CHAPTER 5

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

The relationship between good corporate governance and firm performance has been a
topic of study for many academic researches. However, there are still gaps and deficiencies when
it comes to determining correlation between the two variables.

Summary of Findings
The corporate governance practices employed by the selected companies were gathered
and assessed using the ICD Scorecard. The results showed that a reasonable degree of
compliance was achieved by the companies of around 50% to 80% for all components of the
scorecard which denoted that these Malaysian publicly listed companies have reasonably good
corporate governance practices. Moreover, as per industry purposes, the real estate industry
showed the highest degree of compliance to the code of corporate governance due to the
intervention by stricter regulatory bodies, as compared to the other industries.
The financial performances of the companies were assessed using the DuPont Model to
determine their respective ROE. These figures were compared with the industry averages to
determine its reasonableness. The companies that revealed to be outliers in relation to other
publicly listed companies and their respective industries were not included in the analysis of the
correlation so as not to distort the results.
The findings of the study had led the researchers to conclude that there is a weak negative
correlation between good corporate governance practices and ROE. One reason for the negative
correlation is due to the use of the ASEAN ICD Scorecard. According to Chuanrommanee et al.
(2007), the analysis of good corporate governance practices using the scorecard or checklist may

not be sufficient to fully determine the actual corporate governance practices because the formal
acceptance of regulations does not mean commitment, especially in Thailand and Malaysia
where the regulatory standards were rated high, but enforcement was very weak.
Another factor that the researchers considered in concluding the weak negative
correlation is that ROE may not be a good indicator of financial performance. It does not follow
that if the company has good corporate governance practices, its ROE will be high as well. The
difference lies with how a company finances its operations. If a company uses more equity
financing, it may still result to low ROE. On the other hand, if a company is highly levered with
more debt financing, its ROE will still be high. The implementation of a companys good
corporate governance practices will not affect ROE as much as a firms capital structure would.
Hence, it does not follow that if a company has good corporate governance practices, its ROE
will be high as well.
A framework for indicators of good corporate governance was developed that addressed
only those positively correlated components, namely Rights of Shareholders and Equitable
Treatment of Shareholders, which may have an impact on a firms performance as measured by
the ROE. These specific parts of the scorecards have found out to be directly related to the
companies financial performance, which means that the stricter the companies comply with
what these components represent, the more that there will be a positive impact to these
companies Return on Equity. ROE becomes directly affected by the degree of compliance to
these specific parts of the scorecard (A and B) because net income and equity are the main
figures that are affected especially because the aforementioned components of the scorecard are
all about shareholders. Thus, as shareholders receive the much importance and treatment they

deserve, the company gains a positive image within the industry and attracts more investors
which helps boost the companys financial performance, especially its net income.

Conclusion
The initial objective of the proponents was to create a framework for indicators of good
corporate governance practices, which would affect a firms profitability measured in terms of
return on equity (ROE). The study, however, showed an overall weak negative correlation
between good corporate governance practices and ROE. This negative correlation denotes that as
these companies further increase their compliance to the scorecard, a negative impact can be
experienced as regards their ROE. Likewise, a more favorable impact to ROE can be achieved
when compliance to the scorecard becomes slack. However, certain components were positive,
thus framework indicators were created for the same. These components which resulted to the
positive correlation were found out to be more on the shareholders side as to their involvement
with the companies relations. So, a framework in relation to such would help the companies
improve performance, specifically the components of Return on Equity.
In contrast, when comparing results on a per industry basis, positive weak correlations
were derived for the banking and real estate industries. The researchers concluded that because
banks are, by nature, heavily financed with debt, this would result to a high ROE. Without
regards to the governance practices of the bank, the ROE would still be high. The positive
correlation of the real estate industry is due to its strict compliance with the code of corporate
governance as required by regulatory bodies. The individual companys ROE is in tune with the
average industrys ROE. Thus, real estate industry depicts a positive correlation.

It appears that there is no clear consensus on the matter of correlation between good
corporate governance and firm performance in the study of academic literature. What can be
inferred is that some aspects of good corporate governance have been individually and separately
associated with high firm performance.

Recommendations
The researchers have formulated the following recommendations:

The implementation of good corporate governance practices is costly. If these

costs exceed their benefits, it would not be reasonable to implement such
practices as it would eventually decrease firm performance. Firms should
implement only those policies on corporate governance when benefits exceed

costs.
These companies should focus on strengthening their good corporate governance
practices, especially on Shareholders Rights and Equitable Treatment of
Shareholders because these two, individually and separately, have the strongest

direct relation with the firms financial performance.

For future researches, other measures of profitability should be taken into
consideration in correlating it with good corporate governance practices employed
by the company. These measures can provide a more reliable basis on assessing
how a company performs within the industry it is in. The study should not
constrict itself within Return on Equity only as the measure of financial
performance because such does not completely consider other factors of
performance or the manner of financing operations.