This issue focuses primarily on two fast developing Asian economies which are in different stages of implementing corporate governance regulations for their business firms, namely India and Malaysia. Earnings management by the managers often raises serious concerns among the investors as it practically reduces the firms’ financial reporting quality, distorting the true condition of firms’ well-being and adversely influencing users’ decision making. Hence, the regulators make efforts to prevent such practices. The first paper titled, “The Malaysian Listing Requirement Reforms and Earnings Management Practices of Public Listed Firms” by Sahlan analyzes the earnings practices after the implementation of the Bursa Malaysia Listing Requirement Reforms in 2001. Using a sample of 100 firms (the top 50 and bottom 50 companies listed on the corporate governance index), the author compared the earnings management practices of the firms in the pre- and post-reform period. The results suggest that the reforms are indeed providing the desired results as the earnings management practices in the post-reform period are lower than the pre-reform period.

But there is still room for improvement in another governance parameter even after the Bursa Malaysia Listing Requirement Reforms, i.e., risk management disclosure. A firm should have proper risk management system to ensure proper utilization of the funds of the investors. Further, it needs to disclose the risks and risk management systems also, without compromising the strategic edge, to the investors to get their confidence. The literature on corporate governance indicates that the level of risk disclosure is positively associated with corporate governance mechanisms adopted by the firms. In the second paper titled, “Institutional Investors and Board of Directors’ Monitoring Role on Risk Management Disclosure Level in Malaysia”, the authors, Rosnadzirah Ismail and Rashidah Abdul Rahman, analyze this issue in the context of Malaysia. The paper examines the relationship of risk disclosure level with the monitoring function of internal and external parties, namely, the institutional investors and the board of directors with a sample of 124 listed firms for three financial years 2006 to 2008. The results indicate that institutional investors play a more effective role in monitoring the company’s risk management disclosure compared to the board of directors. The findings also indicate that directors’ education has a significant positive relationship with risk management disclosure level.

As in Malaysia, Indian securities market regulator SEBI also introduced Clause 49 of listing agreement to enforce corporate governance practices among the listed Indian firms in 2001. It was modified further in 2006 to make it more effective in ensuring corporate governance practices. In the third paper titled, “Corporate Governance Reforms and Financial Disclosures: A Case of Indian Companies”, the authors, Neeti Sanan and Sangeeta Yadav, analyze the effectiveness of the modified Clause 49 in improving the corporate governance disclosures of the 30 firms which are part of the well-known stock market index of India i.e., BSE Sensex. Using S&P Corporate Governance Transparency and Disclosure Instrument, they rate the corporate governance disclosures of the sample firms for the pre-reform period (2001-02 to 2004-05) and post-reform period (2005-06 to 2008-09). The study finds that though corporate governance disclosures have improved in the post-reform period, the overall disclosures of the Indian companies are only moderate. It also suggests that the external drivers such as listing status on international exchanges plays very big role in improving the level of disclosures a firm makes. This indicates that there is scope for improved enforcement of legal and regulatory structures to enhance corporate governance disclosures.

In the last paper of the issue, “Board, Ownership Structure & Pay and Firm Performance:

A Literature Review”, the authors, Nikhat Afshan et al., review the literature that analyzes the relationship between firms’ performance and the three parameters viz., ‘board characteristics’, ‘ownership structure’ and ‘executive pay’. The review indicates that the relationships between these parameters are inconclusive, indicating the need for further research into this area.

-- S Subramanian
Consulting Editor