Corporate risk-taking and performance in

Malaysia: the effect of board composition,

political connections and sustainability
practices
Lee-Lee Chong, Hway-Boon Ong and Siow-Hooi Tan

Abstract Lee-Lee Chong is Senior

Purpose – This paper aims to examine how board composition, political connections and sustainability Lecturer at the Faculty of
practices affect risk-taking and performance of firms. Management, Multimedia
Design/methodology/approach – This paper used secondary data and regression technique to University, Cyberjaya,
analyse the relationship. A sample consisting of 290 firm-year observations was applied in the analysis. Malaysia.
Findings – The findings show that a larger board size contributes to greater financial risk; however, this Hway-Boon Ong and
risk can be reduced with more independent directors in the boardroom. An optimal board size with Siow-Hooi Tan are both
appropriate number of independent directors is desired, as a large board size can be harmful to firm
based at the Faculty of
performance. Politically connected firms also generate lower risk-taking and performance, and the
Management, Multimedia
double-edged sword effect of political connections needs to be considered. In terms of sustainability
practices, firms have to engage in sustainable development to maximise the firms’ value, not ignoring the University, Cyberjaya,
vital role of women in strategising business performance. However, the effect of sustainability practices Malaysia.
on firms’ risk-taking is still not noticeable.
Research limitations/implications – Even though the sample size is not large because of the limited
availability of data, the findings, to a certain extent, could be generalised to emerging markets, as most
emerging markets do have similar financial and economic developments.
Practical implications – The findings from this paper can be used to support the implementation of
sustainability practices, especially in those countries where sustainability initiatives are yet to be widely
accepted.
Originality/value – This is one of the first few studies that examined the effect of non-financial information
on risk-taking and performance of firms. This study concludes the positive effect of sustainability
practices on firm performance.
Keywords Performance, Corporate governance, Sustainability, Risk-taking
Paper type Research paper

1. Introduction
In business, firms need to make managerial decisions and to be involved in risk-taking.
Corporate risk-taking activities can nurture long-term growth for firms (Faccio et al., 2011), but
excessive risk-taking can be harmful to firms. The re-occurrence of financial crises, for example
the Asian financial crisis of 1997-1998 and the credit crunch of 2007-2008, suggested that firms
engage in excessive risk-taking to manage their businesses. The excessive risk-taking
behaviour could exacerbate financial stability and create setbacks to economic growth. In the
present global market, corporate health is deteriorating (IMF, 2016). Firms’ vulnerabilities to risk Received 17 May 2017
Revised 16 October 2017
become acute, and they have to increase their resilience to withstand against the growing 2 February 2018
indebtedness, tighter credit situation and slowdown of the world economy. Accepted 3 February 2018

DOI 10.1108/CG-05-2017-0095 VOL. 18 NO. 4 2018, pp. 635-654, © Emerald Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 635
 In protecting the interest of stakeholders, good corporate governance practices have been
emphasised by companies and regulators. Malaysia, as an emerging market, started its
corporate governance journey back in the year 2000 after the Asian financial crisis, whereby
companies were severely affected by the financial turmoil of 1997-1998. After the episode
of financial turmoil, the Malaysian Code of Corporate Governance (MCCG) was put in place.
In 2007, the codes were revised to enhance the roles and responsibilities of the board of
directors, internal auditors and audit committees. Subsequently, the corporate governance
blueprint was outlined in 2011 to foster market discipline, and finally, the MCCG 2012 was
launched to strengthen the effectiveness of board composition and its structure. MCCG
2012 outlined broader principles and conduct of good corporate governance for public-
listed companies. Public-listed companies are required to disclose their compliance in their
annual report. This newest version emphasises the importance of board composition and
board independence. Assessment by the World Bank in 2012 on Malaysia’s corporate
governance revealed that this country was a regional leader in corporate governance, and
one of the suggested forward-moving reforms was in terms of reinforcing board
independence. Accordingly, board composition remains as the focus in corporate
governance initiatives, and it is important in driving firms’ competitiveness. Consistent with
most previous research, for example in Sener and Karaye (2014), the effect of board
composition in terms of board size, independent directors and gender diversity on risk-
taking of firms is of interest to this study.
There is a wealth of literature looking at how board composition affects firms’ risk-taking; for
instance, Huang and Wang (2015) and Nakano and Nguyen (2012) looked at board size,
Dahya and McConnell (2005) and Mathew et al. (2016) examined the independent directors
and Faccio et al. (2016) focused on gender diversity. Nevertheless, in the literature, the
nexus of board size and risk-taking of firms is ambiguous thus far. Cheng (2008) found that
firms with a larger board size tend to assume lower risk. This result is not consistent with our
findings in terms of the financial risk. We also hypothesized that female board members are
more risk-averse than male board members in decision-making (Agnew et al., 2003;
Bernasek and Shwiff, 2001). Our results do not conform to this finding but suggest that
idiosyncratic risk is higher when firms have more female board members. We also posited
that having independent directors in the boardroom is expected to lead to less risk (Mathew
et al., 2016); accordingly, the results of our study lend support to this relationship. Up to
August 2017, female board members only accounted for 17.8 per cent of the top-100
public-listed companies in Malaysia, and this figure is much lower than the target of the
Malaysian Government (The Star Online, 2017).
Stock markets in emerging markets are concentrated with politically connected firms that
hold considerable market shares. In Malaysia, firms with political connections, or the so-
called government-linked corporations (GLCs), make up almost 40 per cent of the total
market capitalisation. The GLCs play a pivotal role in the Malaysian stock market, and the
effect of GLCs is worthy of investigation. However, most of the studies in Malaysia are
focused on the effect on firm performance. In addition to the effect of GLCs on firm
performance, our study also focused on how GLCs affect firms’ risk-taking. Among others,
Boubakri et al. (2013a) have shown that politically connected firms exhibit more risk-taking,
especially for corporations with sound political connections. In the same context, politically
connected firms in China are taking more risks, and the effect is stronger for firms with
younger managers (Ding et al., 2015). The effect of firms’ risk-taking encompasses two
sides of the same coin. If risk is managed properly, it generates growth to the company.
Otherwise, excessive risk-taking could be harmful. This study sought to examine whether
firms with political connections engage in more risk and how the politically connected firms
affect both risk-taking and firms’ performance.
Apart from the effect of board composition and political connections on firms’ risk-taking,
we also gauged the impact of sustainability practices of firms on their risk-taking. The

PAGE 636 j CORPORATE GOVERNANCE j VOL. 18 NO. 4 2018

environmental, social and governance (ESG) indicator was used in this context to check
whether firms taking initiatives to practise sustainable measurements in their business
dealings can reduce their risk. Our study adds to the literature by incorporating the new
indicator, ESG, to examine the effect of sustainability practices of firms on their risk-taking.
Motivated by the study of Jiraporn et al. (2015), who examined various aspects of corporate
governance on risk-taking of firms, especially on the aggregate quality of corporate
governance, this study aimed to assess the effect of board composition, political
connections, aggregate governance score (GS) and sustainability practices in term of ESG
score on risk-taking of firms.
In this paper, we used several alternative measures of corporate risk-taking, including stock
price volatility or total risk, idiosyncratic or firm-specific risk and financial risk. Our results
document that the greater the companies engaged in corporate governance practices, the
lower the stock price volatility would be but the higher the leverage risk. The sustainable
initiatives that firms take did not significantly reduce their risk-taking. Instead, firms in
Malaysia were found to practise corporate governance mechanisms more commonly, and
its impact was found to be more pronounced than sustainable practices. Overall, firms still
endeavoured less in sustainability efforts, as their average ESG score was lower than their
GS by more than double.
Besides looking at the risk-taking of firms, firm performance is also an important aspect
to examine. On the determinants of firm performance, excessive risk-taking of firms
would impact firm performance negatively (Fiordelisi et al., 2011). The detrimental
performance effect of politically connected firms could be seen from our findings, and it
was more pronounced when we controlled for governance and sustainability factors.
Our study also ascertained the importance for firms to align their businesses towards
accountability for ESG, as the compliance would promote better firm performance. The
positive relationship between firm performance and environmental concerns is
supported by Flammer (2013), whereas Gompers et al. (2003) and Cretu (2012)
revealed that good corporate governance and firm performance are positively
correlated. In addition, Chelawat and Trivedi (2016) showed that a good ESG score
could improve firm performance.
Understanding the risk-taking behaviour of firms in an emerging market, in this context
Malaysia, is salient, as the current international market is globalised and strategic risk
choices and managerial decisions made by firms would have an effect on firm profitability
over the long term. Furthermore, studies on risk-taking of firms in Malaysia are still limited,
especially in relation to those that look at board composition, political connections,
governance mechanisms and sustainability practices. Many of the past studies on
politically connected firms have been focused on the firms’ performance rather than their
risk-taking. Thus, our study adds to the literature in this aspect.
The paper is organised as follows: Section 2 reports the review of pertinent literature.
Section 3 discusses the data and research methodology. Section 4 deliberates the results
and presents the discussion of the findings. Section 5 provides the concluding remarks.

2. Review of literature and hypothesis development

In current literature, not much empirical work has been carried out in an integrated
framework on how board composition, political connections and sustainability practices of
firms affect firms’ risk-taking and firm performance. Existing studies are heavily
concentrated in one specific area and on developed markets. Empirical work on
sustainability of firms is still limited, despite its popularity in current research. The following
review of literature provides a thorough summary to support the proposed hypotheses.

VOL. 18 NO. 4 2018 j CORPORATE GOVERNANCE j PAGE 637

 2.1 Corporate risk-taking and board composition
In the literature, many studies have looked at the relationship between board composition and
risk-taking of firms. The common specific board composition characteristics studied are board
size, independent directors, ownership structure and many more. In their study, Huang and
Wang (2015) reported that firms with smaller board size faced greater volatility. This result is
consistent with the findings of Mathew et al. (2016). Likewise, Nakano and Nguyen (2012) also
supported the notion that a bigger board size induces lesser volatility in bankruptcy and
performance, consistent with that reported by Cheng (2008) and Pathan (2009).
Under the listing requirement of Bursa Malaysia, public-listed corporations must have at least
two independent directors, or one-third of the board should be independent members. MCCG
2012 further recommends that independent directors constitute a majority of the board to
ensure board effectiveness. Based on the agency theory, the role of independent directors is
to provide the mechanism for monitoring to minimise the conflict of interest between the
managers and shareholders. Independent directors can make unbiased judgements and
make beneficial decisions. Linck et al. (2008) argued that independent directors bring skills,
knowledge and expertise to the firms but, at the same time, incur more cost. A higher number
of independent directors in the boardroom can ensure better decision-making by the board
(Dahya and McConnell, 2005) and profit efficiency (Hardwick et al., 2011). Mathew et al.
(2016) believe that independent directors can lead to less risk in firms.
One of the managerial traits, namely, women in the boardroom, is also under our scrutiny,
as less attention has been paid on this trait and most research on women in the boardroom
has been carried out in developed markets (Khaw et al., 2016). Khaw et al. (2016), who
analysed Chinese firms, found that male board members tend to increase firms’ risk-taking,
but the risk is reduced if the firm is controlled by the state ownership.
In emerging markets, the number of women participating in the boardroom is still limited.
Female board members in Malaysia’s boardrooms are still short of the specified target of 30
per cent (Foo, 2016). In corporate Malaysia, 37 per cent of the top management in the
public sector was held by women. However, in the largest 100 companies by market
capitalisation listed at Bursa Malaysia in 2015, women only made up 14 per cent of the
boardroom members (Foo, 2016). The number was increased to 17.9 per cent in June 2017
(The Star Online, 2017). However, this number is considerably higher than in Singapore and
Hong Kong, where the number of women in boardrooms only came to 8.8 per cent and 9.6
per cent in 2014, respectively (Foo, 2016). Gender diversity is a vital factor in corporate
governance (Davies, 2011). Adams and Funk (2011) and Berger et al. (2014) argued that
women are more of a risk-taker than men. However, Faccio et al. (2016) mentioned that
female CEOs tend to generate lower borrowing and lower variability in earnings and have
better survival skills. Female managers behave more rationally than male managers (Jogulu
and Vijayasingham, 2015). Gender diversity will reduce firm risk (Lenard et al., 2014). In
addition, a negative relationship was also found by Mathew et al. (2016); nonetheless, the
relationship was found to be insignificant.
Based on the above discussion, this study predicted that bigger board size, higher number
of independent directors and board women can lead to lower firm risk:
H1. Board size is negatively related to firm risk.
H2. Independent directors are negatively related to firm risk.
H3. Board women are negatively related to firm risk.

2.2 Corporate risk-taking and political connections

The impact of politically connected firms on the capital market is always a concern, and the
literature suggests that government connections affect corporate risk-taking either positively

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or negatively. Malaysia has substantial market capitalisation that is controlled by politically
connected firms (Chua, 2016). Boubakri et al. (2013a) concluded that politically connected
firms take more risks, and strong firms engage in more risks than the weak firms. In the
context of China, age, politically connected firms and their political ranking affect the risk-
taking of firms, and those with younger managers take higher risks (Ding et al., 2015). State-
owned banks also face higher risks (Srairi, 2013).
Corporate insiders may have different interest on firms (Gillette et al., 2003), and one of the
corporate insiders, for instance the government, normally maintains its ownership in certain
important firms in key sector industries, for example utilities, infrastructure and
telecommunications, to pursue its social, economic and political agenda. Governments may
take less risky projects if their aim is to capitalise on social stability and employment
(Boubakri et al., 2013b). Politically connected firms have a non-linear U-shaped relationship
with risk-taking of firms (Uddin, 2016). However, Boubakri et al. (2012b) advocated that
politically connected firms face lower risk compared to their non-connected peers. The
government’s holding on firms reduces risk-taking of the firms (Boubakri et al., 2013b).
Boycko et al. (1996) supported the notion that the government will less likely undergo risky
investment, as their objective is more towards economic development and continuing to win
in the election. Likewise, the influence by the government would tend to make the firms
more conservative (Fogel et al., 2008). Al-Khouri (2012) also ascertained that government-
owned banks have lower risk than private-owned banks for the Gulf Cooperation Council
banking industry. More formally:
H4. Politically connected firms face lower risks.

2.3 Corporate risk-taking and sustainability practices

In the extant literature, little is known on the effect of sustainable practices on corporate risk-
taking. Some earlier studies, for example Boutin-Dufresne and Savaria (2004) and Jo and
Na (2012), paid attention to how corporate social responsibility (CSR) affects firm risk.
Notably, Lee and Faff (2009) suggested that firms with high corporate social performance
have lower idiosyncratic risk. The recent study of Banerjee and Gupta (2017) suggested
that sustainable practices enhance corporate risk-taking; nevertheless, their focus was on
environmentally sustainable practices.
Recent research in the area includes analysis of aggregate corporate governance as found
in Jiraporn et al. (2015); they examined the overall effect of governance on risk-taking of
firms and concluded that firms with more corporate governance face lower degree of risks.
They used self-constructed and ISS scores to measure the quality of the aggregate
corporate governance. Motivated by their study, our own research further included the
sustainability index (ESG) and GS to gauge the relationship between corporate risk-taking
and sustainability practices. Khairollahi et al. (2016) also argued that corporate
environmental practices lead to a lower firm risk. The hypothesis is posited below.
H5. Sustainability practices can lower firm risk.

2.4 Corporate performance and board composition

Past research has shown mixed findings in relation to the effect of board composition on
firm performance (Darko et al., 2016). Jensen (1993) commented that smaller boards are
preferable because they are more efficient, and similarly, a smaller board size is also
supported by Yermack (1996) and Cheng et al. (2008). On the same note, no relationship
was found between board size and firm performance (Darko et al., 2016).
In recent years, gender diversity in board composition has received great attention. Firms
with higher female board members and female top managements tend to perform better
(Farrell and Hersch, 2005; Campbell and Minguez-Vera, 2008; Adams et al., 2009).

VOL. 18 NO. 4 2018 j CORPORATE GOVERNANCE j PAGE 639

 Darko et al. (2016) also argued that female board members can increase firm performance.
In the Malaysian context, Julizaerma and Sori (2012) found a positive relationship between
gender diversity and firm performance. Using Asian data, Low et al.’s (2016) finding was
also consistent with that of Julizaerma and Sori (2012). In contrast, Carter et al. (2010) found
a non-significant relationship between gender and firm performance, whereas Adams and
Ferreira (2009) recorded a negative relationship between the two variables.
In terms of independent directors, Abor and Biekpe (2007) suggested that a higher number
of independent directors improve firm performance. Independent directors are believed to
provide skills and expertise (Wang and Hussainey, 2013); nevertheless, Azeez (2015)
claimed that independent directors do not affect firm performance. In contrast, Darko et al.
(2016) asserted that independent directors influence firm performance negatively. Thus,
three hypotheses are posited below:
H6. Bigger board size leads to lower firm performance.
H7. Female board members are positively related to firm performance.
H8. Independent directors can increase firm performance.

2.5 Corporate performance and political connections

The relationship between political connections and firm performance has been studied in
the literature; an example is the study by Wan and Hoskisson (2003). Haque and Shahid
(2016) argued that government ownership has a negative impact on firm profitability. In their
study, Chen et al. (2014) concluded that politically connected firms obtain better firm
performance, especially in high-barrier industries. In the context of China, politically
connected firms have a positive effect on firm performance (Song et al., 2016), as those
firms could have access to bank loans and land at cheaper rates (Boubakri et al., 2012a).
This leads to the following hypothesis:
H9. Firms with political connections tend to perform better.

2.6 Corporate performance and sustainability practices

Corporate sustainability and performance has been studied over the years, especially in
terms of CSR, and a trade-off between corporate social performance and financial
performance is observed (Ziegler et al., 2007; Wagner, 2010). In current literature,
inconclusive results are recorded for the relationship between sustainability and firm
performance (Marti et al., 2015). Proponents of CSR basically believe that it enhances
corporate performance (Weber, 2008; Cahan et al., 2016; Wang and Li, 2015). Recent
studies have focused on wider sustainability performance criteria. Chang and Kuo (2008)
stated that sustainability and profitability are positively related, whereas Wagner (2010)
concluded that embedding sustainability into the business model can generate benefits to
corporations. Koo et al. (2014), on the other hand, emphasised the importance of
environmental performance on corporate performance. In the most recent study by Maletic
et al. (2015), financial performance of firms improved when firms are involved in more
sustainability practices. In addition, Lun (2011) found that engaging in more green
management practices promotes better firm performance.
A number of research works indicate that firm performance would be improved if firms
conduct more environmental exercises (Pahuja, 2009; Setyorini and Ishak, 2012), whereas
ESG disclosure enhances firm value (Fatemi et al., 2017). Firms’ performance would be
enhanced by engaging in more social responsibility and environmental sustainability
practices (DiSegni et al., 2015). Isaksson and Woodside (2016) asserted that the positive
relationship between ESG factor and financial performance and environmental performance
has a direct impact on economic performance (Wagner, 2010). However, an inverse

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relationship was found by Usman and Amran (2015). Santis et al. (2016) also affirmed that
sustainable firms do not achieve better financial performance and that no significant
differences in financial performance were found when comparing between sustainable and
non-sustainable companies (Cunha and Samanez, 2013; Ortas et al., 2012).
H10. Sustainability practices of firms can improve firm performance.
Existing research has only focused on the effect of board composition, political connections
and sustainability practices on firms’ risk-taking and performance in an isolated manner,
whereas little is known on the effect of corporate governance, political connections and
sustainability practices on risk-taking and performance of firms in an integrated approach.
In particular, it is unclear how sustainability practices of firms consisting of ESG practices
influence firms’ risk-taking and performance.

3. Method
3.1 Sample and data source
Annual data from the year 2010 to 2014 were sourced from Bloomberg’s database. The
original data set consisted of all public-listed firms from Bursa Malaysia’s main market. We
obtained a total of 3,860 firm-year observations from 2010 to 2014 from the main market of
Bursa Malaysia. We then eliminated firms that do not have corporate governance and ESG
data for the entire five years. After filtering, the final balanced panel data were reduced to
290 firm-year observations. In total, 21 GLCs and 37 non-GLCs that have sustainability data
available are included in the analysis. Three models were developed. The first model looked
at how board composition and political connections affect risk-taking of firms. The second
model analysed the influence of board composition, political connections and the broader
measures – GS – on firms’ risk-taking. In addition, the third model included the sustainability
score into the investigation apart from the determinants mentioned above. The same setting
was applied to firm performance analysis.
To date, there is no official classification of politically connected firms in Malaysia. In this
study, we used those firms of which the Malaysian Government has a direct controlling
stake as politically connected firms, and they are normally called GLCs (Mitchell and
Joseph, 2010; Fung et al., 2015). In the study of ownership, risk-taking and performance of
banks in India, Haque and Shahid (2016) defined government ownership as those firms of
which the government had equity ownership. GLCs are owned by the federal government
either as majority or single largest shareholders, and they play an important role in the
national economic development, as their market capitalisation contributes around 40 per
cent in the Malaysian stock market. Faccio et al. (2006) highlighted that the total number of
GLC firms in Malaysia is the biggest among other countries. Due to the lack of efficiency
found in GLCs, those firms have been undergoing programmes of transformation since
2004 (Menon and Ng, 2013). In total, 21 GLC firms with available corporate governance
data were included in our sample.

3.2 Measurement of variables

Table I outlines the description of the variables used. We calculated corporate risk-
taking by using three proxies. Following Bargeron et al. (2010), the variable stockvol is
the standard deviation of stock return which captures the total risk; idiorisk represents
specific risk, and we regressed stock return on market return to obtain the residual of
the regression. These two proxies are consistent with that reported by Jiraporn et al.
(2015) and Nguyen (2011). Leverage is the financial risk of firm that shows financial
health, and the measurement is based on the studies of Huang and Wang (2015) and
Faccio et al. (2016). We regressed each risk on board compositions, politically
connected firms and control variables, and then regressed the same by adding the

VOL. 18 NO. 4 2018 j CORPORATE GOVERNANCE j PAGE 641

 Table I Description and measurements of the variables used
Variables Descriptions Measurements

Risk measures
STOCKVOL Total risk The standard deviation of daily stock return from 2010 to 2014
IDIORISK Firm-specific risk The standard deviation of the residual of the regression of daily stock return on daily
market return
LEVERAGE Financial risk Firm total long-term and short-term debt divided by assets
Firm performance
ROA Firm performance Return on assets
Board composition
BS Board size Total number of board members
IND Independent directors Total number of independent directors in the boardroom
WOMEN Female board members Number of women on the board
Political connections
GLC Government-linked corporation Dummy variable; 1 refers to government-linked corporation and 0 otherwise
Sustainability score
GS Governance score The extent of a company’s governance disclosure recorded by Bloomberg
database
ESG Environmental, social and A company’s environmental, social and governance (ESG) disclosure recorded by
governance score Bloomberg database
Control variables
TA Size of the firm Total assets of firms
SG Sales growth Annual rate of growth in sales
FA Firm age Number of years in corporation
Note: All the data are in natural logarithm, except for leverage, ROA, sales growth and government-linked corporation.

broader governance and sustainability scores. This process was repeated for the other
two types of risk. We also regressed firm performance on those variables to see their
effect on firm performance.

3.3 Research method

Three models were proposed in this study. Model 1 examined how board composition and
political connections affect risk-taking and performance of firms. Model 2 presented how
board composition, political connections and GS influenced risk-taking and performance of
firms. Model 3 delineated the relationship between risk-taking and firm performance with
board composition, political connections, GS and ESG score. The mathematical equations
are presented as follows:

Yij ¼ a þ b 1 BSij þ b 2 INDij þ b 3 WOMENij þ b 4 TAij þ b 5 ROA þ b 6 SGij þ b 7 GLCij

þ b 8 FAij þ « j
(Model 1)

Yij ¼ a þ b 1 BSij þ b 2 INDij þ b 3 WOMENij þ b 4 TA þ b 5 ROAij þ b 6 SGij þ b 7 GLCij

þ b 8 FAij þ b 9 GSij þ « j (Model 2)

Yij ¼ a þ b 1 BSij þ b 2 INDij þ b 3 WOMENij þ b 4 TAij þ b 5 ROAij þ b 6 SGij þ b 7 GLCij

þ b 8 FAij þ b 9 GSij þ b 10 ESGij þ « j (Model 3)

Where:
Y = risk {STOCKVOL; IDIORISK; LEVERAGE} or return {ROA}

PAGE 642 j CORPORATE GOVERNANCE j VOL. 18 NO. 4 2018

Detailed description of the variables’ measurement is presented in Table I. The research
framework is presented in Figure 1, which delineates the effect of board composition,
political connections and sustainability practices on firms’ financial performance and risk-
taking.

4. Empirical results
4.1 Descriptive statistics of the variables
The descriptive statistics are shown in Table II. The three different types of risk are
represented by stockvol, idiorisk and leverage, and their mean values are 27 per cent, 18
per cent and 22 per cent, respectively. Averagely, firms have lower idiosyncratic risk
(idiorisk) and their total (stockvol) and financial (leverage) risks do not deviate much from
each other. The average number of board members (BS) is nine, with only one female
board member (WOMEN). The average number of independent directors (IND) is almost
half of the total board members. The average age of the firm (FA) is around 20 years old.
We also noticed that the average GS is 53, which is much higher than the average ESG
score. This suggests that Malaysian firms engaged more in governance initiatives and less
in terms of overall sustainability practices.

Figure 1 Research framework for the proposed models

Table II Descriptive statistics of the variables used

Variables Minimum Maximum Mean SD Skewness Kurtosis

STOCKVOL 0.79 1.22 0.27 0.37 0.06 0.13

IDIORISK 1.00 1.19 0.18 0.38 0.067 0.24
LEVERAGE 0.00 0.63 0.22 0.16 0.01 0.002
ROA 0.33 0.68 0.08 0.10 0.02 0.098
BS 5.00 14.00 9.08 1.98 0.51 2.65
IND 2.00 9.00 4.23 1.26 1.03 4.10
WOMEN 0.00 4.00 0.9364 0.94 0.62 0.57
GS 42.86 73.21 52.90 5.88 1.20 3.98
ESG 9.92 57.85 22.07 11.12 1.04 3.44
TA 5.20 13.37 9.25 1.69 0.13 0.33
SG 0.90 2.62 0.10 0.29 0.04 0.29
FA 0.17 42.00 20.57 8.71 0.68 2.68
Note: GS and ESG are based on the score of 100

VOL. 18 NO. 4 2018 j CORPORATE GOVERNANCE j PAGE 643

 4.2 Comparison between GLCs and non-GLCs
In our sample, we carried out a comparison between GLC and non-GLC firms and this is
presented in Table III. The differences in these two types of corporate ownership – firms
with substantial government stake and not – are compared. All the three risks undertaken
by GLC firms tend to be lower compared to non-GLC firms. Both mean differences for total
and idiosyncratic risk are significant, with t-statistics values of 0.0897 and 0.1410,
respectively. In contrast to the findings of Faccio (2006), our result indicates a lower mean
value of financial risk for GLCs (21.46 per cent) to non-GLCs (21.64 per cent), but the t-
statistics value is insignificant. The mean difference of return on assets (ROA) is 0.0389
between GLCs and non-GLCs, and this indicates the lower performance of GLCs. However,
GLC firms do have a higher number of women in the boardroom compared to the non-GLC
firms. The same goes for board size, independent directors, GS, ESG and total assets. We
noticed that GLC firms are averagely older, have larger total assets and practice more
corporate governance and sustainability activities.
The overall correlation matrix of the variables examined is presented in Table IV. The
correlation does not show a multicollinearity problem, as the correlations between
independent variables are below 0.80 (Judge et al., 1985; Gujarati, 1995). The only
correlation that is close to 0.8 is between GS and ESG. However, both variance inflation
factor (VIF) values for GS and ESG reported in Tables V and VI are still below 5, which
suggests no serious multicollinearity problem.

4.3 Empirical results of risk-taking of firms

The results on risk-taking of firms are outlined in Table V. All the VIF values below 5 indicate
the non-existence of multicollinearity (Judge et al., 1985; Montgomery et al., 2001). The
three board composition measurements, namely, board size (BS), independent directors
(IND) and women, produced consistent results for the three models tested. Our results
show that firms with larger board size are more aggressive in using debt financing in which
the coefficient of board size is significant, with the coefficients of 23.2074, 20.9141 and
20.7932, respectively, under the three models. This positive relationship is consistent with
Wang (2012) and Huang and Wang (2015); thus, our hypothesis is not supported.
Meanwhile, it is evident that having more independent board members can reduce the
financial risk of firms, as the coefficients of 17.2212, 19.7069 and 19.7091 are all
statistically significant. The emphasis on the effectiveness of independent directors as
specified in MCCG 2012 is a forward-moving exercise to optimise the benefits generated

Table III Independent mean difference between GLCs and non-GLCs

GLCs Non-GLCs
Variables Mean Standard error Mean Standard error t-statistics for mean difference

STOCKVOL 0.2042 0.3365 0.2939 0.3808 0.0897*

IDIORISK 0.0795 0.3611 0.2206 0.3858 0.1410**
LEVERAGE 0.2146 0.1370 0.2164 0.1665 0.0174
ROA 0.0516 0.0350 0.0905 0.1161 0.0389**
BS 2.2482 0.2153 2.1526 0.2099 0.0956**
IND 1.5109 0.3150 1.3493 0.2513 0.1616**
WOMEN 1.2000 0.9446 0.8133 0.9116 0.3867**
GS 4.0017 0.0992 3.9405 0.1029 0.0612**
ESG 3.1544 0.4470 2.8784 0.4612 0.2760**
TA 10.0002 1.4584 8.8948 1.6818 1.1055**
SG 0.1274 0.3474 0.0923 0.2575 0.03512
FA 2.7772 0.8348 2.8696 0.7494 0.0924
Notes: GS and ESG are based on the score of 100. **and * denote statistical significance at 5% and
10% respectively

PAGE 644 j CORPORATE GOVERNANCE j VOL. 18 NO. 4 2018

 Table IV Correlation matrix
Variables STOCKVOL IDIORISK LEVERAGE BS IND WOMEN TA ROA SG GLC FA GS ESG

STOCKVOL 1.000 – – 0.119* (0.043) 0.186** (0.001) 0.042 (0.476) 0.284** (0.000) 0.117* (0.047) 0.102 (0.082) 0.106 (0.071) 0.092 (0.118) 0.203** (0.000) 0.250** (0.000)
IDIORISK – 1.000 – 0.140* (0.017) 0.234** (0.000) 0.022 (0.711) 0.384** (0.000) 0.080 (0.175) 0.087 (0.138) 0.158** (0.007) 0.097 (0.100) 0.192** (0.001) 0.267** (0.000)
LEVERAGE – – 1.000 0.118* (0.044) 0.098 (0.096) 0.053 (0.366) 0.133* (0.024) 0.134* (0.023) 0.082 (0.164) 0.040 (0.500) 0.184** (0.002) 0.110 (0.062) 0.082 (0.165)
BS 0.119* (0.043) 0.140* (0.017) 0.118* (0.044) 1.000 0.558** (0.000) 0.492** (0.000) 0.266** (0.000) 0.234** (0.000) 0.011 (0.850) 0.218** (0.0000) 0.085 (0.148) 0.226** (0.000) 0.162** (0.006)
IND 0.186** (0.001) 0.234** (0.000) 0.098 (0.096) 0.558** (0.000) 1.000 0.168** (0.004) 0.327** (0.000) 0.239** (0.000) 0.012 (0.841) 0.242** (0.000) 0.050 (0.394) 0.262** (0.000) 0.224** (0.000)
WOMEN 0.042 (0.476) 0.022 (0.711) 0.053 (0.366) 0.492** (0.000) 0.168** (0.004) 1.000 0.158** (0.0007) 0.042 (0.478) 0.025 (0.671) 0.264** (0.000) 0.047 (0.422) 0.164** (0.005) 0.157** (0.007)
TA 0.284** (0.000) 0.384** (0.000) 0.133* (0.024) 0.266** (0.000) 0.327** (0.000) 0.158** (0.000) 1.000 0.453** (0.000) 0.012 (0.836) 0.305** (0.000) 0.181** (0.002) 0.008 (0.897) 0.183** (0.002)
ROA 0.117* (0.047) 0.080 (0.175) 0.134* (0.023) 0.234** (0.000) 0.239** (0.000) 0.042 (0.478) 0.453** (0.000) 1.000 0.001 (0.991) 0.205** (0.000) 0.063 (0.283) 0.205** (0.000) 0.214** (0.000)
SG 0.102 (0.082) 0.087 (0.138) 0.082 (0.164) 0.011 (0.850) 0.012 (0.841) 0.025 (0.671) 0.012 (0.836) 0.001 (0.991) 1.000 0.066 (0.263) 0.027 (0.643) 0.006 (0.921) 0.003 (0.962)
GLC 0.106 (0.071) 0.158** (0.007) 0.040 (0.500) 0.218** (0.0000) 0.242** (0.000) 0.264** (0.000) 0.305** (0.000) 0.205** (0.000) 0.066 (0.263) 1.000 0.063 (0.287) 0.279** (0.000) 0.280** (0.000)
FA 0.092 (0.118) 0.097 (0.100) 0.184** (0.002) 0.085 (0.148) 0.050 (0.394) 0.047 (0.422) 0.181** (0.002) 0.063 (0.283) 0.027 (0.643) 0.063 (0.287) 1.000 0.015 (0.793) 0.054 (0.362)
GS 0.203** (0.000) 0.192** (0.001) 0.110 (0.062) 0.226** (0.000) 0.262** (0.000) 0.164** (0.005) 0.008 (0.897) 0.205** (0.000) 0.006 (0.921) 0.279** (0.000) 0.015 (0.793) 1.000 0.794** (0.000)
ESG 0.250** (0.000) 0.267** (0.000) 0.082 (0.165) 0.162** (0.006) 0.224** (0.000) 0.157** (0.007) 0.183** (0.002) 0.214** (0.000) 0.003 (0.962) 0.054 (0.362) 0.280** (0.000) 0.794** (0.000) 1.000

Notes: **and * denote significance at 5% and 10% level, respectively

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j CORPORATE GOVERNANCE j PAGE 645
 PAGE 646
j CORPORATE GOVERNANCE j VOL. 18 NO. 4 2018
Table V Factors influencing the risk-taking behaviour of firms
Model 1 Model 2 Model 3
Dep. variable STOCKVOL IDIORISK LEVERAGE STOCKVOL IDIORISK LEVERAGE STOCKVOL IDIORISK LEVERAGE VIF

Constant 1.5958** (5.6901) 1.8312** (6.5276) 21.6598** (1.6823) 3.0245** (3.6740) 2.9663** (3.5945) 143.3915** (3.8568) 2.8770** (2.4799) 2.6513** (2.2802) 155.9608** (2.9770)
BS 0.1229 (0.9171) 0.1405 (1.0482) 23.2074** (3.7778) 0.0960 (0.7150) 0.1191 (0.8851) 20.9141** (3.4506) 0.0974 (0.7231) 0.1221 (0.9047) 20.7932** (3.4195) 2.057
IND 0.1293 (1.5047) 0.1581* (1.8391) 17.2212** (4.3694) 0.1002 (1.1509) 0.1349 (1.5465) 19.7069** (0.0000) 0.1002 (1.1492) 0.1350 (1.5448) 19.7091** (5.0058) 1.671
WOMEN 0.0294 (1.1157) 0.0518* (1.9599) 1.0952 (0.9037) 0.0298 (1.1320) 0.0521** (1.9730) 1.1211 (0.9431) 0.0299 (1.1332) 0.0523** (1.9769) 1.1135 (0.9350) 1.463
TA 0.0806** (5.6731) 0.1083** (7.6230) 0.9628** (1.4786) 0.0816** (5.7627) 0.1091** (7.6881) 1.0465 (1.6374) 0.0806** (5.3371) 0.1071** (7.0720) 1.1268 (1.6521) 1.664
ROA 0.0122** (5.9472) 0.0130** (6.0647) 0.1426 (1.4463) 0.0105** (4.6443) 0.0120** (5.3224) 0.2526** (2.4827) 0.0104** (4.4494) 0.0118** (5.0564) 0.2438** (2.3187) 1.538
SG 0.0012* (1.8499) 0.0012* (1.6950) 0.0420 (1.3288) 0.0013* (1.8152) 0.0012* (1.6647) 0.0395 (1.2750) 0.0013* (1.8129) 0.0012* (1.6640) 0.0395 (1.2713) 1.008
GLC 0.0389 (0.8613) 0.0651 (1.4407) 1.5423 (0.7449) 0.01496 (0.3196) 0.0461 (0.9817) 3.5818* (1.6947) 0.0145 (0.3083) 0.0450 (0.9568) 3.5408* (1.670) 1.332
FA 0.0239 (0.9067) 0.0211 (0.8021) 4.1280** (3.4137) 0.0223 (0.8488) 0.0199 (0.7548) 3.9909** (3.3631) 0.0221 (0.8374) 0.0194 (0.7337) 4.0110** (3.3706) 1.100
GS 0.3894* (1.8448) 0.3094 (1.4622) 33.1841** (3.4806) 0.3441 (1.0481) 0.2125 (0.6459) 37.0516** (2.4995) 3.132
ESG 0.0133 (0.1807) 0.0285 (0.3851) 1.1375 (0.3411) 3.206
F-statistics 8.1673** (0.0000) 12.9400** (0.0000) 5.3521** (0.0000) 7.7000** (0.0000) 11.7866** (0.0000) 6.2917** (0.0000) 6.9093** (0.0000) 10.5905 (0.0000) 5.6562** (0.0000)
R2 18.87% 26.92% 13.22% 19.84% 27.48% 16.82% 19.84% 27.51% 16.85%

Notes: Values in parentheses are t-statistics. **and * denote statistical significance at 5% and 10%, respectively
 Table VI Factors influencing the performance of firms
Model 1 Model 2 Model 3
ROA
Dep. variable VIF VIF VIF

Constant 58.1725** (8.3116) 60.3921** (8.6566) 48.4305** (6.6935) 36.5694* (1.7061) 33.3163 (1.5720) 72.5567** (3.3373) 44.8087 (1.5440) 44.7709 (1.5603) 15.6584 (0.5216)
BS 8.4581** (2.4147) 8.5378** (2.4643) 6.9824* (1.8507) 9.4411** (2.7874) 9.5028** (2.8369) 7.4745** (2.0949) 8.1492** (2.4592) 2.017 8.2527** (2.5142) 2.017 6.2953* (1.8085) 2.118
IND 1.6630 (0.7313) 1.9954 (0.8858) 1.5573 (0.6348) 3.2711 (1.4723) 3.5610 (1.6189) 4.4060* (1.8592) 3.0706 (1.4189) 1.667 3.3441 (1.5584) 1.670 4.0815* (1.7703) 1.801
WOMEN 1.5685** (2.2652) 1.7583** (2.5621) 1.4009* (1.9273) 1.4146** (2.1143) 1.5824** (2.3854) 1.1805* (1.7153) 1.2862* (1.9717) 1.450 1.4461** (2.2320) 1.458 1.0642 (1.5889) 1.455
TA 2.8933** (8.1318) 3.1468** (8.7140) 2.4039** (6.5496) 2.5633** (7.3109) 2.7955** (7.8409) 2.0245** (5.7352) 2.9249** (8.2862) 1.471 3.1253** (–8.7366) 1.540 2.4440** (6.8297) 1.439
SG 0.0111 (0.6003) 0.0109 (0.6038) 0.0016 (0.0824) 0.0110 (0.6254) 0.0112 (0.6435) 0.0007 (0.0400) 0.01001 (0.5831) 1.019 0.0102 (0.5980) 1.017 0.0009 (0.0521) 1.014
GLC 1.8454 (1.5541) 2.0716* (1.7618) 1.7573 (1.4116) 3.1806** (2.6924) 3.3629** (2.8793) 3.5495** (2.9190) 3.2637** (2.8367) 1.295 3.4314** (3.0120) 1.294 3.6065** (3.0501) 1.302
FA 0.3808 (0.5469) 0.3690 (0.5360) 0.0104 (0.0140) 0.4361 (0.6489) 0.4294 (0.6462) 0.0415 (0.0589) 0.5378 (0.8212) 1.101 0.5270 (0.8127) 1.100 0.1057 (0.1543) 1.145
STOCKVOL 8.1757** (5.4653) 6.8368** (4.6443) 6.3966** (4.4494) 1.165
IDIORISK 8.8733** (6.0647) 7.6445** (5.3224) 7.1155** (5.0564) 1.264
LEVERAGE 0.0518 (1.4463) 0.0853** (2.4827) 0.0776** (2.3187) 1.180
GS 24.3597** (4.6574) 24.0644** (4.6630) 31.3067** (5.8625) 1.4375 (0.1759) 3.144 0.7634 (0.0944) 3.137 3.6757 (0.4349) 3.200
ESG 7.1983** (4.0357) 3.029 6.9429** (3.9231) 3.040 7.5648** (4.1430) 3.021
F-statistics 15.6095** (0.0000) 16.7375** (0.0000) 11.0761** (0.0000) 17.3069** (0.0000) 18.3920** (0.0000) 14.8334 (0.0000) 18.0552** (0.0000) 18.9426** (0.0000) 15.8373** (0.0000)
R2 30.77% 32.28% 23.97% 35.75% 37.15% 32.29% 39.29% 40.43% 36.21%

Notes: Values in parentheses are t-statistics. **and * denote statistical significance at 5% and 10%, respectively

VOL. 18 NO. 4 2018

j CORPORATE GOVERNANCE j PAGE 647
 from the independent directors. On the impact of women on risk-taking of firms, the number
of women in boards increases the idiosyncratic risk consistently with the significant
coefficient values of 0.0518, 0.0521 and 0.0523, respectively. Thus, H2 is supported by our
regression results but not for H3.
We also considered the effect of politically connected firms on corporate risk-taking. All the
coefficients of GLCs to total risk, idiosyncratic risk and financial risk have the negative sign,
which suggests that the GLC firms tend to have a lower risk compared to non-GLC firms.
This supports the proposed hypothesis and is consistent with the finding of Boubakri et al.
(2013b). However, only the coefficients of GLCs to financial risk are significant, with the
values of 3.5818 and 3.5408, respectively, under Model 2 and Model 3 when the
broader corporate governance and sustainability scores were included. For the control
variables, when we compared total risk and idiosyncratic risk under different models,
consistent results were observed.
For the broader corporate GS measurement, when firms undertake more corporate
governance initiatives, they face lower total risk, and the result confirms the negative
relationship between sustainability and risk-taking of firms. The coefficient of 0.3894 is
significant. Strong corporate governance will prevent managers from taking too much risk,
and stricter governance will ensure managers make corporate polices and investment
decisions more ethically. Strong and effective governance will prevent managers from
taking unnecessary risk, as managers might accept more risk when their remuneration is
tied to firm performance. To receive lucrative compensation, they may accept investments
that are too risky. The agency problem can be minimised by practising more effective
governance. However, contrasting result was found for the nexus between financial risk and
GS in which it is positively related. The significant coefficients of GS are 33.1841 and
37.0516, respectively. This could be due to the higher corporate governance performance
leading to better credit rating and firms finding it easier to obtain financing. Meanwhile, ESG
is negatively related to the three types of risk, but the t-statistics are insignificant. This could
be due to the fact that sustainable practices are still new in Malaysia. ESG initiatives taken
by firms would need more time to flourish and hence reduce the risk of firms.

4.4 Empirical results of performance of firms

The findings on the determinants of firm performance are presented in Table VI. Again, all
VIF values do not show a serious multicollinearity problem. For the effect of board
composition on firm performance, the larger the board size, the lower the profit for the firm,
as all the coefficients are negatively related. The coefficients values are 8.4581, 8.5378
and 6.9824 in Model 1; 9.4411, 9.5028 and 7.4745 in Model 2; and 8.1492,
8.2527 and 6.2953 in Model 3. All the values are statistically significant. This result is
consistent with Cheng et al. (2008) and Yermack (1996). Notably, female board members
play a significant role in stimulating firm performance. Our results echo the finding of Smith
et al. (2006), who recognised the importance of female board members, as they can
understand the market better, enhance firms’ image and increase firms’ performance. The
positive coefficient values are 1.5685, 1.7583 and 1.4009 in Model 1; 1.4146, 1.5824 and
1.1805 in Model 2; and 1.2862, 1.4461 and 1.0642 in Model 3. All the values are significant,
except 1.0641. Our regression results support H6 and H7 proposed in the study. However,
our study indicates that a large number of independent directors may not be good to firm
performance. Only two coefficients 4.4060 and 4.0815 are statistically significant when
financial risk is included as the risk-taking variable in the regression, and this rejects H8.
In addition, the GLC factor had ascertained that when firms are more government-linked,
their performance would be lower. Similar support is found in Haque and Shahid’s (2016)
study. All coefficients are negatively significant, with the values of 2.0716 in Model 1;
3.1806, 3.3629 and 3.5495 in Model 2; and 3.2637, 3.4314 and 3.6065 in
Model 3. This rejects H9 proposed in the study.

PAGE 648 j CORPORATE GOVERNANCE j VOL. 18 NO. 4 2018

As presented in Table VI, this study also shows that when firms undertake broader
corporate governance exercises, their performance can be improved. All GS coefficient
under Model 2 are positively related with the coefficients of 24.3597, 24.0644 and 31.3067.
When firms engage more in sustainable practices, the firms tend to do better. Friede et al.
(2015) reported that most studies suggest a positive relationship between ESG and
financial performance. All the three ESG factors are positively significant at values of
7.1983, 6.9429 and 7.5648. To conclude, sustainability practices can enhance firm
performance, and this supports H10.

5. Conclusion
Motivated by the importance of sustainability practices and corporate governance impact
on business performance, we investigated how board composition, political connections
and sustainability practices affect corporate risk-taking and firm performance. Three
different types of risks, namely, total risk, company-specific risk and financial risk, were
computed to represent the risk-taking of firms. At the same time, we also ascertained the
risk–return relationship in the stock market of an emerging market that has substantial
politically connected firms and in the nascent stage of sustainability development. This
present study highlights the importance of non-financial information on company’s
performance and risk.
For board composition, we looked at three board attributes – board size, independent
directors and female board members. The bigger the board size, the higher the financial
risk faced by firms. However, the risk can be reduced if firms have more independent
directors. This finding reiterates the importance of independent directors in the board and
supports the MCCG’s principles. The negative effect of board size and independent
directors on firm performance demonstrates the importance of having an optimal size for
board and independent directors. Gender diversity on boards is also an important issue in
many countries, especially in emerging economies. Our results indicate that women play a
vital role in improving firm performance, and hence, more opportunities should be rendered
to them, especially in the corporate sector, to promote gender equality in maximising firm
value. Firm image can also be improved when firm’s competitive advantages are further
enhanced by having gender diversity in the boardroom.
The effect of politically connected firms is a double-edged sword, as firms with political
connections have lower financial risk and performance. Our results tend to argue that
politically connected firms may have political and social goals to achieve, and this results in
poor performance relative to non-politically connected firms. Given that the proportion of
firms with political connections is high in Malaysia, they have to operate with greater
efficiency to harness their competitiveness and safeguard the shareholders’ interest.
Our study sheds light on the overall effects of governance on corporate risk-taking and
performance. The use of effective corporate governance can control the excessive risks
taken by the managers and reduce the agency problem. The total risk is reduced. However,
firms with stronger corporate governance are most likely the better credit-rated firms that
can borrow more, resulting in higher financial risk and financial performance. This confirms
the important role of corporate governance in business. In the current stage, sustainability
practices taken by firms still do not endure lower risk to firms but it does enhance firm
performance. The results encourage firms to engage in sustainability practices for superior
financial performance. Businesses are encouraged to emphasise on non-financial issues,
apart from financial performance, to drive them to succeed in the long run. Undoubtedly,
moving towards sustainability is a must for all firms in the near future. For future research,
the study can be expanded to include data from multiple countries to provide a regional
perspective on the issues examined.

VOL. 18 NO. 4 2018 j CORPORATE GOVERNANCE j PAGE 649

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Further reading
Cheah, F.S. and Lee, L.S. (2009), Corporate Governance in Malaysia: Principles and Practices, August
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Economics, Vol. 87 No. 2, pp. 329-356.

Crisostomo, V.L., De Souza Freire, F. and De Vasconcellos, F.C. (2011), “Corporate social responsibility,
firm value and financial performance in Brazil”, Social Responsibility Journal, Vol. 7 No. 2, pp. 295-309.
Das, A. and Ghosh, S. (2009), “Financial deregulation and profit efficiency: a nonparametric analysis of
Indian banks”, Journal of Economics and Business, Vol. 61 No. 6, pp. 509-528.

Corresponding author
Lee-Lee Chong can be contacted at: [email protected]

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