Corporate governance mechanisms, corporate sustainability concerns and company financial performance : evidence from public listed Indonesian commercial banking companies

Kartadjumena, Eriana

Abstract

This thesis investigates the relationship between corporate governance mechanisms, corporate sustainability concerns and company financial performance for public listed of Indonesian commercial banking companies throughout the period 2007-2014. Corporate governance mechanisms are defined by the construct of the board of commissioners' (BoCs) role, executive compensation and ownership structure. Meanwhile, corporate sustainability concerns are defined by the corporate social responsibility activities, which are disclosed in the bank's published reports (i.e., annual report or sustainability report). This thesis also employs the combination of two different measures of company financial performance: company financial health and market value, measured by the Altman's Z-Score Revision Model and Tobin's Q, respectively.

The thesis employs a decision-making model framework, the Throughput Model, which is developed by Rodgers (1997) to describe the relationship among those constructs by adopting the shareholder and stakeholders perspectives. Data is presented from 252 firm-year observations as an unbalanced data panel of 39 commercial banking companies publicly listed on the Indonesia Stock Exchange throughout 2007-2014. Then, Partial Least Square-Structural Equation Modelling (PLS-SEM) is used to analyse data and provide results about potential influences among those aforementioned constructs.

The thesis contains seven chapters, including three chapters of empirical findings, which are presented in chapters four, five and six. For each chapter of empirical findings, the study built and tested the potential influences among the constructs in four different research models: a simultaneous and separate current period analysis, a year time-lagged analysis, a moderation effect analysis and a reverse (changing) direction of framework analysis.

The first empirical finding is presented in chapter four. It addresses the issue of whether mandatory internal corporate governance mechanisms, particularly the role of board of commissioners as the board supervision function, could influence corporate sustainability concerns as the construct of corporate responsibility disclosure. Further, this study examines whether there is an extended impact of the relationship of corporate sustainability concern on financial performance, in terms of both financial health and market value performance. This study provides evidence that the board of commissioners could be an important control mechanism to encourage the company to be more concerned with corporate sustainability with respect to economic, environment, and social activities. Further, viewed from the shareholder perspective, the positive influence brought by the board of commissioners on corporate sustainability concerns may dampen the firm's market value. On the other hand, according to the stakeholder perspective, the positive influence of the board of commissioners on corporate sustainability concern will improve company market value performance through its financial health performance. Moreover, this study also reveals that the motive of Indonesian banking companies in engaging in corporate sustainability initiatives tends to be altruistic. Indonesian commercial banking companies conduct corporate social responsibility activities only for their own sake, which influences the reduction of the company’s financial performance, both financial health and market value performance.

The second empirical finding is provided in chapter five. It explores the potential influence of executive compensation on corporate sustainability concerns and company financial performance. Interestingly, by investigating the pay-for-performance relationship, this study finds that executive compensation has a direct significant positive impact on corporate sustainability concerns and both company financial health and market value performance. Meanwhile, by adopting a shareholder perspective, this study reveals that higher executive compensation can encourage managers to adopt more corporate sustainability concerns for the shareholders' and/or managers' benefits; however, this will reduce the firm's value. However, a counter-balance mechanism occurs when employs the stakeholders' perspective is employed. High executive compensation motivates managers to implement more corporate sustainability concerns to serve all stakeholders’ interests, which may to increase the firm's market value through company financial health.

The third empirical finding is described in chapter six. It investigates whether the BoCs' role simultaneously with executive compensation could shape the motivation of the top management or executives to achieve company goals of higher company financial performance in a concentrated ownership dominant context. This study discovers that both the BoCs' role and ownership structure have a direct significant positive influence on executive compensation. This study reveals that the BoCs' role and ownership structure in two-tiered corporate governance systems promote higher payment of executive compensation and better company financial performance. Thus, there is a substitution and complementarity effect among the constructs and indicators of corporate governance mechanisms in determining company financial performance. This study also finds that concentrated ownership strengthens the positive relationship between the role of board of commissioners and executive compensation in order to increase company financial health and market value performance.

Citation

Kartadjumena, E. (2016). Corporate governance mechanisms, corporate sustainability concerns and company financial performance : evidence from public listed Indonesian commercial banking companies. (Thesis). University of Hull. Retrieved from https://hull-repository.worktribe.com/output/4222240

• Thesis Type: Thesis
• Deposit Date: Mar 2, 2020
• Publicly Available Date: Feb 23, 2023
• Keywords: Business
• Public URL: https://hull-repository.worktribe.com/output/4222240
• Additional Information: Business School, The University of Hull
• Award Date: Sep 1, 2016