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Asian Academy of Management Journal, Vol. 22, No. 2, 53–95, 2017
© Asian Academy of Management and Penerbit Universiti Sains Malaysia, 2017. This work is
licensed under the terms of the Creative Commons Attribution (CC BY) (http://creativecommons.
org/licenses/by/4.0/).
ETHICAL COMMITMENTS AND FINANCIAL
PERFORMANCE: EVIDENCE FROM PUBLICLY LISTED
COMPANIES IN MALAYSIA
Ahmad Firdhauz Zainul Abidin, Haza Aishah Hashim*, and
Akmalia Mohamad Ariff
School of Maritime Business and Management, Universiti Malaysia Terengganu,
Terengganu, Malaysia
*Corresponding author: hazaaishah@umt.edu.my
Published online: 29 December 2017
To cite this article: Abidin, A.F.Z., Hashim, H.A., and Ariff, A.M. (2017). Ethical
commitments and nancial performance: Evidence from publicly listed companies in
Malaysia. Asian Academy of Management Journal, 22(2), 53–95. https://doi.org/10.21315/
aamj2017.22.2.3
To link to this article: https://doi.org/10.21315/aamj2017.22.2.3
ABSTRACT
This study explores the role of business ethics towards corporate wealth creation and
sustainable performance. In the context of Malaysia, the importance of committing
to following the highest ethical standards is evidenced by the recommendations and
guidelines imposed through the Malaysian Code of Corporate Governance (MCCG) 2012.
The perspective from stakeholder theory indicates that commitment towards ethics has
multiple, positive impacts to companies. One of the positive impacts, which is a result
of being able to gain trust and secure loyalty from their stakeholders, is better nancial
performance. This study posits that management commitment towards ethics is positively
associated with nancial performance. Content analysis is used to systematically code
and evaluate data from 243 publicly listed rms on the Main Board of Bursa Malaysia in
year 2014. The Ethics Commitment Assessments Index (ECAI), which contains 14 items, is
used to score commitment towards ethics. Financial performance is represented by return
on assets (ROA) and return on equity (ROE). The results show a positive relationship
between commitment towards ethics and nancial performance. The ndings contribute
to policy formulation by suggesting that commitment towards ethics should continue to be
emphasised by regulators because it is considered by stakeholders in assessing the risk of
companies in the capital market.
Keywords: business ethics, commitment to ethics, nancial performance, MCCG 2012
Ahmad Firdhauz Zainul Abidin et al.
54
INTRODUCTION
Ethical conduct in business is an important criterion for a corporation to compete
in today’s complex markets. Cases of ethical misconduct, such as the highly cited
cases of Enron and Parmalat, were followed by legislative responses such as those
involving corporate governance. In the context of Malaysia, Krishnan (2011)
highlights corporate nancial scandals like those of Megan Media Bhd., Transmile
Bhd., and Welli Multi. Nevertheless, subsequent to the new legislations, there are
still cases of ethical misconduct being reported. Dilemmas on whether to pursue
self-interest or company interest often leads to corporate misconduct. According
to Schweitzer, Ordóñez, and Douma (2004), motivation to achieve individual
interest can lead to unethical behaviour. As reported in The Star Online dated
17 January 2014, KPMG reports that bribery, fraud, and corruption in Malaysia
have increased nearly 100% in the last three years. The KPMG report suggests
that the desire for wealthy lifestyles acts as a motivation behind the unethical
behaviours. Thus, in the light of the worsening ethical misconduct in Malaysia,
the need to explore corporate ethical issues is important and timely from both the
perspectives of policy formulation and corporate practices.
Commitment to ethics by a rm, can be described as a rm’s agenda in increasing
their stakeholder’s interest and maintaining a social relationship between rms
and stakeholders. Stakeholders are attracted to rms with high ethical commitment
because such commitment reects the rms’ responsibilities in ensuring sustainable
performance. For investors, sustainable performance results in greater return
on their investment, both in short- and long-term perspectives. Thus, corporate
obligations, roles, and responsibilities to commit to high ethical standards are in
line with the efforts to protect the shareholders’ interest and maximise their values.
In the context of Malaysia, the Malaysian Code of Corporate Governance (MCCG)
2012 directly emphasises on the role of the corporate board of directors and
management in promoting ethical corporate conduct. Any company is expected to
have clear policies involving corporate ethical commitments, whereas the managers
are expected to maintain high discipline to avoid involvement in unethical conduct
in their business operations. Although the objective of a corporation is increasing
prots and maximising shareholders’ wealth, stakeholders’ interest should also
be considered because they also play important role in determining corporate
performance.
The effect of corporate commitment towards ethical behaviours can be viewed from
the perspective of stakeholder theory. Firms that emphasise ethical commitments,
whether within their operations or beyond, often experienced increases in their
corporate values. When rms perform good ethical conduct in their operations,
Ethical Commitments and Financial Performance
55
they will receive loyalty from their stakeholders, such as suppliers and customers.
When rms show their commitment towards ethics in activities beyond their
operations, such as having ethical sensitivity towards the environment, the rms
will gain trust from stakeholders. All of these will result in sustainable nancial
performance of the rms. Accordingly, shareholders will be more attracted to rms
that have sustainable nancial performance, thus resulting in an increase in the
rm’s values.
This study examines whether corporate commitments to ethics affects their
nancial performance. Corporate commitments to ethics are disclosed in
corporate annual reports and derived using the Ethics Commitment Assessments
Index (ECAI). Financial performance is measured using return on assets (ROA)
and return on equity (ROE). A number of 243 companies publicly listed in the
Main Board of Bursa Malaysia in 2014 are used as the sample. The results show
positive association between commitment to ethics and nancial performance,
which supports stakeholder theory. Findings indicate that rms that show their
commitment toward ethics receive better return from stakeholders. Our ndings
are in support of the emphasis towards ethical corporate conduct by the Malaysian
government, especially through the MCCG 2012. More specically, the ndings
indicate that commitment towards ethical conduct is an aspect that should be
practiced by companies, and made known to the stakeholders.
Our study is among the rst to adopt an ethical disclosure index that incorporates
the recommendations in MCCG 2012 in an empirical analysis examining the
benet of corporate commitment towards ethical conduct. By doing that, we
incorporate the perspective of the Malaysian regulators in the development of the
index and at the same time highlight the aspect of MCCG 2012. This approach
has not received considerable attention in prior studies (i.e., recommendations
towards ethical corporate conduct). Also, our study highlights the importance
of corporate ethical conduct from the perspective of a developing country
(i.e., Malaysia). In doing so, we add another perspective concerning mechanisms
to curb unethical corporate conduct, aside from legislative framework that are
often shown to be ineffective in the developing countries due to the lack of efcacy
in their enforcement mechanisms. Corporate commitment towards ethical conduct
is expected to be effective in detecting and preventing corporate misconduct and
unethical behaviours in Malaysia, unlike the legislative framework that is treated
to be just another hurdle to overcome by the perpetrators.
Ahmad Firdhauz Zainul Abidin et al.
56
LITERATURE REVIEW
Stakeholder Theory
The benet of putting commitment on ethics in corporations can be explained by
stakeholder theory. This study is related to the stakeholder theory by focusing on
a rm’s commitment towards ethics that can provide nancial benets towards
rms. In theory, rms that well-managed their stakeholders’ interest, reducing cost
at the same time, help the rms’ nancial positions (Karim, Suh, & Tang, 2016).
Stakeholder theory indicates that rms that full a stakeholder’s interest by
promoting ethical conduct and being sensitive towards the environment tend to
receive trust and loyalty from the stakeholders (Harrison & Wicks, 2013). A formal
denition of stakeholder theory is a model of corporate social responsibility that
holds that business managers have ethical responsibilities to a range of stakeholders
that goes beyond a narrow view that the primary or only responsibility of managers
is to stockholders (Hartman, DesJardins, & MacDonald, 2014). Firms that treat
stakeholders well create values because the rms are considered to perform better
(Harrison & Wicks, 2013).
Mill (1961) proposed the idea that stakeholder happiness is also considered as
a level toward stakeholder satisfaction when engaging with rms. According to
Bosse, Phillips, and Harrison (2009), and Harrison, Bosse, and Phillips (2010) as
cited in Harrison and Wicks (2013), there are additional requirements to create
stakeholder values that are more than just meeting the satisfaction level of a
stakeholder. Harrison and Wicks (2013), in constructing examples of performance
measures from multiple stakeholder perspectives, include employees, customers,
shareholders, suppliers, and the community. All these perspectives are measure
based on each interest for the group. For example, a customer will be more happy
and satised if rms produce high quality products and good services.
According to Phillips, Freeman, and Wicks (2014), some people misinterpret
stakeholder theory to be tools for managers to take advantage for self-interest
through benets for some group of stakeholders against other stakeholder interests.
Another critical view of stakeholder theory perspectives is that rms that tend to
benet stakeholders are considered to be opportunist because of taking advantage
of the stakeholder. As in the denition of stakeholder, this consists of a group that
affects or can affect managerial decisions and actions which include shareholder.
Phillips et al. (2014) also stated that stakeholder theory stresses rms that intend to
provide equal treatment for all groups of stakeholders.
Ethical Commitments and Financial Performance
57
Financial Performance
Financial performance can be dened as the nancial position for rms in their
industries. According to Choi and Jung (2008), nancial performance reects a
measurement from historical nancial positions of companies. Firm performance
is a term applied to an organisation’s conduct and activities over a period, with
reference to cost efciency and accountability. It is also used to determine
any success or loss for rms. Financial performance is the monetary term for
measuring rms’ operations and policies, and to assess nancial conditions, income
statements, and the balance sheets of companies (Adam, 2014). Firm performance
can also reect a rm’s values (Rouf, 2011). The effectiveness and efciencies
of a rm’s operations can be measured by nancial performance (Neely, 2005).
Firm performance is used to determine the success or loss for rms. According to
Meigs (1978), analysis of a rm’s nancial performance is the process of selecting,
relating, and evaluating the rm’s operations, management, and decisions in
monetary forms. Most corporate organisations measure their performance by
analysing the sales-to-assets ratios, ROE, and ROA. For example, the study by
Kabajeh, Al-Nu’aimat, and Dahmash (2012) utilised rms’ nancial performance
ratios, which are ROA and ROE in their study. Bhunia, Mukhuti, and Roy (2011)
used rm liquidity, solvency, protability, and stability in the pharmaceutical
sector to measure the weaknesses and strength of nancial positions among public
listed companies in India. They used the liquidity test, solvency, and protability
and accounting ratios in determining the nancial performance.
Commitment to Ethics
Commitment to ethics has many denitions. Kanter (1968, as cited in Dixit and
Bhati, 2012, p. 34) denes commitment as “the willingness of social actors to give
their energy and loyalty to social systems, the attachment of personality systems
to social relations, which are seen as self-expressive.” It is the basic concept
and fundamental principles of human conduct and belief. Salancik (1977) states
that commitment can be dened as a bind between individual and actions. It is a
belief from the individual perspective to get involved in organisations, and that
the involvement will strengthen the bonds between individuals and organisations.
Simply put, commitment is a promise to do something that is believed will transform
the promise into reality. Meanwhile, ethics can be dened as a judgement and rules
that are based on the basis of morality, which can be distinguished between right
or wrong (Ferrell, Fraedrich, & Ferrell, 2011). Therefore, commitment to ethics
can be dened as a willingness, based on moral principle, belief, and actions, to
conduct something good and promote in others in order to maintain the relationship
within organisations. According to Verschoor (1998), commitment to ethics is an
Ahmad Firdhauz Zainul Abidin et al.
58
organisation’s willingness to conduct operations as what have been written in its
codes of ethical conduct. Meanwhile, commitment to ethics as an organisational
commitment, which occurred in individuals, can promote increased organisation’s
performance (Wells, 2013; Zohdi, Maghool, Ramezani, & Hosseini, 2013). Other
studies implied that commitment to ethics involves corporate responsibilities
towards ethical business conduct (Pae & Choi, 2011). Pae and Choi (2011) added
in their studies that high ethical standard practices in corporations reect higher
corporate valuation.
Commitment to ethics also describes how rm operations are committed within
a framework of shareholder values, stakeholder interests, and social issues
(Keim, 2001). Keim (2001) added that rms that have a commitment towards
ethical values by investing in social issues are seen to have made a transactional
investment. Furthermore, rms can be considered as having ethical conduct when
the management is committed to promote the ethical codes and values towards
employees in organisations (Valentine & Barnett, 2003). Additionally, rms’
commitments to ethics must be implemented at the management levels to create
awareness among the stakeholders (i.e., employees, suppliers, customers, and
society) towards organisation code of ethics and organisation policies. Thus, it is
management commitment to promote the organisation's ethical values (Callaghan,
2012).
Relationship between Commitment to Ethics and Financial Performance
There are several studies focusing on business ethics in terms of corporate
social performance (CSP) or commitment to ethics. Most studies focusing on
the relationship between CSP and nancial performance (Waddock & Graves,
1997; Fu, Wang, & Jia, 2012; Wang & Berens, 2015; Fischer & Sawczyn, 2013).
Waddock and Graves (1997) focused on two types of CSP directions – which are
slack resource, a resource that provide rms investing towards social relations;
and good management, where good management practice improves stakeholders
relationships with the company – which results better performance. Waddock
and Graves (1997) have found a positive relationship between CSP and nancial
performance for all companies in the S&P 500. The researchers concluded that
rms with strong nancial performance are able to invest in CSP by utilising slack
resources, and by doing so, reects the rm’s positive image towards stakeholders
who are then provided better nancial returns.
The relationship between CSP and nancial performance in China (Fu et al., 2012,
p. 35) used ROE as accounting-based measures and Tobin’s Q as market-based
measures. The researchers argue that companies with high activities of corporate
Ethical Commitments and Financial Performance
59
social responsibility (CSR) need to utilise more resources, thus affecting its current
nancial performance (ROE). Moreover, Fu et al. (2012) found negative relations
between CSP and corporate nancial performance (Tobin’s Q) among companies
in China. The researchers concluded that rms in China should emphasise on CSR,
contributes towards society, employee, and natural environment, and by doing so
improves their market values and nancial positions.
Jauch, Glueck, and Osborn (1978) examined the relationship between commitment
and performance. The study conducted by selecting samples among academicians
to determine whether productivity of research has relationship with professional
commitment. They found that those professionals with commitment have a positive
relationship within research productivity. The greater the professional commitment,
the greater the research productivity. This nding concludes that when individuals
have high commitment, in their profession, productivity also increased. Similar
to rms, manager commitment will drive the management towards ethical and
improved performance.
According to Berman, Wicks, Kotha, and Jones (1999), in the intrinsic stakeholder
commitment model, normative commitment in rms, based on morals, tends to
treat stakeholders in a positive way, and based on nancial returns, rms consider
setting strategy based on nancial performance. Generally, the relationship between
management and stakeholder were based on an intrinsic stakeholder commitment
model, which is more committed towards morality rather than maximising prots.
Thus, this intrinsic model has signicant affect towards the managerial decision to
act ethically and morality as their values.
Watson (2010) discussed leader ethics and organisational commitment.
Organisational commitment is dened as “a strong belief in and acceptance of the
organization’s goals and values, a willingness to exert considerable effort on behalf
of the organization, and a denite desire to maintain organizational membership”
(Mowday, Porter, & Steers, 1979, p. 604 as cited in Watson, 2010). Commitment also
can be constructed into three forms: (1) continuance commitment, evaluation tools
towards members, (2) affective commitment, emotional-bond within organisation,
and (3) normative commitment, which is perceived moral obligations (Meyer &
Allen, 1991, as cited in Watson, 2010). The study concluded that affective and
normative commitment has a relationship with employees’ perception of leaders’
values. Thus, rms that can show its commitment towards ethical values, and
encourage their employees by having clearly rules, and protecting employee
interests, the manager can be seen as being an ethical person, thereby gaining
commitment from employees to improve performance.
Ahmad Firdhauz Zainul Abidin et al.
60
Previous studies have looked into the relationship between commitment to ethics
and nancial performance. Verschoor (1998) found a positive relationship between
rms’ commitment to ethics and nancial performance among the 500 largest
companies in the US. Verschoor (1998) added that a company committed towards
ethical behaviour inside corporate reports meet better nancial performance.
Meanwhile, Choi and Jung (2008) using a survey method based on the Ethical
Commitment Index (ECI), found no relationship between commitment to ethics
and nancial performance among South Korean companies. These studies were
researched further by Pae and Choi (2011) by focusing on corporate governance
and business ethics. They found a positive relationship between corporate
governance and business ethics with a rm’s value among Korean public listed
rms. According to Chandler (2015), rms that have a high commitment towards
promoting ethical values and utilising the resources towards ethical practice will
have a better reputation with stakeholders. Furthermore, stakeholders are sensitive
towards a rm’s activities, thus affecting nancial performance.
Hypotheses Development
The relationship between commitment towards ethics and corporate nancial
performance has been examined from the perspective of cost of capital, market
values, and corporate governance (CG) structure. For example, studies show that
rms with comprehensive CG are valued highly in the stock market, and leads to
better nancial positions because investors are more likely to invest in rms that
provide low risk and protect the investment (Pae & Choi, 2011). More related to
this study are those that have examined corporate commitment to ethics. Studies
such as Van der Merwe, Pitt, and Berthon (2003), Verschoor (1998), and Vogel
(1991) nd a positive relationship between corporate commitment to ethics and
nancial performance (or corporate value). Thus, based on the evidence from the
prior studies, Hypothesis 1 is constructed as follows:
H1: Management commitment towards ethics is positively associated with
nancial performance.
METHODOLOGY
Sample Selection
The sample rms in this study are publicly listed rms on the Main Board of Bursa
Malaysia from the year 2014. A total of 260 rms are randomly selected from the
total of 820 rms listed in 2014. The number in the sample were selected based
Ethical Commitments and Financial Performance
61
on the Krejcie Morgan procedure in order to minimise error and achieve a 95%
condence level (Krejcie & Morgan, 1970). From the 260 companies, only 243
rms are in the nal sample used for analysis because 17 rms are excluded due
to missing data.
Regression Model
To test the hypothesis, multiple regression analysis is employed. Multiple
regression analysis, as dened by Higgins (2005), is a tool to examine the relation
between multiple independent variables and a dependent variable. It is also used
to predict value of the dependent variable by using several independent variables.
The regression models to test H1 are as follows:
For the rst model where nancial performance is proxied by ROA:
ROACOMMTFIRMSZFIN LVGMKT CAP
IND
12
34
k1
11
5k
0
bb
=++++
+
bbb
bf
+
=+
/
(1)
For the second model where nancial performance is proxied by ROE:
ROECOMMT FIRM SZ FINLVG MKTCAP
IND
12
34
k1
11
5k
0b
=++++
+
bbbb
bf
+
=+
/
(2)
where,
ROA = nancial performance measured by ROA
ROE = nancial performance measured by ROE
COMMT = management commitment
FIRM_SZ = rm's size
FIN_LVG = rm's nancial leverage
MKT_CAP = rm's market capitalisation
IND = industries
The models were expected to show that rms with a higher commitment towards
ethics (COMMT) have a positive association with nancial performance ROA
(ROE) and proving hypothesis of this study. The model includes several control
variables that are selected based on the commonly used measures in prior studies
(e.g., Yu & Choi, 2014; Wang & Berens, 2015; Waddock & Graves, 1997). They
are:
Ahmad Firdhauz Zainul Abidin et al.
62
• Firm size (FIRM_SZ), which can be measured as rm’s total assets, where
Firm's size = Total assets (3)
• Financial leverage (FIN_LVG), otherwise known as debt ratio, measured
by a rm’s total liabilities divided by total assets
Financialeverage
Totalassets
Totaliabilities
l
l
= (4)
• Market capitalisation (MKT_CAP), measured by multiplying a rm’s
shares outstanding by stock price per share. All these ratios were collected
from Osiris database. Lastly, industries were measured by using Bursa
Malaysia industries listings.
Market capitalisation = Oustanding shares × Shares value (5)
Moreover, rm size (FIRM_SZ), which is associated with strong nancial
performance (Pae & Choi, 2011), contributed towards resource to commit to
better ethical conduct. Financial leverage (FIN_LVG) is measured by using total
liabilities divided by total assets (TL/TA) or debt-to-asset ratio. Financial leverage
provides better capital structures but at the same time increases risk, where
management need to reduce risk by meets creditors expectations and committed
towards ethical conduct (Choi & Jung, 2008). Market capitalisation (MKT_CAP)
is also considered in the model, where it is associated with a rm’s size (Pae &
Choi, 2011), which also reects nancial positions. Lastly, industry (IND) variable
is also included in the model, which is the variety of industry reects different
commitment to ethics disclosure and nancial performance. This is based on the
ndings of Fischer and Sawczyn (2013), who stated that companies in different
industries have different ethical behaviour.
In measuring nancial performance, variety of measures were used to rank a
rm’s performance. Basically, ratios such as ROA, ROE, protability ratios, debt-
to-equity ratios, and market values are common measures of performance. For
example, Kabajeh et al. (2012) used ROA, ROE, and return on investment (ROI)
in examining the ratios relationship with share values of Jordanian insurance
public companies. Boaventura, Silva, and Bandeira-de-Mello (2012) used ROA,
ROE, return on sales (ROS), sales growth, market share, risk of the rm, return
on capital employed (ROCE), and earnings per share (EPS) in order to indicate
corporate nancial performance. This study employs ROA and ROE as measures of
nancial performance. ROA is the most favourable proxies in measuring nancial
performance. ROA was chosen because it represents a rm’s protability (Fischer
Ethical Commitments and Financial Performance
63
& Sawczyn, 2013) and rms controlling their total assets to gain advantages that
can return a prot (Hull & Rothenberg, 2008). Firms’ activities were related to the
CSR that impacts towards ROA (Wang, Choi, & Li, 2008). ROE is also considered
to be the second proxies of nancial performance. ROE were calculated using
net income divided by total equity; it is also favourable among previous studies
(Waddock & Graves, 1997; Pae & Choi, 2011; Fu et al., 2012; Saedi, Soan,
Saeidi, Saeidi, & Saaeidi, 2015). According to Johnson and Greening (1999, as
cited in Zabri, Ahmad, & Wah, 2016), ROE is proven in measuring performance
for both rm’s stakeholder and shareholders. ROA and ROE were calculated using
the following formulae:
ROA
Totalaverage assets
Netincome
= (6)
ROE
Totalequity
Netincome
= (7)
The data for the ratios are derived from the annual reports and Osiris database.
Measuring Commitment to Ethics
The test variable is COMMT, which represents commitment to ethics. In measuring
commitments to ethics, board statements from the annual reports of the publicly
listed companies are examined. This approach is similar to prior studies on corporate
commitment to ethics. More specically, this study follows the studies on US rms
conducted by Verschoor (1998) and Korean rms conducted by Pae and Choi
(2011). To score the management commitments towards ethics, this study develops
an ECAI index. In developing the index, the management commitment assessment
items in Pae and Choi (2011) are adopted. The original index containing 11 items,
constructed by Pae and Choi (2011), is revised by considering the Malaysian
corporate practices. More specically, recommendations from the MCCG 2012
in relation to the management commitment towards ethics in organisations are
examined. Three items from the MCCG were added into the index in this study.
The ECAI consists of 14 items, as presented in Table 1.
In Table 1, items 1 to 11 are adapted from Pae and Choi (2011), and items 12,
13, and 14 are added based on the MCCG 2012 and rm’s practices. Item 12 was
added based on the recommendations from the MCCG 2012, which stated: “The
code of conduct should include appropriate communication and feedback channels
which facilitate whistleblowing.”
Ahmad Firdhauz Zainul Abidin et al.
64
Table 1
The ECAI index
Items
1. Top managers of this company regularly emphasise the importance of business ethics.
2. Ethical behaviour based on a formal business philosophy is the norm of this company.
3. This company has a disciplinary system through which unethical behaviour is strictly
punished.
4. This company has a code of ethics.
5. In this company, employees can report unethical conduct through an anonymous channel.
6. In this company, ethics education, training, or workshops are in place to enhance business
ethics of employees.
7. This company regularly puts a signicant portion of its prots towards philanthropy.
8. This company has an independent ethics department and ofcers.
9. In this company, employees can get help regarding business ethics through an ethics hotline
or open communication channel.
10. This company has an ethics committee.
11. This company has an ethics evaluation system measured by an independent party from
outside the company.
12. The board of this company have established the Whistleblowing Policies.
13. The board of this company committed to achieve business sustainability.
14. The board of this company committed to conduct business in accordance with the highest
ethical standards.
Additionally, the statement on establishment of a whistleblowing policy also were
provided from several rms that stated:
The Group implemented the Whistleblowing Policies and
Procedures (“Whistleblowing Policy”) to address whistleblowing
matters; and the Whistleblowing Policy describes the Group’s
Speak-Up Policy, avenues for ling a concern and handling of
whistleblowing incidents by the employees and external party
or any insurance intermediary (Allianz Malaysia Berhad, 2014,
p. 74).
Item 13 was added based on board commitment in promoting and achieving
nancial, social, and environmental sustainability for the rm:
The board should ensure that the company’s strategies promote
sustainability.
Ethical Commitments and Financial Performance
65
The board should formalise the company’s strategies on promoting
sustainability. Attention should be given to environmental, social
and governance (ESG) aspects of business which underpin
sustainability (Securities Commission Malaysia, 2012, p. 12).
For example, CIMB Bank Malaysia and Cocoaland Holdings Berhad stated that:
As a good corporate citizen, CIMB has shifted its focus from giving
back to the community to addressing the concerns of stakeholders
regarding issues impacting the long-term sustainability of CIMB’s
business and customers (CIMB Group, 2014a, p. 157).
The Board recognises the need for the Company’s strategy to
include sustainability on the operations. A sustainability process
would help the Company to set goals, measure its performance
and manage changes in its business (Cocoaland Holdings Berhad,
2014, p. 16).
Item 14 was added based on the board commitment towards highest ethical
standards in conducting business: “The board should formalise ethical standards
through a code of conduct and ensure its compliance” (Securities Commission
Malaysia, 2012). An example of this statement can be found from British-American
Tobacco (Malaysia) Berhad and Amway (Malaysia) Holdings Berhad:
The Company and its Board of Directors (Board) remain
steadfast in its commitment in maintaining high standards of
corporate governance. The Board rmly believes that the integrity
and commitment of its Board and employees, supported by a
comprehensive framework of policies guidelines and internal
controls, will serve to strengthen the Company’s sustainability,
organisational effectiveness and drive a high-performance culture
within the organisation [British-American Tobacco (M) Berhad,
2014].
The Board recognises the importance of enhancing shareholder
value through building a sustainable business by implementing
and maintaining high standards of corporate governance in
managing the business affairs of the Company [Amway (M)
Holdings Berhad, 2014, p. 25].
Ahmad Firdhauz Zainul Abidin et al.
66
In measuring disclosure items, most previous studies used a scoring method,
whether binary scoring (Haniffa & Cooke, 2000; Mia & Al-Mamun, 2009) or rating
scoring that is based on quality of disclosure and sentence structure (Verschoor
1998; Pae & Choi, 2011; Fu et al., 2012). Binary scoring (0,1) system is favourable
among previous studies related to the social disclosures (see Haniffa & Hudaib,
2007; Wang & Berens, 2015). This study uses binary scoring for each ECAI item.
Each item is scored as one (1) if the item existed and zero (0) if not exist. The
score is calculated in percentage; where each score of a company is divided by
total scores.
1
100%
n
c#
/ (8)
Where n is the number of total scores which is 14, and c is the scores for each
company. The higher the ECAI score, the higher the management commitment
towards ethics in the rms.
RESULTS
ECAI Disclosure Statistics
Table 2 displays the results of frequency analysis of 14 ECAI items for the 243
rms in the sample.
Table 2
Frequency analysis of ECAI items
Item Item not disclosed Item disclosed
Frequency % Frequency %
1 122 50.2 121 49.8
2129 53.1 114 46.9
3 221 90.9 22 9.1
4 64 26.3 179 73.7
5 197 81.1 46 18.9
6 178 73.3 65 26.7
7 46 18.9 197 81.1
8 231 95.1 12 4.9
9226 93.0 17 7.0
(continued on next page)
Ethical Commitments and Financial Performance
67
Item Item not disclosed Item disclosed
Frequency % Frequency %
10 220 90.5 23 9.5
11 237 97.5 6 2.5
12 129 53.1 114 46.9
13 59 24.3 184 75.7
14 34 14.0 209 86.0
Based on Table 2, 121 rms (49.8%) disclosed item 1 where top managers or
board emphasised the importance of business ethics. For example, the statement
from Telekom Malaysia Berhad committed to promoting business ethics in their
operations:
TM’s rm commitment to enhancing and strengthening our
corporate governance and business ethics, as well as inculcating
ethical behaviour among the workforce and representatives of
the Company. We have, in fact, two arms looking into ethics and
integrity (Telekom Malaysia Berhad, 2014, p. 17).
Meanwhile, 114 rms (46.9%) disclosed item 2 that suggested the rm’s
commitment by having philosophy towards ethical conduct. Basically, the
philosophy is stated as part of the vision or mission of rms to show their
commitment to ethics. For example, CIMB Bank Malaysia states ve core values
as the main philosophy in their operations:
(1) CUSTOMER-CENTRIC: We exist to serve our customers
and we sell products and services that our customers understand
and value; (2) HIGH PERFORMANCE: We work hard and we
work strategically for customers, staff and other stakeholders;
(3) ENABLING PEOPLE: We empower and align our people to
innovate and deliver value in their workplace as well as for the
community they serve; (4) STRENGTH IN DIVERSITY: We have
respect for different cultures, we value varied perspectives and
we recognise diversity as a source of strength; (5) INTEGRITY:
We are honest, respectful and professional in everything we do
because integrity is the founding value of CIMB Group (CIMB
Group, 2014a, p. 2).
Table 2 (continued)
Ahmad Firdhauz Zainul Abidin et al.
68
For item 3, only 22 rms (9.1%) have disciplinary action towards unethical
behaviours among workers. For example, a statement from CIMB Bank Malaysia
explained further actions towards unethical conduct among employees:
The Group ensures prompt investigations and disciplinary actions
are taken against offending employees. Disciplinary actions taken
can include dismissal of employment and ling of civil suit for the
recovery of losses. Employees are trained to handle the personal
information securely and with the utmost respect. Failure to do
so may result in disciplinary action (CIMB Group, 2014b, p. 93).
Item 4 explains the actions from the board to establish a code of ethics or code
of conduct in rms. A number of 179 rms (73.7%) disclosed item 4. There were
several types of sentence structures that show the rms have established a code
of ethics towards board and employees. For example, Advanced Synergy Berhad
established a code of conduct and ethics for both directors and employees: “The
Company’s Code of Conduct for Directors and employees continue to govern
the standards of ethics and good conduct expected of Directors and employees”
(Advanced Synergy Berhad, 2014, p. 13).
Meanwhile, other companies adopted a code of business ethics provided from
Companies Commission of Malaysia, such as Aturmaju Resources Berhad:
“The Directors shall be guided by the Code of Ethics for Directors issued by the
Companies Commission of Malaysia. The Directors shall observe the Code of
Ethics in performance of their duties” (Aturmaju Resources Berhad, 2014, p. 9).
Item 5 refers to the commitment from the board and management towards ethics
by providing a reporting channel to report unethical cases related to the rm’s
business or wrongdoings among employees. Forty-six rms (18.9%) disclosed
this item. Sixty-ve rms, or 26.7% of total sample, disclosed item 6, where the
board and management team facilitated training towards employees in improving
their skills. These rms also show their commitment by regularly reminding their
employees about the importance of business ethics by providing seminars and
booklets for references. For example:
The group-wide programmes conducted during the year to embed
the right ethical values and compliance with Maybank’s Code of
Ethics amongst all Maybank employees included the following:
(1) Annual e-Learning Code of Ethics Declaration; (2) Training
through induction for new employees; and (3) e-Capsule –
messages are screened through MyPortal to remind and ensure
Ethical Commitments and Financial Performance
69
compliance to the Code of Ethics (Malayan Banking Berhad,
2014, p. 179).
Meanwhile, 197 rms, or 81.1% from 243 samples, disclosed item 7 that stated
conducting philanthropic activities and CSR activities. This demonstrates that
most rms are showing their commitment towards social and environmental
ethical concerns. Certain rms only disclosed their philanthropic activities in
general sentences:
The Group plays its role as a socially responsible corporate citizen
in the community whenever the need arises. The Group is active
and aware on community welfare by supporting needy social
objectives in the communities in which its businesses operate and
its employees live and work (Chuan Huat Resource Berhad, 2014,
p. 110).
Other companies explained philanthropy in detail, such as utilising donations
towards underprivileged children, schools, and engaging with various parties in
utilising charitable giving. For example:
BHIC is committed to support and engage communities through
its various business divisions. This forms a fundamental pillar
in its CSR initiative to engage key stakeholders such as local
communities, charitable organisations and Non-Governmental
Organisations (NGOs). As part of our commitment towards
community, BHIC group made contributions in cash and
equipments to selected organisations including orphanages, an old
folks home, and schools (Boustead Heavy Industries Corporations
Berhad, 2014, p. 45).
Item 8 stated the commitment from the board or management to have an independent
ethics department and ofcers. Only 12 rms disclosed this item. An example of
disclosure is found in the following statement:
Employees and stakeholders who reasonably and in good faith
believe that malpractices exist within the Company are able to
report their concerns to the Audit Committee Chairman or the
Independent Non-Executive Director (Daibochi Plastic and
Packaging Industry Berhad, 2014, p. 12).
Ahmad Firdhauz Zainul Abidin et al.
70
It is believed that this is not possible or appropriate, then the
concern should be reported to the Senior Independent Non-
Executive Director of the Company [Harrisons Holdings (M)
Berhad, 2014, p. 9].
Item 9 also has low disclosure among companies, of which only 17 rms, or 7.0%,
disclosed this item in their reports. Item 9 represents rms’ commitment to ethics
by providing an ethical hotline for their employees in gaining information of
ethical issues or improving knowledge on ethical conduct. There were also only
23 rms that disclosed item 10 where the board established an ethics committee to
promote ethical values and controlling risk. Some rms established separate ethics
committee, for example:
The establishment of our Enterprise Ethics and Integrity Unit
(EEIU) back in February 2013 is testament of TM’s rm
commitment to enhancing and strengthening our corporate
governance and business ethics, as well as inculcating ethical
behaviour among the workforce and representatives of the
Company (Telekom Malaysia Berhad, 2014, p. 17).
Meanwhile, some rms facilitate the audit committee or risk management
committee in reviewing ethical matters.
Audit committee/ethic Line Review of matters in relation to legal
compliance, conicts of interest, investigation and ethical conduct.
Review of the Ethics Line Procedures to address allegations made
by whistle blowers, to ensure proportionate and independent
investigation are duly conducted and follow-up action is taken and
brought to the attention of the AC (ASTRO Malaysia Holdings
Berhad, 2014, p. 66).
Item 11 represents ethics evaluation from outside companies. Only six rms
disclosed this item. For example: “The Board has established an independent
internal audit function that reports directly to the Audit Committee. This internal
auditor function is outsourced to Russell Bedford Malaysia Business Advisory
Sdn. Bhd.” (Emas Kiara Industries Berhad, 2014, p. 13).
In terms of recommendations from MCCG 2012, items 12, 13, and 14 represent
a rm’s commitment to ethics by following guidance provided by MCCG 2012.
There were 114 rms, or 46.9% from 243 rms, that disclosed item 12 whereby
the board of the company established Whistleblowing Policies, reecting the
Ethical Commitments and Financial Performance
71
recommendation 1.3 in MCCG 2012: “The code of conduct should include
appropriate communication and feedback channels which facilitate whistleblowing”
(Securities Commission Malaysia, 2012).
For example, as being stated in Allianz Malaysia Berhad Annual Report, whistle
blowing mechanisms were established as a part of company’s policy in reporting
unethical conduct, which provide details and procedures in reporting: “The Group
implemented the Whistleblowing Policies and Procedures (‘Whistleblowing
Policy’) to address whistleblowing matters; and the Whistleblowing Policy
describes the Group’s Speak-Up Policy, avenues for ling a concern and handling
of whistleblowing” (Allianz Malaysia Berhad, 2014, p. 74).
Meanwhile, 75.7% from 243 rms disclosed item 13, which is the board of a
company is committed to achieve sustainability that reects rms in fullling
recommendation 1.4 in MCCG 2012: “The board should formalise the company’s
strategies on promoting sustainability. Attention should be given to environmental,
social and governance (ESG) aspects of business which underpin sustainability”
(Securities Commission Malaysia, 2012).
In analysing item 13, each of the companies have their own denition of
sustainability, a general statement that can be viewed under the board strategies in
promoting sustainability, which is one of the recommendations from MCCG 2012.
For example:
The Board recognises the need for the Company’s strategy to
include sustainability on the operations. A sustainability process
would help the Company to set goals, measure its performance
and manage changes in its business. The effort would continue
to be monitored by the Board in helping to shape the Company’s
strategy and policy and ultimately to improve the overall
performance (Asia Bioenergy Technologies Berhad, 2014, p. 10).
Additionally, sustainability also denes a rm’s responsibility in giving back
towards society in achieving long term business sustainability, for example: “As
a good corporate citizen, CIMB has shifted its focus from giving back to the
community to addressing the concerns of stakeholders regarding issues impacting
the long-term sustainability of CIMB’s business and customers” (CIMB Group,
2014a, p. 2).
The last item is item 14, which reected the overall recommendation from the
MCCG for each public listed rm to show and maintain their highest standard in
Ahmad Firdhauz Zainul Abidin et al.
72
conduct and business practice. Item 14 is the highest disclosure score where 209,
or 86.0% from 243 rms, showed that the majority of rms from the samples
attempted to full recommendations from MCCG 2012 in maintaining highest
standards in their operations. The sentence structures can be simply recognised
under corporate governance section inside annual reports which reect a rm’s
commitment towards highest standards of ethical conduct by complying MCCG
2012 recommendations. For example:
The Board of Asia Bioenergy Technologies Berhad (the
“Company”) recognises the importance of adopting high standards
of corporate governance in the Company in order to safeguard
stakeholders’ interests as well as enhancing shareholders’ value.
The Directors consider corporate governance to be synonymous
with four key concepts, namely transparency, accountability,
integrity as well as corporate performance … This corporate
governance statement (“Statement”) sets out how the Company
has applied the 8 Principles of the Malaysian Code on Corporate
Governance 2012 (“MCCG 2012”) and observed the 26
Recommendations supporting the Principles during the nancial
year following the release of the MCCG 2012 by the Securities
Commission of Malaysia in late March 2012 (Asia Bioenergy
Technologies Berhad, 2014, p. 10).
A majority of rms used the sentences such as in the following examples:
The Board of Directors (“the Board”) of Group and (“the
Company”) is committed/ promote/ recognised the important of
business ethics (Euro Holdings Berhad, 2014, p. 17; Focus Point
Holdings Berhad, 2014, p. 22).
To ensure that good corporate governance practices are applied/
ensure that the high standards of corporate governance are
practised throughout the Company and its subsidiaries (“the
Group”) (Country Heights Holdings Berhad, 2014, p. 64; CN Asia
Corporation Berhad, 2014, p. 13).
The Board fully supports the principles and recommendations
of good corporate governance practices as promulgated by the
Malaysian Code of Corporate Governance 2012 (“the Code”)
(Aturmaju Resources Berhad, 2014, p. 9; Asia Media Group
Berhad, 2014, p. 37).
Ethical Commitments and Financial Performance
73
These types of sentences reect the boards’ commitment towards achieving highest
ethical conduct in business by supporting recommendations from MCCG 2012,
and can be found in majority of rms annual reports.
To conclude, in terms of the disclosure of commitment to ethics, as represented by
the ECAI score, majority of the rms explain in detail their commitment to ethics.
The results suggest that most rms show their concern towards the importance of
ethical conduct in their business because ethical conduct affects their sustainability
in the future. Certain items are not disclosed in detail, such as item 4, 7, and 12 –
especially among small rms.
Descriptive Statistics of Variables
Table 3 provides descriptive statistics for continuous variables where both ROA
and ROE were nancial performance indicators measured in percentage. For
COMMT, measurement of management commitment is the mean score. Firms’ size
(FIRM_SZ) is measured in Malaysian Ringgit (RM) from actual values of each
rm’s total assets. Financial leverage (FIN_LVG) was measured using debt ratio
(total liabilities divided by total assets) in percentage. Lastly, market capitalisation
(MKT_CAP) is measured from actual values of a rm’s market capitalisation.
From the table, the mean value for ROA is 4.137%, minimum value is –84.35%,
shows not all companies in the sample recorded prots. Maximum ROA value is
94.92%, meanwhile the mean value for ROE is 8.398. In fact, the abnormal values
for maximum values of ROE were 232.52% and was the highest ROE overall from
243 samples. The numbers indicate that one of the rms utilise their shareholders
investment efciently. Minimum values for ROE is –67.59%, indicating one rm is
managing their shareholder investment inefciently. The mean value for COMMT
is 0.385 with a standard deviation of 0.357, minimum is 0.071, and maximum is
0.929. For FIRM_SZ, the mean value is RM6,629,000,000, minimum value is
RM6,981,000 and maximum value is RM640,299,956,000 which indicates one
rm has large total assets and has a large source of funds can utilise for ethics
and other social activities. For FIN_LVG, the mean value is 0.383%, minimum
is 0.005%, and maximum is 1.861%. The abnormal value for maximum value of
FIN _LVG indicates one rm in the 243 sample has high liabilities and debt that
exceed their assets. This shows the company faces unhealthy nancial positions.
The abnormal value for minimum value of FIN _LVG indicates that several rms
in Malaysia have low liabilities than their total assets and have not depended on
loans. These data suggest that those rms are able to manage their debt and assets.
The extremely low leverage among Malaysian companies in 2014 is consistent
with the fact that most Malaysian companies were in less riskier conditions and
only few companies funded their assets by using debt in 2014 (Salim & Yadav,
Ahmad Firdhauz Zainul Abidin et al.
74
2012). In line with that, Bank Negara Malaysia has reported that the leverage of
Malaysian companies are maintained at low level after global nancial crisis.
The low leverage reects the situation where each industry has different ways
of funding their capital. Industries such as telecomunications, oil and gas, and
infrastructure depends more on market-based nancing due to larger and longer
funding requirement (Bank Negara Malaysia, 2014). Lastly, the mean value for
MKT_CAP is RM2,302,870,000, minimum is RM5,850,000 and maximum value
is RM85,455,505,000.
Table 3
Descriptive statistics for continuous variables
Continuous
variables
ROA
(%)
ROE
(%) COMMT FIRM_SZ
(RM)
FIN_LVG
(%)
MKT_CAP
(RM)
N 243 243 243 243 243 243
Mean 4.137 8.398 0.385 6.63 × 1090.383 2.30 × 109
Median 4.000 7.780 0.357 3.58 × 1080.364 1.61 × 108
Std. deviation 14.218 24.137 0.172 5.01 × 1010 0.229 8.93 × 109
Minimum –84.350 –67.590 0.071 6.98 × 1060.005 5.85 × 106
Maximum 94.920 232.520 0.929 6.40 × 1011 1.861 8.55 × 1010
Table 4 shows that rms in the industrial production industry (INDUS_PROD)
are 27.6% of the total sample. The real estates investment trust industry (REITS)
is only 2% from the total sample. The nance industry (FINANCE) contributes to
2.9% from 243 rms, while the consumer industry (CONSUMER) is 15.9%. The
construction industry (CONSTRUCTION) is 4.9% and the trade/service industry
(TRADE_SERVICE) is 21.5%. The technology industry (TECHNOLOGY)
contributes 11.4% whereas the properties industry (PROPERTIES) contributes to
8.1% of the total sample. Lastly, (PLANTATION) industries consist of 4.5% of the
total sample.
Table 4
Descriptive statistics for rm’s industry
Frequency Percentage from sample COMMT score
(%)
INDUS_PROD 68 27.60 37.82
REITS 5 2.00 40.00
FINANCE 7 2.90 55.10
CONSUMER 39 15.90 36.08
(continued on next page)
Ethical Commitments and Financial Performance
75
Frequency Percentage from sample COMMT score
(%)
CONSTRUCTION 12 4.90 38.69
TRADE_SVS 53 21.50 42.72
TECHNOLOGY 28 11.40 33.67
PROPERTIES 20 8.10 35.71
PLANTATION 11 4.50 36.36
Total 243 100
From the table, commitment to ethics (COMMT) scores for each industry are also
presented. The calculation for each score is based on the average score for each
item in ECAI and is divided by the number of rms for each industry.
( 14)n
a
i
ni
#
/
(9)
where, n is the number of rms in industry, a is score for each rms in industry, and
14 is total score for ECAI items.
On average, each industry has scores between 30% and 40%. The highest scores
were 55.1% from nance industry and the lowest from technology industry
(33.67%).
Pearson Correlation
Table 5 provides correlation analysis, which is performed to test the correlations
between variables in the model. From Table 5, COMMT are correlated with
nancial performance in terms of ROA, at the signicance level of 1% (p < 0.01).
Meanwhile, COMMT, FIN_LVG, and MKT_CAP are correlated with ROE at the
signicance level of 1% (p < 0.01). Overall, there is a weak correlation between
COMMT and nancial performance (ROA, ROE) with Pearson coefcient below
0.4. Except for the correlations between MKT_CAP and COMMT, and MKT_
CAP and FIRM_SZ, other independent variables show weak correlation with each
other because the coefcient values are generally lower than 0.4.
According to Pallant (2011), multicollinearity exists between independence
variables if (r > 0.9). Because the highest value of correlation is 0.827, which
(r < 0.9), there is no multicollinearity existing between independent variables in
the sample. Ghasemi and Zahediasl (2012) also added that the assumptions of
Table 4 (continued)
Ahmad Firdhauz Zainul Abidin et al.
76
normality should be taken seriously for data smaller than 50, (N < 50). If the data
sample is larger than 50, the violation of normality will not be a major problem
for analysis. Hair Jr., Black, Babin, and Anderson (2014) also stated that with
sample size smaller than 50, the violations of normality will cause major problems
towards results. Furthermore, the exceptions of assumption exist when the sample
size is large enough (i.e., N = 200 or more). Based on Hair Jr. et al.’s (2014), this
study neglects the assumptions of normality.
Table 5
Pearson correlation analysis
N=243 ROA ROE COMMT FIRM_SZ FIN_LVG MKT_CAP
ROA 1
ROE 0.827** 1
COMMT 0.220** 0.284** 1
FIRM_SZ –0.015 0.034 0.227** 1
FIN_LVG –0.104 0.137*0.047 –0.145*1
MKT_CAP 0.119 0.211** 0.443** 0.755** –0.049 1
Notes: * correlation is signicant at the 0.05 level (2-tailed); ** correlation is signicant at the 0.01 level (2-tailed)
Multiple Regression Analysis
The results of the multiple regression analysis, to test H1, are shown in Table 6.
From the table, adjusted R2 for rst model is 0.052, which means that the model
can explain 5.2% of the variance of ROA. The F-value is signicant at 5% level
(p < 0.05). For the second model, the adjusted R2 is 0.127, which means that 12.7%
the variables in the model can predict ROE. The F-value is signicant at 1% level
(p < 0.01).
In the rst model, where the dependent variable is ROA, commitment to ethics,
represented by COMMT, is signicant at 5% signicance level (p < 0.05). The
beta coefcients is 0.188, indicating positive association between COMMT and
ROA. This positive association indicates that most rms in the sample had better
performance when providing commitment towards ethics. Meanwhile, FIRM_SZ
and FIN_LVG have signicant association with ROA, at the 5% signicance level
(p < 0.05), with beta coefcients of –0.265 and –0.157, respectively. MKT_CAP
also shows signicant association with ROA, at a signicance level of 10%
(p < 0.10).
Ethical Commitments and Financial Performance
77
In the second model, where the dependent variable is ROE, COMMT has signicant
association with ROE at the 1% signicance level (p < 0.01), with beta coefcients
of 0.204. Meanwhile, FIRM_SZ has a negative association with ROE at the 5%
signicance level (p < 0.05). MKT_CAP is also signicantly associated with ROE
at the 1% signicance level (p < 0.01).
Table 6
Regression analysis for ROA and ROE models
Model 1 Model 2
Betaa
Coefcients tSig. Betab
Coefcients tSig.
(Constant) –0.252 0.801 –2.637 0.009
COMMT 0.188 2.609 0.010** 0.204 2.950 0.004*
FIRM_SZ –0.265 –2.368 0.019** –0.258 –2.400 0.017**
FIN_LVG –0.157 –2.389 0.018** 0.088 1.392 0.165
MKT_CAP 0.210 1.956 0.052*** 0.293 2.842 0.005*
Industry Included Included
Adjusted R20.052 0.127
F-value 2.106** 3.928*
aROA = β0 + β1COMMT + β2FIRM_SZ + β3FIN_LVG + β4MKT_CAP + β5INDUSTRY1….+
β11INDUSTRY11
bROE = β0 + β1COMMT + β2FIRM_SZ + β3FIN_LVG + β4MKT_CAP + β5INDUSTRY1….+
β11INDUSTRY11
Notes: *** signicant at 10% signicance level (p < 0.10), ** signicant at 5% signicance level (p < 0.05),
* signicant at 1% signicance level (p < 0.01)
Additional Analysis
In order to ensure the robustness of this study, the original ECI index from Pae
and Choi (2011) contained 11 items were used in same analysis using multiple
regression method.
Table 7 shows that commitment to ethics proxies from original indexes, (COMMT_
ECI) created by Pae and Choi (2011) have positive association with ROA, with beta
coefcients 0.198 at 1% signicance level (p < 0.001). Meanwhile, FIRM_SZ and
a rm’s FIN_LVG have a negative association with ROA, with beta coefcients
–0.265 and –0.162, respectively at the 5% signicant level (p < 0.005). For MKT_
CAP, there is a positive association with ROA, with a beta coefcient 0.200 at the
10% signicant level (p < 0.10).
Ahmad Firdhauz Zainul Abidin et al.
78
For the second model, ROE and COMMT_ECI also have positive association
with ROE, with a beta coefcient 0.212 at the 5% signicant level (p < 0.05).
FIRM_SZ has a negative association with ROE, with beta coefcient –0.259 at the
5% signicance level (p < 0.05). FIN_LVG has positive asscociation with ROE,
with beta coefcient 0.083, but is not signicant. Lastly, MKT_CAP has a positive
association with ROE, with beta coefcient of 0.285 at the 1% signicance level
(p < 0.01). This further analysis indicates that previous ndings using ECAI index
have the same results with ECI index that originated from Pae and Choi (2011).
Table 7
Further analysis using ECI indexes
Model 1 Model 2
Betaa
Coefcients tSig. Betab
Coefcients tSig.
(Constant) 0.254 0.800 –2.377 0.018**
COMMT_ECI 0.198 2.712 0.007* 0.212 3.016 0.003*
FIRM_SZ –0.265 –2.376 0.018** –0.259 –2.417 0.016**
FIN_LVG –0.162 –2.457 0.015** 0.083 1.318 0.189
MKT_CAP 0.200 1.851 0.065*** 0.285 2.739 0.007*
Industry Included Included
Adjusted R2 0.054 0.128
F-value 2.155** 3.966*
aROA = β0 + β1COMMT_ECI + β2FIRM_SZ + β3FIN_LVG + β4MKT_CAP +
β5INDUSTRY1….+ β11INDUSTRY11
bROE = β0 + β1COMMT_ECI + β2FIRM_SZ + β3FIN_LVG + β4MKT_CAP +
β5INDUSTRY1….+ β11INDUSTRY11
Notes: *** signicant at 10% signicance level (p < 0.10), ** signicant at 5% signicance level (p < 0.05),
* signicant at 1% signicance level (p < 0.01)
From the ndings, there is evidence to accept H1 involving the positive association
between commitment to ethics and nancial performance. The ndings are in line
with previous studies that were set in other countries such as the US (Verschoor,
1998); Spain (Moneva, Rivera-Lirio, & Munoz-Torres, 2007); and South Korea
(Pae & Choi, 2011). The results indicate that the stakeholder theory is also
applicable in the Malaysian business environment because rms that show their
commitment towards ethics receive better return from stakeholders. Results of the
multiple regression analysis indicate that management commitment towards ethics
is associated with nancial performance. The results suggest that the disclosures
of a rm’s commitment towards ethics affect ROA (ROE), thus supporting H1.
Ethical Commitments and Financial Performance
79
Stakeholders, such as customers and shareholders, put their trust and loyalty
towards rms that are ethical, and accordingly this affects the rm’s income.
There is evidence that rm size and nancial leverage determines a rm’s nancial
performance. Meanwhile, market capital, which reects a rm’s market values,
also inuences nancial performance. The correlation between market capital
and ROE indicates that return toward shareholders depends on share prices of the
company.
Overall, this study nds that rms that show commitment towards ethics tend to
receive better performance. Thus, the hypothesis in this study that management
commitment towards ethics is positively associated with nancial performance is
accepted.
CONCLUSION
This study investigates the relationship between commitment towards ethics and
nancial performance among publicly listed companies in Malaysia. In today’s
highly competitive market coupled with awareness from public about ethical
concerns, it is important for companies to commit in fullling stakeholders’ needs
and demands, including committing to serve the community and environment in
ethically manners. Findings of this study show that rms that are committed to
ethical conduct tend to achieve better performance. The ndings, on the benet
of corporate ethical conduct, are in support of stakeholder theory. Also, similar
from studies using data from rms in developed countries such as the US, UK, and
South Korea, our ndings highlight the importance of corporate ethical conduct in
a developing country like Malaysia. More specically, the ndings indicate that
commitment towards ethical conduct in business operations are needed in order to
maintain corporate nancial sustainability.
The ndings imply the importance of promoting a higher standard of business
ethics among publicly listed companies, including in Malaysia. The ndings should
be taken into consideration by the regulators, in policy formulation involving
corporate governance, and by companies in strategy formulation involving
business operations. From the perspective of the regulators, this study highlights
that good ethical conduct should become a practice of publicly listed companies.
Legislative frameworks, which often arise after cases of corporate misconduct, are
often treated as just “another hurdle for people who are committed to gaming the
system to jump over” (McClean, 2015). Hence, aside from a legislative framework,
regulators may incorporate the perspective of the prevention of unethical conduct
through emphasising corporate commitments towards ethical conduct in their
Ahmad Firdhauz Zainul Abidin et al.
80
policy making. From the perspective of the Malaysian corporations, this study
highlights that good ethical conduct should be emphasised as a culture in
organisations. Our study shows that being committed to ethical conduct leads to
corporate nancial sustainability. By understanding the positive impact of being
committed to ethical conduct, companies will be more encouraged to be involved
in such practice. This research benets society as the ndings can be incorporated
into the formulation and the development of guidelines on ethical corporate
conduct that can be further extended to small and medium enterprises, public
sectors, and non-prot organisations. This approach can be used to supplement
the effort by the government of Malaysia in its quest to combat corruption and
unethical misconduct in the country.
Nevertheless, the ndings of this study have to be interpreted by considering its
limitations. First, the data is only collected for one year period, which is 2014. As
there is a possibility that the quality of reporting may improve year by year, future
research can extend the dataset to analyse the changes in the quality of reporting
involving corporate commitment towards ethical conduct. The recommendation
for this limitation towards future research is the researcher can observe in more
than two years period. Additionally, future studies can use panel data analysis to
see the impact of commitment to ethics towards rms’ nancial performance. With
this method, the quality of reporting can be observed and the changes of reporting
can determine whether the rm improves their disclosure about commitment or
not, and answering the question did the improvement of reporting have signicance
relations with nancial performance. Furthermore, other types of nancial
indicators can be used such as market values because its represents current and
future rms values (Choi & Jung, 2008).
Finally, the other limitation is from the scoring method that was used in measuring
commitment to ethics by using binary scoring. Binary scoring was used to
determine whether the item is disclosed or not. The quality of reporting cannot
be determined precisely because the rms only disclosed the item in common
statement or standard language, which can be considered as disclosed. Quality of
reporting also can be used as an indicator to determine the relationship between
rms’ commitment to ethics and nancial performance. Rating scoring methods
can be recommended towards future research to get a more precise result such as
that found in Holder-Webb, Cohen, Nath, and Wood (2008).
Ethical Commitments and Financial Performance
81
ACKNOWLEDGEMENT
The study is supported by the Fundamental Research Grant Scheme (vote no.:
59468) provided by the Ministry of Higher Education of Malaysia. The authors
would like to thank the Ministry for its support.
APPENDIX
Example of Ethical Commitment Disclosure
1. Top managers of this company regularly emphasise the importance of business ethics
British American
Tobacco (Malaysia)
Berhad
The obligation to comply with the Standards also extends to the
Group’s contractors, service providers, suppliers and distributors and
is essential in ensuring high standards of business ethics are similarly
binding on the Group’s suppliers and service providers (where
applicable) in ensuring high standards of business ethics amongst all
suppliers and service providers of the Group, including the suppliers’
or service providers’ related companies.
CIMB Group Holdings
Berhad
The directors, ofcers and employees of the nancial institution,
thus, must be seen to conduct their business with the highest level of
moral behaviour. While bankers may be guided by certain informal,
time-tested and generally accepted code of ethics to attain a level of
conduct expected of them, the diversity and complexity of today’s
banking world requires that these ethical rules be codied and issued
as written guidelines in order to promote and maintain a uniform
ethical standard.
Genting Malaysia
Berhad
N/A
Telekom Malaysia
Berhad
TM’s rm commitment to enhancing and strengthening our corporate
governance and business ethics, as well as inculcating ethical
behaviour among the workforce and representatives of the Company.
We have, in fact, two arms looking into ethics and integrity.
Acme Holdings
Berhad
N/A
Acoustech Berhad N/A
Ahmad Zaki
Resources Berhad
N/A
Al-‘Aqar Healthcare
REIT
N/A
Asdion Berhad Good business ethics should be a part of every business, therefore the
Group belief that established behavioural standards and written codes
of ethical conduct can help bolster virtuous values and promote ethical
organisational behaviour.
Ahmad Firdhauz Zainul Abidin et al.
82
2. Ethical behaviour based on a formal business philosophy is the norm of this company.
British American
Tobacco (Malaysia)
Berhad
Our commitment to sustainability underpins our strategy and our
business. Creating shared value is a priority for us and we do this
by upholding the highest standards of integrity and accountability
throughout our operations.
CIMB Group Holdings
Berhad
We are committed to customer satisfaction, truthful advertising,
complying with applicable laws and regulations as well as a high
standard of ethical behaviour and service.
Genting Malaysia
Berhad
The Group also upholds integrity as one of its core values and is
committed to acting professionally, fairly and with integrity in all its
business dealings and relationships.
Telekom Malaysia
Berhad
N/A
Acme Holdings
Berhad
N/A
Acoustech Berhad N/A
Ahmad Zaki
Resources Berhad
N/A
Al-‘Aqar Healthcare
REIT
N/A
Asdion Berhad N/A
3. This company has a disciplinary system through which unethical behaviour is strictly
punished.
British American
Tobacco (Malaysia)
Berhad
Employees who have been identied as not complying with the safety
guidelines can face disciplinary action.
CIMB Group Holdings
Berhad
Disciplinary actions taken can include dismissal of employment and
ling of civil suit for the recovery of losses. Failure to do so may
result in disciplinary action.
Genting Malaysia
Berhad
N/A
Telekom Malaysia
Berhad
At the same time, we continue to take action against unethical
practices while encouraging the use of the TM Ethics Line.
Acme Holdings
Berhad
N/A
Acoustech Berhad N/A
Ahmad Zaki
Resources Berhad
N/A
Al-‘Aqar Healthcare
REIT
N/A
Asdion Berhad N/A
Ethical Commitments and Financial Performance
83
4. This company has a code of ethics.
British American
Tobacco (Malaysia)
Berhad
The Standards of Business Conduct describe high standards of
business integrity and code of ethics that guide an employee’s
conduct. BATM code.
CIMB Group Holdings
Berhad
CIMB Group and its employees adhere to Bank Negara Malaysia’s
Code of Ethics BNM/GP7, which promotes proper standards of
conduct and sound and prudent business practices among nancial
institutions.
CIMB employees adopt Bank Negara Malaysia’s Code of Ethics for
banking institutions. This code outlines the minimum level of conduct
expected from employees.
Genting Malaysia
Berhad
The Company recognises that any genuine commitment to detecting
and preventing actual or suspected unethical, unlawful, illegal,
wrongful or other improper conduct must include a mechanism
whereby employees can report their concerns freely without fear of
reprisal or intimidation.
Telekom Malaysia
Berhad
TM’s Code of Business Ethics supports the Company’s vision and
core values by instilling, internalising and upholding the value of
Uncompromising Integrity in the behaviour and conduct of the Board
of Directors, the Management, employees and all stakeholders of the
Company.
Acme Holdings
Berhad
The Company’s Codes of Ethics for Directors continue to govern the
standards of ethics and good conduct expected of Directors. The Code
of Ethics for Directors includes principles relating to their duties,
conict of interest and dealings in securities are available at the
Company’s website
Acoustech Berhad The Group had established a set of corporate values, ethical
behaviour, and a guidance for quality products and services and these
are set out in the Group’s Employee Handbook and safety Handbook.
Ahmad Zaki
Resources Berhad
The Standing Instruction on Business Ethics (“the Code”) is
communicated to all employees and compliance to the Code is
mandatory. The Code provides guidance and serves as the main
source of reference to assist employees to live up to ethical business
standards and explains how business and duties should be conducted.
Al-‘Aqar Healthcare
REIT
N/A
Asdion Berhad N/A
Ahmad Firdhauz Zainul Abidin et al.
84
5. In this company, employees can report unethical conduct through an anonymous channel.
British American
Tobacco (Malaysia)
Berhad
Appropriate channels are available for employees to provide
feedback INDIRECT & DIRECT Communication.
CIMB Group Holdings
Berhad
All employees of CIMB are expected to be vigilant about any
wrongdoings, malpractices or irregularities at the workplace and
report such instances promptly through designated channels for
immediate rectication or for other necessary measures in minimising
potential nancial or reputational loss.
Genting Malaysia
Berhad
N/A
Telekom Malaysia
Berhad
Accordingly, during the year there was constant communication
through our internal communication channels on maintaining a high
level of ethics and integrity, including snippets, scenarios, dialogues,
guidelines, latest news and updates to keep awareness levels high.
Employees were also reminded of TM’s Ethics Line which provides a
safe channel for them to report illegal, unethical or improper business
conduct affecting the Company.
Acme Holdings
Berhad
N/A
Acoustech Berhad N/A
Ahmad Zaki
Resources Berhad
N/A
Al-‘Aqar Healthcare
REIT
N/A
Apollo Food Holdings
Berhad
N/A
Asdion Berhad N/A
6. In this company, ethics education, training, or workshops are in place to enhance business
ethics of employees.
British American
Tobacco (Malaysia)
Berhad
Conducted international, regional, and local training for our
employees.
CIMB Group Holdings
Berhad
The code is emphasised at the Group Orientation programme and
training programmes when certain aspects are highlighted.
Genting Malaysia
Berhad
N/A
Telekom Malaysia
Berhad
Company’s core value of Uncompromising Integrity and strong
work ethics among the Board of Directors, Management, employees
and all stakeholders of the Company, while at the same time
enhancing our existing multiple integrity initiatives. We also
organised our rst ever TM Integrity Day, targeted at employees as
well as business partners.
Ethical Commitments and Financial Performance
85
Acme Holdings Berhad N/A
Acoustech Berhad Formal recruitment, training and development, and performance
appraisals are in place to ensure and maintain the professionalism
and competency of staff.
Ahmad Zaki Resources
Berhad
In order to nurture the quality and competencies of employees,
training and development programmes are established.
Al-‘Aqar Healthcare
REIT
N/A
Asdion Berhad The Group believe training and development is very important in
developing and upgrading skills, knowledge and attitudes to ensure
optimal performance. Thus, we constantly provide in-house training
programmes to enhance and increase employees job-related skills
knowledge and experience. The Group also committed to career
development of our management and support staff, by sponsoring
key personnel for training and seminars.
7. This company regularly puts a signicant portion of its prots towards philanthropy.
British American
Tobacco (Malaysia)
Berhad
N/A
CIMB Group Holdings
Berhad
Contribution for charitable expenses (RM10,151,584).
Genting Malaysia Berhad GENM Education Fund Committee approved RM880,000 in
scholarships for candidates pursuing their studies overseas and
locally.
Telekom Malaysia
Berhad
TM had successfully implemented our inaugural Project Giveaway
through which festive hampers and gifts delivered to the Board of
Directors or employees during Hari Raya Aidiltri were donated.
Acme Holdings Berhad N/A
Acoustech Berhad N/A
Ahmad Zaki Resources
Berhad
N/A
Al-‘Aqar Healthcare
REIT
N/A
Asdion Berhad N/A
8. This company has an independent ethics department and ofcers.
British American
Tobacco (Malaysia)
Berhad
Ethics Valuation Line (EVL).
CIMB Group Holdings
Berhad
N/A
Ahmad Firdhauz Zainul Abidin et al.
86
Genting Malaysia Berhad N/A
Telekom Malaysia
Berhad
EEIU
Acme Holdings Berhad N/A
Acoustech Berhad N/A
Ahmad Zaki Resources
Berhad
N/A
Al-‘Aqar Healthcare
REIT
N/A
Asdion Berhad N/A
9. In this company, employees can get help regarding business ethics through an ethics hotline
or open communication channel.
British American Tobacco
(Malaysia) Berhad
The revised Standards were duly communicated to all employees
of the Group through an announcement on the Group’s intranet
and email notication. The revised Standards have also been
uploaded to the Group’s intranet and website respectively.
CIMB Group Holdings
Berhad
All employees of CIMB are expected to be vigilant about any
wrongdoings, malpractices or irregularities at the workplace
and report such instances promptly through designated channels
for immediate rectication or for other necessary measures in
minimising potential nancial or reputational loss.
Genting Malaysia Berhad N/A
Telekom Malaysia Berhad Employees were also reminded of TM’s Ethics Line which
provides a safe channel for them to report illegal, unethical or
improper business conduct affecting the Company.
Acme Holdings Berhad N/A
Acoustech Berhad N/A
Ahmad Zaki Resources
Berhad
N/A
Al-‘Aqar Healthcare REIT N/A
Asdion Berhad N/A
10. This company has an ethics committee.
British American Tobacco
(Malaysia) Berhad
CSR committee.
CIMB Group Holdings
Berhad
Group risk management; Audit Committee.
Genting Malaysia Berhad N/A
Ethical Commitments and Financial Performance
87
Telekom Malaysia Berhad The establishment of our Enterprise Ethics and Integrity Unit
(EEIU) back in February 2013 is testament of TM’s rm
commitment to enhancing and strengthening our corporate
governance and business ethics.
Acme Holdings Berhad N/A
Acoustech Berhad N/A
Ahmad Zaki Resources
Berhad
N/A
Al-‘Aqar Healthcare REIT N/A
Asdion Berhad N/A
11. This company has an ethics evaluation system measured by an independent party from
outside the company.
British American Tobacco
(Malaysia) Berhad
Collaboration amongst Bursa Malaysia Securities Berhad,
Companies Commission of Malaysia, Malaysian Institute of
Integrity, Malaysian Anti-Corruption Commission & NKRA
Corruption Monitoring & Coordination Division, Securities
Commission Malaysia.
CIMB Group Holdings
Berhad
N/A
Genting Malaysia Berhad N/A
Telekom Malaysia Berhad N/A
Acme Holdings Berhad N/A
Acoustech Berhad N/A
Ahmad Zaki Resources
Berhad
N/A
Al-‘Aqar Healthcare REIT N/A
Asdion Berhad N/A
12. The board of this company have establishing the Whistleblowing Policies.
British American
Tobacco (Malaysia)
Berhad
The Company has adopted a whistleblowing policy which serves
as an early warning system to assist the Company in detecting
wrongdoings and taking early corrective action.
CIMB Group Holdings
Berhad
The whistle-blowing policy provides employees of CIMB with
accessible avenue to report on suspected fraud, corruption,
dishonest practices or other similar matters.
Genting Malaysia
Berhad
To this end, the Company has adopted a Whistleblower Policy
which is disseminated to employees.
Telekom Malaysia
Berhad
In addition, TM’s CBE includes a Whistleblower Policy under
which TM Group employees are encouraged to report concerns
about alleged unethical behaviour, actual or suspected fraud within
the Group.
Ahmad Firdhauz Zainul Abidin et al.
88
Acme Holdings Berhad N/A
Acoustech Berhad N/A
Ahmad Zaki Resources
Berhad
N/A
Al-‘Aqar Healthcare
REIT
N/A
Asdion Berhad N/A
13. The board of this company committed to achieve business sustainability.
British American
Tobacco (Malaysia)
Berhad
British American Tobacco Malaysia’s commitment to sustainability
underpins our strategy and lies at the heart of our business
operations.
CIMB Group Holdings
Berhad
As a good corporate citizen, CIMB has shifted its focus from giving
back to the community to addressing the concerns of stakeholders
regarding issues impacting the long-term sustainability of CIMB’s
business and customers.
Genting Malaysia
Berhad
The Group is committed to operating in a sustainable manner and
seeks to contribute positively to the well-being of stakeholders.
Malayan Banking
Berhad
Sustainability at Maybank means conducting business in a way that
enhances performance responsibly - today and over the long-term.
We continue to serve ASEAN communities while strengthening
and expanding our operations regionally. Our sustainability journey
is a reection of Maybank’s position as a regional leader in the
provision of nancial services and one that supports business
growth through impact based approaches.
Telekom Malaysia
Berhad
TM continues to focus on organic growth by building business
models that create enduring consumer and employee values. The
economic, social and environmental aspects of its operations
continue to be managed to ensure long-term viability of the
Company’s business.
Acme Holdings Berhad N/A
Acoustech Berhad Across all Group’s activities, Acoustech Berhad (“ACOSTEC”)
Group recognises the responsibility we have towards our people
and the communities and environments in which we operate.
ACOSTEC Group continuously develops, implements, maintains,
reviews and improves its sustainable development.
Ahmad Zaki Resources
Berhad
N/A
Al-‘Aqar Healthcare
REIT
N/A
Asdion Berhad N/A
Ethical Commitments and Financial Performance
89
14. The board of this company committed to conduct business in accordance with the highest
ethical standards.
British American
Tobacco
(Malaysia) Berhad
The Company and its Board of Directors (Board) remain steadfast in its
commitment in maintaining high standards of corporate governance. The
Board rmly believes that the integrity and commitment of its Board
and employees, supported by a comprehensive framework of policies,
guidelines and internal controls, will serve to strengthen the Company’s
sustainability, organisational effectiveness and drive a high-performance
culture within the organisation.
CIMB Group
Holdings Berhad
CIMB Group Holdings Berhad (CIMB) is fully committed to continuously
implementing a sound Corporate Governance Framework to support
th Group’s pursuit of achieving long-term and sustainable value. It is
important that this framework is supported by the right culture, values and
behaviours at the top and throughout the entire organisation.
Genting Malaysia
Berhad
It is the policy of the Company to manage the affairs of the Group in
accordance with the appropriate standards for good corporate governance.
Telekom Malaysia
Berhad
At TM, corporate governance remains ingrained in every aspect of the
organisation. Coupled with corporate values that uphold strong ethics and
Uncompromising Integrity as the foundation for its people, the practice
of good corporate governance continues to be strengthened in line with
national as well as the organisation’s own aspirations.
Acme Holdings
Berhad
N/A
Acoustech Berhad N/A
Ahmad Zaki
Resources Berhad
N/A
Al-‘Aqar
Healthcare REIT
The Board of Directors of the Manager (“the Board”) recognizes the
value of good corporate governance and prioritizes in ensuring that
high standards of corporate governance is upheld and practised with the
ultimate objective of protecting and enhancing unitholders’ value and
protecting the interests of all stakeholders.
Asdion Berhad The Company is committed to achieve high standards of corporate
governance throughout the Group and highest level of integrity and ethical
standards in all of its business dealings. The Board will continue to strive
for the full compliance with the Malaysian Code of Corporate Governance
in the coming nancial year.
Ahmad Firdhauz Zainul Abidin et al.
90
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