MODERATING INFLUENCE OF ORGANIZATIONAL CULTURE ON THE ASSOCIATION BETWEEN CORPORATE GOVERNANCE AND CORPORATE PERFORMANCE

MODERATING INFLUENCE OF ORGANIZATIONAL CULTURE ON THE ASSOCIATION BETWEEN CORPORATE GOVERNANCE AND CORPORATE PERFORMANCE Ifa Rizad Mustapa 1 a, Nazli Anum Mohd. Ghazali 2 b, Muslim Har Sani Mohamad 3 c a School of Accountancy, Universiti Utara Malaysia, Malaysia Email: ifarizad@uum.edu.my b Kulliyyah Of Economics and Management Sciences, International Islamic University Malaysia, Malaysia Email: nazlianum@iium.edu.my c Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, Malaysia Email: muslimh@iium.edu.my Abstract The purpose of this study is to assess the association between corporate governance and corporate performance of companies listed on Bursa Malaysia. Introduction of the Malaysian Code on Corporate Governance (MCCG) in 2000, which stresses accountability and transparency, is expected to provide evidence that those companies complied with the recommendations result in better performance. Additionally, the author is motivated to examine the moderating effect of organizational culture on the association between corporate governance and performance of companies listed on the Bursa Malaysia since no prior studies have reported on the work albeit they examined the influence of these variables independently. The current paper mainly focuses on achieving two objectives: 1) examining the influence of corporate governance on performance; and 2) assessing the moderating effect of organizational culture as moderator between corporate governance and performance. Employing questionnaire survey in its data collection, this research contributes to the theory by employing organizational culture theory in developing the hypotheses. The current study further contributes to the methodology by demonstrating the interaction terms in assessing the effect of moderators on performance. A further contribution to the practice is reported as top management appears to promote flexibility culture in a company. Taken together, findings of this study acknowledge that different types of culture are significant in certain scenarios or environments. Keywords: Competing Values Framework, Control Culture, Corporate Governance, Flexibility, Culture, Organizational Culture Theory INTRODUCTION A company is a social system in which members of a company usually have a certain influence in their decision to only get involved in the system during working hours (Hofstede, 1991). A number of empirical studies associating organizational culture with corporate performance have been conducted (Rashid, Sambasivan & Johari, 2003; Lee & Yu, 2004; Lee & Ahmad, 2009). The essence of the organizational culture theory introduced by Schein in 1988 can be described as the way people within organizations act and make decisions not only based on the facts of a case but also in response to the culture of the organization. Although the link between corporate governance and corporate performance among Malaysian companies has long been researched, still little empirical evidence concerning the assessment of the impact of organizational culture on corporate performance. 347

Moreover, most studies only concern the relationship between corporate governance and corporate performance (Che Haat et al., 2008; Amran & Ahmad, 2010; Abdul Rahim, Yaacob, Alias & Nor, 2010; Dian, 2014; Gupta & Sharma, 2014). The first research objective of this study is to investigate the impact of corporate governance on the performance of Malaysian companies listed on Bursa Malaysia starting from the year the regulations on corporate governance were implemented followed by the second research objective aiming to assess the moderating effect of organizational culture on the relationship between corporate governance and company performance The current research findings contribute towards evaluating how business culture moderates the relationship between corporate governance and corporate performance. This paper is organized as follows. In Section 2, discussion on the review of literature, methodology used and development of hypotheses are presented. Questionnaire data analyses using the multiple and hierarchical regression analysis are shown in Section 3. Finally, the research paper is summarised. Corporate Governance LITERATURE REVIEW The main theory being employed in the present study is the theory of agency developed by Berle and Means (1932), which explains the divergence of the interests between the agents and the principals (owners) creates the agency costs that arise when the agent maximizes their own utility at the expense of their principals. Thus, this perspective recommends an intermediate condition of control, which suggests delegation of power to the agents by the principals followed by monitoring or a small portion of control to avoid the exploitation of the delegation. An underlying assumption of the agency theory perspective is that goal divergence exists between the owners (principals) and the executives (agents) (Fama and Jensen, 1983). Another perspective is the stewardship theory that allows a steward to believe that his or her own interests are aligned with the shareholders interests, and, therefore, for him or her to behave in a manner that will not depart from maximizing his or her own interests and the interests of the owners. The behaviour of the agents is more towards pro-organizational or collectivistic behaviour, which has higher value than individualistic or self-serving behaviour (Davis et al., 1997). The stewardship theory views the behaviour of the steward as collective because the steward looks to accomplish the objectives of the company. Believing that their future wealth or excellence in employment is bound to their current employers, executives under the stewardship theory are attached to the commitment that is aligned with the organization and its owners (Donaldson, 1990a, 1990b; Barney, 1990). First, based on the agency theory, the aspect of corporate governance was perceived from the mixture of mechanisms that shape part of an organization structure. Second, with respect to organizational culture, this study applied value dimensions, which were introduced in the Competing Values Framework, which is a theoretical model that was initially developed by Cameron and Quinn (1999) from a research conducted on the major indicators of effective organizations. Organizational Culture The topic of organizational culture or corporate culture began in 1979 when Pettigrew conducted a research On Studying Organizational Cultures and posited that organizational culture is a blend of symbols, language, ideologies, beliefs, rituals and myths of an organization. Many researchers have presented numerous articles concerning the nature and definitions of organizational culture. However, the impact of organizational culture on the performance of Malaysian listed companies has not been examined in great detail, with only a small number of studies (Rashid et al., 2003; Rashid, Sambasivan and Rahman, 2004; Lee and Ahmad, 2009). 348

Organizational culture varies from country to country (Abe & Iwasaki, 2010). Culture in a business provides the understanding of how individuals and groups in a company work. The current research adopts the Competing Values Framework by Quinn and Rohrbaugh (1983), and the Organizational Culture theory to support the issue pertaining to organizational culture. Henri (2006) states that values are the priorities assigned to certain states or outcomes. An organization might simultaneously contain control and flexibility values; therefore, one organization might not be likely to only adopt one culture (Henri, 2006). According to the competing value approach, the control/flexibility dilemma incorporates the control value dimension and flexibility value dimension, which refer to preferences about structure, stability and changes whereby it emphasises stability versus flexibility, which refers to considering control and order versus innovation and change of organization. While the control values refer to predictability, stability, formality, rigidity and conformity, the flexibility values refer to spontaneity, change, openness, adaptability and responsiveness (Barney, 1986). This research uses the four classifications of culture developed by Quinn and others (Quinn & Rohrbaugh, 1983; Deshpande et al., 1993) as shown in Figure 1: i. Clan/Team culture emphasizes cohesion, self-esteem, loyalty and tradition to achieve value in the development of human resources. ii. Exclusively, the Adhocracy culture relies on readiness to achieve growth, innovation and resource acquisition. iii. Market/ Firm culture sees measurable goals, planning objective setting as a means to foster productivity effectiveness. iv. Hierarchical culture is characterized by formal rules, policies and bureaucratic procedures. It reflects stability and equilibrium. Figure 1: Competing Values Framework: Culture Internal Clan/Team Culture Hierarchy Culture Flexibility Control Adhocracy Culture Market/ Firm Culture External All organizations have their own culture and there are elements that make strong cultures, which are identified as business environment, values, heroes, the rites and rituals as well as the cultural network (Deal and Kennedy, 1982). These elements explain how an organization is shaped according to the type of business they are in together with the basic concepts and beliefs. In this respect, the organizational culture values are practiced by the personnel in the organization, which lead other individuals. CONCEPTUAL FRAMEWORK Figure 2: Research Framework Organizational Culture Corporate Governance H1CorGov H2Flexibility H2Control Corporate Performance INDEPENDENT VARIABLE DEPENDENT VARIABLE 349

The research framework is displayed in Figure 2. The research framework of this study is expected to appear as a descriptive and explanatory tool, rather than a predictive one. Drawing on the work of a variety of researchers (Quinn and Rohrbaugh, 1983; Deshpande, Farley and Webster, 1993; Shleifer & Vishny, 1997; Weir et al., 2002; Rashid et al., 2003; Henri, 2006, Lee and Ahmad, 2009), the framework in Figure 1 serves as the research framework for the current study. Sampling Design RESEARCH METHODOLOGY The population for this study comprises of respondents from eight hundred (800) Malaysian listed companies on the Main Market excluding the financial companies. The reason for not using respondents from the financial companies and investment entities is because the regulatory requirements for financial companies and non-financial-firms reporting are different (Rahman & Haniffa 2005). The target respondents were the chief financial officer (CFO), the company secretary or the accountant of each company. Although the respondents are from different groups, selection of the respondents was made based on their broad range of functions to ensure proper representation of the corporate governance and culture type experience, and that the resources used are comparable across companies (Lee & Yu, 2004). Research Procedure The current study applies data collection method through a questionnaire survey. In order to assess the influence of corporate governance traits on the performance of companies, the researcher adopted several items from two recent surveys on determining the level of corporate governance compliance among Malaysian firms. The two surveys are the Corporate Governance Survey Report 2004, a joint study by the Minority Shareholders Watchdog Group (MSWG) and the University of Nottingham and the Corporate Governance Screencard 2005, a joint study by the MSWG and Universiti Teknologi MARA (UiTM). Corporate governance was measured as a multidimensional construct in which corporate governance mechanisms are considered as representative dimensions. Meanwhile, the effectiveness of an organization can be examined using the Organizational Culture Assessment Instrument (OCAI) developed by Cameron and Quinn (1999) to determine the cultural strength, cultural type and cultural congruence of a company. In diagnosing the corporate culture, the questionnaire was developed based on the work of Cameron (1985), as cited in Quinn (1988). This questionnaire design has also been used by Deshpande and Farley (1999), and Rashid et al. (2003) for other Malaysian cases. For the purpose of this study, the researchers focused on the control/flexibility dilemma because this issue is associated with the core of management control systems and is related to organizational structure which assesses how the organizational culture moderates the relationship between corporate governance and corporate performance using sets of activities of organizations that serve as the foundation of organizational effectiveness based on the Competing Values Framework. The criteria of organizational effectiveness exist in each culture type. Table 1: Sources of Items and Variable Measurement for Questionnaire Survey Variable Source Measured as Items used in the Corporate Total score of 20 corporate Governance Survey 2004 and governance items Corporate governance Corporate Governance Screencard 2005 350

Organizational culture: Flexibility Culture Control Culture Corporate performance Competing Values Framework Self-constructed Total score of 6 categories organizational culture constructs with 24 items Total score of 10 company performance items The sources of items and measurement of the explanatory variables for questionnaire survey are presented in Table 1. The hypothesis on the association between corporate governance mechanisms and corporate performance was developed based on the agency theory. In accordance with the discussion based on the Competing Values Framework, the Organizational Culture theory suggests that there is a positive relationship between organizational culture and corporate performance (e.g. Lee & Ahmad, 2009). Table 2 summarizes the response cycle in respect of the questionnaires. Table 2: Response to Questionnaire Survey Stage Questionnaire Selection of Response Nonrespondent Respondent mailed subsample rate First stage 800-55 6.9% 745 Second stage 25% from 745 187 non-respondents 20 11% 167 Third stage 100 from 167 100 telephone calls made and emails sent to non-respondents 16 16% 84 Total respondent 91 DATA ANALYSIS The analyses conducted in this chapter include factor analysis, descriptive statistics, Pearson coefficient correlation, multiple regression and hierarchical regression in testing the hypotheses. This study applied the independent sample t-test and the Mann-Whitney U test showing no significant differences (Sig. two-tailed >.05) in response to the questionnaire between the five early and late respondents for all variables. The regression standardized residuals suggest that non-normality of the sample is not a problem in this study. No existence of heteroscedasticity was depicted. The Durbin Watson values for all analyses are within the acceptable range of 1.50 to 2.50, and, thus, suggest that each predicted value is independent of any other predicted value. The corporate governance items were then factorized under three separate groups of corporate governance factors comprising board governance (BrdGov), board process (BrdProc) and board compensation and information access (BrdComp). The organizational culture names the two types of culture as flexibility and control. Table 3: Characteristics of Board Governance Board Governance (BrdGov) Sufficient ongoing training and professional education for board members. Orientation programme for directors covers the company s business and governance practice. Nomination and re-election of directors are carried out at regular intervals (at least once every 3 years). Number of members on board is appropriate for the company size. The existence of a nominating committee. One-third or more independent directors on the board. Adequate disclosure of transactions that require board approval. Non-family members dominating the board. Separation of the role of Chairman and CEO. 351

Table 4: Characteristics of Board Process Board Process (BrdProc) Company s management provides the board with all necessary supporting and background information including customer satisfaction and services quality, market share and market reaction. The audit committee meets with the external auditors at least annually. The existence of an audit committee. Full attendance of members at board meetings. The existence of minority shareholders. Table 5: Characteristics of Board Compensation and Information Access Board Compensation and Information Access (BrdComp) Executive directors are rewarded with long-term incentives (e.g. share options). The existence of a remuneration committee. Appropriate remuneration and compensation package for directors. Board has separate and independent access to the company secretary. Company s management provides the board with monthly management accounts, including explanation of differences between plans and actual. Table 3, 4 and 5 describe the characteristics of corporate governance items. Based on the factor analysis, the KMO value for organizational culture is 0.889 and the Bartlett s test of sphericity of 1470.800 is determined to be significant (p = 0.000). Factor loading for the items for corporate performance ranges from 0.695 to 0.864, relatively good factor scores. All constructs have a Cronbach s alpha value well above 0.7, which indicates more than acceptable reliability. Specifically, the model of the study takes the following form: Performance = α i + 1Flexibility + 2BrdGov + 3BrdProc + 4ComInfo + 5BrdGovFlexibility + 6BrdProcFlexibility + 7ComInfoFlexibility + Є (Equation 1) Performance = α i + 1Control + 2BrdGov + 3BrdProc + 4ComInfo + 5BrdGovControl + 6BrdProcControl + 7ComInfoControl + Є (Equation 2) Descriptive analysis shows the minimum score for flexibility culture is 1.57 and control culture is 2.50. The results indicate that there is flexibility and control culture values for every company. This finding is in line with Quinn s (1988) that the flexibility and control dimensions are not a mutually exclusive categorization but lie in a continuum of culture. The high correlation between flexibility and control culture (r = 0.728, p < 0.001) did not change the hypothesis because the two culture variables were adopted from the competing values model. Revised hypotheses for corporate governance are as follows: H1BrdGov : Board governance is positively associated with corporate performance. H1BrdProc : Board process is positively associated with corporate performance. H1BrdComp : Board compensation and information access are positively associated with corporate performance. H2Flexibility : Flexibility culture has a moderating effect on the association between corporate governance and corporate performance. H2Control : Control culture has a moderating effect on the association between corporate\ governance and corporate performance. 352

Figure 3: Revised Research Framework Organizational Culture *Flexibility Culture *Control Culture Corporate Governance *Board Governance *Board Process *Board Compensation and Information Access INDEPENDENT VARIABLES H1: Board governance is positively associated with corporate performance. H1: Board process is positively associated with corporate performance. H1: Board compensation & information access are positively associated with corporate performance. H2: Flexibility culture has a moderating effect on the association between corporate governance & corporate performance. H2: Control culture has a moderating effect on the association between corporate governance & corporate performance. Performance DEPENDENT VARIABLE In accordance with the revised hypotheses, a revised research framework is presented in Figure 3. The multiple regression analysis reveals that each of the corporate governance components, Board Governance (β = -0.040, p > 0.05), Board Process (β = 0.214, p > 0.05) and Board Compensation and Information Access (β = 0.012, p > 0.05) has an insignificant influence on corporate performance. Table 6: Hierarchical Regression Analysis: The Moderating Effect of Flexibility Culture Variables Performance Coeff. M1 M2 M3 Flexibility Culture (Flexibility) 0.471** (5.042) 0.503** (4.749) 0.440** (4.186) Board Governance (BrdGov) -0.157 (-1.112) (0.269) -0.239 (-1.726) (0.088) Board Process (BrdProc) 0.115 (0.863) (0.391) 0.165 (1.165) (0.247) Board Compensation & Information Access (BrdComp) -0.034 (-0.263) (0.793) 0.006 (0.046) (0.963) BrdGov x Flexibility -0.020 (-0.114) (0.910) BrdProc x Flexibility 0.156 (1.125) (0.264) 353

BrdComp x Flexibility -0.350* (-2.344) (0.021) Model Summary ANOVA [**p < 0.01; *p < 0.05] R 2 0.222 0.238 0.329 R 2 Change 0.222 0.016 0.091 Sig. F Change 0.000 0.613 0.014 F Value 25.418 6.725 5.809 Sig. 0.000 0.000 0.000 With respect to Flexibility Culture as shown in Table 6, the results from hierarchical regression analysis indicate that the Board Compensation and Information Access x Flexibility Culture interaction term explain the weaker association with corporate performance (β = -0.350, p < 0.05). However, the Board Governance x Flexibility Culture interaction term (β = -0.020, p > 0.05) and Board Process x Flexibility Culture interaction term (β = 0.156, p > 0.05) did not explain the association with corporate performance. From the R 2 Change and Sig. F Change value, Flexibility Culture made a significant contribution of 1.4 percent to the variance of corporate performance. Table 7: Hierarchical Regression Analysis: The Moderating Effect of Control Culture Variables Control Culture (Control) Board Governance (BrdGov) Board Process (BrdProc) Board Compensation & Information Access (BrdComp) BrdGov x Control BrdProc x Control BrdComp x Control Performance Coeff. M1 M2 M3 0.452** (4.782) 0.455** (4.452) -0.124 (-0.878) (0.383) -0.156 (1.164) (0.248) -0.032 (-0.249) (0.804) 0.454** (4.625) -0.139 (1.000) (0.320) 0.146 (1.127) (0.263) -0.036 (-0.280) (0.780) -0.212 (-1.267) (0.209 0.190 (1.160) (0.250) -0.248 (-1.690) (0.095) 354

Model Summary ANOVA [**p < 0.01; *p < 0.05] R 2 0.204 0.219 0.306 R 2 Change 0.204 0.014 0.087 Sig. F Change 0.000 0.669 0.020 F Value 22.872 6.016 5.217 Sig. 0.000 0.000 0.000 With regard to Control Culture as presented in Table 7, the results indicate that the Board Governance x Control Culture interaction term (β = -0.212, p > 0.05), Board Process x Control Culture interaction term (β = 0.190, p > 0.05) and Board Compensation and Information Access x Control Culture interaction term (β = -0.248, p > 0.05) did not explain the association with corporate performance. From the R 2 Change and Sig. F Change value, Control Culture did not make any significant contribution to the variance of corporate performance. As a conclusion from the findings, Hypothesis H2Flexibility was supported whereas Hypothesis H2Control was not supported. CONCLUSION AND DISCUSSION The finding shows that when using Flexibility Culture as the moderating variable, there was a statistical and significant negative moderating effect on the association between Board Compensation and Information Access and corporate performance. Hence, the finding supports hypothesis H2Flexibility. One of the reasons could be that there are other possible culture types for the corporate governance characteristics investigated in this study. For example, there are numerous factors in the organizational culture that are suitable in the Malaysian business environment which could influence the Board Compensation and Information Access and thus resulted in better corporate performance. On the other hand, the moderating effect of the Control Culture does not show support for hypothesis H2Control implying that the joint effect of the Control Culture and corporate governance (Board Governance, Board Process and Board Compensation and Information Access) has no influence on the performance of a company. Consequently, hypothesis H2Control is rejected. Overall, the association among all three corporate governance variables and corporate performance has been moderated by the Flexibility Culture. Therefore, the findings in the present study verify that there are moderating effects between the corporate governance and corporate performance. The negative joint effect of the Flexibility Culture and corporate governance on corporate performance provides an indication that some features of the Flexibility Culture may be inappropriate or impractical within the company, which causes a decrease in performance. In such a case, companies may need to decide to at least reduce the effect of dysfunctional values that are entrenched in the Flexibility Culture. Since the Flexibility Culture values teamwork, coaching of employees, sharing among employees, leaders as facilitators, innovators, high commitment to company, emphasizes human resources, acquiring new resources and challenges, the results of this study indicate that the characteristics that involve individual, environment and other factors are likely to influence the impact of remuneration committee, directors remuneration and compensation package as well as executives rewards. These characteristics of the Flexibility Culture may also interfere with regard to the information access to the company secretary and also company management by the directors. The empirical analysis in the current study verifies the pattern of the relationships between corporate governance, organizational culture and corporate performance. The outcome of the study has made a contribution by documenting that different types of culture are only significant in certain scenarios or environments. On the other hand, the interaction variables explain that Control Culture does not moderate the relationship between all three components of corporate governance and corporate performance. The 355

Control Culture values an organization that functions with formal rules and policies, efficiency experts as leaders, management style that focuses on achievement and longevity in position, emphasizes the efficiency and stability of operations and maintains a smooth-running company. It is also external constituencies oriented including suppliers, customers, regulators and so forth. Therefore, findings of this study suggest that companies in Malaysia may need to select the culture types that appear to hold values that fit their business activities. Additionally, selecting the appropriate culture values will allow for the strong effect of corporate governance on corporate performance. More importantly, the findings of this study reveal that only certain organizational culture values are suitable for different organizations. The findings further suggest that the policymakers should perhaps design different sets of guidelines in setting and regulating formal rules and procedures for companies. The overall implication of this research on the company s management and the shareholders is the importance of having effective corporate governance practice with the presence of appropriate culture type. REFERENCES Abdul Rahim, R., Yaacob, M.H., Alias, N. & Md Nor, F. 2005. Investment, Board Governance and Firm Value: A panel data analysis, International Review of Business Research Papers, 6 (5), 293-302. Amran, N.A. & Ahmad, A.C. 2010. Corporate governance mechanisms and performance: Analysis of Malaysian family and non-family controlled companies, Journal of Modern Accounting and Auditing, 6 (2), 1-15. Barney, J.B. 1986. Organizational Culture: Can it be a source of sustained competitive advantage?, Academy of Management Review, 11 (3), 656-665. Che Haat, M.H., Abdul Rahman, R. & Mahenthiran, S. 2008. Corporate governance, transparency and performance of Malaysian companies, Managerial Auditing Journal, 23 (8), 744-778. Deshpande, R., Farley, J.U. & Webster, F.E. 1983. Corporate culture, customer orientation, and innovativeness in Japanese firms: A Quadrad Analysis, Journal of Marketing, 57 (1), 23-37. Dian, Y. (2014). Corporate Governance and Firm Performance: A Sociological Analysis Based on Chinese Experience, Social Sciences in China, 35 (1), 44-67. Gupta, P. & Sharma, A.M. (2014). A Study of the Impact of Corporate Governance Practices on Firm Performance in Indian and South Korean Companies. Procedia Journal of Social and Behavioral Sciences, 133 (15), 4-11. Henri, J-F. (2006). Organizational culture and performance measurement systems, Accounting, Organizations and Society, 31, 77-103. Hofstede, G. 1991. Cultures and organizations: Software of the mind. London: McGraw-Hill. Lee, H. Y. & Ahmad, K.Z. (2009). The moderating effects of organizational culture on the relationships between leadership behaviour and organizational commitment and between organizational commitment and job satisfaction and performance, Leadership and Organization Development Journal, 30, 53-86. Lee, S.K.J. & Yu, K. (2004). Corporate culture and organizational performance, Journal of Managerial Psychology, 19 (4), 340-359. Rashid, Md. Z. A., Sambasivan, M. and Johari, J. (2003). The influence of corporate culture and organizational commitment on performance, Journal of Management Development, 22 (8), 708-728. Quinn R.E. & Rohrbaugh, J. (1983). A spatial model of effectiveness criteria: towards a competing value approach to organization analysis, Management Sciences, 29 (3), 363-378. Quinn, R.E. (1988). Beyond rational management: Mastering the paradoxes and competing demands of high performance. San Francisco, CA: Jossey-Bass. 356