The Determinants of Corporate Board Size and Independence: Evidence from Malaysia

Abstract

Board of directors has gained much attention in improving corporate governance in recent years. Many reforms have been done to ensure that board of directors is effective. In general, the codes of good governance in many countries, including developed and developing markets call for greater independent directors in the board. In Malaysia specifically, Malaysian Code on Corporate Governance codified the best practices of good governance and described optimal corporate governance structures. All these reforms show the importance of composition of boards in playing their role as advisors and monitors to the management activities. Our study investigates the determinants of board structure for Malaysian firms from year 2000 to 2007 by grouping the existing theory into 2 hypotheses. We also examine corporate board structure trends and the compliance level of board of directors in Malaysia with the requirement in Malaysian Code on Corporate Governance. Overall, we find that the board independence shows an upward trend throughout the years. Our results also suggest that board size is correlated with the operation level of the firms and the measures in monitoring costs to determine the board independence are consistent with the monitoring hypothesis prediction.

Keywords: corporate governance, board structure, Malaysian Code on Corporate Governance

JEL Classification: G30, G38