Corporate governance : the effect of Shariah supervisory board on Malaysian financial institutions’ performance

This study explores the performance of Malaysian financial institutions and identifies the effectiveness of Shariah Supervisory Board (SSB) as a corporate governance mechanism. Despite the importance of the subject matter, little research has been carried out on the influence of Shariah Supervisory Board as a corporate governance mechanism on firm performance in Malaysia. The conceptual framework describes how firms’ performance is influenced by the presence and absence of SSB. In the framework, the corporate governance variables are Board size, number of non-executive directors, number of women directors, number of committees, number of board meetings, company age, SSB size, SSB women directors and qualification of the SSB directors. The dependent variable of firm performance is assessed by measuring financial performance ROA (Return on assets) and market value (Tobin’s Q). This study primarily employs the agency theory to investigate the relationship between corporate governance and firm performance. It has been argued that board of directors; ownership concentration and managerial ownership are efficient corporate governance mechanisms for solving the agency problems between shareholders and management. The study used the quantitative research method in which secondary data, comprising of the annual reports of the selected Malaysian financial institutions, was used to extract data. This study’s sample of financial institutions’’ was selected based on the DataStream database while data, related to governance-specific variables such as board-size, non-executive directors, women-directors, Shariah supervisory board-size and number of committees, was collected by hand, using the annual reports of each financial institution. To obtain quantitative measures of descriptive statistics, pair wise correlation and OLS (ordinary least square) STATA was used as a methodological tool to analyse the data. The findings of this study revealed that good corporate governance practices have positive effects on firm performance. This study also finds that SSB characteristics have less influence on the Malaysian firm performance, so when it works in association with other board of directors, it results in better firm performance. This suggests a complimentary role of SSB. Keywords: Corporate Governance, Shariah Supervisory Board, Financial Institutions, Malaysia, Board Size, SSB Size, Firm Size, Firm Performanc