The Outcome of Politically Connected Boards on Commercial Bank Performance in Malaysia

Abstract

This study draws on upper echelon theory (Hambrick & Mason, 1984) to examine whether the demographic characteristics of politically connected board members affect commercial bank performance in Malaysia. Interaction effect between age, ethnicity, and the political connections of board directors demonstrates that commercial bank performance depends on the presence of non-ethnic minority elder directors who have political connections with higher government authorities. The findings have important implications for corporate governance in commercial banking sectors in Malaysia. Although bank performances are impressive, the valuable human capital resources of board members who have diverse skills and backgrounds remain underutilized. Improving corporate governance performance through better use of human capital resources is of paramount importance for an effective business strategy that facilitates creativity and innovation. Government-Linked Companies (GLCs) should reengineer strategies to support the private sector, instead of crowding out private investment.

Keywords: Malaysia, board characteristic, firm performance, politically connected, commercial banks

JEL Classification: L25, M21