtosis -1.324 6.134 -0.623 11.946 -0.423 0.191

Mean 0.6811 6 -0.3835 -0.3493 0.4509 0.4353

5% Trimmed Mean 0.6833 5.6842 -0.3823 -0.3402 0.4489 0.434

Besides, this study also uses statistical analysis of skewness and kurtosis which has been summarized in Table 4.2. Normal data have values in the range of +1 to -1 for both skewness and kurtosis. Based on the table, the data distribution are not normal for all of the variables as the value is far from zero except for ICD and ICD relational capital. Nevertheless, all the variables show the results of skewness are between the ranges of 2.58 to 2.58. In addition, the data can be considered normal by do a comparison between mean and 5% trimmed mean whereas both amount should be quite similar. Thus, based on the results it shows that all variables have similar

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amount of mean and 5% trimmed mean. As a result, it also can be assumed that all variables are normally distributed.

4.2

The Correlations Results

Correlations among independent variables are examined as one of the assumptions underlying the use of regression analyses. Correlation analysis is executed to explain the strength and direction (positive or negative) of the linear relationship between two variables. As due to that it is to ensure strength of the findings which could be weaken for the existence of multicollinearity. Multicollinearity will be arising when the correlation more than .9 (Pallant, 2001). There are two correlation can be applied which is Pearson product-moment correlation to check the existence of multicollinearity.
Table 4.3 Correlations of Type of IC Disclosure and Corporate Governance Mechanisms No Items 1 2 3 4 5 6 1 LG_ICDHC 1.000 LG_ICDSC .277* 1.000 2 3 4 5 6 7 8 ICD Relational capital ICD Share concentration Cross directorship Frequency of meeting Total Asset .476** .268* 1.000

.695** .537** .450** .014 .131

.355** .088 .153 .058 -.041

.895** .554** .541** .346** .104

1.000 .612** .563** .246* .134 1.000 .596** .005 .308** 1.000 .095 .182 1.000 -.206 1.000

The results for relationships between corporate governance mechanisms variables, corporate characteristics variables and IC (relational capital, structural capital and human capital) are shown in Table 4.3. The results indicated significant positive relationship between the human capital with share concentration and cross directorship. The correlation coefficients were .537and .450 and significant at the level p < 0.01 for share concentration and cross directorship. This result is quite similar with relational capital whereby there is significant positive relationship between the relational capital with share concentration, cross directorship, and audit committee meeting. The correlation coefficients were .554, .541and .346 and significant at the level p < 0.01. As overall, it indicates that with an increase on corporate governance mechanisms it will also give an increase on voluntary disclosure of IC.

The results for relationships among corporate governance mechanisms variables and also corporate characteristics variables shows significant positive relationship between share concentration with cross directorship (r = .596,p < .01) and total asset (r = .308,p < .01). The correlation result also reflect significant positive relationship between cross directorship with share concentration (r = .596,p < .01). Nevertheless, a very low correlation (r < 0.1) and not significant relationship was found between corporate governance mechanisms and corporate characteristics (company size) with audit committee meeting. The result for total aaset indicates significant positive relationship with share concentration (r = .308,p < .01). The above results indicate that there is no severe multicollinearity problem as the correlations between the variables fell below .9.

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4.3

Empirical result

The development of the hypotheses H1, H2, H3, H4, that has been discussed in development of hypotheses and research design in order to examine the influence of corporate governance towards IC disclosure are tested using multiple model regression. In this study, the dependent variable is IC disclosure items which is consist of relational capital, structural capital and human capital. The result is presented below.

4.3.1

Multiple Regression Analysis

Regression analysis is executed to examine the influence of corporate governance towards IC disclosure. Controlled by independent variables which is corporate governance mechanisms like share concentration, cross directorship, audit committee meeting and also control variables which is corporate characteristic like company size in term of total assets are regressed to determine their relationship with IC (relational capital, structural capital and human capital) disclosure.

The results for multiple regression for overall IC disclosure are summarized in Table 4.4. The results indicated the value of adjusted R-square is .489 and also indicates that 48.9% of the variances in IC disclosure have been explained by the variable of corporate governance mechanisms and control variable (corporate characteristic). Besides, P-value is .001 which is below the significance level .05 which is can conclude that there is significance relationship between corporate governance mechanisms and control variable (corporate characteristic) with overall IC disclosure. Under the corporate governance mechanisms and control variable only share concentration, cross directorship and audit committee meeting showed significant positive relationship to the overall IC disclosure.

Table 4.4 Multiple Regression for Overall IC Disclosure Model 1 Model 1 Regression Residual Total R 0.732 R Square 0.536 Adjusted R Square 0.489 Std. Error of the Estimate 0.06863

Sum of Squares 0.371 0.32 0.691

df 7 68 75

Mean Square 0.053 0.005

F 11.241

Sig. 0

Model

Unstandardized Coefficients B 0.153 -0.006 0.193 Std. Error 0.062 0.011 0.053

Standardized Coefficients Beta -0.055 0.394 t 2.452 -0.581 3.631 Sig. 0.017 0.563 0.001

(Constant) Total Asset Share concentration

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Cross directorship Frequency of meeting

0.053 0.008

0.022 0.003

0.252 0.217

2.424 2.503

0.018 0.015

Table 4.5, 4.6 and 4.7 is shown for the regression that is run individually under each type of IC such as relational capital, structural capital and human capital that obtain different results. The regression model in Table 4.5 shows the value of adjusted R-square is .466 which telling us that corporate governance mechanisms and control variable (corporate characteristic) are having 46.6% of the variances in the IC disclosure. It showed that they have a significant relationship to the IC disclosure as P-value is .001 which is below the significance level .05. Thus, it showed that share concentration, cross directorship and audit committee meeting influenced IC disclosure positively.

Table 4.5 Multiple Regression for Relational Capital Model R 0.718 Model 1 Regression Residual Total Sum of Squares 0.879 0.824 1.703 R Square 0.516 Adjusted R Square 0.466 Std. Error of the Estimate 0.11007

df 7 68 75

Mean Square 0.126 0.012

F 10.365

Sig. 0

Model

Unstandardized Coefficients B -0.012 -0.004 0.264 0.086 0.018 Std. Error 0.1 0.017 0.085 0.035 0.005

Standardized Coefficients Beta -0.021 0.343 0.26 0.326 t -0.119 -0.213 3.094 2.45 3.684 Sig. 0.906 0.832 0.003 0.017 0

(Constant) Total Asset Share concentration Cross directorship Frequency of meeting

Under Table 4.6, the adjusted R-square is .044, meaning that 4.4% of the variances in IC disclosure have been explained by the corporate governance mechanisms and control variable (corporate characteristic). P-value is .189 which is above the significance level .05 which can conclude that there is no significance relationship between corporate governance mechanisms and control variable (corporate characteristic) with IC disclosure.

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Table 4.6 Multiple Regression for Structural Capital Model R 0.369 Model 1 Regression Residual Total Sum of Squares 0.18 1.145 1.325 R Square 0.136 df 7 66 73 Adjusted R Square 0.044 Std. Error of the Estimate 0.13169 Sig. 0.189

Mean Square 0.026 0.017

F 1.482

Model

(Constant) Total Asset Share concentration Cross directorship Frequency of meeting

Unstandardized Coefficients B Std. Error -0.484 0.121 -0.03 0.021 -0.025 0.103 0.039 0 0.043 0.006

Standardized Coefficients Beta -0.19 -0.037 0.133 -0.009

t -3.989 -1.442 -0.246 0.919 -0.071

Sig. 0 0.154 0.806 0.361 0.944

In the findings shown in the Table 4.7, the importance of share concentration shows a significant, positive relationship with the IC disclosure as p-value is .001. This can be explain by looking at the adjusted R-square which is 0.254 that indicate 25.4% of the variances in IC disclosure have been explained by the corporate governance mechanisms and control variable (corporate characteristic).

Table 4.7 Multiple Regression for Human Capital Model R R Square 0.569 0.323 Model 1 Regression Residual Total Sum of Squares 0.213 0.446 0.66 df 7 68 75

Adjusted R Square 0.254 Mean Square 0.03 0.007

Std. Error of the Estimate 0.08102

F 4.644

Sig. 0

Model

Unstandardized Coefficients Std. B Error

Standardized Coefficients Beta t Sig.

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(Constant) Total Asset Share concentration Cross directorship Frequency of meeting

-0.562 -0.008 0.197 0.041 -0.001

0.074 0.013 0.063 0.026 0.004

-0.071 0.412 0.197 -0.025

-7.636 -0.624 3.146 1.57 -0.235

0 0.535 0.002 0.121 0.815

The overall findings for the relationship between corporate governance mechanisms and control variable (corporate characteristic) with IC disclosure can be summarized from the multiple regression analysis shown in Table 4.4 till 4.7 to explain detail analysis for each component of corporate governance and control variable towards IC disclosure. Take as a whole, it shows that share concentration has significant positive relationship with overall IC, relational capital and human capital. The finding do support and fail to reject null hypothesis for hypothesis (H1) wherein companies that holding more on share concentration will be less reported on IC items as dominant shareholders can be easily to access the information they needed and give them less pressure to disclose IC in annual report. This result however is consistent with previous findings in the literature by Haniffa & Cooke (2002) that there is positive relationship between share concentrations with IC disclosure.

Cross directorship indicate to be significant positive relationship with overall IC disclosure and relational capital which is supporting hypothesis (H2) that the more companies have cross directorship the more IC will be disclose. This can be explained that cross directorship hold by the member of boards lead to a positive implications for disclosure practice since they are able to get a greater and better access of information more than one company as well as to abolish any secrecy information as encouraging voluntary disclosure indirectly (Rahman, 2010). This result similar with the finding from previous research by Haniffa & Cooke (2002) and Gan, et al. (2008). Audit committee meeting shows significant positive relationship with overall IC disclosure and relational capital, thus hypothesis (H3) is failed to reject the null hypothesis. As such, this finding is consistent with previous research findings by Li, et al. (2008) and Gan, et al. (2008) whereas by having more meeting between audit committee may also encourage to provide more IC disclosure in annual report. According to Li, et al. (2008) claimed that in monitoring management behavior it is one of important activity by audit committee as to IC disclosure can minimize information asymmetry.

Company size was found not influence IC disclosure in term of total asset. The total asset to be not significant by overall IC disclosure items. This result fails to accept the null hypothesis for (H4). These findings are consistent with previous research findings by Williams (2001) and Bontis (2003) that show insignificant.

Overall, we can conclude that H1, H2 and H3 are accepted and H4 are rejected as there is no evidence to show that these variables have relationship with IC disclosure items. Hence, it can conclude that share concentration, cross directorship and audit committee meeting have an effect on IC disclosure items.

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5. Conclusions 5.1 Summary and Conclusions

The importance of the disclosure of IC information is not only for indicating and measuring, however it is more to focus on increasing companies transparency to the stakeholders. Thus, as a global economy shift to information age, IC information become acknowledges and essential factor underlying value creation. In acknowledging the importance of the IC information, it will encourage companies to be more aware and intention to voluntarily disclose this information to the public. The company also will realize that IC information can contribute towards improving companies business to increase competitive advantage. As a result, there is no doubt for the Malaysian companies to disclose IC information in their annual report.

Therefore, this study is set out to investigate the influence of corporate governance on IC disclosure by Malaysian GLCs in their annual report. The corporate governance mechanisms consist of share concentration, cross directorship and audit committee meeting which is control by company size in term of total asset. Based on multiple regression model, it shows the results for three IC disclosure which is with the exclusion of total asset, all corporate governance mechanisms are related with one or more of the IC disclosure types. The significance of three corporate governance mechanisms like share concentration, cross directorship and audit committee meeting discover in this study. It shown that these variables give a big contribution and become an important for the determinants for IC disclosure and as such for the extended study on disclosure should be included these variables.

Particularly, share concentration is significantly contributed to the IC disclosure as dominant shareholder can easily access the IC information with less pressure. Besides, cross directorship is positively relate with the IC disclosure which means the greater cross directorship in the companies, the more practice on IC disclosure as a better access of information that are getting from more than one company which can improve the companies performance. This study also finds an evidence of audit committee meeting hypotheses which is to be positively related with IC disclosure. It indicates that the more frequent meeting by audit committee has been held will contribute a better IC communication.

5.2

Limitations of the study

There are some limitations arising while doing this study. Firstly, the small sample size is one of the limitations that will make generalization based on this studys observation difficult (Brennan, 2001). Secondly, this study unable to extend the analysis because only focuses on review the annual report (Campbell & Rahman, 2010). Thirdly, this study will involve subjectivity during coding process as well as self-developed of scoring sheet which complicated to compare with prior study (Davey, Schneider & Davey, 2009). Fourth, there are other determinants that affect IC disclosures that have not been discussed in this study.

5.3

Recommendation for future research

This study is still far in order to explain the influence of corporate governance towards IC disclosure. However, this study provides some insight relating to corporate governance of 26 Malaysian GLCs in relation to it IC disclosure. As due to the weak support by the overall proposition as well as limitations arising for this study, the opportunities for future research are still extensive.

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In order to overcome the limitations arising from this study, some recommendations are suggested for future research. Firstly, future research supposed to have a large sample size in order to get reliability and more significant result and can be generalized. Secondly, future research should consider in order to cover verbal disclosures of IC related matters at meetings between managers and stakeholders or do a survey or refer to others documents such as IPO, website. Thirdly, in the future it should has a standardized scoring sheet and develop a fixed format for coding process as future researchers can easily to do a greater analysis for their data. Finally, future research may also incorporate other corporate governance mechanisms as well as using other measures to represent the independent variables.

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Appendix 1.1 List of Malaysian GLCs GLCs under study: 1 AXIATA GROUP 2 BOUSTEAD HOLDINGS BHD 3 CCM DUOPHARMA BIOTECH BHD 4 CHEMICAL COMPANY OF MALAYSIA BHD 5 FABER GROUP 6 LITYAN HOLDINGS BHD 7 MALAYSIA AIRPORTS HOLDINGS BHD 8 MISC BHD 9 MALAYSIAN AIRLINES SYSTEM BHD 10 MALAYSIAN RESOURCES CORP BHD 11 NCB HOLDINGS 12 PETRONAS DAGANGAN 13 PETRONAS GAS 14 PHARMANIAGA BHD 15 PLUS EXPRESSWAY 16 POS MALAYSIA BHD 17 PROTON HOLDINGS BHD 18 SIME DARBY BHD 19 TELEKOM MALAYSIA BHD 20 TENAGA NASIONAL BHD 21 TH PLANATATIONS 22 TIME DOTCOM BHD 23 TIME ENGINEERING 24 UAC BHD 25 UEM LAND BHD 26 UMW HOLDINGS BHD GLCs excluded: 1 AFFIN HOLDINGS BHD 2 BANK ISLAM MALAYSIA BHD 3 BUMIPUTRA COMMERCE HOLDINGS BHD 4 MALAYAN BANKING BHD 5 MALAYSIA BUILDING SOCIETY BHD 6 MNRB HOLDINGS BHD 7 SYARIKAT TAKAFUL MALAYSIA BHD

(source : http://www.pcg.gov.my)

Appendix 1.2 The IC list (Adopted from Campbell and Rahman, 2010) Type of IC Key concepts Indicators/ Attributes Structural capital Intellectual properties Patent An exclusive right Patent granted by government that Trademark confers upon the creator of an Copyright

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Corporate culture

Management philosophy

Management and technological process Information and networking system Infrastructure

invention the sole right to make, use, and sell that invention during period of protection. Copyright protection of creative or artistic works such as literature, drama, music, art, layout and recording. Trademark A distinctive characteristic by which a person or things become to be known The pattern of arrangement, material or behavioural which has been adopted by a corporation, group or team as the accepted way of solving problem How organization thinks about its employees, customers, environmental and community (referring to companys general belief not to activities) System, procedure and technologies practised or used by companies System consisting of the network of all communication channels used within organization Development of tangible longterm assets

Internet domain name Design

Vision, Mission, Code of ethic, Code of conduct, Code of practice, Principles of operation Create value to shareholders,Sustain growth,Protect environment and Caring society

Financial relationships

Brands

Customers

Control stock Quality control Performance appraisal Computer network, database, software, network, hardware, intranet, server etc. Portfolio of properties, stores modernization and refurbishment, floor extension, store safety, machine, plant etc. Favourable monetary relationship Relationship with with suppliers shareholders, bankers and other fund suppliers Relational capital It is a promise. By identifying and Brand authenticating a product or Sub-brand services it delivers a pledge of Range of product and services satisfaction and quality name Market shares Product awards Customers named Customer loyalty Customers trust Customers feedback Customers services Customer satisfaction No. of customers Customers segment

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Distribution channel

The commercial process involves promoting, selling and distributing product and services into market

Business partnering

A relationship between company and individual or groups that is characterized by mutual cooperation and responsibilities in terms of business or social/environmental objectives

Corporate reputation

Actions and activities which would positioning companys reputation into higher level

Customers convenience such as shop more appealing, more facilities Supply chain Business network Development new stores across regions. Delivery system Marketing and advertising Carry out market research Online selling Catalogue Promotion activities/strategies Liaison office Franchising Licensing Collaboration Outsourcing Suppliers External expert/consultant Agents Government Local authorities Media/press Company name Sponsorship Community involvement Environmental protection measures. Social responsibilities. Any activities that could raise company name and favourable contract

Human capital Employees Employee profile. Employee equity. Equal opportunities. Employee safety. Employee relationship. Employee featured. Employee representation. Employee welfare. Employee recognition Compensation plan, bonus, better pay. Loyal and retention. Duties and responsibilities. Employee good attitude Employee morale The act or process taken by Vocational development.

Training

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Education

Work related knowledge

Innovatio

company directly or indirectly to Career development. imparting skills to employees Induction programme. In house training. Recruitment. Employee assistance programme. Continuing education for employee. Any state of being trained Education level possessed by any Bachelor companys members Master PhD Professional qualification Work related Knowledge Seniority Work related Competencies Experience Work related Experience Expertise Know how Innovation is holistic and covers Development new product. the entire range of activities in Research and development business which creates value to New technology customers and satisfactorily return Creative marketing strategy to business. Add new product line Innovation appears in product and services, human resources management, procedure, organization structure and many things.