The Effect Of Banking Company Performance Toward Good Corperate Govannance Listed In Indonesia Stock Exchange

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Markonaha Yohanes Ferry Cahayab Hedwigis Esti Riwayatic

a,b,cLecture Perbanas Institute, Jakarta, 12940, Indonesia

Abstract

The purpose of this study was to measure performance of banking sector toward Good Corporate Governance (GCG). Independent variables used in this study is the Return on Equity (ROE), Return on Assets (ROA), Composition and Size of the Company’s Corporate Assets. The dependent variable that is of GCG. The sample used in this study is banking company listed in Indonesia Stock Exchange 2010-2014 and CGPI with Purposive sampling of 10 commercial banks . The analysis used linear regression. The analysis showed that ROE and Size significantly and negatively related to GCG. ROA and Composition significantly and positively effect on GCG.

 

Keywords: GCG, ROA, ROE, Fixed Assets Ratio, Performance Size

 

© 2016 The Authors.Published by Elsevier Ltd.

Peer-review under responsibility of the Organizing Committee of the 3rd GCBSS-2015.

 

  1. Introduction

GCG started started to emerge in 1998 when in Indonesia experienced a prolonged crisis. There were two trigger GCG issues, namely, the rapid environmental changes which had an impact on changing the map of global market competition. Second, the increasing number of interested parties (constituents) including complex ownership structures that affect the management of stakeholders (Syakhroza, 2000). Many say that the lengthy restoration process in Indonesia was due to the weak corporate governance applied within the company in Indonesia. Since then, both the government and investors began to give significant attention in the practice of GCG. GCG implementation in the business industry, especially in Indonesia, is the demands of the times so the companies can compete on international level. GCG is an effort to improve and provide progress upon company performance. Several studies have been conducted to prove that GCG implementation affect company’s performance, Berghe and Ridder states that companies with poor performance are caused by poor governance. This statement is also supported by a research, Gompers et al. (2003) in Darmawati (2004), which indicates that there is a positive relationship between corporate governance and corporate performance as measured by Return on Assets (ROA). Milton (2000) in Darmawati (2004) also showed that the variables associated with GCG have a strong impact on company performance. But on the other hand, another research shows that GCG has no effect on the company’s performance, Khomsiah et al (2003).

 

  1. Theoritical Review

Good Corporate Governance (GCG)

Two main theories associated with GCG, namely Stewardship Theory and Agency Theory. Stewardship Theory is built on philosophical assumptions about human nature, namely that men are essentially trustworthy, able to act with full responsibility, integrity and honesty towards others. In other words, stewardship theory views management as something that can be trusted to act in the best possible way for the benefit of the public and stakeholders. Meanwhile, the Agency Theory, developed by Michael Johnson, believes that the company’s management as “agents” for shareholders, which will act with full awareness of its own interests. GCG is defined as structures, systems and processes used by a company in order to provide more value sustainable in the long term. Meanwhile, according to Jensen and Meckling (1976), agency theory is a contract between the manager (agent) with the owner (principal). Klapper (2002) states that GCG is associated with means or mechanism to convince the owners of capital in obtaining the return on investment that has been invested. Syakhroza (2002) defines corporate governance as a system that uses the leadership of an organization to direct, control, and supervise the organization’s resources management in an efficient, effective, economical and productive with the principles of transparency, accountable, responsible, independent and fairness to achieve organizational goals. Theoretically, corporate governance practices can improve the performance of a company, reduce the risks that might be done by the board with a decision which only benefits themselves. Generally, GCG can increase the investors’ confidence to invest which happens to affect performance (Darmawati et al, 2004).  The research, conducted by Pranata (2007), aims to determine the effect of applying GCG on ROE, Net Profit Margin (NPM). The samples are 35 companies taken by purposive sampling at publicly traded company listed on the Indonesia Stock Exchange during 2001-2005 and big 10 in the group based on the index of GCG. Results from this study indicate that the application of GCG positively affect return on equity (ROE), Net Profit Margin (NPM) as well as changes in the scores of GCG implementation caused by other factors which are not included in the regression model.

 

  1. Previous Studies

Aggarwal, Priyanka (2013) find that governance  ratings have  positive and significant impact on  corporate  financial performance, Companies that follow the CGPI survey showed a willingness to become a trusted and open. This effort should be perceived positively by stakeholders (Juniarti and The Lia Natalia, 2012). The results of McKinsey & Co. (2002) survey have shown that investors tend to avoid companies with poor corporate governance. Investors’ attention given to GCG is as big as the attention to the company’s financial performance. Investors believe that companies implementing good corporate governance practices has sought to minimize the risk of making mistakes, thus improving the company’s performance, which in turn maximize the value of the company. Therefore, the purpose of corporate governance is not only implementing good corporate governance practices but also improving the company’s performance. Darmawati et al. (2004) found that statistically, GCG significantly affects the company’s operating performance that is proxied by ROE. This may be due to the market response towards the implementation of corporate governance which takes time. Samples taken as many as 53 companies listed on the Jakarta Stock Exchange in 2001 and 2002, included in the ranking of GCG implementation done by IICG. This study provides additional evidence on another research, Gompers et al. (2003), who found a positive relationship between corporate governance indexes with a long-term company performance. Another study conducted by the Pranata (2004) who also found results that ROA positively affect company’s performance. However, a different result, disclosed by Kaaro (2002) in Suranta and Institution (2004), states that ROA negatively affect the company’s performance. Klapper and Love (2002) found a positive relationship between corporate governance and corporate performance as measured with Return on Assets (ROA). Another important discovery is that the application of corporate governance at enterprise level is more meaningful in developing countries than in developed countries. It shows that companies implementing good corporate governance would gain greater benefit in countries with poor legal environment. Lastanti (2004) examined the relationship between corporate governance structure with performance and market reaction. In that study, the structure of corporate governance is used in the form of the composition of the independent board, concentrated ownership structures and institutional ownership while corporate performance is proxied by financial performance (ROA and ROE). The study states that there is a significant positive relationship between the independence of the board of commissioners. Other variables do not significantly affect both on ROA and ROE, nevertheless, we want to conduct a different research is The Effect Of Banking Company Performance Toward Good Corperate Govannance Listed In Indonesia Stock Exchange.

  1. Hypothesis

Our hypothesis are consists of hypothesis 1 until 4:

H1:  Return on Equity positively affect Good Corporate Governance.

H2:  Return on Assets positively affect Good Corporate Governance

H3:  Composition of Assets positively affect the Company’s Good Corporate Governance

H4:  Company Size positively affect on the Company’s Good Corporate Governance

  1. Research Methodology
    • Population and Sample

The objects of this research are companies listed on the Indonesian Stock Exchange (BEI) that implement GCG with the observation samples period starting from 2010 to 2014, which is the big 10 of GCG implementation done by the Indonesian Institute for Corporate Governance (IICG) in 2010, 2012, 2013, 2014 and reported in the Indonesian Capital Market Directory (ICMD). Sampling was done by using purposive sampling, namely the determining the sample with a target or specific considerations (Sekaran, 2003). The considerations used in selecting samples are: 10 Companies that belong to the group of the best banking company in the implementation of GCG in 2010 until 2014, listed on the Stock Exchange and that have outstanding stock price data starting in late December 2010 until the end of December 2014. This stock data are used to calculate Tobin’s Q (the company’s performance).

  • Variables and Variables Measurement

In this study, there is a dependent variable, Good Corporate Governance (GCG), and five independent variables; return on equity (ROE), return on assets (ROA), the composition of the assets (KAP) and the size of the company (SIZE). The measurement of each variable is as follows:

Table 1.

VARIABLES MEASUREMENT

No Variabel Notasi Pengukuran
1 Good Corporate Governance GCG FCGI Indexes
2 Return on equity ROE Net Profit
3 Return on assets ROA Total Assets
4 Komposisi Aktiva Perush KAP Fixed Assets
5 Ukuran Perusahaan SIZE FCGI Indexes
  1. The Data Analysis

To answer the hypothesis proposed in this study requires accurate analysis tools. This study uses linear regression model to measure company performance towards corporate governance variables and SPSS 22.0 as a proponent. The multiple regression model is as follows:

GCG = α + β1ROE + β1ROA + β1KAP + β1SIZE

 

  1. Research Result

 

7.1. Descriptive Statistics

 

This section will explain each variable that has been processed based upon the Minimum Value, Maximum Value, Value Average (Mean), Standard Deviation and  its Variants. The results of the descriptive statistics of each variable used in the present study are:

 

Tabel 2.

DESCRIPTIVE STATISTICS

  N Range Minimum Maximum Mean Std. Deviation Variance
GCG 30 40,00 13,00 53,00 23,2333 9,26128 85,771
ROE 30 ,29 ,01 ,30 ,1751 ,06748 ,005
ROA 30 ,02 ,01 ,03 ,0200 ,00871 ,000
KAP 30 ,99 ,05 1,04 ,2970 ,24654 ,061
SIZE 30 6,17 14,56 20,73 16,3627 1,63721 2,680

 

It is known from table 2 above that the banking industry has GCG with a minimum value at 13.00 a maximum value 53.00 and the average value (mean) that is equal to 23.2333 while the standard deviation and variance at 9.26128 and 85.771.  ROE known minimum value is at 0.01, the maximum value 0.30 and average value (mean) 0.1751, while the standard deviation and variants are at 0.06748 and 0.005. KAP has a minimum value at 0.05 where the maximum value is at 1.04 and average value (mean)  0.2970, while the value of standard deviation and variance are at 0.24654 and 0.061. SIZE notes on a minimum amount at 14.56, the maximum value  20.73 and the average value (mean) 16.3627 while the standard deviation and variants are at 1.63721 and 2.680.

 

7.2. Hypothesis Test Results

 

To test the hypothesis of linear regression model, SPSS 22.0 calculation is  used where  Good Corporate Governance (GCG) is a measurement of financial performance which happens to be dependent variable. And for Independent variables there are; return on Equity (ROE), Return on Assets (ROA), Assets Composition of The Company (KAP) and the size of the company (SIZE).

 

Table 3.

HYPOTHESIS TEST RESULTS (T TEST)

Model Unstandardized Coefficients Standardized Coefficients    
B Std. Error Beta t Sig.
(Constant) 11,748 14,535   0,611 0,425
ROE -104,168 29,115 0,56 3,36 0,002
ROA 598,447 228,305 0,363 2,42 0,015
KAP -19,049 6,87 0,312 2,523 0,012
SIZE 1,224 0,79 0,052 1,239 0,016
  1.                            Dependent Variable: GCG

 

 

The results of T test in table 4.7 shows that the significance level of ROE to GCG is at 0.002; smaller than the required significance level (<0.05), so, ROE has a positive and significant impact on GCG. T test results shows that the significance level ROA to GCG is at 0.015; smaller than the required significance level (<0.05), so, ROA has a positive and significant impact on GCG. T test shows that the significance level of KAP to GCG is at 0,012; smaller than required significance level (<0.05). KAP has a positive and significant impact on GCG. T test shows that the significance level of SIZE to GCG is at 0.016; the required significance level (<0.05). SIZE has a positive and significant impact on GCG.

 

  1. DISCUSSION

 

8.1. ROE influence on GCG

 

Darmawati et al. (2005) found that statistically, GCG significantly affects the company’s operating performance that is proxied by ROE. This may be due to the market response towards the implementation of corporate governance which takes time. Samples taken as many as 53 companies listed on the Jakarta Stock Exchange in 2001 and 2002, included in the ranking of GCG implementation done by IICG. This study provides additional evidence on another research, Gompers et al. (2003), who found a positive relationship between corporate governance indexes with a long-term company performance. Oktapiyani (2009) also examined the effect of corporate governance on ROE. It is found that corporate governance has a significant negative effect on ROE. Similarly, Pramono (2011), found that corporate governance is negatively related to company performance. Indifference towards corporate governance can reduce company achievement of competitive which leads to a negative impact on performance.

 

8.2. ROA influence on GCG

 

As described above, the results of t test done by the researcher found that the significance level ROA to GCG is at 0.015; smaller than the required significance level (<0.05). ROA has a positive and significant impact on corporate governance. And also has a standard error of 226.505. Klapper and Love (2002) found a positive connection between corporate governance and corporate performance as measured by Return on Assets (ROA).

 

8.3. KAP influence on GCG

 

T test done by the researcher found that the significance level of KAP to GCG is at -0.012; smaller than the required significance level (<0.05). KAP has a significant negative effect on corporate governance. And also has a standard error of 7.07. Companies that have intangible and current assets are large tend to apply more stringent corporate governance for it is difficult to monitor and protect intangible and current assets, Thus, the negative correlation between the proportion of the company assets with corporate (Klapper and Love, 2002). The composition of assets is measured using the ratio of fixed assets on total sales (Klapper and Love, 2002).

 

8.4. SIZE influence on GCG

 

As described above, the results of t test done by the researcher, found that the significance level of SIZE to GCG is at 0.016; smaller than the required significance level (<0.05). SIZE has a positive and significant impact on GCG. And also has a very small error standard of 0.99. The results support the research Darmawati (2004) which states that basically large companies have greater financial strength to support their performance, on the other hand, the company faces a larger agency problem.

 

  1. CONCLUSION

 

Based on the analysis of 10 banking companies taken from 2011-2013, it can be concluded as follows: ROE has a positive and significant impact on company’s financial performance and it has also been proven true. This is indicated by the results of regression calculation by linear regression analysis test that has the t value of -3.560 with a significance level of 0.002 (<0.05). This receives hypothesis 1 in a study that states “ROE has a positive and significant impact on financial performance of the company”.It is also true that ROA disclosure has a positive effect on financial performance. This is indicated by the results of the regression calculation by linear regression analysis test that has the t value of 2.420 with a significance level of 0.015 (<0.05). This accepts hypothesis research 2 which states “ROA positive effect on financial performance”. The Company assets composition significant positive effect on a company financial performance has also been proven true. This is indicated by the results of regression calculation by linear regression analysis test that has the t value of -2.523 with a significance level of 0.012 (<0.05). This receives hypothesis 3 in the study that states “The composition of the assets of the Company and significant positive effect on the financial performance of the company”. Company size significant positive effect on company financial performance has also been proven true. This is indicated by the results of the regression calculation by linear regression analysis test that has the t value of 1.239 with a significance level of 0.016 (<0.05). This receives hypothesis 4 in a study that states “Company Size positive and significant impact on the financial performance of the company”.

 

  1. SUGGESTION

 

Corporate Governance, Return on Equity, Return on Assets, Company Assets Composition and Company Size can be used as a benchmark to face business competition. The higher the corporate governance, Company Assets Composition as well as the size of the company show that a company has strength in the market competition against competitors. In addition, the company should improve corporate governance, Company Assets Composition and the size of company, such as making positive issues, improving management of the company, so investors would be interested in investing and ultimately it leads to the increase in ROE and ROI and create good corporate governance. For investors; return on equity and return on assets can be used as a basis for making decisions whether to invest or not because this ratio measures the company’s ability to produce a return rate on the investment made within the company. For further research; for scholars who are interested in researching the problem of return on equity and return on assets, this research could be proceeded by investigating the influence of Debt Equity Ratio on both ROE and ROA with longer time span, so it will produce more valid conclusions. This study examines only the companies that implement good corporate governance, further research is recommended to investigate companies that are on LQ45 (corporate banking and financial institutions of profitability, high company performance). The length of research also needs to be extended so that the estimation and the results can be more representative and not biased.

 

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