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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 aggregateeconomic 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.


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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. Thereleased 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


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

companies.