Disclosures And Transparency Amongst Small-Medium-Enterprises: A Comparative Study Between Malaysia And Indonesia

Abstract

Since the late 1990s, Corporate Governance (CG) has gained momentous attention within the Asia-Pacific region. Whilst Small and Medium Enterprises (SMEs) still play a major role in most economies, particularly in emerging economies which contribute around 33 percent of Gross Domestic Products (GDP). The CG compliance codes has become the norm for listed firms across the globe. This study purposed to compare and analyse the Disclosures and Transparency (D&T) of CG items between Malaysia and Indonesia’s SMEs’ listed firms. The design and methodology used in this study is a descriptive analysis approaches based on secondary data sources, i.e the SMEs Annual Report and the companies’ website. The Indonesia’s SMEs were taken from the top Pefindo 25 Index Members, whilst the Malaysia’s SMEs were taken from the FTSE Bursa Malaysia ACE Index top performers. The research framework tools applied the Asean Corporate Governance Scorecards (ACGS). It found that Indonesia listed SMEs have better performance against Malaysia’s listed SMEs which D&T scores was 71% and 51%, respectively; mainly in several D&T items, including, the annual report quality, related party transactions disclosure, medium of communications, timely annual and financial reports publications, company’s website performance and investor relations contact. Nevertheless, both countries shared the similar poorly experience in terms of the disclosure information implementation

Keywords: Corporate GovernanceSMEsACGSDisclosures and Transparency ”

Introduction

Since the late 1990s, Corporate Governance (CG) has gained momentous attention from stakeholders in the Asia-Pacific region, especially from businesses and government (Cheung, et al., 2014). The reason for the scrutiny is that corporate governance was identified as one of the major factors believed to have caused the Asian Financial Crisis in 1997. As argued by (Zhuang, Edwards, & Capulong, 2000) that poor corporate governance practices led to poor investment and financing decisions among firms within East Asia.

Meanwhile, Small and Medium Enterprises (SMEs) still play a major role in most economies, particularly in developing countries. Formal SMEs contribute up to 45 percent of total employment and up to 33 percent of national income (GDP) in emerging economies (World Bank, 2015). In Indonesia, SMEs accounted to 99 percent of all firms, employed around 97 percent of total employment and contributed approximately 57 percent of its GDP (Bellefleur, Murad, & Tangkau, 2012), whilst in Malaysia it represent 57% of the total employment in the labour market and 99.2% of the overall SMEs business establishments. Furthermore, Malaysian SMEs contribute 32% of the GDP and 19% of the total export value of the SMEs (Bank Negara Malaysia, 2013). Moreover, SMEs also play an important role within ASEAN Economic Community (AEC) integration because of around 90 percent of the firms in this region are constituted in SMEs forms (ERIA, 2014). It is believed that SMEs development would strengthen of the competitiveness and business sustainability of the region’s economies. Nevertheless, to reap such business sustainability, the SMEs should follow sound governance and principles practices as proposed by (IODSA, 2011) as well as the Institute of Hawkamah-Dubai for Corporate Governance (Hawkamah, 2012).

Up to present, the corporate governance codes of compliance has served the norm for listed firms all over the world. In majority countries, especially in developing nations, SMEs do not strictly comply with such codes but it has often been argued that such codes should also apply to those SMEs for future’s advancement (Abor & Adjasi, 2007;IFC, 2014; Jaswad, Iqbal, & Sumiadji, 2015).

Problem Statement

Research Questions

The major research question of this study was whether the Malaysia and Indonesia’s SMEs implement the best practice of the specific part of CG Disclosures and Transparency? The other research question was whether the implementation of such specific CG can improve SMEs performance in both countries?

Purpose of the Study

The main purpose of this study was to compare and analyse the specific part of CG Disclosures and Transparency (D&T) practices between Malaysia and Indonesia SMEs listed firms. The paramount reason chosen this purpose was in accordance with the International Finance Corporation (IFC, 2014) that the transparency and disclosure issues are amongst the most critical points of the listed firms and these remain challenging issues especially for the emerging countries. The secondary objective was to investigate the performance of respective SMEs listed firms in both countries.

Research Methods

The design and methodology used in this study is a descriptive analysis approaches based on secondary data sources, namely the SMEs Annual Report in 2015 and the companies’ website. The Indonesia’s SMEs listed companies were taken from the top Pefindo 25 Index Members whilst the Malaysia’s SMEs listed companies were taken from the top performers of the FTSE Bursa Malaysia ACE Index.

Indonesia’s Pefindo25 is a stock price index which consists of SMEs selected based on certain performance criteria, both financially and shares’ performance liquidity. It was firstly introduced in May 2009 and being reviewed bi-annually each year. For this study, there are 13 Indonesia’s SMEs listed firms were chosen and taken from the top performers which on the Pefindo25 index for the three consecutive years. The list can be seen in the following table.

Malaysia’s ACE Market which stands for the “Access, Certainty, and Efficiency” is the new name for the formerly MESDAQ - Malaysian Exchange Securities Dealing and Automated Quotation market (Sherman, 2015). MESDAQ came into existence in 1997 when it was the home mainly technological stocks and today it is replaced by the ACE Market under Bursa Malaysia. The ACE Market was derived together with the unification of the Main and Second Board into the Main Market of Bursa Malaysia in 2009.

The ACE Market is seen as the ideal market for start-ups and new firms which are run by entrepreneurs (SMEs type firms) who are looking to push for more capital by listing their firms’ public. This is where they might not have the large and high amount like firms in the Main Market but would probably have a strong product or service portfolio which if injected more capital. For this study, there are 10 SMEs firms were chosen and taken from the top ten FTSE Bursa Malaysia ACE Index. The list can be seen in the Table 02 .

For a certain reason one firm i.e Perak Transit Berhad was not calculated for the D & T chosen items due to the undisclosed of its annual report publication and has just less than six months listed in the Bursa Malaysia in 2015.

Findings

In terms of SMEs firms’ profile, it found that the differences and similarities of characteristics between listed SMEs in Indonesia and Malaysia’s performance. As it can be seen in the Figure 01 , in terms of the assets and the establishment date, the average of Indonesia’s SMEs firms’ assets have three times higher than Malaysia’s firms (US$ 210 million against US$ 70 million), as well as the average of Indonesia’s firms’ established year nearly three times older than its counterparts (31 years old against 12 years old). It means, in average, Malaysia’s SMEs consist of smaller and younger firms. On the contrary, in terms of average of public shares in the market (shareholders below five percent), Malaysia’s SMEs firms publics shares’ percentage were outweighed of its counterparts (45 percent against 36 percent), which means the shares market of the Malaysia’s SMEs firms much more liquid compared to Indonesia’s, even though both Malaysia and Indonesia have the similar length period listed in the exchange market i.e eight years.

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In terms of main business, around 80 percent of Malaysia’s listed SMEs consist of Information Technology (IT), software and computer services’ firms (Figure 02 ). For the rest, consist of marine producer and industrial transportation firms by 10 percent, respectively. For Indonesia’s listed SMEs, the situation are different which consisting of more variety in the firms’ main business. Retailer and consumer goods contributed around 30 percent of SMEs, followed by building and construction type of business (23 percent) and IT, software and computer services (15 percent). For the rest, consist by eight percent were agriculture products, oil and gas services, medical and hospital services and machinery and automotive, respectively. It can be concluded, in average SMEs main business in Malaysia were more homogenised compared its counterparts. It was informed at the beginning the Malaysia’s ACE market was the home of mainly technological firms stock.

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In terms of the D & T implementation, Indonesia listed SMEs performance have outperformed against Malaysia listed SMEs, where Indonesia achieved better D & T grades which is classified as a good disclosure at 71 percent, whilst Malaysia has only reached a poorly D&T grade at 51 percent (Figure 03 ).

Indonesia SMEs have succeeded in achieving six D & T subjects which qualifying a good, very good and even excellent D & T grade (above 71 percent), namely timely filling of annual and financial report (100%), investor relations (92%), medium of communication (79%), company website (78%), quality of annual report (77%) and disclosure of related party transactions (RTP).

Meanwhile, Malaysia SMEs only can achieved one D & T subject which has a good D&T grades qualification, namely transparent ownership structure (71%). For Malaysia, there were four subjects which have poorly D&T disclosures (< 60%), namely quality of annual report (56%), company website (42%), external auditor and auditor report (33%) and disclosure of related party transactions (13%).

For the quality of annual report, the majority lower grade were contributed by the undisclosed or no information regarding with the non-financial performance indicators and whistle blowing policy details explanation. For the company website, undisclosed information relating with notice and minutes of AGM/EGM as well as firms’ constitution acts were the major factors of the D&T lower grades. For the external auditor report, the undisclosed information of the auditor and non-auditor fees were the main factors of lowering D & T grades. Finally, the absence of information related to the (RTP) institutions, values and nature was the most item in cutting D&T grades down.

It is one of indication that the D & T CG implementation in Indonesia’s SMEs much more well a head compared to Malaysia’s.

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Nevertheless, both countries shared the similar poorly experience in terms of implementation in the disclosure of information regarding the directors/commissioners dealings in shares of the company which results nil percent, which means there were no disclosures at all for this D&T item in both nations. In other words, Indonesia and Malaysia should give a more pay attention and need a major change improvements for this subject. The details comparison D & T figures of average scores’ items and percentage from both countries can be seen in the Table 04 .

As it can be seen in Table 05 , from the individual listed SMEs analysis comparison in both countries, no one firm from both nations has achieved the first grade of D & T (excellent disclosure). Indonesia’s TOTL and ELSA have had the only firms that achieved a second grade of D&T (very good disclosure). Next, Indonesia’s SMSM, ACES and ROTI have reached a third D&T grade by 80, 79 and 72 percent, respectively. Nevertheless, no Malaysia’s SMEs firms which have reached a first, second and even third grades range of D&T.

In the fourth D & T grades range (satisfactory disclosure), Indonesia posted six or 47 percent of its SMEs firms, namely MTDL (70 percent), SILO (68 percent), SIDO (67 percent), NRCA (67 percent), CSAP (65 percent), and LINK (61 percent), respectively. Meanwhile, Malaysia only placed two or 22 percent of its SMEs firms, namely 0069 (62 percent) and 0127 (61 percent), respectively.

At the lowest D & T grade (poorly disclosure) only two Indonesia’s SMEs firms were placed, namely ARNA at 60 percent followed by BISI at 59 percent, respectively. Meanwhile, around 78 percent or seven of Malaysia’s SMEs firms were posted in this grade range. Figure 4 summarises of all comparison D&T grade range between Malaysia and Indonesia.

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Conclusion

The Corporate Governance (CG) issues have become hot topic discussions since the last decade by academician scholars as well as business people across the globe. In ASEAN countries, this issue has obtained more attention, especially after the economic crisis hit this region in the end of 1990s. Every country, including Indonesia and Malaysia has promoted the CG regulations and legal framework to implement the best GCG in the company’s operations and performance.

To face and challenge the AEC by 2015, the ACMF has released the CG Scorecard which is recommended used for all public listed companies within this ASEAN region. For the study objective, the D & T items was chosen in a purpose to compare and analyse the listed SMEs performance against the CG scorecards in Indonesia and Malaysia.

It found that in general, Indonesia listed SMEs have better performance against Malaysia’s listed SMEs which D&T scores was 71% and 51%, respectively. Indonesia’s SMEs were excel its counterpart mainly in several D&T items including, quality of the annual report (77% against 56%), disclosure of related party transactions (72% against 13%), medium of communications (79% against 67%), timely in releasing annual and financial reports (100% against 78%), company website performance (78% against 42%) and investor relations contact (92% against 67%). However, both countries shared the similar poorly experience in terms of implementation in the disclosure of information regarding the directors/commissioners dealings in shares of the company and the disclosure of external auditor and auditor reports’ fees. It signs that the D & T CG implementation in Indonesia much more well a head compared to Malaysia. In other words, Indonesia listed SMEs much more ready to face the AEC integration challenge in the years to come. Notwithstanding, both countries shared the similar poorly experience in terms of implementation in the disclosure of information regarding the directors/commissioners dealings in shares of the company which results nil percent, which means there were no disclosures at all for this D&T item in both nations.

For both nations, it is recommended to pay more attentions and need a major change improvement to advance their CG performance. For all SMEs firms that place in the lowest grade range are needed more efforts to improve their D&T performance in the future. Therefore, the outcome of this study is to promote a better D&T for the respective listed SMEs in both countries that in line with the best of ACGS in improving performance for the firms’ going concerns. As a result, the better SMEs’ performance, the better countries’ economics for both nations in the future.

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