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  • 1. The Effects of Corporate Governance Initiatives on Corporate Entrepreneurship Performance in GLCs Harry Entebang Shazali Abu Mansor Irma Yazreen Md Yusoff Faculty of Economics & Business, Universiti Malaysia Sarawak AbstractPrior to the Asian Financial Crisis in 1997/98, many large and established organizations in Asiaappeared to have ignored the importance of corporate governance. However, many argued that poorgovernance was a major cause of the crises. Admitting this, as well as to protect and enhanceshareholder value and the financial performance of firms the Malaysian Code on Corporate Governance(Code) was issued and this marked a significant milestone in corporate governance initiatives inMalaysia. Consequently, public listed companies including Government-linked companies (GLCs) havestarted to issue a statement on corporate governance which highlights and describes the principles andbest practices of good governance in their organizations. On the other hand, the practices of corporategovernance have led to too much control and ways of restraining corporate decisions. Given this, thepurpose of this paper is to investigate the extent to which corporate governance initiatives haveinfluenced corporate entrepreneurship performance in GLCs. While recognizing the importance ofcorporate governance, the results of the content analysis suggest that too much corporate governanceappeared to have a negative effect on the extent to which organizations have pursuedentrepreneurial activities.Keywords: Corporate Governance, Corporate Entrepreneurship Performance, Government- Linked CompaniesIntroductionIn the pursuit of competitive advantage, superior financial performance and growth, large andestablished organizations appeared to have ignored the significance of practicing corporategovernance to the highest standards. However, since the early 1990s, corporate governance hasreceived increasing attention from regulatory bodies and practitioners worldwide (Cheung &Chan, 2004). Even though most studies do not suggest that Asian firms were badly managed(Claessens & Fan, 2002), scholars and practitioners continue to argue that weak regulatorysystems and poor governance have caused corporate failures of most organizations in Asia. Infact, the Asian Financial Crisis of 1997/98 is regarded as a crisis of corporate governance. 1
  • 2. Recently, the global financial crisis caused by the US subprime problems has once againtriggered the need for conformance on principles of good corporate governance (Santiago, 2009).On the other hand, for organization to achieve superior performance, instituting and practicingtoo much corporate governance may appear to strangle corporate entrepreneurship performanceof the firm (Taylor, 2001). In fact, Taylor observes that after Enron and WorldCom, USpoliticians and regulators are convinced that chairmen, CEOs and board of directors have beentoo entrepreneurial and they have neglected their attention on corporate governance and henceargues that corporate governance and entrepreneurship remains a highly controversial subject(Taylor, 2003).Using the conceptual perspective of content analysis, this paper examines the extent to whichcorporate governance practices may affect or influence entrepreneurial activities/behaviour inlarge and established government-linked companies in Malaysia. The outcomes of the semi-structured interview suggest that corporate governance have significantly influenced corporateentrepreneurship (CE) performance in these companies.Literature review and theoretical foundationOver the last decade, organizations in North America, Europe and Asia have undergoneunprecedented transformation. In Asia particularly, forces like market changes, rapidtechnological changes, industry life-cycle, government intervention, uncertainty of the financialmarkets and the effects of the Asian 1997/1998 economic crisis, as well as the need to deliverhigh quality products and services due to an intensity of competitive pressures resulting from theimplementation of the ASEAN Free Trade Area (AFTA), have also forced many Asian corporateleaders to rethink the strategic positioning of their business organizations (Entebang, 2010). Infact, Dess et al., (1999, p.85) observe that “intensifying global competition, corporatedownsizing and delaying, rapid technological progress, and other organizational factors haveheightened the need for organizations to become more entrepreneurial in order to survive andprosper.” Subsequently, scholars within the field of strategic corporate entrepreneurship suggestthat to be successful firms must have the capacity to innovate faster than their best competitors 2
  • 3. (Teng, 2007) and stay entrepreneurial (Thornberry, 2006). Consequently, corporateentrepreneurship is fast becoming a weapon of choice for many large, established companies ororganizations because it entails both the mindset and skills demonstrated by successful start-upentrepreneurs, and the inculcation of these entrepreneurial characteristics into the culture andactivity/behaviours of the large organizations (Thornberry, 2001).Nonetheless, in pursuit of superior performance, large and established organizations in Asiaappeared to have ignored the importance of corporate governance. In fact, many argue that poorgovernance was a major cause of the crises. Admitting this, the Malaysian Code on CorporateGovernance (Code) was issued in March 2000 and this has marked a significant milestone incorporate governance initiatives in the country (Securities Commission, 2007).Corporate governance (CG) refers to the system through which the behaviour of an organizationis monitored and controlled (Cheung & Chan, 2004) as well as by which firms are owned andmanaged (Krafft & Ravix, 2005). It outlined the principles and best practices of good governanceand described optimal corporate governance structures and internal processes (SecuritiesCommission, 2007). In fact, in knowledge-based and advanced economies, new principles ofcorporate governance have been oriented towards the maximization of shareholder value (Krafft& Ravix, 2005). These new principles of CG driven by shareholder value appear to suggest threethings: (a) financial considerations have a central role in the way organizations are governed, (b)information asymmetries between the different actors (i.e., between management andshareholders) have to be eliminated, and (c) a contractual structure of organizations have to begeneralized within the firm (OECD, 1999).However, given the unpredictable market conditions, organizations are exposed to economic andfinancial risks and this would eventually destroy shareholders’ value. Hence, the principles ofgood corporate governance have been introduced to increase companies’ internal efficiency, andto favor investments through financial markets (Krafft & Ravix, 2005). In fact, Kraft & Ravixnoted that “maximizing the shareholder value in corporate governance greatly favored thefinancing of emerging firms via the stock markets and the acquisition of new knowledge andcompetencies on the basis of mergers and acquisitions over the period 1998-1999” (Krafft & 3
  • 4. Ravix, 2005, p.126). Besides, good CG has been recognized as essential for establishing anattractive investment climate characterized by competitive companies and efficient financialmarkets (OECD, 2003). On the other hand, such an emphasis has greatly affected the viability ofcompanies and this has resulted in over-investment, excess capacity, downsizing, and a sharp fallin the share price, revenue and profitability (Krafft & Ravix, 2005). Consequently, CG couldhave accelerated the process of financial crisis, and contributed high turbulence in firms’demography and dramatic changes in market shares (Lazonick & OSullivan, 2002).On the other hand, corporate entrepreneurship (CE) refers to entrepreneurial activities withinexisting business organizations (Schollhammer, 1982). Later, Antoncic and Hisrich (2004)appear to share the same view and define CE as entrepreneurship within an establishedorganization. Alternatively, Zahra (1995) views CE as the sum of an organization’s innovation,renewal, and venturing efforts. An alternative view is that CE is a process whereby theorganizations engage in diversification through internal development (Burgelman, 1983).Stevenson, Robert and Grousbeck (1989) also perceive CE as a process which individuals _ eitheron their own or inside organizations _ pursue opportunities without regard to the resources theycurrently control. Within the same line of thought, CE is further defined as the process wherebyan individual or a group of individuals, in association with an existing organization, create a neworganization or instigate renewal or innovation within that organization (Sharma & Chrisman,1999). However, other scholars suggest that CE is primarily concerned with entrepreneurialbehaviour inside established mid-sized and large organizations (Morris & Kuratko, 2002).Therefore, corporate entrepreneurship appears to have a multiple definitions (Entebang, 2010),nonetheless most entrepreneurship scholars seem to agree that CE activities focus primarily oninnovation, strategic renewal and corporate venturing aspects of the organization (Teng, 2007;Zahra, 1993) which may contribute to organization’s survival and performance (Covin & Slevin,1989; Drucker, 1985; Lumpkin & Dess, 1996; Miller, 1983; Zahra, 1993).Consequently, scholars argue that organizations with high levels of corporate entrepreneurshipare more likely to perform better than those with lower levels of CE (Antoncic & Hisrich, 2004).In fact, they find that corporate entrepreneurship is strongly, positively and significantly relatedto organizational growth, profitability and new wealth. Hence, they argue that corporate 4
  • 5. entrepreneurship appears to be a good direct predictor of organizational performance (i.e., wealthcreation, growth and profitability).Building on the above literature, it is clear that effective and good corporate governance isnecessary but due to intensifying global competition, rapid technological progress, and otherorganizational factors the need for organizations to become more entrepreneurial throughcorporate entrepreneurship remain one of the keys to competitive advantage. Therefore, althoughmanagers of organizations are legally responsible to the shareholders (Allen & Gale, 1998),however, in practice managers do not appear to pursue the interests of shareholders (Berle &Means, 1932). Given this, the issue between legal rights of shareholders and the de facto controlof managers proposed by Berle and Means led to the conceptualization and development ofagency approach to corporate governance (see also Jensen & Meckling, 1976).Problem statementIn most emerging economies, government-linked companies (GLCs) or public enterprises (PEs)still represent a substantial part of gross domestic product (GDP), employment and marketcapitalization. Moreover, GLCs are often prevalent in several key sectors of the economy, whoseperformance is of great importance to broad segments of the population and to other parts of thebusiness sector (Putrajaya Committee on GLC High Performance, 2006). However, theperformance of GLCs continues to be a major concern (Putrajaya Committee on GLC HighPerformance, 2005). Therefore, building on corporate entrepreneurship literature there is anurgent need for these companies to be more entrepreneurial. On the other hand, there has been agreat emphasis to institute corporate governance initiatives by enhancing board effectiveness andstrengthening directors capabilities in GLCs. In most Organization for Economic Co-operationand Development (OECD) countries, the governance of state-owned enterprises (SOEs) forinstance has been regarded as critical to ensure their positive contribution to a country’s overalleconomic efficiency and competitiveness. Besides, OECD experience has also shown that goodcorporate governance of SOEs is an important prerequisite for economically effectiveprivatization, since it will make the enterprises more attractive to prospective buyers and enhancetheir valuation (OECD, 2005). 5
  • 6. Building on an agency perspective of CG in which the division between financing (risk-taking)and managing/controlling functions leads to difficulties i.e., principal-agent problems in relationof managers (the agent) and owners (shareholders) or the principal proposed by Krafft & Rafix(2005), the key research question of this investigation is to what extend the practices of corporategovernance by GLCs have influenced the corporate entrepreneurship performance in thesecompanies.Research designBuilding on past literature of CG and CE, pre-determined questionnaires were prepared toassist/guide the interviewer during the interview. Senior executives or managers in GLCsinvolved with CE initiatives or activities in their organizations were identified and approachedfor interview. All interviews lasted between forty-five minutes to an hour. To ensure a highdegree of accuracy, all interviews were tape recorded and subsequently transcribed intoMicrosoft Word. The data was later converted into Rich Text Format (RTF) and imported toMAXQDA 2007, qualitative software for processing qualitative data and text analysis. A total often senior managers participated in the exercise.Since data reduction is a key element of qualitative analysis, effort was made to ensure thequality of the qualitative data was respected and this was achieved through content analysisprocedures (Cohen, Manion, & Morrison, 2007). It is argued that the content analysis techniqueis recognized for its efficiency and reliability (Namey, Guest, Thairu, & Johnson, 2007). Despitethis, it has been argued that the problem of reliability may still prevail because coding errors canonly be minimized, and not eliminated (Gottschalk, 1995).Once the data were coded and categorized, data analysis was done by retrieving text based oncategories rather than only single words (Weber, 1990), because categories tend to retrieve morethan single words, drawing on synonyms and conceptually close meanings. Therefore, in thisstudy, the data was categorized using codes as well as sub-codes based on its themes or conceptsand not numbers/frequencies. Support for the theme and the sub-themes was presented throughuse of key relevant quotations or excerpts drawn from the data transcriptions (Zhao, 2005). Thisis an established technique used to demonstrate the validity of the findings in qualitative research 6
  • 7. (Whitemore, Chase, & Mandle, 2001). Building on descriptive evidence, appropriate explanationfor the situation was highlighted and discussed.Findings and discussionThe goals of the interview were to find out and examine the perception of senior managersregarding the extent to which corporate governance initiatives/practices have influencedcorporate entrepreneurship performance in their organizations over the last three years. Uponexamination of the interview transcripts, the results were divided into three major sub-themes,the significance of corporate governance; challenges in implementing corporate governance, andthe effects of corporate governance on corporate entrepreneurship performance in GLCs. Table 1depicts the major theme and the sub-themes of the data.Table 1 Major Theme and Sub-ThemesMajor Theme Sub-themesCorporate Governance  The significance of corporate governanceInitiatives  Corporate governance and its challenges  Corporate governance and its implications on corporate entrepreneurship performanceThe significance of corporate governance in GLCsThe Asian Financial Crisis in 1997/1998 has served as a wake up call to many multinationalcorporations (MNCs) in Asia including GLCs in Malaysia. Further more, the introduction of theASEAN Free Trade Area (AFTA) aiming to reduce tariff barriers among member countriesthrough the Agreement on the Common Effective Preferential Tariff (CEPT) scheme madeASEAN a full free trade area in 2008 (Hapsari & Mangunsong, 2006). Recently, the effects ofthe credit crunch, the collapse of Wall Street and the increase of fuel prices have become a globalpressure that affects every sector of the global economy. The accumulation of these forces has inturn become a major global and market force that compels organizations including GLCs torethink the way they should conduct their businesses. Given the effects of such phenomena, the 7
  • 8. Code was adopted to enable public organizations including GLCs to set out principles and bestpractices on structures and processes that will safeguard shareholders interests and eventuallystrengthen their competitiveness. Generally, majority of the managers recognized the importanceof CG in their organizations. For instance, one senior manager stated that, “one of the bigproblems within an established organization is that sometimes decisions are being made by oneperson and therefore the risk of making wrong decision is higher. That‟s why we need differentpeople, people with different experiences, people who can look at things differently even thoughthis may slow down the decision-making processes of the firm. But such checks and balances willensure that decisions will be made optimally by collective group of professional managers.Therefore, given the importance of corporate governance in our organization, we have one keyfundamental operating control document called the Limit of Authority (LOA), where financialdecision by any manager is made within his or her limit of authority”.Within the financial sector, the importance of effective corporate governance is even crucial.Banks and other financial institutions are highly regulated merely because they are thecustodians of public money. According to one of the senior managers, “corporate governance in……(name of bank) involves the entire employees of the organization”. As a result of financialturmoil in 1997/1998, banks are becoming more prudent. Consequently, the roles of non-executive directors are becoming highly relevant in ensuring the rights of investors are properlyprotected”.In another organization, a senior manager argues that, “having good corporate governance willensure company‟s profitability because good corporate governance indicates that money is spentwisely on various projects”.In another company, a manager stated that “corporate governance does give us confidence thatwe are doing things right. In fact, we have been recognized by other institutions for having goodcorporate governance. On this basis, I do believe that bankers and other financial institutionshave actually invested or granted us loan because they know we have got good corporategovernance in place. 8
  • 9. From the excerpts of the interview, corporate governance initiatives in GLCs are inspired by theneeds to minimize losses through effective checks and balances, protect the rights of investors,gain confidence among stakeholders and ensure company’s profitability. These initiativesappeared to concur with the work of Cheung & Chan (2004) where they discovered that a keyaspect of corporate governance in Asia is to improve investor protection and by so doing willenhance the development of local capital markets and promote foreign direct investment forlong-terms economic prosperity.Corporate governance and its challengesRegulators and practitioners tend to argue that good corporate governance initiatives aredemonstrated by strict compliance of rules and other regulatory requirements. By doing so,companies and organizations will be able to improve their performance, competitiveness andsustainability. On the other hand, there are numerous challenges at firm or organization level.One of the senior managers of a listed company argued that as a result of strengthening the rolesof independent directors, although “we have promising project(s) with another associated listedcompanies….(name of company), but because of corporate governance issues, at times even wewere the lowest in terms of contract pricing, we still did not get the job(s) and this can be verydisappointing. Hence, for the sake of adhering to the Code, we are losing the opportunity andthis can affect our performance”.In adopting corporate governance initiatives within an organization, one of the senior managerspointed out that “corporate governance is good for the country and it is also good for the groupas a whole, however, when we actually apply it, it makes our tasks become more difficult. Giventhe size of our organization, we have to go to the Board for approval before we could participatein any new project especially if the proposed project(s) is RM200 million and above but to us,this amount is very small. Therefore, by going back to the Board for approval has actuallyslowed down the decision-making processes of the company. This doesn‟t help us in a waybecause tenders are normally very short, say within a month. On the other hand, we have toschedule for a meeting to take place for our directors and this is not always easy. Very often than 9
  • 10. not, they want you to show them that the proposed projects will be able to generate some levelsof profit margin. Therefore, this has been a great challenge for us‟.From the excerpts above, the key challenges of corporate governance initiatives in GLCsappeared to be in the area of effective implementation, while the issue of board compositionpertaining to number of independent non-executive directors remains a debate among regulatorsand practitioners. For instance, Cheung & Chan (2004, p. 19) observed that “the issue of boardcomposition might not necessarily provide a strong system of checks and balances between theinterest of the major shareholder and that of the minority shareholders. Since directors areelected by the controlling shareholders, it is unlikely that the number of non-executive directorswill provide an adequate degree of monitoring of the majority shareholders or be able to exert astrong influence on major corporate decisions. The role of such non-executive directors,however, may serve an advisory purpose in the decision-making process”. Given this, the studyhas advanced our understanding in terms of its practicality.Corporate governance and its implications on corporate entrepreneurship performanceThe key research question of this study is to what extend do corporate governance initiativeshave influenced the corporate entrepreneurship performance in GLCs. Generally, most managersindicated that the ability to pursue corporate entrepreneurship activity is strongly influenced byinstitutionalization of corporate governance framework in their organizations. Although theultimate goal of any organization is to enhance shareholders value, through various CE activitiesbut their abilities to demonstrate proactiveness, risk-taking and innovativeness are constrained byrules and regulations. As one of the senior managers put it “although we have corporategovernance in place, but we still make losses from our projects in the Middle East. This wasmainly because of different management team and the situation at that time was unpredictable.Since then, we really need to convince our directors. In fact, construction business is verychallenging, our environment and condition today can be very different from that of tomorrowand therefore we really need to adapt to changes fast. However, given all these corporategovernance things i.e., rules and restrictions, it is very difficult for us to move on”. 10
  • 11. In fact, another senior manager claimed that the presence of corporate governance in publicorganizations does empower “board of directors of the company to challenge every ideapresented to them and this has subsequently put down many good ideas and proposals”. Thisargument is consistent with another senior manager in other company. The manager pointed outthat “actually corporate governance plays heavier role than the pursuit of corporateentrepreneurship activities! This is because doing it right or doing the right things is one of themain reasons as to why top management is very careful with their decisions especially when itcomes to new venture(s) or other CE initiatives simply because they are answerable to the board.After all, the company will be putting in a lot of money without seeing any return for severalyears. Therefore, I personally feel that given the importance of corporate governance inminimizing risks associated with new projects or ventures, it does hold back CE activities as faras venturing into new projects in a new territory is concerned simply because people are afraidof failures”.Within an established and diversified group of companies, there is a need for them to strike abalance between corporate governance and corporate entrepreneurship even though Taylor(2001, p. 128) has strongly proposed that “board members should focus more on the central taskof the board which is „corporate entrepreneurship‟ — creating conditions for corporate renewal,encouraging the development of new activities and the elimination of old ones”. However, one ofthe senior managers has pointed out that “we have to achieve a balance between governance andour entrepreneurial activities so that we will not simply risking our capital or money on nonfeasible/reliable project(s). In fact, more often than not most people do not see the potentials ofcreativity and innovation and these are some of the downside of viewing ideas/proposals fromthe perspective of corporate governance. Therefore, corporate entrepreneurship activities tendto be affected by rigidity of corporate governance…despite this, innovation is part of our visionand we have to be innovative in everything we do. On the other hand, we also believe that goodcorporate governance will drive the shareholders value because it ensures the accuracy ofshareholders value. Nonetheless, overall, corporate governance has a negative effect on ourentrepreneurial performance”. 11
  • 12. In a separate interview with another senior manager, he also argued that corporate governancehas negative effects on corporate entrepreneurship in his organization. However, he recognizedthe importance of having good corporate governance while pursuing various corporateentrepreneurship activities. He stated that “it is the innovation that actually drives our progressand development”. Building on this, the outcomes of the study appears to be quite consistentwith the work of Taylor (2001).Conclusion, limitations and future researchCorporate governance (CG) has received considerable attention in recent years among scholars,practitioners and regulatory bodies especially after the financial crisis in 1997/1998. A review ofthe literature on corporate governance and corporate entrepreneurship confirms that, both areimportant but for an organization to move forward it needs to strike a right balance. The studyshows that too much corporate governance may have a negative effect on the extent to whichorganizations will pursue entrepreneurial activities. Hence, although managers as agents shouldconform to the practice of good corporate governance but, at the same time they should notforget their primary duty i.e., to protect and enhance shareholders values. This can be achievedby putting more efforts on corporate entrepreneurship activities.On the other hand, this study has several limitations. Firstly, only ten senior managersparticipated in the exercise and this may limit generalizability of the findings. Therefore, oneshould be very careful when interpreting the outcomes of the study. In addition, this is a crosssectional study and for better understanding of the subject, the study should be conducted onlongitudinal basis using an in dept interview instead of the semi-structured approach. Futureresearch should consider the extent to which the relationship between CG and CE is mediated ormoderated by internal and external organizational factors. 12
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