Exploring the role of institutional investors in voting, monitoring and dialogue engagement in mitigating agency conflict in Malaysia's public listed companies

The paper addresses the agency dilemma as a core ethical, practical, and economic concern in corporate governance. In contexts with asymmetric information, managers (agents) may not always act in the best interests of shareholders (principals), creating agency conflicts and costs. Institutional investors, given their substantial ownership and influence, can mitigate these conflicts through activism—exit or voice—via monitoring, voting, resolutions, and engagement. In Malaysia, multiple governance scandals (e.g., MAS, Perwaja Steel, Sime Darby, Bank Bumiputra) have raised doubts about the effectiveness of corporate governance and the role of institutional investors. The study’s purposes are to: (1) examine the level of agency conflict in Malaysian PLCs; (2) assess institutional investors’ roles—voting, monitoring, and dialogue engagement—in mitigating agency conflicts; and (3) identify which roles are most effective. The research contributes by focusing on the extent of agency conflict in Malaysia, exploring the breadth of institutional investor activism beyond firm value effects, and determining which stewardship roles are most impactful. Hypotheses include the presence of significant agency conflict in Malaysian PLCs (H1) and associations between agency conflict and institutional investors’ voting (H2/H2a), monitoring (H3), and dialogue engagement (H4).

Institutional shareholders in Malaysia: Institutional investors now dominate Malaysian shareholding and are positioned to influence governance standards (MCCG 2007; MCII 2014). Government-linked investment companies (GLICs)—notably EPF, PNB, LTH, LTAT, SOCSO—hold about 70% of institutional shares. Regulatory initiatives (MCII 2014, updated 2017 and 2021) encourage active monitoring of performance, reporting quality, and safeguarding firm value. Institutional investors’ clout enhances disclosure and early risk detection, potentially reducing agency conflicts. Agency theory and agency conflict: Agency theory (Jensen & Meckling, 1976) models the principal-agent relationship where separation of ownership and control, combined with information asymmetry, leads to conflicts of interest. Managers may pursue self-interest (e.g., wealth maximization, risk avoidance), creating agency problems across disciplines. Agency costs arise from monitoring and bonding expenditures and residual loss. Prior research suggests institutional investors may be motivated and equipped to monitor due to scale, offsetting activism costs. Malaysian governance context: Despite governance codes (MCCG 2000, 2007; Blueprint 2011; MCCG 2012; MCII 2014/2017/2021), scandals (e.g., Sime Darby, TM, FGV, MISC) and enforcement actions indicate persistent agency issues, potentially undermining investor confidence. The 1MDB scandal further eroded trust. Literature indicates institutional investors’ activism can improve governance and firm value, though Malaysian activism has been characterized as nascent, with CSR-related activism rising. Roles of institutional investors: Voting at AGMs is a key channel, with institutional investors expected to act as gatekeepers on conflicted proposals. However, proxy fights can be costly. Monitoring includes both exit (informed selling) and voice (active oversight), with long-horizon investors favoring transparency. Dialogue engagement—board-shareholder interactions and behind-the-scenes communications—can improve transparency and performance. Hypotheses posit associations between agency conflict and voting (H2/H2a), monitoring (H3), and engagement (H4).

Design: Quantitative survey of corporate executives responsible for institutional investor relations in Malaysian PLCs. Sample: 201 firms listed on Bursa Malaysia Main Market across 11 sectors (consumer goods, industrial products, construction, trade/services, real estate, plantations, technology, infrastructure, finance, hotels, REITs). No industry exclusions. Pilot study: 60 listed firms, informing reliability. Eight major institutional investors were noted as significant investors across the 201 firms. Measures: - Dependent variable: Agency conflict level, proxied by management responses regarding information disclosure, information asymmetry, decision-making, and the influence of institutional investors; measured on a 5-point Likert scale (1=strongly disagree to 5=strongly agree). Mean analysis used to gauge level. - Independent variables: Institutional investor roles—Voting (exercise of voting rights and intensity of use relative to shareholdings), Monitoring (e.g., board representation, observing share price, oversight of operations, compliance with governance codes), Dialogue engagement (regular discussions to safeguard/grow shareholder value, access to firms, active engagement). All measured on 5-point Likert scales. Analysis: Data analyzed with SPSS. Descriptive statistics (means, SDs), Pearson correlations (significance at p<0.05/p<0.01), and multiple regression with agency conflict as the dependent variable. Multicollinearity assessed via inter-construct correlations (all <0.80). Validity/Reliability: KMO=0.914 with significant Bartlett’s Test (p=0.000), supporting factorability. Cronbach’s alpha: Voting=0.801; Monitoring=0.929; Engagement=0.915; Agency conflict=0.874, indicating acceptable to excellent reliability.

- Descriptive levels (Likert interpretation: 1.00–1.99 low; 2.00–2.99 moderate; 3.00–3.99 high; 4.00–4.99 very high): • Agency conflict mean=3.8657 (SD=0.75078): high, indicating prevalent agency conflict in Malaysian PLCs. • Voting mean=3.7711 (SD=0.81654): high. • Monitoring mean=3.4637 (SD=1.00753): high. • Engagement mean=3.5796 (SD=1.00275): high. - Correlations (all p<0.01): • Voting–Agency conflict: r=0.355 (moderate positive). • Monitoring–Agency conflict: r=0.518 (moderate positive). • Engagement–Agency conflict: r=0.654 (strong positive). Inter-correlations: Voting–Monitoring r=0.674; Voting–Engagement r=0.388; Monitoring–Engagement r=0.388. No multicollinearity concerns (all <0.80). - Multiple regression predicting agency conflict: • Constant B=1.925 (SE=0.198), t=9.729, p=0.000. • Voting: B=−0.065, Beta=−0.071, t=−1.013, p=0.312 (not significant). • Monitoring: B=0.221, Beta=0.297, t=3.963, p=0.000 (significant). • Engagement: B=0.397, Beta=0.530, t=8.840, p=0.000 (significant). Interpretation reported by authors: Voting is not a required/primary role for understanding or reducing agency conflict (H2a rejected), while monitoring and dialogue engagement are the most influential and effective roles in mitigating agency conflicts. H1, H3, and H4 are supported.

The study confirms a high degree of principal–agent (Type 1) agency conflict among Malaysian PLCs, aligning with prior Malaysian evidence and countering claims that agency issues are primarily principal–principal in ASEAN contexts. Despite extensive governance reforms, institutional and cultural factors, and human self-interest, continue to foster conflicts of interest, including fraud and unethical behavior. Within this context, institutional investors’ active stewardship is critical. The findings support the MCII’s emphasis on monitoring and engagement: sustained oversight and constructive dialogue enhance transparency, reduce information asymmetry, and influence managerial behavior. While voting remains an important governance mechanism, it was not a significant predictor in the regression, suggesting that in Malaysia, behind-the-scenes monitoring and engagement are more impactful in addressing agency issues. The results imply that institutional investors should adopt proactive and, when necessary, assertive approaches to protect shareholder value and strengthen governance practices.

The research demonstrates that Malaysian PLCs exhibit a high level of agency conflict and that institutional investors play a significant role in addressing these issues. Monitoring and dialogue-based engagement emerge as the most effective stewardship tools, whereas voting alone is not sufficient or decisive in this context. The study advances understanding of agency conflict in Malaysia by quantifying its prevalence and by distinguishing the relative effectiveness of key institutional investor roles. It recommends that institutional investors intensify active, potentially assertive stewardship strategies and that regulators and industry bodies further promote awareness and capabilities related to agency issues. Future research should expand the scope of investor roles considered, integrate alternative theoretical lenses beyond agency theory, and conduct cross-country comparisons to enhance generalizability.

- Scope of investor roles: The study focuses on three roles (voting, monitoring, dialogue engagement). Other impactful roles (e.g., large block trades affecting prices, pre-investment governance screening, proxy contests) were not examined. - Theoretical lens: Reliance on agency theory may not fully capture the multifaceted role of institutional investors as substantial shareholders. - Generalizability: Findings are specific to Malaysia’s governance environment and regulatory context and may not directly generalize to other countries. Comparative international studies are needed.