Roles of Corporate Governance in Terms of Risk and Performance: Malaysian Resources Corporation Berhad

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1 Universiti Utara Malaysia From the SelectedWorks of Nor Jannah Bt Abd Rahim Spring April 17, 2017 Roles of Corporate Governance in Terms of Risk and Performance: Malaysian Resources Corporation Berhad Nor Jannah Bt Abd Rahim, Universiti Utara Malaysia Available at:

2 Roles of Corporate Governance in Terms of Risk and Performance: Malaysian Resources Corporation Berhad Nor Jannah Bt Abd Rahim Universiti Utara Malaysia Abstract The study analyzes the Malaysian Resources Corporation Berhad annual report for five years from 2011 until The analysis is to identify the performance of the company in term of Risk and Return. 5 types of risk including macroeconomic variables were used in this study which is Credit Risk, Financial Risk, Liquidity Risk, Operational Risk and Market Risk. While for analyzing the return the Malaysian Resources Corporation Berhad, the Return on assets and Return on Equity is used to measuring their performance by years. The finding shows that, the most risk that influence the formation of return is the Liquidity risk by using current ratio for internal factor and Inflation for external factor. Keywords: Firm Performance, Risk Assessment, Profitability Risk, Credit Risk, Liquidity Risk and macroeconomic 1.0 Introduction Malaysian Resources Corporation Berhad is one of the company listed in the Construction Industry which including property development, infrasturucture, engineering, construction and environment, and facilities management. It is well known as MRCB which focusing on construction and property development company based. It is also located in Kuala Lumpur. MRCB was a developer of the Kuala Lumpur Sentral transport hub and business district with a venture of Keretapi Tanah Melayu and Pembinaan Redzai by developing and constructing the largest transportation hub in Malaysia which is Kl Sentral. As we know that Kl Sentral is the main

3 transport routes for Rapid Rail Project Lines, KTM Komuter, Express Rail Link to Kuala Lumpur International Airport. By analyzing the financial report of the Malaysian Resources Corporations for five years from 2011 until 2015, we can see that the average number of total assets is RM 4,237,846,000 while the average number of total liabilities RM 2,437,830,000. So this company manage well their assets and liabilities. Then, the board of director well managed the corporate governance by providing nomination and remuneration committee, audit committee, executive committee, esos committee but, unfortunately there is no risk management committee. Other than that, the board of director have at least one female in the board named Rohaya Mohammad Yusof for 3 years from 2013 to Then, the board of director also have fully local of the nationality and there is no foreign board of director. After that, the number of meeting in 2014 which is 12 times, and the least number of meeting for the year 2011 is 6 times. In relation, we can see that, the total remuneration for both non-executive and executive is highest in 2014 which is RM 3,170,000. So it can be said that, the higher the number of meeting attended, the higher the paying of remuneration given to the board. In conclusion, the latest year which is 2015, the chairman, Azlan Zainol stated that the Malaysian Resources Corporation Berhad shows the company had recorded about 12% increase in revenue which is RM1697 million. The net profit after tax also shows the highest potential within 5 years which increasing about 116% increasing that estimate RM330 million. Said the Chairman, this was the highest profit and revenue generated by Malaysian Resources Corporation Berhad in the past 10 years. 2.0 Literature review Referring to the article of Systematic and Unsystematic Risk Determinants of Liquidity Risk Between Islamic and Conventional Banks mentioned that without proper knowledge of risk formation in Islamic mode of financing, the management of liquidity is merely unreliable. The bank has to sell its assets far below their value by fulfilling the current financial obligations, the liquidity changes the solvent bank into insolvency bank. Waemustafa and Sukri (2016). According

4 to Sundararajan, V., Errico, L. (2002), by avoiding liquidity risk, long term liability is needed to financing assets using the equity modes. Then, for corporate governance, any companies that follows the rules and regulation of Islamic finance, will refer to the Shariah Supervisory Board by monitoring any practices implemented in the company and also the decision taken. As Shariah system is one of the part in corporate governance, Shariah Supervisory Board should reflecting and implementing the four pillars of a good corporate governance. Waemustafa and Abdullah (2015) The second article entitled Bank Specific and Macroeconomics Dynamic Determinants of Credit Risk in Islamic Banks and Conventional Banks. According to Waemustafa, W., Sukri, S. (2015), since the increasing of non-performing loan, the bank more collapsed recently. Some thesis suggesting loan is part of the bank assets while deposit payable is part of liabilities of bank. Other than that, as the liquidity is improved, this enabling the customer to service their loans while can mitigate credit risk. The impact of uncertainty due to the future profitability of investment projects is referring to the inflation problem. As higher conservative investment strategies will lead to a slow investment and the growth of economic also will become slower. Other than that, Inflation will reduce the competitiveness of Malaysia and other international country. The higher the exports price, relatively thus impacting on the balance of payments. Moreover, due to tax system, inflation can influence the tax system by distorting the decision of borrowing and lending decision. Gokal and Hanif (2004). The article mention about an orientation of industrial market and stakeholder ranks in a company is very important for a shareholders on a specific company. This is because the board committee focusing more on measures and devices rather than financial especially when the activities are being initiating, ratifying and monitoring activities. By comparing the industrial market and financial market, the board will be more focusing on industrial market when evaluating the performance of a company. Dziao (2016).

5 YEAR 3.0 Descriptive analysis 3.1 Risk Assessment Credit Risk (Average Collecting Period Ratio) Year/ratios AVERAGE COLLECTING PERIOD RATIO DAYS Based on the graph average collecting period above, that is expressed in days and is an indication for the quality of receivables by converting into cash, we can see that Malaysian Resources Corporation Bhd have a very bad average collecting period ratio on 2012 which is 329 days. This is the longest time for this company to collect all their debt within 5 years from 2011 until After a year, it slowly decreased the number of days until 166 days. It shows a good collecting period which is the shortest time in 2014 about 2 days only. This is the fastest period within these 5 years. So this shows that, Malaysian Resources Corporation Bhd have an effective account receivables management practices in 2014 but then it is only performing good for that particular year only while it increase the number of days again at 2015.

6 YEAR Liquidity Risk (Current Ratio) Year/ratios CURRENT RATIO TIMES Current ratio is the measurement to evaluate short term solvency or for paying off the ability of its short term liabilities with its current assets for any business to meet its short term obligations. In this following graph, we can see that Malaysian Resources Corporation Berhad s current ratio is increasing from 3.08(2011) until 3.84(2012) but have a very extreme fall from 3.84 times (2012) to 0.53times (2013). Year 2012 is the lowest current ratio which is 0.53 times over these 5 years which shows that this company is unable meet its current obligation. It can be proven that, on that particular year, the total current asset is lower than total current liabilities. Then, the current ratio increased at 2014 within 2.98 times but decreased at 2015 about 1.58 times. Within this 5 years, we can see that, 2012 is the most highest current ratios which 3.84 which means that on that year, the company can manage its own current assets wisely and can meet its current its current obligation.

7 YEAR Operational Risk (Operating Ratio) Year/ratios OPERATING RATIO TIMES Operating ratio shows that the efficiency for Malaysian Resources Corporation Bhd management by comparing the operating expenses and income. From the graph above, we can see that, in 2011 have the highest percentage of operating ratio which is 9.04 times which shows that this company has a low ability to create profit. Then, the next year of 2012, it has a slightly decrease which is 8.83 times. Then, the percentage decreasing about 68.74% from 8.83times to 2.76 times. Then, it decreasing again at 2013 to 0.07 times. This shows the lowest level of operating ratio for this 5 years which means that Malaysian Resources Corporation Bhd has a more efficiently in creating profit. Then, it has a slightly increasing after a year on 2015 which is 0.75 times. Although the value of ratio is increasing, it still has a low level of operating ratio which shows this company can still generate profits.

8 YEAR Financial Risk (Leverage Ratio) Year/ratios LEVERAGE RATIO(Debt to Equity) TIMES Leverage ratio is measured to evaluate the Malaysian Resources Construction Bhd, debt levels. Too much debt and loans shows that the company has a high leverage ratio. In debt to equity ratio has a minimum standard which means that, when the ratio is higher than 1 which can be seen in the graph at the year 2013(2.8 times), 2014(3times) and 2015(3 times) shows that Malaysian Resources Construction Bhd financed more with debt. While in year 2014 and 2015 the ratio is below that 1 which is 0.46 times and 0.44 times. This means that, this company is financed more by equity. In the overall, the higher the equity to debt ratio, it shows that this company not be able to generate more cash to satisfy the debt obligation.

9 YEAR 3.2 Company s Performance Return on Assets Year/ratios RETURN ON ASSETS PERCENTAGE Return on Assets measures efficiency of the company business by using their own assets for generating income. From this graph we can see that, the return on assets shows the highest percentage on 2014(7.86%) and the lowest percentage in 2013(0.3%). From the year 2011 the percentage of return on assets keep declining until 2013, but then have a drastic increasing to 7.86 % which shows the profitable of this company is improving and then drop to 6.97% in the year The higher the values of return on assets, will shows that the company is more profitable, so we can see that in the year 2014 and 2015, the Malaysian Resources Corporation generate more profit that other previous years.

10 YEAR Return on Equity Year/ratios RETURN ON EQUITY PERCENTAGE Return on equity is a measurement for the company to generate profits from the shareholder s investment in that particular company. It also shows that, how efficiently Malaysian Resources Corporation Bhd can use the money from shareholders to generate profits. Based on the graph above, we can see that in year 2011, the percentage of return on equity increasing from 3.76% to 3.99%. Then the percentage decline until become 1.15% at the 2013 and 1.14% at After a year, the percentage of return on equity having a sharp increasing about 88% which is 10.06%. So, we can say that, in 2015 the company of Malaysian Resources Corporation Bhd generate more profit from the shareholders. While in 2014, does not shows a good profitability that generate from the amount of equity.

4.0 Discussion and Recommendation 4.1 Discussion 4.1.1 Descriptive Statistics Table 1.0 Based on figure 1.

11 4.0 Discussion and Recommendation 4.1 Discussion Descriptive Statistics Table 1.0 Based on figure 1.0, the descriptive statistics shows that the descriptive statistics dependent and independent variables. The return on assets which is have been chosen as the dependent variable and as internal factor in this analysis shows that the mean is 3.68%. This means that the Malaysian Resources Corporation Berhad making a quite good return on assets on average for 5 years from 2011 until To compare with the standard deviation of Return on Assets variable which can be seen as the volatility of this company which by measuring the returns on the particular assets. Table 1.0 shows the standard deviation of 3.49% which has a slightly differences 0.19% with the mean.

12 The return that can be gained by the total equity of the shareholders in the company in terms of average for 5 particular years from 2011 until 2015 is 6.07% and the standard deviation is 4.42%. By comparing both mean and standard deviation of ROE with the ROA, we can see from the Table 1.0, Roe shows a higher percentage than ROA. This means this company producing return more on equity instead of their current assets. Then, the liquidity risk which using the current assets by measuring how liquidity of the total current assets of the Malaysian Resources Corporation Berhad. The mean ratio for the current assets by referring the result in table 1.0 shows it has 2.4 times. While the standard deviation is 1.33 times which is lower than the average mean. But still, this company have a good management in paying off its short term obligations. For the macroeconomic variables or external factor in this study including the Gross Domestic Product, Inflation Rate, Exchange Rate and Unemployment Rate. By referring table 1.0, the percentage of inflation rate is 2.44% in average but has a lower percentage of standard deviation/volatility which is 0.66%. While the Gross Domestic Product average mean is 5.3% and the volatility is 0.5%. All four external factor used in this analysis having a slightly big differences gap between the percentage of mean with the standard deviation.

13 4.1.2 Correlations Table 2.0 Correlation for Internal Factor/ Risk Variables Table 2.0 indicates that Malaysian Resources Corporation Berhad correlation for the internal factor of Return on Assets is more than R>0.3 this evidenced that these all variables are not free from multicollinearity issues but except for the average collecting period, operating ratio, leverage ratio, and size which is below than 0.3. This shows that, some variables for Malaysian Resources Corporation Berhad is positively significant to the Return on Assets (ROE, BOD Remuneration, Index and Current Ratio). This implies that, the higher financing concentration, should providing greater needs for return on assets while exposing risk. Other than that, by comparing the Return on Assets that amounting 1.000, the Return on Equity shows the which means that, when the Return on Assets increasing linearly with the Return on Equity. In contrary, the Return on Assets having a contrast sign which the Average Collecting Period is decreasing into negative. From the table, the correlation to the average collecting period, operating ratio, leverage ratio, and the size shows the negatively sign to the Return on Assets. While the correlation in Return on Assets in terms of Return on Equity, BOD Remuneration, and Index are showing a positive sign.

14 Table 3.0 Pearson Correlation for External Factor/ Macroeconomic Variables Table 3.0 exhibits the result of the Pearson correlation of Malaysian Resources Corporation Berhad macroeconomic variables. The results show that all the external factor which the Gross Domestic Product (0.496), Inflation (0.397), Exchange Rate (0.724) and Unemployment Rate (0.526) is positively significant to the Return on Assets Model Summary Table 4.0 Table of Model Summary Table 4.0 indicates that the information on regression ability of the Return on Assets for the total variation. The R (Pearson R) that shows the level of influence. This means that the greater the number of R, the higher the model for the Return on Assets. Based on the table, the value of R square is which means that 96.9% of the total variance in education length or variation which shows that the company model (Malaysian Resources Corporation Berhad) is a good company.

15 4.1.4 Coefficient Table 5.0 Table of Coefficient The Table of 5.0 shows that the significant value for the dependent variable (Return on Assets) is which is relevance. Then, the Beta shows a positive sign which is which means that the size of this company also positive. Then, the t value which shows the impact on variables used when doing some marketing, the Malaysian Resources Corporation Berhad should look at the inflation issue. 4.2 Recommendation To recommend the company of Malaysian Resources Corporation Berhad, this company should aware more for their credit risk. The result for average collecting period ratio in 2012, was a very huge problem that will give a high impact to this company if this mismanagement of credit risk is repeated again. Maybe the company should be more strict in collecting their debt from the debtor. For example, Malaysian Resources Corporation Berhad can keep updating the amount of debt to the debtor by sending a notice to pay back the debt on specific future dates. Other than that, Malaysian Resources Corporation Berhad also can increase the interest rate for the extended time or maybe gives a discount to the debtor if paying at a specific time or dates. For macroeconomic view, the Malaysian Resources Corporation Berhad may should reduce the production of product suh raw materials when inflation happened in country. This is due to reduce loss for the company and operating expenses. As the operating expenses is higher than operating income, the company might loss.

16 5.0 Conclusion Overall, Malaysian Resources Corporation Berhad perform well in terms of risk and return. As we can see towards the descriptive analysis before, this company shows a good performance by measuring the mean and standard deviation for each risk and return. The dependent variables which is Return on Assets shows a good achievement which is the mean is 3.68% which is quite high that shows that the Malaysian Resources Corporation Berhad good in generate profit and gaining return. While, the Return on Equity performs well in this company by producing return from the shareholder s equity. There were a very sharp increasing of the return which is from 1.14% to 10.06%. It was a very good achievement which the return increases rapidly. This may due to the amount of equity for that particular year is very high among other years. Other than that, in term of risk, we can see that, Malaysian Resources Corporation Berhad manage well their leverage ratio or debt to equity ratio. This is because the leverage is keep improving for 5 previous years which shows that Malaysian Resources Corporation Berhad tried the best to reduce the financial risk. In 2015 shows 0.44 times and this was the lowest ratio within 5 years. This can be assume that Malaysian Resources Corporation Berhad s risk committee focusing more to improve the debt to equity ratio. Because in 2011, the graph shows that the leverage/debt to equity ratio is very high which is 9.05 times. Then, Malaysian Resources Corporation Berhad shows a bad risk management for the credit risk which is average collecting period. Although, the numbers of days in collecting their debt is decreasing from 2011 until 2015, but in 2012, the number of days is almost 330 days. This was the most terrible management for managing their receivables. It means that the indication for the quality of receivables by converting into cash is very bad on that year 2012.

17 References Dziao, J. (2016). Corporate Governance and efficiency of a firm. Institute of Economics, University of Lodz, Poland, 1. Gokal, V., & Hanif, S. (2004). Relationship Between Inflation and Economic Growth. 2. Waemustafa, W., & Abdullah, A. (2015). Mode of Islamic Bank Financing: Does Effectiveness of Shariah Supervisory Board Matter? Australian Journal Of Basic and Applied Sciences 9 (37), Waemustafa, W., & Sukri, S. (2015). Bank Specific and Macroeconomics Dynamic Determinants of Credit Risk in Islamic Banks and Conventional Banks. International Journal of Economics and Financial Issues, 476. Waemustafa, W., & Sukri, S. (2016). Systematic and Unsystematic Risk Determinants of Liquidity Risk Between Islamic and Conventional Banks. International Journal of Economics and Financial Issues, 1321.

Careplus paper.pdf. Universiti Utara Malaysia. From the SelectedWorks of Yong Shun Xiong. Yong Shun Xiong, Universiti Utara Malaysia

Careplus paper.pdf. Universiti Utara Malaysia. From the SelectedWorks of Yong Shun Xiong. Yong Shun Xiong, Universiti Utara Malaysia Universiti Utara Malaysia From the SelectedWorks of Yong Shun Xiong Spring April 16, 2017 Careplus paper.pdf Yong Shun Xiong, Universiti Utara Malaysia Available at: https://works.bepress.com/yong-shunxiong/1/