This paper examines the roles played by the board's independence, the audit committee's independence and the separate roles of the board Chairman and the Chief Executive Officers on the suitability of financial reporting. Results reveal that corporate governance is improving as the degree of disclosure has increased, there is an entry to more independent outside directors, and influence of inside directors is curtailed. Moreover, board of director independence, audit committee independence and the separation of the top two roles improve effectiveness, and suggest that the public listed companies in Malaysia have complied with the recommendation of the Malaysian Code of Corporate Governance.

The subject of corporate governance has dramatically been brought to the forefront following the breakdown of governance in institutional companies. Corporate governance is a framework of legal, institutional and cultural factors shaping the patterns of influence that stakeholders exert on managerial decision-making (Weimer and Pape, 1999). It covers the way in which the varying interests of the major constituents of a company, such as the board of directors, management and shareholders, are directed and managed. More broadly, corporate governance refers to the defense of shareholders' interests to internalize the welfare of stakeholders, since there is widespread awareness that managers might take actions that harm shareholders. In fact, economists refer to it as the principal (investors)-agent (insider managers) problem. The problem facing corporate governance in the 21st century is the increasing transformation towards knowledge-intensive organizations with particular governance responsibility for financial and physical capitals. Among the factors that contribute towards this issue are the globalization and liberalization of capital markets, the growing emphasis on consumer rights, and the shifting investment landscape (Kole and Lehn, 1997; Coffee, 1999; and Cioffi, 2000).

One of the notable changes in Malaysian corporate finance before crisis of 1997 was the increasing growth of Non-performing Loans (NPLs) in the banking system following massive credit growth especially in the aspects of property and equity issuance financing (Low et al., 2001). Apart from that, inadequate transparency and insufficient corporate disclosure were among the major contributors in accelerating the Asian crisis. Moreover, sizeable corporate bonds attached with debt-financing guarantees were issued by the manufacturing industry, implying that firms with strong link to financial institutions would issue debt securities at a much lower cost. Consequently, corporate risk was created in financial institutions. Recognizing the problem, it was clear that issues of financial transparency and information disclosure are integral to alleviate conflict and information asymmetry between the management and financial stakeholders to reduce NPLs and relieve the agency costs.