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THE EFFECTS OF EXTERNAL CORPORATE GOVERNANCE ON PERFORMANCE OF FEDERAL STATUTORY BODIES IN MALAYSIA

Abd Rahman Hj Ali1*, Mustaffa Mohamed Zain2, Roslani Embi3 and Zubaidah Zainal

Abidin4

1,2Faculty of Accountancy, Universiti Teknologi MARA Puncak Alam Campus, 42300 Bandar Puncak Alam, Selangor.

3Institute of Neo Education, University Teknologi MARA Shah Alam Campus, 40450 Shah Alam, Selangor, roslani@salam.uitm.edu.my.

4Deputy Vice Chancellor, Kolej Universiti Poly-Tech MARA, Cheras, 55300 Kuala Lumpur,

*Corresponding author: datoarha@gmail.com.

ABSTRACT

Corporate Governance (CG) has become a significant mechanism to enhance organisational performance. In order to realise its Vision 2020, the government of Malaysia has launched Government Transformation Programme (GTP) which aims to accelerate the performance of public sector agencies “through the embodiment of the highest standard of ethical conduct and good governance.” In spite of this assurance by the government, Malaysia continues to experience challenges including: corruption perception; inefficiency; delay in service provision and unfair action which seem to indicate a lack of internal control. Hence, this study examines the effects of External Corporate Governance on the performance of Malaysian Federal Statutory Bodies (FSB), bodies incorporated by their own incorporation acts and adopt a corporate style management. A panel data analysis utilising SPSS and STATA was conducted on 51 samples of FSB from 2009 till 2013. The results demonstrate that the External Corporate Governance mechanisms have significant effects on financial and non-financial performance of Federal Statutory Bodies. Hence, it is recommended that all public and private organisations practice good corporate governance in order to enhance their corporate performance.

Keywords: Corporate Governance (CG), Effects of External CG on Performance, Federal Statutory Bodies, Malaysia, Stakeholder Influence and Institutional Influence.

INTRODUCTION

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THE EFFECTS OF EXTERNAL CORPORATE GOVERNANCE ON PERFORMANCE OF FEDERAL STATUTORY BODIES IN MALAYSIA

Abd Rahman Hj Ali1*, Mustaffa Mohamed Zain2, Roslani Embi3 and Zubaidah Zainal

Abidin4

1,2Faculty of Accountancy, Universiti Teknologi MARA Puncak Alam Campus, 42300 Bandar Puncak Alam, Selangor.

3Institute of Neo Education, University Teknologi MARA Shah Alam Campus, 40450 Shah Alam, Selangor, roslani@salam.uitm.edu.my.

4Deputy Vice Chancellor, Kolej Universiti Poly-Tech MARA, Cheras, 55300 Kuala Lumpur,

*Corresponding author: datoarha@gmail.com.

ABSTRACT

Corporate Governance (CG) has become a significant mechanism to enhance organisational performance. In order to realise its Vision 2020, the government of Malaysia has launched Government Transformation Programme (GTP) which aims to accelerate the performance of public sector agencies “through the embodiment of the highest standard of ethical conduct and good governance.” In spite of this assurance by the government, Malaysia continues to experience challenges including: corruption perception; inefficiency; delay in service provision and unfair action which seem to indicate a lack of internal control. Hence, this study examines the effects of External Corporate Governance on the performance of Malaysian Federal Statutory Bodies (FSB), bodies incorporated by their own incorporation acts and adopt a corporate style management. A panel data analysis utilising SPSS and STATA was conducted on 51 samples of FSB from 2009 till 2013. The results demonstrate that the External Corporate Governance mechanisms have significant effects on financial and non-financial performance of Federal Statutory Bodies. Hence, it is recommended that all public and private organisations practice good corporate governance in order to enhance their corporate performance.

Keywords: Corporate Governance (CG), Effects of External CG on Performance, Federal Statutory Bodies, Malaysia, Stakeholder Influence and Institutional Influence.

INTRODUCTION

Corporate Governance has become an essential mechanism to enhance organisational performance in private and public sectors all over the world. In order to realise its Vision 2020, the government of Malaysia has launched Government Transformation Programme (GTP) which aims to accelerate the performance of public sector agencies, “through the embodiment of the highest standard of ethical conduct and good governance.” (10th Malaysia Plan, 315). The Malaysian public sector agencies which includes Federal Statutory Bodies (FSB) are governed by various legislative, policy and implementation procedures that regulates their governance and management. Besides agency-specific legislation, several essential circulars, directives and guidelines such as :1) Garispanduan bagi Mempertingkatkan Tadbir Urus Dalam Sektor Awam (2007); 2) Arahan YAB Perdana Menteri Bilangan 1 Tahun 2009:

formation of Governance Committee; and 3) Arahan YAB Perdana Menteri Bilangan 1 Tahun 2014: formation of Integrity and Governance Committee , were circulated to all ministries, state and local government to improve governance practices in order to enhance their delivery services.

In spite of assuring the Malaysian public that the government is able to perform its governance efficiently and effectively to gain the public trust and confidence, Malaysia is still facing shortcomings including: corruption perception; inefficiency; unfair action; delay in service provision (Transparency International, 2016, Auditor General’s Report 2016, the Bureau of Complaint’s Report 2016). These shortcomings seem to indicate that there is a weakness in corporate governance practices.

The Malaysia Auditor General welcome all relevant personalities and organisations to evaluate the current governance practice in term of structure and process and identify the potentials for improvement (Buang, 2012). Hence, the above shortcomings deserve attention and improvement in order to accelerate public sector delivery services toward the realisation of 2020. The main objective of this study is to investigate the effects of external corporate governance mechanisms on performance of FSB. It provides a panel data analysis of the relationship between External corporate governance such as institutional and stakeholders influence on Malaysian FSB performance.

LITERATURE REVIEW AND HYPOTHESIS

Concepts of Corporate Governance

The most commonly used definition of corporate governance is “the system by which companies are directed and controlled. Board of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors to satisfy themselves that an appropriate structure is in place.” (Cadbury Report, 1992). While the ANAO (2003) refers corporate governance as “the process by which organization are directed, controlled and held to account”. Besides responsible for their directing and controlling functions, directors are also accountable to stakeholders. The Malaysian Code on Corporate Governance (MCCG) defines corporate governance as “the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value whilst taking into account the interest of other stakeholders.” (MCCG, 2017).

From the above definitions, corporate governance concentrates on the process and structure utilised to direct and manage the affairs and business of the company with the aims of attaining the following:

 The achievement of the organisational objectives.

 The practice of corporate culture to meet the shareholders’ expectation

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16 Corporate Governance and Performance

According to MCCG (2017), good governance contributes to long-term shareholder value and corporate prosperity. This indicates that good governance will accelerate organisational performance. Several researchers have found that there was a positive relationship between governance and performance. For example, Klapper and Love (2004) using firm level data of 14 emerging stock markets with return on assets as a proxy for operating performance found that there was a high positive association between better governance and operating performance. Likewise, Gompers, Ishii and Metrick (2001), Brown and Caylon (2004), and Drobetz, Schillhofer, and Zimmermann (2004) also reported a positive relationship between the quality corporate governance and their quality of profitability.

Corporate governance mechanisms can be divided into two categories: internal CG mechanisms and external CG mechanisms. Internal corporate governance mechanisms refer to the structural and process components that are utilised to manage performance. Whereas External CG mechanisms refer to institutional and stakeholder influence that are used to enhance performance. As suggested by stakeholder theory, stakeholders can positively influence the performance through monitoring the performance of the firm and influencing the decisions of the management (Fama & Jensen, 1983). Existing governance literature also suggests that regulatory authority has the power to enforcing regulations and monitoring performance to influence the performance of the firms through effective institutional influence: coercive, normative and mimetic isomorphism (Fielden, 2007; Major & Hopper, 2004). In this study, the external corporate governance mechanisms are the independent variables namely Government Funding (GFN), Employees Power (EPW), Leverage Power (LPW), Regulatory Authority (RAY), Professionalisation (PRO) and Board Interlock (BTK. The level of practice of these six mechanisms in influencing Performance is represented by a composite, External Corporate Governance Score (ECGS).

Performance in private sector can be classified as operational performance such as return on asset and return on equity and market value, example: Tobin’s Q. Whereas in public sector, the performance are based on financial such as a reasonable financial profit as agreed in the budget and non-financial such as good delivery services in key result areas (KRA) as compared to Key Performance Indicators (KPIs) (Abu Bakar & Salleh, 2011). In this study the dependent variables are represented by financial performance: ROA and ROE (Epps & Cereola, 2008, Vintila & Gherghina, 2012) and non-financial performance: Key result areas (KRA) (Abu Bakar & Salleh, 2011) and financial management accountability index (FMAI) (Abu Bakar & Ismail, 2011) are being used. This study also utilise three control variables: organisation age; organisation size and sales/revenue growth. Based on the above argument, the first hypothesis is the relationship between ECGS and performance as follows:

H1:There is significant positive relationship between External Corporate Governance Score

(ECGS) and FSB’s performance

Government Funding and FSB’s Performance

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Corporate Governance and Performance

According to MCCG (2017), good governance contributes to long-term shareholder value and corporate prosperity. This indicates that good governance will accelerate organisational performance. Several researchers have found that there was a positive relationship between governance and performance. For example, Klapper and Love (2004) using firm level data of 14 emerging stock markets with return on assets as a proxy for operating performance found that there was a high positive association between better governance and operating performance. Likewise, Gompers, Ishii and Metrick (2001), Brown and Caylon (2004), and Drobetz, Schillhofer, and Zimmermann (2004) also reported a positive relationship between the quality corporate governance and their quality of profitability.

Corporate governance mechanisms can be divided into two categories: internal CG mechanisms and external CG mechanisms. Internal corporate governance mechanisms refer to the structural and process components that are utilised to manage performance. Whereas External CG mechanisms refer to institutional and stakeholder influence that are used to enhance performance. As suggested by stakeholder theory, stakeholders can positively influence the performance through monitoring the performance of the firm and influencing the decisions of the management (Fama & Jensen, 1983). Existing governance literature also suggests that regulatory authority has the power to enforcing regulations and monitoring performance to influence the performance of the firms through effective institutional influence: coercive, normative and mimetic isomorphism (Fielden, 2007; Major & Hopper, 2004). In this study, the external corporate governance mechanisms are the independent variables namely Government Funding (GFN), Employees Power (EPW), Leverage Power (LPW), Regulatory Authority (RAY), Professionalisation (PRO) and Board Interlock (BTK. The level of practice of these six mechanisms in influencing Performance is represented by a composite, External Corporate Governance Score (ECGS).

Performance in private sector can be classified as operational performance such as return on asset and return on equity and market value, example: Tobin’s Q. Whereas in public sector, the performance are based on financial such as a reasonable financial profit as agreed in the budget and non-financial such as good delivery services in key result areas (KRA) as compared to Key Performance Indicators (KPIs) (Abu Bakar & Salleh, 2011). In this study the dependent variables are represented by financial performance: ROA and ROE (Epps & Cereola, 2008, Vintila & Gherghina, 2012) and non-financial performance: Key result areas (KRA) (Abu Bakar & Salleh, 2011) and financial management accountability index (FMAI) (Abu Bakar & Ismail, 2011) are being used. This study also utilise three control variables: organisation age; organisation size and sales/revenue growth. Based on the above argument, the first hypothesis is the relationship between ECGS and performance as follows:

H1:There is significant positive relationship between External Corporate Governance Score

(ECGS) and FSB’s performance

Government Funding and FSB’s Performance

The second hypothesis of the study requires analysis of the relationship between stakeholder influence namely government Funding and the performance of FSB. Researchers such as Fama and Jensen (1983), and Holmstrom and Tirole (1997) suggest that higher stakeholder rights minimises the free hand of managers and forces them to perform well and to improve the performance. Researchers have found that the agency cost is much lower in democratic firms

with high stakeholder influence (Doidge, Karolyi & Stulz, 2004; Gompers, Ishii & Metrick, 2003).

Government assistance namely Government Funding (GFN) was used to measure the influence of stakeholder in affecting the performance of FSB. This mechanism was formulated as a percentage of government assistance (development and emolument allocations) compared to the total revenue of FSB. The rational is that the Malaysia government, as the major stakeholder in giving grants and loans to public sector agencies including FSB, has the influence to positively influence the Government Funding (GFN) on the performance of FSB. The above discussion supports the argument that there is a positive relationship between Government Funding (GFN) and FSB’s performance. This leads to the following hypothesis:

H2: There is significant positive relationship between Government Funding (GFN) and

FSB’s performance.

Employee Power and FSB’s Performance

The third hypothesis pertinent to the study is about the role of employee power in affecting the performance of FSB. A study conducted to examine the influence of employee participation in decision-making (PDM) on firm performance in Saudi Arabia’s manufacturing sector, found that there was a significant positive relationship between PMD and firm performance, suggesting that PDM is a crucial component influencing firm performance (Alsughayir, (2016). According to Kuya, and Adeola Sulaiman, A.H., (2011) who investigated the relationship between employee participation in decision making and firms’ performance also in the manufacturing sector in Nigeria, found that there was a statistically significant relationship between employee engagement in decision making and firms’ performance.

In this study, employee power refers to involvement of employees in the employee unions and participation of unions in regular Majlis Bersama Jabatan or Employees/Unions Meeting with Management. Based on the above findings, it is hypothesised that employee power has the following relationship with FSB performance:

H3: There is significant positive relationship between Employee Power (EPW) and FSB’s

performance.

Leverage Power and FSB Performance

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H4: There is significant positive relationship between Leverage Power (LPW) and FSB’s

performance.

Regulatory Authority and FSB’s performance

The fifth hypothesis relevant to the study is about the role of regulatory authority (RAY) in affecting the performance of FSB. Existing governance literature also suggests that regulatory authority has the power to influence the performance of the firms through enforcing regulations and monitoring performance (Fielden 2007; Major & Hopper, 2004). A regulatory authority index ( Rashid, Islam & Anderson, 2008) was calculated by developing the index of compliance with the Prime Minister Directive (PMD) 1 year 2009.This variable was constructed by taking into consideration whether FSB comply with PMD 1/2009. Since the above argument support that regulatory authority affect the organisational performance, then this study propose the following hypothesis:

H5: There is significant positive relationship between Regulatory Authority (RAY) and

FSB’s performance.

Professionalisation and FSB’s Performance

The sixth hypothesis relevant to the study is about the role of professionalisation in affecting the performance of FSB. Professionalisation refers to (1) training, education, and other activities that transform a worker into a professional and (2) social processes by which an occupation becomes a profession. For a professional association, professionalisation might mean establishing a code of conduct or creating (or recognizing) certifications, training programs, or educational standards (The National Academies of Sciences, 2013).This study focus on the professional association of Malaysian Statutory Bodies Association or Persatuan Badan-Badan Berkanun Malaysia and its relationship with FSB’s performance. Its functions are mainly establishing closer relationship and collaboration with its members and conducting training program at local and international levels. Since Malaysian Statutory Bodies Association seem to have positive contribution to the profession of its members this study postulate the hypothesis of Professionalisation influencing FSB’s performance as follows:

H6: There is significant positive relationship between Professionalisation Influence (PRO)

and FSB’s performance.

Board Interlocking and FSB Performance

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H4: There is significant positive relationship between Leverage Power (LPW) and FSB’s

performance.

Regulatory Authority and FSB’s performance

The fifth hypothesis relevant to the study is about the role of regulatory authority (RAY) in affecting the performance of FSB. Existing governance literature also suggests that regulatory authority has the power to influence the performance of the firms through enforcing regulations and monitoring performance (Fielden 2007; Major & Hopper, 2004). A regulatory authority index ( Rashid, Islam & Anderson, 2008) was calculated by developing the index of compliance with the Prime Minister Directive (PMD) 1 year 2009.This variable was constructed by taking into consideration whether FSB comply with PMD 1/2009. Since the above argument support that regulatory authority affect the organisational performance, then this study propose the following hypothesis:

H5: There is significant positive relationship between Regulatory Authority (RAY) and

FSB’s performance.

Professionalisation and FSB’s Performance

The sixth hypothesis relevant to the study is about the role of professionalisation in affecting the performance of FSB. Professionalisation refers to (1) training, education, and other activities that transform a worker into a professional and (2) social processes by which an occupation becomes a profession. For a professional association, professionalisation might mean establishing a code of conduct or creating (or recognizing) certifications, training programs, or educational standards (The National Academies of Sciences, 2013).This study focus on the professional association of Malaysian Statutory Bodies Association or Persatuan Badan-Badan Berkanun Malaysia and its relationship with FSB’s performance. Its functions are mainly establishing closer relationship and collaboration with its members and conducting training program at local and international levels. Since Malaysian Statutory Bodies Association seem to have positive contribution to the profession of its members this study postulate the hypothesis of Professionalisation influencing FSB’s performance as follows:

H6: There is significant positive relationship between Professionalisation Influence (PRO)

and FSB’s performance.

Board Interlocking and FSB Performance

The seventh hypothesis relevant to the study is about the effects of board interlocking (BTK) in affecting the performance of FSB.Resource dependence theory maintains that the board is an essential link between the firm and the external resources that it needs to maximise performance (Pfeffer & Salancik, 2003). The external resources might be obtained by sitting on more than one board (interlocking-directorships). Dahya, J. Lonie, A.A., Power, D.D. (1996), suggest that interlocking-directorships will help in making resources such as information more transparent as comparisons can be made based on knowledge of other organisations. Hence, decisions made at one board may become part of the resources for decisions at other board. Based on these arguments the hypothesis of board interlocking affecting FSB’s performance is as follows:

H7: There is significant positive relationship between Board Interlocking (BTK) and FSB’s

performance.

Control Variables

Three control variables included in this study are: 1) organisational age; 2) organisational size and 3) average annual sales or revenue growth. These three variables are determined to have high impact on the non-financial and financial performance of FSB. Hence, controlling these variables provides more powerful explanation on the association between external corporate governance mechanisms and FSB’s performance.

RESEARCH FRAMEWORK AND METHODOLOGY

The Conceptual Framework

Institutional, stakeholder and resource dependency theories form the theoretical framework of this study. Whereas the conceptual framework addresses the relationship between the external corporate governance practices and performance of FSB on the theoretical framework formulated. The operationalisation of the external corporate governance mechanisms or variables to effect performance of FSB for the purpose of empirical testing of hypotheses is then conducted.

External Corporate Governance Score (ECGS) is a composite score of 6 sub-score: 3 Stakeholder Influence and 3 Institutional Isomorphism variables. FSB performance represented by Key Result Area (KRA) Scores, an Accountability Index, ROA and ROE are dependent variables, while there are 3 control variables: age; size; and growth.

Variables Identification and Measurement

Based on the hypotheses and conceptual framework thus developed, there are 4 dependent variables, 7 independents variables and 3 control variables. The identification and measurement of each variable and its expected sign is as shown in Table 1.

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Table 1. Variables Used to Study the ECG Mechanisms and Performance of FSB

NO. VARIABLES HYPO

. SIGN

MEASUREMENT

1. External Governance Mechanism Score (ECGS)

+ Composite score of ECG variables (2-7) as a proxy for external governance

mechanism 2. Government funding

(GFN) + Government funds as a percentage of total revenue 3. Employees Power

(EPW) + Employees participation in trade union 4. Leverage power

(LPW) + Debt as a percentage of total assets 5. Regulatory Authority

(RAY) + Compliance with Prime Minister Directive No. 1 year 2009 6. Professionalisation

Influence (PRO) + Participation in the Association of Malaysian Statutory Bodies. 7. Board Interlock

(BTK) + Percent of board members who are members of other boards.

8. KRA scores (KRA) + Overall average score of Key Result Areas compared to KPIs

9. Accountability Index

(AI) + Financial management indicator developed by National Audit Department 10. Return of Assets

(ROA) + An indicator of how profitable before tax of an agency is relative to its total assets 11. Return of Equity

(ROE) + Measure of FSB’S profitability before tax in relation to the money shareholders have invested

12. Age (LAG) + Natural Logarithm of organisation years since incorporation

13. Size (LSZ) +/- Natural logarithm of assets

14. Growth (GRO) + Average annual sale/revenue growth

Governance Model

The analytical governance model of this study is based on the conceptual framework. It attempts to explain the relationship between external corporate governance practices and the performance of FSB. The strength of FSB’s external corporate governance score (ECGS) is represented by Governing Funding(GFN), Employees Power (EPW), Leverage Power(LPW), Regulatory Authority(RAY), Professionalisation (PRO) and Board Interlock (BTK The governance model to test the relationship between CG practices and performance in FSB is as follows:

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Table 1. Variables Used to Study the ECG Mechanisms and Performance of FSB

NO. VARIABLES HYPO

. SIGN

MEASUREMENT

1. External Governance Mechanism Score (ECGS)

+ Composite score of ECG variables (2-7) as a proxy for external governance

mechanism 2. Government funding

(GFN) + Government funds as a percentage of total revenue 3. Employees Power

(EPW) + Employees participation in trade union 4. Leverage power

(LPW) + Debt as a percentage of total assets 5. Regulatory Authority

(RAY) + Compliance with Prime Minister Directive No. 1 year 2009 6. Professionalisation

Influence (PRO) + Participation in the Association of Malaysian Statutory Bodies. 7. Board Interlock

(BTK) + Percent of board members who are members of other boards.

8. KRA scores (KRA) + Overall average score of Key Result Areas compared to KPIs

9. Accountability Index

(AI) + Financial management indicator developed by National Audit Department 10. Return of Assets

(ROA) + An indicator of how profitable before tax of an agency is relative to its total assets 11. Return of Equity

(ROE) + Measure of FSB’S profitability before tax in relation to the money shareholders have invested

12. Age (LAG) + Natural Logarithm of organisation years since incorporation

13. Size (LSZ) +/- Natural logarithm of assets

14. Growth (GRO) + Average annual sale/revenue growth

Governance Model

The analytical governance model of this study is based on the conceptual framework. It attempts to explain the relationship between external corporate governance practices and the performance of FSB. The strength of FSB’s external corporate governance score (ECGS) is represented by Governing Funding(GFN), Employees Power (EPW), Leverage Power(LPW), Regulatory Authority(RAY), Professionalisation (PRO) and Board Interlock (BTK The governance model to test the relationship between CG practices and performance in FSB is as follows:

𝐐𝐐𝐐𝐐𝐐𝐐 = 𝐚𝐚 + 𝐛𝐛𝐛𝐛 𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐐𝐐𝐐𝐐 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐐𝐐𝐐𝐐 + 𝐄𝐄𝐐𝐐𝐐𝐐 (1)

Where,

Qit is the FSB performance measures: ROA; ROE; AI & KRA

ECGSit = vector of external corporate governance score for FSB at time t

Xit = vector for FSB organisational characteristics: age; size; & growth at time t. Eit = Error term.

𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛 (2)

Where,

Qit = performance, an dependent variable; ROA; ROE; AI & KRA a = Intercept;

b = Slope of the independent variables;

Independent variables: External CG Score (ECGS): Government Funding (GFN); Employees Power (EPW); Leverage Power (LPW); Regularity Authority (RAY); Professionalisation (PRO) & Board Interlock(BTK).

Control Variables: Age, Size, and Growth of FSB. i= 1-51 FSB

t = periods 2009-2013 Eit = error term

Population and Sample

The population of this study consists of 127 Malaysian Federal Statutory Bodies (FSB) (AG Report, 2013). FSB are being chosen to be studied since they adopt a corporate style management and have board of directors who have essential role practising good governance in enhancing their corporate performance. A sample size of 51 FSB is chosen for this study since each of these agencies has the accountability index which will be used as performance indicator.

Data Collection

Data of this study were obtained by content analysis which was based on publicly disclosed information in 51 FSB’s annual reports for the year 2009 till 2013 to analyse the relationship between ECGS and FSB’s performance.

Data Analysis

Date through content analysis were edited for accuracy, quality and completeness. Then the panel data was analysed using SPSS version 21 which produced descriptive outputs, correlation analysis. While STSTA 14 was used to implement regression analysis to determine the relationship between external corporate governance mechanisms and FSB performance.

RESULTS AND DISCUSSION

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Descriptive Statistics

Table 2 shows that on the average FSB received 51.97% of their income came from government grants.71.26% of FSB has employee unions. While 3.3% of their assets are from debts and about 76% conform to the PM’s directive No. 1 2009 which requested every FSB to form governance committee and meet 4 times yearly. About 84.25% of FSB became members of Persatuan Badan-Badan Berkanun as professional affiliation. 86.30% of the board members also sit on Board of other organisations. Overall FSB’s practice of external corporate governance is 62.17%, slightly above average as indicated by ECG scores

Table 2. Descriptive statistics of ECG, Control and Dependent Variables No Variables Minimum Maximum Mean Std. Deviation

1 GFN .0000 99.46 51.97 36.61

2 EPW .0000 100.00 71.26 45.34

3 LPW .0000 97.30 3.25 11.97

4 RAY .0000 100.00 75.98 42.80

5 PRO .0000 100.00 84.25 36.50

6 BTK .6667 100.00 86.30 6.69

7 ECGS .1320 97.05 62.17 14.80

8 KRAS .5000 100.00 83.48 12.27

9 AI .6271 96.67 83.68 7.33

10 ROA -8.72 97.92 573.50 10.43

11 ROE -8.80 100.00 665.04 10.79

12 OAG 1.00 64.00 23.91 15.20

13 LSZ 6.7440 11.80 8.88 1.02

14 GRO -97.90 270.73 15.44 37.14

No.1-11 & 14, figures in percentage No.12 figures in years

No.13 figures in log: mean 8.88 = RM776 millions.

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Descriptive Statistics

Table 2 shows that on the average FSB received 51.97% of their income came from government grants.71.26% of FSB has employee unions. While 3.3% of their assets are from debts and about 76% conform to the PM’s directive No. 1 2009 which requested every FSB to form governance committee and meet 4 times yearly. About 84.25% of FSB became members of Persatuan Badan-Badan Berkanun as professional affiliation. 86.30% of the board members also sit on Board of other organisations. Overall FSB’s practice of external corporate governance is 62.17%, slightly above average as indicated by ECG scores

Table 2. Descriptive statistics of ECG, Control and Dependent Variables No Variables Minimum Maximum Mean Std. Deviation

1 GFN .0000 99.46 51.97 36.61

2 EPW .0000 100.00 71.26 45.34

3 LPW .0000 97.30 3.25 11.97

4 RAY .0000 100.00 75.98 42.80

5 PRO .0000 100.00 84.25 36.50

6 BTK .6667 100.00 86.30 6.69

7 ECGS .1320 97.05 62.17 14.80

8 KRAS .5000 100.00 83.48 12.27

9 AI .6271 96.67 83.68 7.33

10 ROA -8.72 97.92 573.50 10.43

11 ROE -8.80 100.00 665.04 10.79

12 OAG 1.00 64.00 23.91 15.20

13 LSZ 6.7440 11.80 8.88 1.02

14 GRO -97.90 270.73 15.44 37.14

No.1-11 & 14, figures in percentage No.12 figures in years

No.13 figures in log: mean 8.88 = RM776 millions.

The average performance of FSB during the 5 years i.e. from 2009 till 2013 can be gauged by the achievement of ROA, ROE, Accountability Index (AI) evaluated by Auditor General and Key Result Areas (KRA) scores which amount to 5.75%, 6.65%, 83.68% and

83.48% respectively. The average age of FSB was 24 years old with a mean assets of 776 million Ringgit and an average growth rate sale or income of 15.45% per year.

Pearson Correlation Matrix of ECG and Control Variables

Table 3 demonstrates the results of Pearson correlation analysis of 10 variables used in the external corporate governance mechanisms and control variables. From the correlation coefficients, there is no concern of the multicollinearity problem between the explanatory variables and control variables because none of the pairwise correlation values exceeded 0.7.

Table 3. Pearson Correlation Matrix of ECG and control Variables

** Correlation is significant at the 0.01 level (2-tailed)

Multivariate Regression Analysis

Multivariate regression analysis is employed to investigate the panel data analysis of regression models. Model 1 and 2 attempt to test the hypotheses and to reveal the relationships between external corporate governance mechanisms and FSB performance. The results of regression analysis based on the model 1 and 2 are as follows:

GFN EPW LPW RAY PRO BTK LAG LSZ GRO ECGS

GFN 1 -.

EPW .017 1

LPW -.037 -.68 1

RAY -.035 -.092 .057 1

PRO -.005 .323** .091 .162** 1

BTK -.306 -.091 .164** .046 .226** 1

LAG -.099 .126** .061 .122 .341** .076 1

LSZ -.416 .242** .094 .104 .171** -.009 .321 1

GRO -.024 -.172** .055 -.004 -.185** -.005 -.046 .031 1

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24

Relationship between ECGS and FSB performance

Table 4 shows the regression analysis according to Model 1:

𝐐𝐐𝐐𝐐𝐐𝐐 = 𝐚𝐚 + 𝐛𝐛 𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐐𝐐𝐐𝐐 + 𝐜𝐜 𝐗𝐗𝐐𝐐𝐐𝐐 + 𝐄𝐄𝐐𝐐𝐐𝐐 (1)

External Corporate Governance Score (ECGS) represents the overall strength of external of corporate governance mechanisms, FSB performance represented by Return of Assets (ROA), Return of Equity (ROE), Accountability Index (AI) and Key Result Areas (KRA) and control Variables: Organisation’s Age (LAG), Organisation’s Size (LSZ) and Growth of Sales (GRO).

Heteroscedasticity and serial correlation have been detected by using Brusch Pagan/ Cook-Weisberg and Durbin Watson test respectively in model 1. After taking remedial measures including Hausman test and First-order Autoregressive Model the results of model 1 are shown in Table 4:

Table 4. Results of Regression Analysis of ECGS and FSB Performance

MODEL 1 ROA ROE AI KRA

Fixed Effect# Random

Effect# Fixed Effect# Random Effect#

(Constant) 75.282

(4.02)***

0.211 (0.13)

0.880 (32.11)***

0.561 (7.89)***

ECGS 10.645

(0.69)

4.061 (3.25)***

-0.046 (1.51)

0.215 (3.95)***

LAG 46.911

(3.85)***

0.200 (-0.27)

0.309 (0.87)

0.065 (1.94)**

LSZ -1.936

(-0.86)

0.657 (0.45)

0.003 (0.69)

0.006 (0.99)

GRO .035

(2.18**)

0.005 (1.55)

0.000 (0.47)

0.000 (0.52)

R-Squared 0.143 0.0670 0.1426 .0.1457

F-statistics (6.04)*** (14.26)** (6.04)*** (25.87)***

Notes: The values of coefficients are in the 1st row of the cell.

The values for T statistics are in parenthesis in the 2nd row of the cell. **Indicative the variables are at the 0.05 significant level

***Indicative the variables are at the 0.01 significant level

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Relationship between ECGS and FSB performance

Table 4 shows the regression analysis according to Model 1:

𝐐𝐐𝐐𝐐𝐐𝐐 = 𝐚𝐚 + 𝐛𝐛 𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐐𝐐𝐐𝐐 + 𝐜𝐜 𝐗𝐗𝐐𝐐𝐐𝐐 + 𝐄𝐄𝐐𝐐𝐐𝐐 (1)

External Corporate Governance Score (ECGS) represents the overall strength of external of corporate governance mechanisms, FSB performance represented by Return of Assets (ROA), Return of Equity (ROE), Accountability Index (AI) and Key Result Areas (KRA) and control Variables: Organisation’s Age (LAG), Organisation’s Size (LSZ) and Growth of Sales (GRO).

Heteroscedasticity and serial correlation have been detected by using Brusch Pagan/ Cook-Weisberg and Durbin Watson test respectively in model 1. After taking remedial measures including Hausman test and First-order Autoregressive Model the results of model 1 are shown in Table 4:

Table 4. Results of Regression Analysis of ECGS and FSB Performance

MODEL 1 ROA ROE AI KRA

Fixed Effect# Random

Effect# Fixed Effect# Random Effect#

(Constant) 75.282

(4.02)*** 0.211 (0.13) 0.880 (32.11)*** 0.561 (7.89)***

ECGS 10.645

(0.69) 4.061 (3.25)*** -0.046 (1.51) 0.215 (3.95)***

LAG 46.911

(3.85)*** 0.200 (-0.27) 0.309 (0.87) 0.065 (1.94)**

LSZ -1.936

(-0.86) 0.657 (0.45) 0.003 (0.69) 0.006 (0.99)

GRO .035

(2.18**) 0.005 (1.55) 0.000 (0.47) 0.000 (0.52)

R-Squared 0.143 0.0670 0.1426 .0.1457

F-statistics (6.04)*** (14.26)** (6.04)*** (25.87)***

Notes: The values of coefficients are in the 1st row of the cell.

The values for T statistics are in parenthesis in the 2nd row of the cell. **Indicative the variables are at the 0.05 significant level

***Indicative the variables are at the 0.01 significant level

. # Fixed Effect/Random Effect without Heteroscedasticity and Serial Correlation.

As indicated by Table 4, F-statistics or the model fit for ROA, ROE. AI and KRA as proxies of FSB performance were significant at p < 0.01 and p < 0.05. According to this model 1, FSB performance measured in term of financial: ROE and non-financial; KRA has significant relationship with external corporate governance practices (ECGS) at p<0.1. This result indicates that better external corporate governance will yield better financial performance: ROE and also non-financial performance: KRA. ROA has a significant positive relation with control variables: organisation’ age (LAG) and average sales or revenue growth (GRO) at p<0.01, p<0.05 respectively. This result also shows that older FSB and better sales/ revenue growth will lead to better ROA. In addition, KRA has a significant relationship with organisation’s age (LAG) at P<0.05. This implies that older and mature FSB tend to perform better in term financial: ROA and non-financial; KRA.

Relationship between ECG Mechanisms and FSB Performance

Tables 5 shows the regression analysis according to Model 2:

𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 + 𝐛𝐛𝐛𝐛𝐛𝐛 ሺʹሻ

Model 2 attempts to establish relationship between External Corporate Governance Mechanisms or variables: Government Funding (GFN); Employee Power (EPW); Leverage Power (LPW); Regulatory Authority (RAY); Professionalisation Influence (PRO) and Board Interlock (BTK) and FSB performance represented by Return of Assets (ROA), Return of Equity (ROE), Accountability Index (AI) and Key Result Areas (KRA) with Organisation’s Age (OAG), Organisation’s Size (OSZ) and Growth of Sales (GRO) as control variables.

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26

Table 5. Results of Regression Analysis ECG Variables, Control Variables and FSB Performance

MODEL 2 ROA RO E AI KRA

.

Fixed Effect # Random Effect # Fixed Effect # Fixed Effect #

Coeff. t Sig Coeff. t Sig Coeff t Sig Coeff t Sig

Constant

73.973 (3.20)*** 2.033 (0.72) .0.958 (32.53)*** 0.164 (1.12).

GFN 21.818 (2.39)** -1.906 (-3.03)*** 0.004 (0.17) .0.139 (2.24)**

EPW -1.861 (.1.294) 1.341 (2.51)** -0.004 (-0.21) 0.101 (1.72)*

LPW -8.375 (-0.96) 3.738 (2.46)** -.0.001 (-0.03) 0.645 (0.83)

RAY 0.482 (0.16) 0.556 (2.16)** .-0.007 (-1.41) 0.040 (2.00)**

PRO omitted collinearity 1.807 (2.48)** omitted collinearity omitted collinearity

BTK 4.327 (0.23) 0.602 (0.23) -0.124 (-2.96*** -0.035 (-0.28)

LAG -45.803 (-3.86)*** -0.140 (-0.22) .-0.26 (-0.74) 0.347 (4.22)

LSZ -2.280 (-.0.94)* -0.092 (-0.64) .0.003 (0.75) 0.008 (0.55)

GRO 0.047 (2.69)*** 0.004 (1.39) 0.000 (0.66) .0.000 (0.07)

R sq

F Stat.

0.1244

(4.21)***

0.3168

(43.72)***

0.1181

(1.49)*

0.1017

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Table 5. Results of Regression Analysis ECG Variables, Control Variables and FSB Performance

MODEL 2 ROA RO E AI KRA

.

Fixed Effect # Random Effect # Fixed Effect # Fixed Effect #

Coeff. t Sig Coeff. t Sig Coeff t Sig Coeff t Sig

Constant

73.973 (3.20)*** 2.033 (0.72) .0.958 (32.53)*** 0.164 (1.12).

GFN 21.818 (2.39)** -1.906 (-3.03)*** 0.004 (0.17) .0.139 (2.24)**

EPW -1.861 (.1.294) 1.341 (2.51)** -0.004 (-0.21) 0.101 (1.72)*

LPW -8.375 (-0.96) 3.738 (2.46)** -.0.001 (-0.03) 0.645 (0.83)

RAY 0.482 (0.16) 0.556 (2.16)** .-0.007 (-1.41) 0.040 (2.00)**

PRO omitted collinearity 1.807 (2.48)** omitted collinearity omitted collinearity

BTK 4.327 (0.23) 0.602 (0.23) -0.124 (-2.96*** -0.035 (-0.28)

LAG -45.803 (-3.86)*** -0.140 (-0.22) .-0.26 (-0.74) 0.347 (4.22)

LSZ -2.280 (-.0.94)* -0.092 (-0.64) .0.003 (0.75) 0.008 (0.55)

GRO 0.047 (2.69)*** 0.004 (1.39) 0.000 (0.66) .0.000 (0.07)

R sq

F Stat.

0.1244

(4.21)***

0.3168

(43.72)***

0.1181

(1.49)*

0.1017

(3.46)***

*Indicative the variables are at the 0.10 significant level **Indicative the variables are at the 0.05 significant level ***Indicative the variables are at the 0.01 significant level

# Fixed Effect/Random Effect without Heteroscedasticity and Serial Correlation PRO being omitted since it has multicollinearity problem (high VIF: 8.98) in Model 2

Table 5 indicates that F-statistics or the model fit for ROA, ROE.KRA and AI as Representatives of FSB performance were significant at p < 0.01 and p < 0.10 respectively. Government Funding has significant positive effect on ROA and KRA. This implies that increase in government funding helps in increasing in financial performance namely return on Asset and also non-financial performance i.e. key result areas. However, Governing Funding has a negative relationship with Return on Equity. This occurs when there is imbalance in obtaining emolument allocation as compared to development budget which will cause FSB to use their internal fund thus reducing their retained earnings and return on equity. Employees Power (EPW), Leverage Power (LPW), Regulatory Authority (RAY) and Professionalisation (PRO) have significant positive effects on ROE. This result indicates that better employee participation in FSB decision making, better leverage, better regulatory control, and increase in involvement in Persatuan Badan-Badan Berkanun (Federal Statutory Bodies Association) will lead to improved ROE. Employee involvement (EPW) and regulatory control (RAY) also has significant effect on non-financial performance namely Key Result Areas (KRA). There is a significant negative relationship between Board Interlock (BTK) and Accountability Index (AI). This implies that there might exists a negative influence for being on board of other organisations. Organisational Growth of Sales/revenue has significant relationship with ROA. It means that better growth in sales/revenue will lead to better return on assets. However Org. Age (LAG) and Org. Size (LSZ) have significant negative effects on ROA. This indicates that as FSB grow bigger and older at one stage they become less efficient and lead smaller return on assets.

The results from panel data analysis indicate that the hypothesis H1 that test the relationship between external corporate governance practice and financial and non-financial performance is accepted. As for hypothesis H2 that test the relationship between government funding and FSB performance is also accepted. However in cases where there are imbalances in development allocations with the emolument requirement, there is negative effect on retained earnings and hence return on equity. Table 4 also indicates hypothesis H3 that test the relationship between Employee Power and FSB performance is accepted. The hypothesis H4 is accepted since leverage Power has a significant positive effect on ROE at p < 0.05. Likewise with hypothesis H5 and H6, the results of regression analysis shows that the relationship between Regulatory Authority and professionalisation respectively with FSB performance is significantly positive and hence should be accepted. Whereas hypothesis H7 has to be rejected since Board Interlocking has a negative effect on FSB performance. This result support the research by Drago, Millo, Riccinti and Santella, (2010) who found that Board interlocking has a negative effect on firm performance in Italy.

CONCLUSION

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28

governance. In spite of this assurance by the government, Malaysia continues to experience challenges including corruption perception, inefficiency, unfair actions, and delay in service provision. These shortcomings deserve attention, assessment and improvement. Hence this study aims to assess the effects of external corporate governance mechanisms on performance of Federal Statutory Bodies (FSB).

External corporate governance mechanisms refer to the institutional isomorphism: coercive; mimetic; normative and stakeholder influence on an organisation in its undertaking to achieve its objectives. Institutional and stakeholder theories indicates that performance is influenced by institutional organisations and stakeholders that regulate and assist in its performance. As such, external structural component serves to promote positive FSB performance in the long term. External corporate governance mechanisms in this study consists of Government Funding (GFN); Employees Power (EPW); Leverage Power (LPW) and Regulatory Authority (RAY) Professionalisation (PRO); and Board Interlock (BTK).

The study shows that the mean level of external corporate governance practice in FSB is only above average, not according to the assurance by the government i.e. good governance. There is a significant positive relationship between overall level of external corporate governance practice with financial and non-financial FSB performance. This means that better external corporate governance practices will lead to better FSB performance. Specifically, an increase in the practice of external corporate governance mechanisms namely government funding, employee participation in FSB decision making, leverage capability, regulatory authority influence and involvement in Persatuan Badan-Badan Berkanun or Federal Statutory Bodies Association will accelerate FSB performance. It is therefore recommended all FSB should enhance their practice of corporate governance in order to accelerate their performance. Other public and private sector organisations are also recommended to practice good corporate governance in order to enhance their corporate performance.

This study offers significant contribution to the body of knowledge since the research on governance in Malaysian public sector is still lacking. In addition, this study is also beneficial to policy makers, regulators, academicians, directors and managers. The main limitation of this study is that it does not include government departments and agencies in Malaysia which do not have board of directors as governance bodies. Future research may involve these departments and agencies and may focus on the compliance of PM Directive No. 1 Year 2014 including internal control and risk management via ISO 31000.

REFERENCES

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Abu Bakar and Ismail, (2011) ‘Financial Management Accountability Index (FMAI) in Malaysian Public Sector: A Way Forward’ International Review of Administrative Science.’ Vol. 77(1) March 2011 p.159-190

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Alsughayir, A.,(2016) ‘Employee Participation in Decision-making (PDM) and Firm Performance.’ International Business Research; Vol. 9, No. 7; 2016 p.64-70

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governance. In spite of this assurance by the government, Malaysia continues to experience challenges including corruption perception, inefficiency, unfair actions, and delay in service provision. These shortcomings deserve attention, assessment and improvement. Hence this study aims to assess the effects of external corporate governance mechanisms on performance of Federal Statutory Bodies (FSB).

External corporate governance mechanisms refer to the institutional isomorphism: coercive; mimetic; normative and stakeholder influence on an organisation in its undertaking to achieve its objectives. Institutional and stakeholder theories indicates that performance is influenced by institutional organisations and stakeholders that regulate and assist in its performance. As such, external structural component serves to promote positive FSB performance in the long term. External corporate governance mechanisms in this study consists of Government Funding (GFN); Employees Power (EPW); Leverage Power (LPW) and Regulatory Authority (RAY) Professionalisation (PRO); and Board Interlock (BTK).

The study shows that the mean level of external corporate governance practice in FSB is only above average, not according to the assurance by the government i.e. good governance. There is a significant positive relationship between overall level of external corporate governance practice with financial and non-financial FSB performance. This means that better external corporate governance practices will lead to better FSB performance. Specifically, an increase in the practice of external corporate governance mechanisms namely government funding, employee participation in FSB decision making, leverage capability, regulatory authority influence and involvement in Persatuan Badan-Badan Berkanun or Federal Statutory Bodies Association will accelerate FSB performance. It is therefore recommended all FSB should enhance their practice of corporate governance in order to accelerate their performance. Other public and private sector organisations are also recommended to practice good corporate governance in order to enhance their corporate performance.

This study offers significant contribution to the body of knowledge since the research on governance in Malaysian public sector is still lacking. In addition, this study is also beneficial to policy makers, regulators, academicians, directors and managers. The main limitation of this study is that it does not include government departments and agencies in Malaysia which do not have board of directors as governance bodies. Future research may involve these departments and agencies and may focus on the compliance of PM Directive No. 1 Year 2014 including internal control and risk management via ISO 31000.

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Figure

Table 1. Variables Used to Study the ECG Mechanisms and Performance of FSB
Table 2. Descriptive statistics of ECG, Control and Dependent Variables
Table 2. Descriptive statistics of ECG, Control and Dependent Variables
Table 4. Results of Regression Analysis of ECGS and FSB Performance
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