Vol 4 (2007) - Issue 1

Article preview

Controlling Shareholder Systems and Its Impact on Corporate Governance in Malaysia

The focus of this article is to look at diverse ownership structures, especially the controlling shareholder systems, and look at their impact on corporate governance.
This article will discuss the different shareholder systems, that is the widely held and the controlling shareholder systems. The article will expand on the controlling shareholder systems since this is the system practised in Malaysia. In analysing the controlling shareholder systems, there will be a discussion on whether Malaysia has an efficient or inefficient controlling shareholder system and whether the controlling shareholders in Malaysia receive pecuniary or non-pecuniary benefit or both. The article will also analyse whether the controlling shareholder system in Malaysia is governed by good or bad law.
In conclusion, the article will draw from the above analysis and conclude what impact the above factors have on corporate governance in Malaysia.
Introduction
Large shareholders generally have substantial control and influence over company matters. Therefore, it has been suggested that without proper monitoring, large shareholders are prone to exploit minority shareholders’wealth.1 It has been shown that large concentrated shareholders extract private rents through special dividends,while Claessens et al.3 note that large concentrated shareholders can expropriate minority shareholders’ wealth through excessive compensation schemes and related party transactions. Recent accounts in the popular press also depict large concentrated shareholders as harmful to minority investors. For instance, in the case of Rashid Hussein Bank (RHB), where the former majority shareholder, Tan Sri Rashid Hussain, is now being sued by his former company, RHB Capital Bhd, for fiduciary breach of duty, breach of trust and negligence in the handling of the banks monies.
La Porta et al.5 observe that the prevalence of continued large concentrated shareholder ownership and control raises the question of who or what keeps the large concentrated shareholders from expropriating minority shareholders’ wealth. Research shows that several conventional corporate governance mechanisms are less effective in dealing with large concentrated shareholders’ opportunism.