1.

0 LITERATURE REVIEW
1.1 INTRODUCTION
Corporate governance is the board term describes the rules, processes, and laws that
direct the organization and corporation in which they are operated, controlled and
regulated (H.Khan, 2011). Basically it defines the rights and responsibility of the
corporate participants to achieve the goal of the organization and manages the
relationship among the shareholders, boards of directors, officer and managers and
other stakeholders.

According to Chung et. Al, poor governance increases the information asymmetry
which implies operation efficiency and poor financial. Due to this, corporate governance
affects stock market liquidity and increases the information asymmetry between insiders
and outside owner or liquidity provider.

Previous research in corporate finance claims that a firm performance will be

improved with better corporate governance. (Metrick,2003, Cremer and Nair,2005).
Furthermore, the firms with good corporate governance are preferable for the investors.
When the quality of the corporate governance improves, the increases of the firm value
and the decreases of equity cost decreases will be noticeable by the investor. (Loukil and
yousfi ,2010) . Furthermore, according to Mitton,(Mitton,2002), companies with better
corporate governance have an incentive to send signals to investor regarding their higher
expected future share performance, strong governance, survival and sustainability.
A firms corporate governance can be influenced by internal factors and external
forces. Internal factors are shareholders, board of directors, and officers while the
external forces are clients, supplier, creditor, competitors and government regulation.
Desired governance system helps to shape a firms corporate governance structure and
may lead to the improvement of the firms performance and consequently more access to
outside capitals of company, thus, providing the sustainable economic growth. Effective
implementation of governance system leads to resources allocation which associated
with productivity and stability growth.

A governance system with high quality includes tools and mechanisms that ensure
followings: target management follows to maximize investors' wealth and prosperity;
company legislation protects rights of minority shareholders and limits controlling
shareholders; Most board members are non-binding members (Fox and Heller, 2000).
.

1.2 EFFECTIVE CORPORATE GOVERNANCE

Gala, (Hinty Gala, 2011) mentioned that an effectiveness of governance system

depends on application principles and guidance standards in firm. These principles may
have benefits such as solving issues related to conflict of interest, control and
transparency increase for shareholders. According to McGee (2009), good corporate
governance helps the firms to increase its share price which makes it easier to obtain
capital. Futhermore, Okpara stated that international investors tend to be reluctant in
buying shares or lend money in a corporation with poor governance principle (Okpara ,
2010).

Effective Corporate Governance maximizes the return to the firm by imposing a

discipline on firm. Based on Salacuse, toward the expansion of creation of more
competitive market economies and private sector, an effective system is the key variable
which enabling countries to derive real economic benefits prior to these changes.
(Salacuse, 2002). Moreover, an effective system of corporate governance provides the
framework within which board, management , stakeholders and other stakeholders
address their respective responsibilities (Oghojafor et.al,2010) .

Through an effective system of governance, firms may avoid costly litigation by

ensuring compliance with applicable laws and regulations(Evans et.al,2004). Pertaining
to market liquidity, it will generates an environment which is characterized by fair rules
and transparency of play that motivates stakeholders to continue providing funds.
According to Brockman and Chung, the stakeholder will perceive an adequate level of
compensation for the risk they bear, enhanced corporate governance standards should
facilitate market liquidity (Brockman and Chung, 2003).

Through several channels, corporate governance quality may affect aggregate

economic activity. For instance, improvement of the corporate governances quality may
impact gives a good growth by increasing the supply of credit and lowering firms cost of
funds. Thus, it encourages the investment. As a results from productivity and align
managers, the corporate sector may be allocated economically and more efficiently
along with wide productivity growth.

1.3 INDIVIDUAL INVESTOR VERSUS INSTITUITIONAL INVESTORS

There are two broad classes of owners. They are an individuals and institutional. By
differentiating these classes, it would help to gives better understanding of the role that
shareholders play in shaping a firms corporate governance.
1.3.1 Individual Investors
Individual Investors own relatively small quantity of shares which is not
sufficient to directly influence the corporate governance. Individual investors are
often acts as a group by voting collectively on corporate matters in order to
influences the firms.

1.3.2 Institutional Investors

Institutional investors are major player in the global economy and also are an
asset owners and asset managers with equity holdings in corporations listed on
Bursa Malaysia. Investment professional such as banks, insurance companies,
mutual funds, pension funds, that are paid to manage and hold large quantities of
securities on behalf of others. Due to the stake they hold, institutional can exert
significant influence over their investee companies. Due to this, it provides them
with opportunity to encourage appropriate behavior and good governance by their
investee companies which ensure sustainable long-term value for their
beneficiaries or client. The activities of institutional investors include managing and
allocating funds, awarding investment mandates, monitoring investment activities
and designing investment policies and strategies.
1.3.3 Malaysian Code on Corporate Governance
The initiative started with the establishment of Finance Committee on
Corporate Governance in 1998 consisting of both government and industry. The
released of the Malaysian Code on Corporate Governance by the Committee in
March 2000 is an evidence of the recognition of corporate governance in Malaysia.

There are four areas focuses in the principles from the report. Those are board
of directors, directors remuneration, shareholders and accountability and audit.
The code is similar to the Combined Code on Corporate Governance (United
Kingdom) and is hybrid in nature. Under the approach, the companies in Malaysia
should apply the broad principles of good corporate governance sets out by the

code flexibly and with common sense to the varying circumstances of individual
companies.