Corporate governance and financial performance of manufacturing companies in Indonesia

Abstract

This study aims to provide empirical evidence on the effect of corporate governance mechanisms, proxied by board size, independent commissioners, family connections, and audit committees, on corporate financial performance, as measured by Return on Assets (ROA). The population of this study comprises manufacturing companies listed on the Indonesia Stock Exchange during the 2021–2024 period. Using a purposive sampling technique, 195 firm-year observations were selected. Data were analyzed using panel data regression with the Fixed Effect Model (FEM) employing Stata version 17. The findings reveal that board size, independent commissioners, family connections, and audit committees all have a positive and statistically significant effect on financial performance. These results suggest that robust internal governance mechanisms are effective in mitigating agency costs and enhancing corporate performance. Furthermore, the findings support the Alignment Effect perspective, indicating that family-connected boards can optimize the utilization of corporate assets and align managerial interests with those of shareholders. The study provides important implications for both corporate managers and regulators. Manufacturing firms are encouraged to maintain and strengthen governance structures to improve organizational performance, while regulators are expected to enhance substantive supervision regarding the implementation of good corporate governance practices.