Corporate Governance Effectiveness And Malaysian Takaful Companies Performance: The Moderating Role Of Shariah Committee Quality

Abstract

Corporate Governance (CG) has drawn significant attention in the last two decades due to the critical role it plays in stabilizing global economies. As a result of several financial scandals and collapses of giant international companies, especially in IFIs and Takaful operators, many studies have examined CG, but the findings remain inconclusive. Moreover, previous studies recommended the researchers must examine other intervening variables, which may have an effect on the behaviours of directors and influence the relationship between board effectiveness and performance This study examined the effect of the Board of Directors (BOD) effectiveness and Audit Committee (AC) effectiveness on the performance of 11 Malaysian Takaful companies licensed by Bank Negara Malaysia over the period from 2010 to 2017. In addition, the moderating effect of Shariah Committee Quality (SCQ) was investigated. The study uses a panel data approach, and multiple regression was used to test various hypotheses. This study employed relevant governance theories to investigate the relationship between CG and a Takaful company’s performance. The board effectiveness considered in this study were board size, board independence, executive membership, Muslim directors, meeting frequency, and gender diversity. AC effectiveness included AC Chairman Specialization, AC size, AC independence, and meeting frequency. Firm performance was assessed by the return on assets (ROA), return on equity (ROE), and earnings per share (EPS), and an SCQ score was used to determine the quality of Shariah Committee (SC). The empirical investigation revealed mixed results. The findings showed the relationships between BODE and corporate performance ROA and ROE were significant for board independence, Muslim directors on the board, gender diversity, and board effectiveness as an aggregate. Executive membership had an insignificant effect on ROA, Board meetings frequency had an insignificant effect on ROA, ROE and EPS. AC chairman Specialization, AC size, AC independence, and AC effectiveness as composite score had a significant and positive relationship with ROE. AC size, AC independence and AC effectiveness had a significant positive effect on ROA. Meeting frequency had a negative and insignificant relationship with ROA, ROE, and EPS. In addition, AC chairman specialization had an insignificant relationship with ROA. Concerning the relationship with EPS, the findings revealed that board size, board independence, executive membership, Muslim directors in the board, gender diversity, and board director’s effectiveness as an aggregate score had a significant relationship with EPS. Moreover, the findings showed that the AC size and AC effectiveness had a significant and positive relationship with EPS. However, AC chairman specialization, AC independence had insignificant relationship with EPS. The findings indicate that SCQ positively moderated the relationship between BODE on ROA, ROE, and EPS. The results also showed ACE had a negative direct effect on EPS. The findings of this study contribute to the literature on CG and firm performance in the context of developing countries. The findings also have useful implications for policymakers, academics, and users of Malaysia's financial statements.